ORLEN CAPITAL AB (PUBL) (incorporated in the Kingdom of Sweden with registered number 556974-3114) €750,000,000 2.500 per cent. Guaranteed Bonds due 2023 guaranteed by Polski Koncern Naftowy ORLEN Spółka Akcyjna (a joint stock company incorporated in the Republic of Poland) Issue Price 98.727 per cent.
The €750,000,000 2.500 per cent. Guaranteed Bonds due 2023 (the "Bonds") will be issued by ORLEN Capital AB (publ) (the "Issuer") and irrevocably and, subject to a maximum amount of €1,100,000,000, unconditionally guaranteed by Polski Koncern Naftowy ORLEN Spółka Akcyjna ("PKN ORLEN" or the "Guarantor"). Interest on the Bonds is payable annually in arrear on 7 June in each year commencing on 7 June 2017. Payments on the Bonds will be made without deduction for or on account of taxes of Sweden or Poland to the extent described under "Terms and Conditions of the Bonds – Taxation". The Bonds mature on 7 June 2023. The Bonds are subject to redemption in whole, at their principal amount, together with accrued interest, at the option of the Issuer at any time in the event of certain changes affecting taxes of Sweden and Poland and at the option of the relevant holder at any time while any of the Bonds remain outstanding if a Put Event (as defined in the Terms and Conditions of the Bonds) occurs, at their principal amount or at 101 per cent. of their principal amount in the circumstances set out in Condition 7.3, in each case, together with accrued interest to the date fixed for redemption. See "Terms and Conditions of the Bonds – Redemption and Purchase". The Bonds and the guarantee of the Guarantor will constitute unsubordinated and (subject to Condition 4) unsecured obligations of the Issuer and the Guarantor, respectively. See "Terms and Conditions of the Bonds – Status of the Bonds" and "Terms and Conditions of the Bonds – Guarantee". This Prospectus has been approved by the Central Bank of Ireland (the "Central Bank"), as competent authority under Directive 2003/71/EC (and amendments thereto, including by Directive 2010/73/EU) (the "Prospectus Directive"). The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and European Union law pursuant to the Prospectus Directive. Such approval relates only to the Bonds which are to be admitted to trading on a regulated market for the purposes of Directive 2004/39/EC or which are to be offered to the public in any Member State of the European Economic Area. The regulated market of the Irish Stock Exchange plc (the "Market") is a regulated market for the purposes of Directive 2004/39/EC. Application has been made to the Irish Stock Exchange plc for the Bonds to be admitted to the official list of the Irish Stock Exchange plc (the "Official List") and trading on its regulated market. The Bonds will initially be represented by a temporary global Bond (the "Temporary Global Bond"), without interest coupons, which will be issued in New Global Note ("NGN") form and will be delivered on or prior to 7 June 2016 to a common safekeeper (the "Common Safekeeper") for Euroclear Bank S.A./N.V. ("Euroclear") and Clearstream Banking, société anonyme ("Clearstream, Luxembourg"). The Temporary Global Bond will be exchangeable for interests in a permanent global Bond (the "Global Bond"), without interest coupons, on or after a date which is expected to be 17 July 2016 upon certification as to beneficial ownership. See "Summary of Provisions relating to the Bonds while in Global Form". The denomination of the Bonds shall be €100,000 and integral multiples of €1,000 in excess thereof, up to and including €199,000. No definitive Bonds will be issued with a denomination above €199,000. The Bonds are expected to be rated Baa3 by Moody's Investors Service, Inc. ("Moody's") and BBB- by Fitch Ratings Ltd. ("Fitch"). Fitch is established in the European Union and registered under Regulation (EC) No 1060/2009 as amended by Regulation (EU) No 513/2011 (the "CRA Regulation"). As such, Fitch is included in the list of credit rating agencies published by the European Securities and Markets Authority on its website in accordance with the CRA Regulation. Moody's is not established in the European Union but its ratings are endorsed by Moody's Investors Service Limited which is established in the European Union and registered under the CRA Regulation. A rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. Prospective investors should have regard to the factors described under the section headed "Risk Factors" in this Prospectus. GLOBAL CO-ORDINATORS BNP PARIBAS SOCIÉTÉ GÉNÉRALE CORPORATE & INVESTMENT BANKING
JOINT LEAD MANAGERS BNP PARIBAS Citigroup Société Générale UniCredit Bank Corporate & Investment Banking Santander Global Corporate Banking ING PKO Bank Polski S.A.
The date of this Prospectus is 3 June 2016
This Prospectus comprises a prospectus for the purposes of Article 5(3) of the Prospectus Directive, as implemented in Ireland by the Prospectus (Directive 2003/71/EC) Regulations 2005 and for the purpose of giving information with regard to the Issuer, the Guarantor, the Guarantor and its consolidated subsidiaries taken as a whole (the "ORLEN Group" or the "Group") and the Bonds which according to the particular nature of the Issuer, the Guarantor, the ORLEN Group and the Bonds, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profit and losses and prospects of the Issuer and the Guarantor. Each of the Issuer and the Guarantor accepts responsibility for the information contained in this Prospectus. To the best of the knowledge and belief of each of the Issuer and the Guarantor (each of which has taken all reasonable care to ensure that such is the case), the information contained in this Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information.
This Prospectus does not constitute an offer of, or an invitation by or on behalf of the Issuer, the Guarantor or the Joint Lead Managers (as defined in "Subscription and Sale" below) to subscribe or purchase, any of the Bonds. The distribution of this Prospectus and the offering of the Bonds in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by the Issuer, the Guarantor and the Joint Lead Managers to inform themselves about and to observe any such restrictions. For a description of further restrictions on offers and sales of Bonds and distribution of this Prospectus, see "Subscription and Sale" below.
None of the Joint Lead Managers, has separately verified the information contained in this Prospectus. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Joint Lead Managers as to the accuracy or completeness of the information contained in this Prospectus or any other information supplied in connection with the Bonds. Each person receiving this Prospectus acknowledges that such person has not relied on any of the Joint Lead Managers in connection with its investigation of the accuracy of such information or its investment decision and each person must rely on its own examination of the Issuer and the Guarantor and the merits and risks involved in investing in the Bonds. In particular, each investor contemplating purchasing any Bonds should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of the Issuer, the Guarantor and the ORLEN Group.
No person is authorised to give any information or to make any representation not contained in this Prospectus and any information or representation not so contained must not be relied upon as having been authorised by or on behalf of the Issuer, the Guarantor or the Joint Lead Managers. Neither the delivery of this Prospectus nor any sale made in connection herewith shall, under any circumstances, create any implication that there has been no change in the affairs of the Issuer, the Guarantor or the ORLEN Group since the date hereof or the date upon which this Prospectus has been most recently amended or supplemented or that there has been no adverse change in the financial position of the Issuer, the Guarantor or the ORLEN Group since the date hereof or the date upon which this Prospectus has been most recently amended or supplemented or that any other information supplied in connection with the issue of the Bonds is correct as of any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same.
To the fullest extent permitted by law, the Joint Lead Managers accept no responsibility whatsoever for the contents of this Prospectus or for any other statement, made or purported to be made by a Joint Lead Manager or on its behalf in connection with the Issuer, the Guarantor or the issue and offering of the Bonds. Each Joint Lead Manager accordingly disclaims all and any liability whether arising in tort or contract or otherwise (save as referred to above) which it might otherwise have in respect of this Prospectus or any such statement.
The Bonds have not been and will not be registered under the U.S. Securities Act of 1933 (the "Securities Act") and Bonds in bearer form are subject to U.S. tax law requirements. Subject to certain exceptions, Bonds may not be offered, sold or delivered within the United States or to U.S. persons.
Except as otherwise provided, translations of amounts from one currency into another currency are solely for the convenience of the reader and are made at various exchange rates. No representation is made that the amounts referred to herein could have been, or could be, converted into another currency at any particular exchange rate.
In connection with the issue of the Bonds, BNP Paribas (the "Stabilisation Manager") or any person acting on behalf of the Stabilisation Manager may over-allot Bonds or effect transactions
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with a view to supporting the market price of the Bonds at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilisation Manager (or any person acting on behalf of the Stabilisation Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Bonds is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Bonds and 60 days after the date of the allotment of the Bonds. Any stabilisation action or over-allotment must be conducted by the Stabilisation Manager (or person(s) acting on behalf of the Stabilisation Manager) in accordance with all applicable laws and rules.
This Prospectus contains certain forward-looking statements. The words "anticipate", "believe", "expect", "is expected to", "plan", "intend", "targets", "aims", "estimate", "project", "will", "would", "may", "could", "should", "seeks", "continue", "approximately", "predicts" and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact included in this Prospectus, including, without limitation, those regarding the financial position, business strategy, management plans and objectives for future operations of the Issuer and the Guarantor are forward- looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Group's actual results, performance or achievements, or industry results, to be materially different from those expressed or implied by these forward-looking statements. These forward-looking statements are based on numerous assumptions regarding the Group's present and future business strategies and the environment in which the Group expects to operate in the future. Important factors that could cause the Group's actual results, performance or achievements to differ materially from those in the forward-looking statements include, among other factors described in this Prospectus: the Group's ability to integrate its newly-acquired operations and any future expansion of its business; the Group's ability to realise the benefits that the Group expects from existing and future investments in the Group's existing operations and pending expansion and development projects; the Group's ability to obtain requisite governmental or regulatory approvals to undertake planned or proposed terminal development projects; the Group's ability to obtain external financing or maintain sufficient capital to fund the Group's existing and future operations; changes in political, social, legal or economic conditions in the markets in which the Group and its customers operate; changes in the competitive environment in which the Group's and the Group's customers operate; failure to comply with regulations applicable to the Group's business; fluctuations in the currency exchange rates in the markets in which the Group operates; and changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations).
Additional factors that could cause actual results, performance or achievements to differ materially include, but are not limited to, those discussed under "Risk Factors". Any forward-looking statements made by or on behalf of the Issuer or the Guarantor speak only as at the date they are made. Neither the Issuer nor the Guarantor undertakes to update forward-looking statements to reflect any changes in their expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.
Data included in this Prospectus have been subject to rounding adjustments; accordingly data shown for the same item of information may vary and figures which are totals may not be arithmetical sums of their components.
In respect of information in this Prospectus sourced from a third party, the Guarantor confirms that the information has been accurately reproduced and that, as far as the Guarantor is aware and is able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading.
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PRESENTATION OF INFORMATION
In this Prospectus, all references to:
"U.S. dollars" and "USD" refer to United States dollars;
"PLN" refer to Polish zloty;
"CAD" refer to Canadian dollars;
"CZK" refer to Czech koruna; and
"euro", "EUR" and "€" refer to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty on the Functioning of the European Union, as amended.
References in this Prospectus to "concessions" reflect Polish legal terminology and should be understood as references to licences or permits.
Capitalised words used in this Prospectus which are not otherwise defined have the meanings set out in the Glossary.
The Group prepared its unaudited reviewed interim condensed consolidated financial statements for the three months ended 31 March 2016 and its audited consolidated financial statements for the years ended 31 December 2015 and 31 December 2014 in accordance with International Financial Reporting Standards as adopted in the EU ("IFRS EU").
KPMG Audyt Sp. z o.o. conducted their audit of the consolidated financial statements for the year ended 31 December 2014 in accordance with section 7 of the Accounting Act dated 29 September 1994 (Official Journal from 2013, item 330 with amendments) (the "Accounting Act"), National Standards on Auditing issued by the National Council of Certified Auditors and International Standards on Auditing.
KPMG Audyt Sp. z o.o. conducted their audit of the consolidated financial statements for the year ended 31 December 2015 in accordance with section 7 of the Accounting Act and International Standards on Auditing as adopted by National Council of Certified Auditors as the National Standards on Assurance.
The Issuer prepared its audited financial statements for the years ended 31 December 2015 and 31 December 2014 in accordance with the Annual Accounts Act and the Swedish Financial Reporting Board's recommendation RFR 2 Accounting for Legal Entities. The application of RFR 2 means that the Issuer, so far as possible, applied IFRS EU and interpretations of the IFRS Interpretations Committee (IFRIC) as part of the Annual Accounts Act and the Security Act, and considered the relationship between accounting and taxation.
KPMG AB conducted their audits of the financial statements for the years ended 31 December 2015 and 31 December 2014 in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden.
Where financial information as of and for the periods ended 31 March 2015 and 31 March 2016, respectively, which has been reviewed but not been audited, has been included in this Prospectus, this has been indicated as unaudited financial information in the tables containing such financial information.
Non-IFRS Resources
In this Prospectus certain measures are not measures presented in accordance with, or defined by, IFRS EU. These include: EBIT; EBITDA; and EBITDA LIFO, which are measures used by PKN ORLEN's management to measure operating performance.
"EBIT" means profit/loss from operations.
"EBITDA" means profit/loss from operations, before depreciation and amortisation.
"EBITDA LIFO" means profit/loss from operations, before depreciation and amortisation according to the inventory valuation under the LIFO (Last-in, First-out) method.
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The ORLEN Group's inventories are valued in its financial statements in accordance with IFRS EU at the weighted average cost method or purchase price method. Therefore, an upward trend in crude oil prices has a positive effect and a downward trend has a negative impact on the results reported. As a result, in the section entitled "Other Information to Consolidated Quarterly Report" from the Guarantor's reviewed interim condensed consolidated financial statements for the three months ended 31 March 2016, which are incorporated by reference herein, the operating results were presented based on both the weighted average cost of production or acquisition as well as the LIFO method of inventory valuation, which eliminates the above impact.
EBIT, EBITDA and EBITDA LIFO are not recognised measures under IFRS EU and do not purport to be alternatives to profit for the period as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBIT, EBITDA and EBITDA LIFO are not intended to be measures of free cash flow available for management's discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments, changes in working capital, debt service requirements and capital expenditures. PKN ORLEN believes that EBIT, EBITDA and EBITDA LIFO provide useful information to investors and are helpful in highlighting trends because they exclude the results of certain decisions that are outside the control of operating management and can differ significantly from company to company depending on long term strategic decisions regarding capital structure, its stage of growth development, its capital expenditure requirements, the jurisdictions in which certain companies operate and capital investments. As not all companies use identical calculations, these presentations of EBIT, EBITDA and EBITDA LIFO may not be comparable to other similarly titled measures used by other companies.
EBITDA may not be indicative of the Group's historical operating results presented in accordance with IFRS EU. EBITDA LIFO is not subject to audit or review by any independent auditors.
As at 27 May 2016, the National Bank of Poland average exchange rate between euro and zloty was EUR 1 = PLN 4.4063 and between United States dollars and zloty was USD 1 = PLN 3.9393.
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CONTENTS
Page
OVERVIEW ...... 1 RISK FACTORS ...... 4 INFORMATION INCORPORATED BY REFERENCE ...... 20 TERMS AND CONDITIONS OF THE BONDS ...... 22 SUMMARY OF PROVISIONS RELATING TO THE BONDS WHILE IN GLOBAL FORM ...... 32 USE OF PROCEEDS ...... 34 SELECTED FINANCIAL INFORMATION OF THE GUARANTOR ...... 35 SELECTED FINANCIAL INFORMATION OF THE GROUP ...... 39 DESCRIPTION OF THE ISSUER...... 43 DESCRIPTION OF THE GUARANTOR AND THE GROUP...... 44 TAXATION ...... 110 SUBSCRIPTION AND SALE ...... 114 GLOSSARY OF TECHNICAL TERMS ...... 115 GENERAL INFORMATION ...... 117
OVERVIEW
This overview must be read as an introduction to this Prospectus and any decision to invest in the Bonds should be based on a consideration of the Prospectus as a whole, including the full terms and conditions. This overview does not purport to be complete and is taken from, and is qualified in its entirety by, the remainder of this Prospectus.
Words and expressions defined in the "Terms and Conditions of the Bonds" below or elsewhere in this Prospectus have the same meanings in this summary.
The Issuer ORLEN Capital AB (publ) Reg. No. 556974-3114.
The Guarantor Polski Koncern Naftowy ORLEN Spółka Akcyjna.
Joint Lead Managers BNP Paribas Société Générale Citigroup Global Markets Limited Unicredit Bank AG Banco Santander S.A. ING Bank N.V., London Branch PKO Bank Polski S.A.
The Bonds €750,000,000 2.500 per cent. Guaranteed Bonds due 2023.
Issue Price 2.500 per cent. of the principal amount of the Bonds.
Issue Date Expected to be on or about 7 June 2016.
Interest and Interest Payment Dates The Bonds will bear interest from and including the Issue Date at a rate of 2.500 per cent. per annum payable annually in arrear on 7 June in each year commencing on 7 June 2017.
Status of the Bonds and the Guarantee The Bonds are direct, unconditional and (subject to Condition 4) unsecured obligations of the Issuer.
The guarantee is a direct, (subject as described below) unconditional and (subject to Condition 4) unsecured obligation of the Guarantor. The Guarantor's obligations in respect of the guarantee are contained in the Guarantee. The Guarantee will be valid up to a maximum amount of €1,100,000,000.
Form and Denomination The Bonds will be in bearer form in the denomination of €100,000 and integral multiples of €1,000 in excess thereof, up to and including €199,000.
See "Summary of Provisions relating to the Bonds while in Global Form".
Rating The Bonds are expected to be rated Baa3 by Moody's and BBB- by Fitch.
A rating reflects only the views of the relevant rating agency and is not a recommendation to buy, sell or hold any Bonds. A rating may be subject to revision, suspension or withdrawal at any time by the relevant rating agency. For information on certain risks connected with ratings see "Risk Factors". An explanation of the significance of specific ratings may be obtained from the relevant rating agency.
Withholding Tax See "Taxation".
Redemption for Taxation Reasons The Issuer may at its option redeem the Bonds at any time at their principal amount together with interest accrued to but excluding the date of redemption if:
(a) as a result of any change in, or amendment to, the laws or
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regulations of a Relevant Jurisdiction (as defined in Condition 8), or any change in the application or official interpretation of the laws or regulations of a Relevant Jurisdiction, which change or amendment becomes effective after 7 June 2016, (i) on the next Interest Payment Date the Issuer would be required to pay additional amounts as provided or referred to in Condition 8 or (ii) on the next Interest Payment Date the Guarantor would be unable for reasons outside its control to procure payment by the Issuer and in making payment itself would be required to pay such additional amounts or (iii) the Guarantor has or will become obliged to make any withholding or deduction for, or on account of, any Taxes imposed or levied by or on behalf of Poland or any political subdivision or any authority thereof or therein having power to tax with respect to any payment by the Guarantor, under an instrument through which proceeds from the Bonds are transferred from the Issuer to the Guarantor, to the Issuer in order to enable the Issuer to make any payment on the next Interest Payment Date of principal or interest in respect of the Bonds; and
(b) the requirement cannot be avoided by the Issuer or, as the case may be, the Guarantor taking reasonable measures available to it.
See Condition 7.2 of the "Terms and Conditions of the Bonds".
Change of Control with Rating Each Bondholder will have the option to require the Issuer to redeem any Downgrade Put Event outstanding Bonds it holds upon the occurrence of a Put Event (i) at 101 per cent. of their principal amount, together with interest accrued up to, but excluding, the Optional Redemption Date if the Bonds carry a Non- Investment Grade Rating or no credit rating on the Relevant Announcement Date; or (ii) at their principal amount, together with interest accrued up to, but excluding, the Optional Redemption Date if the Bonds carry an Investment Grade Rating at the Relevant Announcement Date, provided that if, at the Relevant Announcement Date, the Bonds carry a credit rating from more than one Rating Agency at least one of which is an Investment Grade Rating, then sub-paragraph (ii) will apply.
A Put Event will be deemed to occur if there is a Change of Control of the Guarantor and, on the Relevant Announcement Date, the Bonds carry from any Rating Agency:
(a) an investment grade credit rating and such rating is downgraded to a Non-Investment Grade Rating or withdrawn and is not, within the Change of Control Period, subsequently (in the case of a downgrade) upgraded to an investment grade credit rating;
(b) a Non-Investment Grade Rating; or
(c) no credit rating and a Negative Rating Event occurs.
Such rating activity must have resulted from the Change of Control, as confirmed by the relevant Rating Agency. See Condition 7.3 of the "Terms and Conditions of the Bonds".
Events of Default See Condition 10 of the "Terms and Conditions of the Bonds".
Negative Pledge See Condition 4 of the "Terms and Conditions of the Bonds".
Governing Law The Bonds, the Guarantee, the Agency Agreement and the Subscription Agreement will be governed by English law.
Listing and Trading Application has been made to the Irish Stock Exchange plc for the Bonds to be admitted to the Official List and to trading on the Market. The
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Market is a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments.
Clearing Systems Euroclear and Clearstream, Luxembourg.
ISIN XS1429673327
Common Code 142967332
Selling Restrictions See "Subscription and Sale".
Risk Factors Investing in the Bonds involves risks. See "Risk Factors".
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RISK FACTORS
The Issuer and the Guarantor believe that the following factors may affect their ability to fulfil their obligations under the Bonds and the Guarantee. All of these factors are contingencies which may or may not occur and the Issuer and the Guarantor are not in a position to express a view on the likelihood of any such contingency occurring.
Factors which the Issuer and the Guarantor believe may be material for the purpose of assessing the market risks associated with the Bonds are also described below.
The Issuer and the Guarantor believe that the factors described below represent the principal risks inherent in investing in the Bonds but the inability of the Issuer or the Guarantor to pay interest, principal or other amounts on or in connection with the Bonds may occur for other reasons and the Issuer and the Guarantor do not represent that the statements below regarding the risks of holding the Bonds are exhaustive. Prospective investors should also read the detailed information set out elsewhere in this Prospectus and reach their own views prior to making any investment decision.
RISK FACTORS RELATING TO THE MARKET
Adverse changes in local and global economic conditions and the demand for transportation fuels may adversely impact the Group's business, financial condition and results of operations.
The global economic recovery from the recession after the financial crisis that started in 2007 continues to be tenuous and the risk of global economic downturn continues. Further prolonged downturns or failure to recover could result in declines in consumer and business confidence and spending as well as increased unemployment and reduced demand for transportation fuels. This continues to adversely affect the business and economic environment in which the Group operates. There is a correlation between a reduction in GDP and a reduction in demand for transportation as fewer business and/or leisure related journeys are undertaken during periods of economic downturn. Furthermore, during such periods, demand for unlawful sales of transportation fuels (such as grey zone transactions) increases. Lower levels of economic activity in the countries in which the Group operates could also result in declines in energy consumption, including declines in the demand for, and consumption of, the Group's refined products, which could cause the Group's revenues and margins to decline. If these macro fundamentals do not improve there may also be a potential impairment risk. Additionally, lower levels of economic activity could lead to increased volatility in prices for refined products and could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group's products are subject to fluctuations in demand and supply due to several factors including changes in the macroeconomic environment, competition and technology.
The economic downturn may increase pressure on the demand for certain petroleum products. Furthermore, advances in technology have enabled alternative fuels such as bio-fuels, liquid petroleum gas ("LPG") and electricity to gain an increased share of the market for automotive fuel.
The demand for the Group's gasoline products in foreign markets has also declined, in particular due to a significant increase in production capacity in the United States, which was a major source of exports for the Group, and due to the increased competitiveness of alternative suppliers and to lower consumption in Ukraine. In addition, European refineries, despite their modernisation, are under increased global competition from foreign producers with new, large refineries. The impact of these factors on supply and demand for the Group's products could have a material adverse effect on the future business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Oil price fluctuations and a substantial or extended decline in refining margins would negatively impact the Group's financial results.
The Group's financial results are primarily affected by the margin between the prices at which the Group sells refined products and the prices at which the Group purchases crude oil and other feedstocks (the "refining margin"). The Group buys crude oil under contracts in which prices are determined on the basis of, or by reference to, world oil prices on the futures market and the spot market. These prices may be subject to significant fluctuations in response to changes over which the Group has no control, including:
• the economic and political situation in the oil producing regions, particularly the Russian Federation, the Middle East, South America, the United States, Canada and Africa;
• global and regional supply and demand and expectations regarding future supply and demand;
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• actions taken by countries extracting and making use of crude oil and by major oil suppliers;
• violations by pipeline owners and operators of agreements, and their failure to perform under such agreements;
• disruptions in the flow of crude oil (e.g. technical or environmental); prices and availability of alternative fuels;
• global economic and political conditions; and
• weather conditions and other emergencies.
The price of the crude oil the Group purchases and the price at which the Group can sell its refined products may also fluctuate independently of each other due to a variety of factors beyond the Group's control, including regional and global supply of, and demand for, crude oil, gasoline and diesel and other feedstocks and refined products. These in turn depend on, among other things, the availability and quantity of imports, the production levels of suppliers, levels of refined product inventories, productivity and growth (or the lack thereof) of regional and global economies, political affairs and the extent of governmental regulation.
The Group seeks, in part, to hedge oil price fluctuations, however, such hedging may not always be effective. The Group purchases refinery feedstocks weeks before refining and selling the refined products. Price level changes during the period between purchasing feedstocks and selling the refined products could have a significant positive or negative effect on the Group's financial results.
A decline in refining margins and oil price fluctuation could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Cyclical nature of the petrochemical industry.
The Group manufactures and sells petrochemical products such as ethylene, propylene and polyolefins. The prices of petrochemical products are cyclical and influenced by changes in global capacity and demand. Historically, the petrochemical industry has experienced periods of low supply, causing an increase in prices and margins, alternating with periods of significant capacity increases resulting in excess supply and lower prices and margins. There is no guarantee that future growth in demand for petrochemical products will be sufficient to take full advantage of the Group's current and projected production capacity.
Surplus production capacity in the US, China and elsewhere can, depending on its extent, cause a reduction of prices and margins. Future price changes of petrochemical products could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group's dependence on natural gas supplies.
Gas supplies may be restricted by technical problems with the related infrastructure. Due to its diversified gas portfolio, the Group is able to source gas from the two gas transmission networks in Poland, namely the Jamal transit pipeline (System Gazociągów Tranzytowych Jamał) and the national transmission system (Krajowy System Przesyłowy), which limits the potential consequences of infrastructure failures.
Nevertheless, the Group remains significantly dependent on one gas supplier in particular, Polskie Górnictwo Naftowe i Gazownictwo S.A. ("PGNiG"), from whom the Group receives between 70 and 90 per cent. of its natural gas supplies depending on the market situation and the gas demand of the Group's installations at the time. This dependence could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Changes in natural gas prices.
Gas prices are dependent on external factors, over which the Group has no control. Prices quoted in import contracts are linked to the prices of oil products or relate to quotations from the energy markets. Any substantial increase in gas prices could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The following factors may affect the price of natural gas:
• global and regional economic and political development trends in the regions rich in energy resources;
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• global and regional changes in supply and demand for natural resources;
• the influence of OPEC members and other countries rich in energy sources on their prices and production levels;
• prices of petroleum products (and all macroeconomic factors affecting the price of oil);
• gas prices in the liquid European markets;
• access to gas infrastructure, in particular, to cross-border connections with the European Union;
• inventory levels;
• the level of balance between supply and demand in the global LNG market;
• fluctuation of prices in relation to alternative energy sources that may have an impact on financial conditions in gas supply agreements;
• Polish and foreign legal regulations and the Polish government's policy and strategy;
• global and local political and economic conditions; and
• prices and access to new technologies for energy production; and weather conditions.
Polish natural gas prices are linked to the price mechanisms operating in liquid gas markets in Europe, such as the German market. Depending on the market situation, however, Polish gas prices may be lower or higher than prices in neighbouring deregulated markets (such as the German or the Czech market).
Changes in the motor fuel market.
Changes in the dynamics of demand for different oil products can have a significant impact on the Group's sales structure and volumes. Periodic surpluses in fuel supply can force the Group to sell its fuels on international markets, which entails higher logistics costs. Furthermore, the Group's fuel market is related to the overall European fuel market through pricing based on Platt's NWE ARA (or Argus) quotations. Any changes in European motor fuel costs are therefore reflected in the Group's general price levels for fuel. Factors that can affect the Group's price levels for motor fuel include:
• major shifts in the supply of diesel from the United States, the Middle East and Russia;
• major shifts in gasoline demand outside of Europe, in particular in the United States, China and West Africa;
• the shift in the demand for gasoline as compared to diesel in Europe following legislation changes, changes in emission controls as a result of the Volkswagen emissions scandal, changes in the European taxation system affecting diesel and changes in the consumers' perception of diesel in view of the pollution it may cause;
• the scope of the "grey market" in fuel trade in Poland;
• increasing volumes of diesel imported into Poland mostly due to the favourable spread of FAME (fatty-acid methyl ester).
In 2015 the Polish economy continued to grow, stimulating an increase in fuel consumption. Data from the Energy Market Agency (ARE SA) indicates a reversal of the long-term downward trend in domestic consumption of gasoline and diesel. In 2015 there was an increase in gasoline consumption by 2.6 per cent. compared to 2014, and in diesel consumption by 5.8 per cent. compared to 2014. The decrease in the oil price on the international markets resulted in a lower cost of refuelling, which encouraged car users to make increased use of this type of transport. This trend may stop as a result of expected higher oil prices. The decreases in the price of crude oil in 2015 benefitted the Group by enabling higher margins, particularly for retail sales. Any rapid or strong increase in the price of crude oil may therefore now have a comparative significant negative impact on the results and performance of the Group.
The "grey market" in Poland has a negative influence on the fuel market. The volume of diesel supplied by criminal groups in 2015 was estimated at 20 per cent. of the fuel consumption of the market according to data published by POPiHN (the Polish Organisation of Oil Industry and Trade) and to the Group's internal market research. Delays in the legislative work can have an impact on the size of the "grey market" and consequently, on the profitability and volumes of the Group's fuel sales.
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Continuation of the above mentioned trends and risks could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Exchange rate risk.
The price of crude oil bought by the Group is expressed in USD. A significant part of the sales of refined oil products is also priced in USD or by reference to USD, and prices of a large portion of petrochemical products are denominated in EUR or indexed to EUR. However, a significant portion of the Group's costs and revenues are denominated in PLN or CZK, therefore the Group is exposed to foreign exchange risk. The costs incurred by the Group in PLN and CZK may exceed its revenues in those currencies, and a significant increase in the value of PLN or CZK relative to USD or EUR could adversely affect the Group's results.
The Group has financing agreements in EUR, USD and CAD that require the Group to maintain a certain ratio of the net debt to EBITDA. There is a risk that an increase in the value of EUR, USD or CAD relative to PLN could immediately increase the net debt, while improving EBITDA would be delayed due to the fact that it is calculated semi- annually and annually. This contingency may expose the Group to additional financial costs if such financing is dependent on, or the margin of such financing is impacted by, the net debt to EBITDA ratio. A significant movement in such figures could potentially result in a breach of the required ratio. As a result, adverse changes in the exchange rates that the Group is exposed to could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group's business, including its supply, could be impaired by political, social and economic instability.
Any political, social or economic instability in countries from which the Group purchases crude oil, through which oil is transported to the countries in which the Group conducts operations ("transit countries"), or in the home countries of contractors supplying oil to the Group's refineries, could lead to a reduction in the supply of crude oil to the Group. In particular, the Group purchases crude oil mainly from Russian sources and therefore any disputes within or involving Russia, transit countries (such as Belarus and Ukraine) and the countries in which the Group operates, including but not limited to the imposition of any international sanctions impacting the operations of any relevant jurisdiction or counterparty, may lead to a reduction in or uncertainty relating to the supply of crude oil to the Group.
The Group is subject to the risk of a reduction in supply as a result of changes in the global infrastructure for the supply of, or market for, crude oil. The Group is dependent on a single pipeline for the majority of its crude oil supplies. There may be a possible reduction in the availability of Russian crude oil within the Druzhba pipeline system as a consequence of: disruption in transit countries, such as Belarus and Ukraine; or following completion of the Baltic Pipeline 2 or the export terminal in Ust-Luga.
Growth of China's demand for oil and the commissioning of the second part of the Eastern Siberia-Pacific Ocean pipeline, could cause an increase in exports of Russian crude oil to Asian markets and, consequently, result in a reduction in supply to European markets.
Changes in the dynamics of the Russian oil industry may result in an increase in the prices of the Russian export blend crude oil of the Urals type ("REBCO") expressed in US dollars per barrel (a volume unit commonly used in the oil industry), which in turn may impact the prices per barrel of other types of crude oil, including Brent.
Each of these factors, and similar changes may impact on the supply and/or price of crude oil available to the Group.
The Group is exposed to risks associated with the process of refining crude oil, which may potentially be disrupted by a variety of factors including:
• disruption of supplies in crude oil;
• logistical disruption of supply by sea, pipeline, rail or other means of transport to the Group's refineries; or
• adverse weather conditions disrupting plant or machinery, or delaying transportation along supply lines, such as loading, reloading and unloading at marine terminals (this applies, in particular, to the SPM port of Butinge).
Furthermore, contracts with transport infrastructure operators (in particular, the Trieste-TAL-IKL system) contain pumping limits. Exceeding these limits may stop further supply or may lead to incurring additional charges for further services.
The Group is also dependent on supply from the Druzhba pipeline. Crude oil supplies to the Płock refinery are predominantly carried out on the basis of long-term contracts through the Druzhba pipeline to the pumping station in
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the town of Adamowo-Zastawa, located on the Polish-Belarussian border. If pipeline transport is unavailable, oil suppliers are required to supply oil on the same terms by marine transport through the port of Gdańsk. The supply contracts include contractual penalties (such as liquidated damages) for any failure to supply the volume of crude oil in accordance with their terms. Any prolonged disruption, without supplies from standard or alternative sources, may have a material adverse effect on the refinery operations of the Group. See "Description of the Group – Sources of Supply".
The Group's refineries may need to use crude oil from third party stocks (including state agencies) when supply from current suppliers is low or when its own stock levels are insufficient. Such supply may be at an increased cost, and may also include unfavourable amendments to agreements signed with third parties for the provision of related logistical services to the Group. The increased processing of types of crude oil other than REBCO would be less cost effective for the Group's refineries in Płock, Litvinov and Mažeikiai where the price of supply of such other crude oil types is higher. Furthermore, the supply of REBCO by marine tankers rather than by pipeline would also increase the costs of crude oil procurement due to increased transport cost and the increased amount of time taken to get to the market.
Any significant disruption in the oil refining process could also lead to an increase in costs associated with repairs, organisation of alternative supply lines, or breach of supply contracts, or losses associated with the opportunity cost of a loss of production or business. Any such costs or losses could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
GENERAL RISKS RELATING TO THE OPERATIONS OF THE GROUP
Certain agreements of the Group governing long-term debt contain restrictive covenants.
Certain agreements of the Group governing long-term debt contain certain restrictive covenants, including negative pledge clauses and covenants requiring the maintenance of particular financial ratios, which may restrict the ability of the Group to acquire or dispose of assets or incur new debt. A sudden drop in the price of crude oil along with the devaluation of PLN to EUR, USD or CAD may, in the short term, increase the risk of such covenants being breached. Failure to comply with any of these covenants could constitute an event of default, which could result in the immediate or accelerated repayment of debt, lead to cross-default under other credit agreements or limit the ability of the Group to implement and execute key strategies. Such factors in turn could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group is subject to risks associated with increased competition.
The Group is facing increasing competitive pressure in all areas of its operations, from both local and global gas and oil companies. The Group's market position in Poland, the Czech Republic, Lithuania and Germany is potentially threatened by competition from other regional refineries and wholesale distributors. Fuel is imported wholesale to the markets where the Group operates, from Belarus, the Slovak Republic, Austria, Hungary, Russia, the Scandinavian countries and Germany. Products imported from these countries as well as an increase in the import of products from the United States and the Middle East may exert price pressure on the Group's products. The Group's retail competitors include international and regional oil companies, many of which have significantly greater financial resources than the Group. Worldwide and regional refining capacity expansions may also result in refining production capability exceeding refined product demand, which would have an adverse effect on refining margins. In particular, the planned expansion, construction of new refineries and increased conversion capacity in Russia may mean that more crude oil is refined in Russia, which would reduce the supply of available crude oil for refining and also increase competition in respect of the sale of refined products. This may ultimately lead to a reduction in refining margins for the Group.
Competition and innovation in the refined oil-products and lubricants industries may put pressure on the product prices the Group is able to charge customers. The implementation of the Group's strategy to remain competitive may require continued technological advances and innovation in its refining and downstream businesses, and its energy generation and trading business. The implementation of these strategies may be costly and ineffective. The Group's financial condition and results of operations may be adversely affected if competitors develop or acquire intellectual property rights to technology or if the Group's innovation lags behind the rest of the industry.
The market for the refining of oil is highly competitive, and any increase in competition could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
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Failures, breakdowns, planned or unplanned outages, as well as natural disasters or sabotage at the Group's plants, or in the supply and distribution infrastructure of the Group, may harm the business and reputation of the Group or could cause significant harm to the environment.
Any of the plants or supply and distribution infrastructure of the Group could be subject to failure, breakdowns, planned or unplanned outages, capacity limitations, system loss, breaches of security or physical damage due to natural disasters (such as storms, floods or earthquakes), sabotage, terrorism, computer viruses, cyberattacks, fuel interruptions and other causes. Such events may cause personal injury, loss of life, damage to property, delayed or reduced production, can have a negative impact on the Group's cost base and can cause damage to the Group's reputation. Remediating their effects may entail incurring significant costs.
Although the Group is covered by insurance customarily used in the industry in which it operates, it is exposed to the risk of potentially significant losses not covered under the insurance limits or to losses in respect of non-essential assets for which the Group does not have insurance.
The Group cannot give any assurance that accidents will not occur or that the preventative measures taken by it will be fully effective in all cases, particularly in relation to external events that are not within its control, such as floods and other natural disasters. Due to the complexity of operations, the Group is not able to eliminate the risk of unplanned outages and cannot predict the timing or impact of these outages with certainty. The Group's emergency response, disaster recovery and crisis management measures may not be sufficient to fully protect or mitigate against the effects of such events. Any disruption of operations may cause loss of stocks of crude oil or refined products, customer dissatisfaction and may also lead to liability for damages, the imposition of penalties and other unforeseen costs and expenses which could have a material adverse effect on the reputation, business, results of operations and financial condition of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group faces risks associated with entering new business areas, in particular relating to the Group's exploration and prospecting projects (extraction activity).
As part of a strategy of greater diversification through vertical integration, the Group is involved in a number of exploration projects. Such projects involve many geological and operating risks that may prevent the implementation of the Group's diversification strategy or the achievement of expected returns from such projects. Investment in such projects is significant and a failure to yield expected returns would involve significant losses. The implementation of these projects may also be delayed or may not succeed. Such projects may also not yield the projected returns due to cost overruns, lower than expected medium to long-term oil and gas prices, higher-than-expected taxes or costs of financing, adverse changes in industry regulations, shortage of equipment and qualified personnel, adverse weather conditions, and/or counterparty risk associated with joint venture or contracting parties associated with such projects. These projects can also often require the use of new, advanced technologies, which are expensive to develop, acquire and implement, may be untested and may not function as expected.
The Group also continues to analyse the possibility and economic viability of acquiring assets related to crude oil excavation (hydrocarbon reserves) in order to diversify its current limited upstream assets portfolio. This would involve property rights and/or the rights to excavate, among other things, oil and gas naturally occurring in conventional and unconventional deposits (oil from tar sands, shale gas, tight gas, gas from coal). Factors such as market liquidity, competition among purchasers, changes in the assessment of economic viability and political risk may restrict the Group's ability to acquire and/or exploit such assets.
Some of the upstream projects are being implemented (or may in the future be implemented) through joint ventures or in co-operation with other companies, which is typical in the upstream activities of the oil and gas industry. Joint venture co-operation to conduct exploration for, and exploitation of, hydrocarbon deposits is used to reduce the total potential exposure in respect of risks associated with such activities, however, it also carries with it additional risks related to performance by such partners and counter-parties. The Group may not have full decision making autonomy in respect of such activities as it may not fully control the operations and assets of, or be able to take significant decisions relating to, these joint ventures without the partners' consent. Furthermore, one or more of the Group's partners may take a unilateral decision to withdraw from a joint venture, which could make the relevant project uneconomical for the Group. Should any of these risks materialise this could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group is exposed to default or delay of counterparties, including partners, contractors, subcontractors, suppliers, financial and insurance institutions.
The Group may undertake significant capital expenditure related to the modernisation, renewal and construction of its assets. The Group faces the risk of potential default or delay by its counterparties (including, among others, partners, contractors, subcontractors, suppliers, financial and insurance institutions), especially in cases of financial hardship or
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bankruptcy. Any default by counterparties may affect the cost and completion of projects, the quality of work, the supply of certain critical products or services and/or lead to potential reputational risk, business continuity risk and the loss of important contracts. There is also a possibility of substantial additional costs, particularly in cases where members of the Group would have to pay contractual penalties, find alternative counterparties or complete work which had previously been sub-contracted.
Such events could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group is exposed to the risks associated with using third party infrastructure to distribute its production.
In terms of product distribution logistics, the Group is largely dependent on local and state monopolies, such as Przedsiębiorstwo Eksploatacji Rurociągów Naftowych "Przyjaźń" S.A. ("PERN Przyjaźń") and its subsidiary Operator Logistyczny Paliw Płynnych Sp. z o.o. Group in Poland, or ČEPRO in the Czech Republic. Product distribution logistics of the Mažeikiai refinery are dependent on the sole rail transport operator, AB Lietuvos Geležinkeliai. Changes in tariffs charged by these entities have a direct impact on the Group's product distribution logistics costs. The Group uses pipelines owned and operated by third parties. Lack of proper maintenance, breakdowns and spills, litigation and other actions restricting the Group's access to such facilities could force the Group to use more expensive alternative routes (including by sea and by rail), which could reduce the Group's margin and as a result could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Introduction of competing renewable fuel technologies or hybrid and electric engines may have an impact on the demand for the Group's products.
Many companies are investigating ways to develop technologies to produce high quality fuel using renewable feedstocks. At the same time, vehicles powered by hybrid systems and electric engines are beginning to gain market share. Hybrid vehicles include both an electric engine and a gasoline or diesel powered engine, both of which are smaller than if they were the sole source of power, and make use of regenerative braking. 'Plug in' hybrids that can be charged from domestic electrical outlets have also been launched. The relative economy of these vehicles depends on how the electricity used is generated and how much it costs. A rapid introduction or diffusion of new renewable fuel production technologies or new vehicles powered by hybrid systems and electric engines may have a material adverse effect on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group may not keep pace with technological changes.
The technologies used in the oil and gas and petrochemical industries may continue to evolve rapidly in the future. In order to maintain competitiveness and to expand its business, the Group must effectively adjust to changes in technology. If the Group is unable to modernise its technologies quickly and regularly so as to take advantage of industry trends, it could face increased pressure from competitors. The Group could also lose valuable opportunities to expand its operations in existing and new markets due to an insufficient integration of new technologies in its operations. As a result, the failure of the Group to respond to current and future technological changes in an effective and timely manner could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Risk associated with IT systems and data security.
The Group operates with and is dependent on, highly complex and advanced information technology systems ("IT") in many areas of its activity. The Group's business might be materially disrupted if there is a failure in its IT systems. IT system failures could be caused by, among other things, software bugs, computer viruses, cyberattacks or conversion errors due to system upgrading, security breaches caused by unauthorised access to systems or loss or corruption of data. The materialisation of any of these risks could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group is exposed to a wide range of health, safety, security and environment risks.
Due to the nature of its business, the Group handles flammable and explosive substances, such as gasoline and liquefied petroleum gases stored under pressure, as well as toxic substances. As a result, the Group faces risks in its daily operations relating to technical failures and loss of containment of hydrocarbons and other hazardous material at its refineries or pipelines. Failure to manage these risks could result in injury, loss of life, environmental damage or loss of
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production and could result in regulatory action, legal liability and disruption of business activities on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Risk of changes in shareholding.
The majority of the Group's share capital is held by minority shareholders who own less than 5 per cent. of the shares in the Group. To the knowledge of the Group, as at the date hereof there are three shareholders with a share of more than 5 per cent. of the share capital of PKN ORLEN, namely: the Republic of Poland, through the Ministry of the State Treasury (the "State Treasury") (holding 27.52 per cent.); ING OFE (which, according to information from the Extraordinary General Meeting of PKN ORLEN of 29 January 2016, holds 9.12 per cent.); and AVIVA OFE (which, according to information from the Extraordinary General Meeting of PKN ORLEN of 29 January 2016, holds 7.34 per cent.).
Whilst management is not aware of any intention by the State Treasury to sell its shares in the Group, there can be no assurance that the State Treasury will retain any or all of its current shareholding in the Group. Changes in the ownership structure could alter the composition of the management and supervisory bodies of PKN ORLEN and influence the Group's strategy. It could also have a negative impact on the Group's rating and could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The main shareholder in the Guarantor is the State Treasury which may exert politically motivated influence on the Guarantor, in particular in relation to its dividends policy and investment projects.
The State Treasury is the main shareholder in the Guarantor. As at the date of this Prospectus, it holds in total 27.52 per cent. of the shares in the Guarantor and 27.52 per cent. of the voting rights at the Guarantor's shareholder meetings. As the main shareholder, the State Treasury can exert influence on the Guarantor's decisions regarding recommendations as to dividend payments. Payments of dividends could weaken the Group's financial condition. Additionally, through the State Treasury, the Polish government has and will continue to have, directly or indirectly, the power to influence the Group's operations. As a result, certain decisions of the Group may reflect the Polish government's policy. Any politically motivated influence or instability in the corporate governance area relating to the Group could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group may make acquisitions or be subject to a merger that may negatively influence its business.
As part of its strategy, the Group may engage in discussions regarding potential acquisitions of businesses which will, in its belief, allow the Group to enter new markets or expand its current operations, increase the synergies between its existing businesses and the acquired business and result in other benefits. Any acquisition that the Group may make in the future could result in the incurrence of additional debt and contingent liabilities by the Group, in an increase in the interest expense and the impairment and amortisation expenses relating to goodwill and other intangible assets, or in the use by the Group of the available cash to finance any such acquisition.
The State Treasury has recently announced that it is analysing plans for a possible consolidation of the oil and gas sector. As a result, the Guarantor may also become engaged in a possible merger or consolidation with another company, including companies from the oil and gas sector, such as Grupa Lotos S.A. or PGNiG S.A. However, no decision or direct statement confirming the above has been issued.
If any such acquisition or merger were to occur, and if the Group experiences any difficulties in integrating the acquired operations into its business, the Group may incur costs higher than expected and may not realise some or all of the expected benefits stemming from such acquisitions or mergers. In addition, the involvement of the Group's management in acquisitions or mergers and in the integration of the combined businesses may limit management's involvement in the Group's other operations. The Group's debt burden may also increase if it uses any external financing to finance any future acquisition, which could have a negative impact on its cash flows and its ability to finance its overall operations.
As a result, if the Group makes any significant acquisitions or completes a merger with another company, this could have a material adverse effect on its business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
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The Group faces the risk of cash flow fluctuations due to interest rate fluctuations.
The Group is exposed to the risk of cash flow fluctuations due to interest rate fluctuations, resulting from bank credits, loans and debt securities issued, based on floating interest rates, and derivatives hedging cash flow risks. The Group hedges part of its cash flow risk associated with interest payments on external financing in EUR and USD, using interest rate swaps. The Group swaps securities issued at variable interest rates in PLN to fixed interest rates in EUR through cross-currency swap transactions. For all transactions with derivatives hedging interest rate risk, cash flow hedge accounting is applied. Fluctuations in interest rates may lead to an increased cost of funding for the Group. Derivatives entered into to counter such risk may not always be effective. Such fluctuations in interest or ineffective derivatives transactions could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group is currently facing pending tax, customs, excise and other financial inspections.
A number of tax, customs, excise and financial inspections are conducted in respect of various entities of the Group. These activities are part of the ordinary course of business. Although the Group does not expect that any of these inspections will have a material adverse effect on the business, financial results, financial condition and prospects of the Group there can be no assurance that this will not occur, and that there will not be a material adverse effect on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee, see "Description of the Guarantor - Court and Arbitration Proceedings".
The Group is subject to litigation and regulatory proceedings and no assurance can be given as to their outcome or the sufficiency of provisions in respect thereof.
In the ordinary course of business, the Group is subject to numerous civil, administrative and arbitration proceedings. The audited consolidated financial statements of the Group show accrued provisions for liabilities relating to particular proceedings, calculated based on the advice of the Group's internal and external legal counsel. As of 31 December 2015, there were recorded provisions in the total amount of PLN 1,459 million, including in relation to the following types of liabilities: environmental - PLN 489 million, carbon dioxide ("CO2") emissions and energy certificates - PLN 466 million, jubilee bonuses and post-employment benefits - PLN 253 million, various other risks and charges - PLN 251 million. However, provisions have not been recorded in respect of all legal, regulatory and administrative proceedings to which the Group is, or may become, a party. In particular, the Group has not recorded provisions in cases in which the outcome is unquantifiable or which the Group currently expects to be ruled in its favour. As a result, no assurance may be given with respect to the adequacy of provisions to cover all amounts payable by the Group in connection with such proceedings. Failure to quantify sufficient provisions or to assess the likely outcome of any proceedings could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee. See "Description of the Group - Court and Arbitration Proceedings".
The Group may not be able to hire, train or retain a sufficient number of qualified staff.
The oil and gas industry requires management and employees who have a highly specialised knowledge bases and skill sets. The Group is therefore dependent on highly skilled management and employees. Experienced and capable personnel are in high demand and the Group faces significant competition in its principal markets to recruit such personnel. Consequently, when experienced employees leave, the Group may have difficulty, and incur additional costs, in replacing them. In addition, the loss of any member of the senior management team may result in a loss of organisational focus, poor execution of operations and/or corporate strategy and an inability to identify and execute potential strategic initiatives in the future, including strategies relating to the growth of the Group's business. Failure to hire, train or retain a sufficient number of experienced, capable and reliable personnel, especially senior and middle management with appropriate professional qualifications, or to recruit skilled professional and technical staff in pace with potential growth, could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Industrial action or adverse labour relations could disrupt the Group's business operations.
The Group's employees are parties to national or industry collective bargaining arrangements and benefit from applicable local law, regulation and custom regarding employee rights and benefits. If the Group is unable to negotiate acceptable labour agreements or maintain satisfactory employee relations, the results could include work stoppages, strikes or other industrial action or labour difficulties (including higher labour costs) and have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
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A deterioration of the Group's business reputation may adversely impact on its operations, brand and financial performance.
The Group's reputation is important to its business for reasons including, but not limited to, finding commercial partners for business ventures, securing licences with governments, attracting contractors and employees and negotiating favourable terms with suppliers. The Group operates in the premium segment of the retail market under the name ORLEN. The Group has a recognised and established brand of petrol stations and is continuing to develop and promote convenience shops and Quick Service Restaurants. See the section entitled "Retail Segment". The Group is focussed on the development and perception of its reputation and brand.
Any damage to the Group's reputation, whether arising from litigation, or from regulatory, supervisory or enforcement actions, matters affecting its financial reporting or compliance with administrative agencies in the jurisdictions in which it does business, negative publicity, including from environmental activists, or the conduct of its business or otherwise could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payment, under the Bonds and under the Guarantee.
Liquidity risk.
The Group is exposed to liquidity risk arising from its low ratio of its current assets to current liabilities. The ratio of current assets to current liabilities (current ratio) was 1.6 at 31 December 2014 and 1.5 at 31 December 2015.
Banks and capital markets globally have experienced a significant disruption since 2008 that has been characterised by severe reductions in liquidity, and in the light of the recent financial crisis and restrictions on the availability of credit, liquidity risk management is of particular importance to the Group. Should the Group be unable to maintain the necessary financial flexibility or maintain sufficient liquidity reserves in the form of committed credit lines, this could have a material adverse effect on the Group's business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Credit risk.
In conducting its business, the Group sells products and services to entities on deferred payment terms. There is therefore a risk of non-payment by the recipients of the products and services. The adopted payment term associated with the normal course of sales is 14 to 30 days.
The Group is also exposed to credit risk associated with guarantees granted to its contractors. The maximum level of exposure arising from such guarantees is the maximum amount that the Group would be forced to pay, should a contractor demand payment under a guarantee. The amount of sureties and guarantees for obligations towards third parties issued in the ordinary course of business as at 31 December 2014 and as at 31 December 2015 amounted to PLN 592 million and PLN 458 million, respectively, which related mainly to warranties and guarantees for due performance of contracts, customs guarantees, bid bonds and payment guarantees.
If a significant amount of receivables are paid late or remain unpaid, or if a significant amount of contingent liabilities are called, this could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group is exposed to the possibility of material divestment.
The Group is exposed to the possibility of material divestment in the mid or long term. The Group's assets are under review due to their performance. Subject to the outcome of such review, the Group may assess the possibility of divesting some of its assets.
A material divestment could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
RISK FACTORS ASSOCIATED WITH THE REGULATORY ENVIRONMENT
The Group is exposed to risks associated with changes in existing laws and regulations.
The oil and gas industry is highly regulated. Frequent changes in the complex regulatory provisions or their interpretation may lead to uncertainty for the Group and increased costs associated with regulatory compliance. The Group is exposed to risks associated with the legal and regulatory developments on three levels: (i) at the EU level in
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terms of directives and regulations applicable to the Group, with a special focus on the EU law in the field of energy, environment and climate change; (ii) at the national level where member states are implementing EU legislation, which may or may not be identical across the member states in the countries in which the Group operates; and (iii) at the national level of local laws and regulations. Changes in regulations could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The operations of the Group are dependent on government permissions, and may be exposed to risks associated with state intervention.
The oil and gas and petrochemical industries are subject to regulations and interventions by state authorities, in particular, in respect of: concessions and licences for exploration, prospecting, production of liquid fuels; restrictions on production and exports; environmental issues; controlling the methods of developing and vacating land and installations. A substantial part of the Group's activities requires a licence, a concession or another form of permit. Any such licence, concession or permit may be suspended, revoked or may not be renewed by the competent authorities, should a violation of regulatory requirements occur. Revocation, amendment or non-renewal of a licence, concession or permit for any reason may have a material adverse effect on the operations of the Group or its financial position, as the Group will not be able to carry out all or part of its current activities, and in turn this could have a material adverse effect on the Group's ability to make payments under the Bonds and on the Bonds' value.
Furthermore, political relations between the governments of the countries in which the Group operates are also of great significance. Changes in regulations, the level of intervention and the political climate in these countries could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group faces risks associated with meeting regulatory stockholding obligations.
Poland meets its 90-day stockholding obligation by holding government stocks and by placing a stockholding obligation on the oil industry. As one of the liquid fuel producers and importers, PKN ORLEN has been obliged from 31 March 2016 to hold minimum stock levels of 63 days, based on its daily production and net import of crude oil and liquid fuels during the previous calendar year. According to the Polish regulations, the required level will be gradually decreased to 60 days from 1 October 2016, 57 days from 31 March 2017 and 53 days from 31 December 2017. Lithuanian law requires that companies that import fuel to Lithuania and ORLEN Lietuva maintain stocks of crude oil and certain petroleum products in Lithuania in volume equal to the 60-day average daily oil consumption of the previous year and 30-day stocks must be maintained by an appropriate Lithuanian state agency. In accordance with the laws of the Czech Republic, mandatory levels of crude oil and stocks must be maintained only by a specialised government agency.
The Group is exposed to significant costs associated with stockholding obligations including the cost of purchase and costs associated with storage and insurance. Furthermore, the reserves are subject to the effects of price fluctuations in the crude oil market, which have a non-cash impact on the valuation of reserves, and consequently on the Group's balance sheet and reported results. In the event of large fluctuations in crude oil prices, the requirement to maintain compulsory stocks can have a significant impact on the Group's rating, liquidity, business, operating results and financial position. In addition, any failure to maintain the required stock level entails high fines. These factors could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Changes in the European Union's climate and energy policy, resulting in higher cost of CO2 emissions, could have a material adverse effect on the Group's results of operations and financial condition.
The Group is subject to EU Directive 2003/87/EC (of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC), which established the EU Emissions Trading Scheme (the "ETS Directive") as part of the EU Climate and Energy Package. The purpose of the ETS Directive is to promote reductions in CO2 emissions annually until 2020. The ETS Directive has been implemented into national legislation in Poland, Germany, the Czech Republic and Lithuania. Currently, CO2 emission allowances should, as a rule, be purchased via auction, however the Group was granted free emission rights for the years 2013-2020 covering part of the expected emissions. The annual quantity of free allowances decreases year by year, which means that an increasing quantity must be purchased each year on the market.
In October 2014, the European Council issued conclusions introducing the new 2030 Climate and Energy Policy Framework. The EU Member States agreed that CO2 emissions should be reduced by 40 per cent. (as compared to 1990 volumes) and the share of renewable energy should achieve 27 per cent. by 2030. As a result of these conclusions, in July 2015 the European Commission proposed an amendment to the ETS Directive which, at the date of this
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Prospectus, is under consultation and which may therefore not be approved at all, or may be subject to change. According to the proposal, the annual reduction in the number of emission allowances should be increased from 1.74 per cent. to 2.2 per cent. (between 2020 and 2030). In addition, a new mechanism for stabilisation of CO2 prices is expected to be introduced by 2021 at the latest (the Market Stability Reserve). It is anticipated that this will increase the prices of emission allowances.
The proposed amendment to the ETS Directive provides for mechanisms which are supposed to lessen the negative impact of higher CO2 prices in 'low income' Member States, including Poland. The mechanisms include: granting new free allowances for the purpose of electricity generation in the years 2020-2030 and the creation of a Modernisation Fund which will be used to support investments in modernising energy systems and improving energy efficiency. The Group may be eligible for support from both mechanisms, but there is no guarantee that this support will be received.
There is a risk that a decrease in the allocation of emission allowances across the EU and/or an increase in the market price of emission allowances, could make some of the Group's activities less economically viable, which would have a material adverse effect on its business, financial results, financial condition and prospects and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
Risks associated with the obligation to achieve the National Indicative Target ("NIT") for bio-components.
In June 2007 the Council of Ministers of Poland implemented a regulation imposing mandatory indicators for bio- components and bio-fuels within Poland. Fuel producers and importers, among others, are required to achieve set NIT levels, which increase progressively. The proportion of fuel to be made up of bio-fuel components was set at 7.10 per cent. in 2013-2016, 7.8 per cent. in 2017 and 8.5 per cent. in 2018 based on energy content. If the Group fails to achieve these targets, a fine might be payable. Such a fine would be calculated according to the formula set out in the Polish Act on Bio-components and Bio-fuels, which would currently amount to approximately PLN 17,500 per tonne of a bio- component fuel produced at less than the required NIT level. As of January 2012, fuel producers may use a lowered NIT which corresponds to 0.85 of the NIT for a given year if at least 70 per cent. of the bio-components used during fuel production have been supplied by domestic producers listed in the register of producers of the Agricultural Market Agency. A mechanism that reduces bio-components has been established for the period 2016-2017. There is an ongoing consultation process with stakeholders on future legislation concerning biofuels, which may result in changes to such legislation.
The prices of bio-fuel can vary, due to natural disasters such as droughts, limited availability of raw materials for the production of bio-components, and increases in the NIT level. If the Polish government states that exceptional circumstances have occurred, it may decide to reduce the relevant NIT for a given year, however, there can be no assurance that it will do so. The price of bio-components is also affected by EU regulations and national regulations relating to certified bio-fuels and related requirements.
Any failure by the Group to meet its obligations relating to the requisite NIT could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
The Group faces risks relating to the level of its industrial emissions.
In accordance with Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control) (the "Industrial Emissions Directive"), which has been implemented in the Czech Republic, Poland and Lithuania, much stricter emission standards for sulphur dioxide, nitrogen oxides and dust have been imposed since 1 January 2016. The ORLEN Group has taken action to reduce excessive emissions from the plants and production units. The boilers in the combined heat and power plant (the "PP") in Płock have been equipped with selective catalytic reduction ("SCR") and electrostatic precipitators ("ESP") to reduce the amounts of nitrogen oxides and dust, respectively. To reduce sulphur dioxide emissions, a common wet flue gas desulphurisation ("FGD") has been installed. One of the boilers is being refurbished and, will be equipped with SCR and ESP and connected to FGD before commissioning. This is expected to lead to a reduction of the abovementioned emissions from the PP in Płock (which is the largest emissions source) by more than 90 per cent. Production installations in Lithuania and the Czech Republic have also undergone initiatives to reduce emissions of sulphur dioxide, nitrogen oxides and dust to reach compliance with the requirements of the Industrial Emissions Directive which have been in force from 2016. Among the actions taken were: the optimisation of combustion conditions including the oxygen content in the flue gas, changing the structure of fuel, increasing the share of gas in the overall volume of burned fuel, exchanging and adjusting the burners, constructing a filter for dedusting with an effectiveness of over 99 per cent. and replacing the analysers for the emissions measurements.
Failure to meet the industrial emission standards could have a material adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds and under the Guarantee.
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The Group is exposed to risks associated with planned changes in the tax legislation (General Anti-Abuse Rule).
On 19 May 2016, the Polish Parliament passed an act implementing a General Anti-Abuse Rule (the "GAAR"), which will enable the Ministry of Finance to challenge taxpayers' actions which have been acknowledged by the Ministry of Finance as tax avoidance. The act implementing the GAAR is expected to come into force 30 days after the President of Poland signs it and it is published in the Journal of Laws (Dziennik Ustaw). The act implementing the GAAR may affect transactions entered into solely or mainly for tax reasons, including transactions entered into for the purpose of avoiding, decreasing or delaying the tax payable in connection with such transactions (a so-called "tax benefit"). Tax avoidance may be achieved by using a structure that involves intermediaries, despite a lack of economic justification of such involvement. If the relevant transaction or structure is acknowledged as tax avoidance, the Ministry of Finance will calculate the tax liability of the relevant taxpayer as if this liability resulted from an 'adequate' transaction of similar economic consequences or by ignoring the tax avoidance activity, which may result in a higher tax liability becoming due and payable. Under the act implementing the GAAR, the GAAR would apply to all tax benefits obtained after the act implementing the GAAR comes into force, even if the tax benefits are gained on the basis of tax structures established before the act implementing GAAR becomes binding. Whilst the Guarantor and the Group are not aware of any particular risks arising out of the GAAR, when the act implementing the GAAR comes into force, the Guarantor and/or other Group companies may have to review the tax structure of their transactions, including the issue of the Bonds by the Issuer and the giving of the Guarantee by the Guarantor. New material tax liabilities could have an adverse effect on the business, financial results, financial condition and prospects of the Group and, consequently, on the value of the Bonds, and on the ability of the Issuer and the Guarantor to make payments under the Bonds, under the Guarantee and/or under any instrument through which proceeds from the Bonds are transferred from the Issuer to the Guarantor (the "Inter-company Loan"). In addition, in the event that, due to the change in, or amendment to, Polish laws or regulations (or any change in the application or official interpretation thereof) made by the GAAR (when implemented), the Issuer or the Guarantor (as the case may be) would be obliged to increase the amounts payable in respect of the Bonds or under the Guarantee due to any withholding or deduction for, or on account of, any Taxes imposed or levied by or on behalf of Poland or any political subdivision or any authority thereof or therein having power to tax, or the Guarantor has or will become obliged to make any such withholding or deduction with respect to any payment by the Guarantor under the Inter-company Loan to the Issuer, the Issuer may redeem all outstanding Bonds in accordance with Condition 7.2.
FACTORS THAT MAY AFFECT THE ISSUER'S ABILITY TO FULFIL ITS OBLIGATIONS UNDER THE BONDS
The Issuer is a special purpose financing entity.
The Issuer is special purpose financing entity with no intended business operations other than entering into financing arrangements (including the issuance of the Bonds), lending of the proceeds to the Guarantor and entering into certain ancillary arrangements. The Issuer's only material assets will be the Guarantor's obligations to repay any such amounts lent to it. Therefore, the Issuer is subject to all risks to which the Guarantor is subject, to the extent that such risks could limit the Guarantor's ability to repay any amounts lent to it by the Issuer and to satisfy, in full and on a timely basis, its obligations under or in connection with the Guarantee.
The Issuer's centre of main interest is in the Kingdom of Sweden.
The Issuer has its registered office in the Kingdom of Sweden. As a result there is a rebuttable presumption that its centre of main interest ("COMI") is in the Kingdom of Sweden and consequently that any main insolvency proceedings applicable to it would be governed by Swedish law.
In the decision by the European Court of Justice in relation to Eurofood IFSC Limited, the European Court of Justice restated the presumption in Council Regulation (EC) No. 1346/200 of 29 May 2000 on insolvency proceedings that the place of a company's registered office is presumed to be the company's COMI and that the presumption can only be rebutted if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at the registered office is deemed to reflect. As the Issuer has its registered office in the Kingdom of Sweden, has a Swedish director, is registered for tax in the Kingdom of Sweden and has a Swedish corporate services provider, the Issuer and the Guarantor do not believe that factors exist that would rebut this presumption, however, there can be no assurance that a Court would agree with this presumption.
FACTORS WHICH ARE MATERIAL FOR THE PURPOSE OF ASSESSING THE MARKET RISKS ASSOCIATED WITH THE BONDS
The Bonds may not be a suitable investment for all investors
Each potential investor in the Bonds must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor may wish to consider, either on its own or with the help of its financial or other professional advisers, whether it:
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• has sufficient knowledge and experience to make a meaningful evaluation of the relevant Bonds, the merits and risks of investing in the relevant Bonds and the information contained in this Prospectus or any applicable supplement;
• has access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Bonds and the impact such investment will have on its overall investment portfolio;
• has sufficient financial resources and liquidity to bear all of the risks of an investment in the relevant Bonds, including where the currency for principal or interest payments is different from the potential investor's currency;
• understands thoroughly the terms of the relevant Bonds and is familiar with the behaviour of any relevant indices and financial markets;
• is able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks; and
• is aware that markets such as Poland are subject to rapid change and can face greater risks than more developed markets, including in some cases significant political, economic and legal risks.
Generally, investment in markets such as Poland is only suitable for sophisticated investors who fully appreciate the significance of the risks involved and potential investors are urged to consult with their own legal and financial advisors before making an investment in the Bonds.
The change of control put option.
The Terms and Conditions of the Bonds provide that the Bonds are redeemable upon the occurrence of a Change of Control (as defined in the Terms and Conditions of the Bonds) at the option of Bondholders (i) at 101 per cent. of their principal amount, together with interest accrued up to, but excluding, the Optional Redemption Date if the Bonds carry a Non-Investment Grade Rating or no credit rating on the Relevant Announcement Date (each term as defined in the Terms and Conditions of the Bonds); or (ii) at their principal amount, together with interest accrued up to, but excluding, the Optional Redemption Date if the Bonds carry an Investment Grade Rating (as defined in the Terms and Conditions of the Bonds) on the Relevant Announcement Date, provided that if, at the Relevant Announcement Date, the Bonds carry a credit rating from more than one Rating Agency (as defined in the Terms and Conditions of the Bonds), at least one of which is an Investment Grade Rating, then sub-paragraph (ii) above will apply. See "Redemption and Purchase — Redemption at the Option of Bondholders on the occurrence of a Put Event".
Investors should be aware that the put option may only be exercised in the specified circumstances of a Change of Control, which may not cover all situations where a change of control may occur or where successive changes of control occur in relation to the Issuer. Once given, a Put Option Notice (as defined in the Terms and Conditions of the Bonds) is irrevocable.
In the event that some, but not all, Bondholders exercise their put option, this may reduce the liquidity of any trading market for the Bonds. See "The secondary market generally" below.
RISKS RELATED TO BONDS GENERALLY
Modification, waivers and substitution.
The Terms and Conditions of the Bonds contain provisions for calling meetings of Bondholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Bondholders including Bondholders who did not attend and vote at the relevant meeting and Bondholders who voted in a manner contrary to the majority.
The Bonds may be redeemed prior to maturity.
In the event that the Issuer or the Guarantor would be obliged to increase the amounts payable in respect of any Bonds (or with respect to any payment by the Guarantor, under an instrument through which proceeds from the Bonds are transferred from the Issuer to the Guarantor, to the Issuer in order to enable the Issuer to make any payment of principal or interest in respect of the Bonds) due to any withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the Kingdom of Sweden or the Republic of Poland or any political subdivision or any authority thereof or therein having power to tax or any other jurisdiction or any political subdivision or any authority thereof or
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therein having power to tax, the Issuer may redeem all outstanding Bonds in accordance with the Terms and Conditions of the Bonds.
Change of law.
The Terms and Conditions of the Bonds are based on English law in effect as at the date of this Prospectus. No assurance can be given as to the impact of any possible judicial decision or change to English law or administrative practice after the date of this Prospectus.
Integral multiples of less than €100,000.
The denomination of the Bonds is €100,000 plus integral multiples of €1,000 in excess thereof, up to and including €199,000. Therefore, it is possible that the Bonds may be traded in amounts in excess of €100,000 that are not integral multiples of €100,000. In such a case a Bondholder who, as a result of trading such amounts, holds a principal amount of less than €100,000 may not receive a definitive Bond in respect of such holding (should definitive Bonds be printed) and would need to purchase a principal amount of Bonds such that it holds an amount equal to one or more denominations. If definitive Bonds are issued, holders should be aware that definitive Bonds which have a denomination that is not an integral multiple of €100,000 may be illiquid and difficult to trade.
RISKS RELATED TO THE GUARANTEE
The Guarantee is limited as to a maximum amount, as described under Condition 3.1 of the Terms and Conditions of the Bonds. The Guarantor will not be obliged to make any payment in respect of the Bonds or Coupons, or pursuant to the Guarantee, to the extent that, and at such time as, the aggregate amounts claimed exceed €1,100,000,000, being the maximum amount permitted under the terms of the Guarantee. Although the principal amount of the Bonds is €750,000,000 and it is therefore anticipated that the Guarantee should be adequate to cover the issue, there can be no assurance that it will do so. In such circumstances, Bondholders could receive less than their anticipated principal, interest or other amounts in respect of the Bonds.
RISKS RELATED TO THE MARKET GENERALLY
Set out below is a brief description of certain market risks, including liquidity risk, exchange rate risk, interest rate risk and credit risk:
The secondary market generally.
Although application has been made to list the Bonds on the Irish Stock Exchange plc, the Bonds may have no established trading market when issued, and one may never develop. If a market does develop, it may not be liquid. Therefore, investors may not be able to sell their Bonds easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market. Illiquidity may have a severely adverse effect on the market value of Bonds.
Exchange rate risks and exchange controls.
The Issuer will pay principal and interest on the Bonds in Euros. This presents certain risks relating to currency conversions if an investor's financial activities are denominated principally in a currency or currency unit (the "Investor's Currency") other than Euros. These include the risk that exchange rates may significantly change (including changes due to devaluation of the Euro or revaluation of the Investor's Currency) and the risk that authorities with jurisdiction over the Investor's Currency may impose or modify exchange controls. An appreciation in the value of the Investor's Currency relative to the Euro would decrease (1) the Investor's Currency-equivalent yield on the Bonds, (2) the Investor's Currency equivalent value of the principal payable on the Bonds and (3) the Investor's Currency equivalent market value of the Bonds.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.
Interest rate risks.
Investment in fixed rate bonds involves the risk that subsequent changes in market interest rates may adversely affect the value of fixed rate bonds.
Credit ratings may not reflect all risks.
One or more independent credit rating agencies may assign credit ratings to the Bonds. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may
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affect the value of the Bonds. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time.
Legal considerations may restrict certain investments.
The investment activities of certain investors are subject to investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) the Bonds are legal investments for it, (2) the Bonds can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of any of the Bonds. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of Bonds under any applicable risk-based capital or similar rules.
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INFORMATION INCORPORATED BY REFERENCE
The following information shall be deemed to be incorporated in, and to form part of, this Prospectus provided however that any statement contained in any document incorporated by reference in, and forming part of, this Prospectus shall be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement:
(a) the published annual report, audited consolidated financial statements, audit opinion, report and supplementary report on the consolidated financial statements of the Guarantor for the financial year ended 31 December 2015 (which can be viewed online at http://www.orlen.pl/EN/InvestorRelations/Documents/PKN_ORLEN_2015%20Consolidated_Financial%20Sta tements.pdf);
(b) the published annual report, audited consolidated financial statements, audit opinion, report and supplementary report on the consolidated financial statements of the Guarantor for the financial year ended 31 December 2014 (which can be viewed online at http://www.orlen.pl/EN/InvestorRelations/Documents/PKN_ORLEN_2014%20Consolidated%20Financial%20 Statements.pdf);
(c) the published annual report, audited unconsolidated financial statements, audit opinion, report and supplementary report on the unconsolidated financial statements of the Guarantor for the financial year ended 31 December 2015 (which can be viewed online at http://www.orlen.pl/EN/InvestorRelations/Documents/PKN_ORLEN%202015%20Unconsolidated%20Financi al%20Statements.pdf);
(d) the published annual report, audited unconsolidated financial statements, audit opinion, report and supplementary report on the unconsolidated financial statements of the Guarantor for the financial year ended 31 December 2014 (which can be viewed online at http://www.orlen.pl/EN/InvestorRelations/Documents/PKN_ORLEN%202014%20Unconsolidated%20Financi al%20Statements.pdf);
(e) the published quarterly report, reviewed interim condensed consolidated financial statements and review report on the interim condensed consolidated financial statements of the Guarantor for the three months ended 31 March 2016 (which can be viewed online at http://www.orlen.pl/EN/InvestorRelations/Documents/PKN_ORLEN_1Q2016%20Financial%20Statements.pd f);
(f) the published annual report, audited financial statements, audit opinion and report on the financial statements of the Issuer for the financial years ended 31 December 2015 (which can be viewed online at http://www.orlen.pl/EN/InvestorRelations/Documents/Orlen%20Capital%20AB%20%28publ%29%202015%2 0Financial%20Statements.pdf); and
(g) the published annual report, audited financial statements, audit opinion and report on the financial statements of the Issuer for the financial years ended 31 December 2014 (which can be viewed online at http://www.orlen.pl/EN/InvestorRelations/Documents/Orlen%20Capital%20AB%20%28publ%29%202014%2 0Financial%20Statements.pdf).
The Guarantor's consolidated financial statements incorporated by reference have been prepared in accordance with accounting principles contained in IFRS EU. The Guarantor's annual financial statements for the year ended 31 December 2014 have been audited in accordance with section 7 of the Accounting Act, National Standards on Auditing issued by the National Council of Certified Auditors and International Standards on Auditing by KPMG Audyt Sp. z. o.o., who have delivered an unqualified audit opinion and report in connection therewith. The Guarantor's annual financial statements for the year ended 31 December 2015 have been audited in accordance with section 7 of the Accounting Act and International Standards on Auditing as adopted by the National Council of Certified Auditors as the National Standards on Assurance by KPMG Audyt Sp. z. o.o., who have delivered an unqualified audit opinion and report in connection therewith. The Guarantor's interim condensed consolidated financial statements for the period from 1 January 2016 to 31 March 2016 have been reviewed by KPMG Audyt Sp. z. o.o.
The Issuer's financial statements incorporated by reference have been prepared in accordance with the Annual Accounts Act and the Swedish Financial Reporting Board's recommendation RFR 2 Accounting for Legal Entities. The application of RFR 2 means that the Issuer, so far as possible, applied all IFRS EU and interpretations of the IFRS Interpretations Committee (IFRIC) as part of the Annual Accounts Act and the Security Act, and considered the relationship between accounting and taxation. The Issuer's annual financial statements have been audited in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden by KPMG AB, who have delivered unqualified audit opinions and reports in connection therewith.
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Such documents will be made available, free of charge, during usual business hours at the specified offices of Citibank N.A., London Branch unless such documents have been modified or superseded. The documents referred to above have been filed with the Central Bank.
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TERMS AND CONDITIONS OF THE BONDS
The following is the text of the Terms and Conditions of the Bonds which (subject to modification) will be endorsed on each Bond in definitive form:
The €750,000,000 2.500 per cent. Guaranteed Bonds due 2023 (the "Bonds", which expression shall in these Terms and Conditions (the "Conditions"), unless the context otherwise requires, include any further bonds issued pursuant to Condition 14 and forming a single series with the Bonds of ORLEN Capital AB (publ) (the "Issuer")) are issued subject to and with the benefit of an Agency Agreement dated 7 June 2016 (such agreement as amended and/or supplemented and/or restated from time to time, the "Agency Agreement") made between the Issuer, Polski Koncern Naftowy ORLEN Spółka Akcyjna (the "Guarantor") as guarantor, Citibank, N.A. London Branch as fiscal agent and principal paying agent (the "Fiscal Agent") and the other initial paying agents named in the Agency Agreement (together with the Fiscal Agent, the "Paying Agents").
The statements in these Conditions include summaries of, and are subject to, the detailed provisions of and definitions in the Agency Agreement. Copies of the Agency Agreement are available for inspection during normal business hours by the holders of the Bonds (the "Bondholders") and the holders of the interest coupons appertaining to the Bonds (the "Couponholders" and the "Coupons" respectively) at the specified office of each of the Paying Agents. The Bondholders and the Couponholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Agency Agreement applicable to them. References in these Conditions to the Fiscal Agent and the Paying Agents shall include any successor appointed under the Agency Agreement.
1. FORM, DENOMINATION AND TITLE
1.1 Form and Denomination
The Bonds are in bearer form, serially numbered, in the denominations of €100,000 and integral multiples of €1,000 in excess thereof up to and including €199,000 each with Coupons attached on issue. Bonds of one denomination may not be exchanged for Bonds of the other denomination.
1.2 Title
Title to the Bonds and to the Coupons will pass by delivery.
1.3 Holder Absolute Owner
The Issuer, the Guarantor and any Paying Agent may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Bond or Coupon as the absolute owner for all purposes (whether or not the Bond or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Bond or Coupon or any notice of previous loss or theft of the Bond or Coupon).
2. STATUS OF THE BONDS
The Bonds and the Coupons constitute (subject to the provisions of Condition 4) unsecured obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Issuer under the Bonds and Coupons shall, save for such obligations as may be preferred by provisions of law that are both mandatory and of general application and subject to Condition 4, at all times rank at least equally with all their respective other present and future unsecured and unsubordinated obligations.
3. GUARANTEE
3.1 Guarantee
The payment of the principal and interest in respect of the Bonds has been irrevocably and, subject as provided below, unconditionally guaranteed by the Guarantor under a guarantee (the "Guarantee") dated 7 June 2016 and executed by the Guarantor. The Guarantee will be valid in respect of all amounts payable by the Issuer on or in respect of any Bond or Coupon up to a maximum amount (when aggregated with all other amounts guaranteed under the Guarantee in respect of the Bonds and the Coupons) not exceeding €1,100,000,000.
3.2 Status of the Guarantee
The obligations of the Guarantor under the Guarantee constitute (subject to the provisions of Condition 4) unsecured obligations of the Guarantor and shall at all times rank pari passu with all other outstanding unsecured and unsubordinated obligations of the Guarantor, present and future. The payment obligations of the Guarantor under the Guarantee shall, save for such exceptions as may be provided by applicable legislation and
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subject to Condition 4, at all times rank at least equally with all their respective other present and future unsecured and unsubordinated obligations. The original of the Guarantee is held by the Fiscal Agent on behalf of, and copies are available for inspection by, the Bondholders and Couponholders at its specified office.
4. NEGATIVE PLEDGE
4.1 Negative Pledge
So long as any of the Bonds or Coupons remains outstanding:
(a) the Issuer will not create or have outstanding any mortgage, charge, lien, pledge or other security interest (each a "Security Interest"), other than a Permitted Security Interest, upon the whole or any part of its present or future undertaking, assets or revenues (including any uncalled capital) to secure any Relevant Indebtedness, unless the Issuer, in the case of the creation of a Security Interest, before or at the same time and, in any other case, promptly, takes any and all action necessary to ensure that:
(i) all amounts payable by it under the Bonds and the Coupons are secured by the Security Interest equally and rateably with the Relevant Indebtedness; or
(ii) such other Security Interest or other arrangement (whether or not it includes the giving of a Security Interest) is provided as is approved by an Extraordinary Resolution (as defined in the Agency Agreement) of the Bondholders.
(b) the Guarantor will ensure that no Relevant Indebtedness of the Guarantor or any of its Material Subsidiaries will be secured by any Security Interest, other than a Permitted Security Interest, upon the whole or any part of its present or future undertaking, assets or revenues (including any uncalled capital) of the Guarantor or any of its Material Subsidiaries unless the Guarantor, in the case of the creation of the Security Interest, before or at the same time and, in any other case, promptly, takes any and all action necessary to ensure that:
(i) all amounts payable by it under the Guarantee are secured by the Security Interest equally and rateably with the Relevant Indebtedness; or
(ii) such other Security Interest or guarantee or indemnity or other arrangement (whether or not it includes the giving of a Security Interest) is provided as is approved by an Extraordinary Resolution of the Bondholders.
4.2 Interpretation
For the purposes of these Conditions:
(a) "Material Subsidiary" means at any time a Subsidiary of the Guarantor whose net book assets or revenues represent more than 10 per cent. of the total consolidated net book assets or revenues, as the case may be, of the Guarantor and its Subsidiaries. For this purpose:
(i) the net book assets and revenues of a Subsidiary of the Guarantor will be determined from that Subsidiary's financial statements (unconsolidated if it has Subsidiaries) upon which the latest consolidated annual financial statements of the Guarantor and its Subsidiaries (the "Group") have been based;
(ii) if a Subsidiary of the Guarantor becomes a member of the Group after the date on which the latest consolidated annual financial statements of the Group have been prepared, the net book assets and revenues of that Subsidiary will be determined from its latest financial statements;
(iii) the net book assets and revenues of the Group will be determined from its latest consolidated annual financial statements, adjusted (where appropriate) to reflect the net book assets and revenues of any company or business subsequently acquired or disposed of; and
(iv) if a Material Subsidiary disposes of all or substantially all of its assets to another Subsidiary of the Guarantor, it will immediately cease to be a Material Subsidiary and the other Subsidiary (if it is not already) will immediately become a Material Subsidiary; the subsequent financial statements of those Subsidiaries and the Group will not be used to determine whether those Subsidiaries are Material Subsidiaries or not.
(b) "Permitted Security Interest" means a Security Interest which is created to secure or provide for the payment of Relevant Indebtedness in connection with any Project Financing provided that the assets or
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revenues subject to such Security Interest are (i) assets which are used or to be used in or in connection with the project to which such Project Financing relates or (ii) revenues or claims which arise from the operation, failure to meet specifications, exploitation, sale or loss of, or damage to, such assets.
"Project Financing" means any indebtedness incurred solely to finance a project or the restructuring or expansion of an existing project, in each case for the acquisition, construction, development or exploitation of any property pursuant to which the person or persons to whom such indebtedness is or may be owed by the relevant borrower (whether or not a member of the Group) (i) expressly agrees or agree that the principal source of repayment of such funds will be that property or assets or revenues generated by such project (or by such restructuring or expansion thereof) and (ii) has or have no other recourse whatsoever to any member of the Group (or its assets and/or revenues) for the repayment of or a payment of any sum relating to such indebtedness;
"Relevant Indebtedness" means (i) any indebtedness with an original maturity of more than one year which is in the form of, or represented or evidenced by, bonds, notes, debentures, loan stock or other debt securities which for the time being are, or are intended to be or capable of being, quoted, listed or dealt in or traded on any stock exchange or over-the-counter or other securities market, and (ii) any guarantee or indemnity in respect of any such indebtedness; and
"Subsidiary" means an entity of which a person has direct or indirect control or owns directly or indirectly more than 50 per cent. of the share capital or similar right of ownership (and for this purpose "control" means the power to direct the management and policies of the entity whether through ownership of voting capital, by contract or otherwise).
5. INTEREST
5.1 Interest Rate and Interest Payment Dates
The Bonds bear interest from and including 7 June 2016 at the rate of 2.500 per cent. per annum, payable annually in arrear on 7 June (each an "Interest Payment Date"). The first payment (representing a full year's interest) shall be made on 7 June 2017.
5.2 Interest Accrual
Each Bond will cease to bear interest from and including its due date for redemption unless, upon due presentation, payment of the principal in respect of the Bond is improperly withheld or refused or unless default is otherwise made in respect of payment. In such event, interest will continue to accrue until whichever is the earlier of:
(a) the date on which all amounts due in respect of such Bond have been paid; and
(b) five days after the date on which the full amount of the moneys payable in respect of such Bonds has been received by the Fiscal Agent and notice to that effect has been given to the Bondholders in accordance with Condition 12.
5.3 Calculation of Broken Interest
When interest is required to be calculated in respect of a period of less than a full year, it shall be calculated on the basis of (a) the actual number of days in the period from and including the date from which interest begins to accrue (the "Accrual Date") to but excluding the date on which it falls due divided by (b) the actual number of days from and including the Accrual Date to but excluding the next following Interest Payment Date.
6. PAYMENTS
6.1 Payments in respect of Bonds
Payments of principal and interest in respect of each Bond will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the Bond, except that payments of interest due on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupon, in each case at the specified office outside the United States of any of the Paying Agents.
6.2 Method of Payment
Payments will be made by credit or transfer to a euro account (or any other account to which euro may be credited or transferred) specified by the payee or, at the option of the payee, by euro cheque.
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6.3 Missing Unmatured Coupons
Each Bond should be presented for payment together with all relative unmatured Coupons, failing which the full amount of any relative missing unmatured Coupon (or, in the case of payment not being made in full, that proportion of the full amount of the missing unmatured Coupon which the amount so paid bears to the total amount due) will be deducted from the amount due for payment. Each amount so deducted will be paid in the manner mentioned above against presentation and surrender (or, in the case of part payment only, endorsement) of the relative missing Coupon at any time before the expiry of 10 years after the Relevant Date (as defined in Condition 8) in respect of the relevant Bond (whether or not the Coupon would otherwise have become void pursuant to Condition 9) or, if later, five years after the date on which the Coupon would have become due, but not thereafter.
6.4 Payments subject to Applicable Laws
Payments in respect of principal and interest on Bonds are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 8.
6.5 Payment only on a Presentation Date
A holder shall be entitled to present a Bond or Coupon for payment only on a Presentation Date and shall not, except as provided in Condition 5, be entitled to any further interest or other payment if a Presentation Date is after the due date.
"Presentation Date" means a day which (subject to Condition 9):
(a) is or falls after the relevant due date;
(b) is a Business Day in the place of the specified office of the Paying Agent at which the Bond or Coupon is presented for payment; and
(c) in the case of payment by credit or transfer to a euro account as referred to above, is a TARGET2 Settlement Day.
In this Condition, "Business Day" means, in relation to any place, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in that place and "TARGET2 Settlement Day" means any day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET2) system is open.
6.6 Initial Paying Agents
The names of the initial Paying Agents and their initial specified offices are set out at the end of these Conditions. The Issuer and the Guarantor reserve the right at any time to vary or terminate the appointment of any Paying Agent and to appoint additional or other Paying Agents provided that there will at all times be a Fiscal Agent.
Notice of any termination or appointment and of any changes in specified offices given to the Bondholders promptly by the Issuer in accordance with Condition 12.
7. REDEMPTION AND PURCHASE
7.1 Redemption at Maturity
Unless previously redeemed or purchased and cancelled as provided below, the Issuer will redeem the Bonds at their principal amount on 7 June 2023.
7.2 Redemption for Taxation Reasons
If:
(a) as a result of any change in, or amendment to, the laws or regulations of a Relevant Jurisdiction (as defined in Condition 8), or any change in the application or official interpretation of the laws or regulations of a Relevant Jurisdiction, which change or amendment becomes effective after 7 June 2016, (i) on the next Interest Payment Date the Issuer would be required to pay additional amounts as provided or referred to in Condition 8 or (ii) on the next Interest Payment Date the Guarantor would be unable for reasons outside its control to procure payment by the Issuer and in making payment itself
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would be required to pay such additional amounts or (iii) the Guarantor has or will become obliged to make any withholding or deduction for, or on account of, any Taxes imposed or levied by or on behalf of Poland or any political subdivision or any authority thereof or therein having power to tax with respect to any payment by the Guarantor, under an instrument through which proceeds from the Bonds are transferred from the Issuer to the Guarantor, to the Issuer in order to enable the Issuer to make any payment on the next Interest Payment Date of principal or interest in respect of the Bonds; and
(b) the requirement cannot be avoided by the Issuer or, as the case may be, the Guarantor taking reasonable measures available to it,
the Issuer may at its option, having given not less than 30 nor more than 60 days' notice to the Bondholders in accordance with Condition 12 (which notice shall be irrevocable), redeem all the Bonds, but not some only, at any time at their principal amount together with interest accrued to but excluding the date of redemption, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer or, as the case may be, the Guarantor would be obliged to pay such additional amounts, were a payment in respect of the Bonds then due.
Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the Fiscal Agent a certificate signed by two Directors of the Issuer or, as the case may be, the Guarantor stating that the requirement referred to in (a) above will apply on the next Interest Payment Date and cannot be avoided by the Issuer or, as the case may be, the Guarantor taking reasonable measures available to it and an opinion of independent legal advisers of recognised standing to the effect that the Issuer or, as the case may be, the Guarantor has or will become obliged to pay such additional amounts as a result of the change or amendment.
7.3 Redemption at the Option of the Bondholders on the Occurrence of a Put Event
If, at any time while any Bond remains outstanding, there occurs a Put Event, the holder of each Bond will have the option (the "Put Option") (unless, prior to the giving of the Put Event Notice (as defined below), the Issuer gives notice of its intention to redeem the Bonds under Condition 7.2) to require the Issuer to redeem or, at the Issuer's option, to purchase or procure the purchase of that Bond on the Optional Redemption Date (as defined below), (i) at 101 per cent. of its principal amount together with (or, where purchased, together with an amount equal to) accrued interest (if applicable) to but excluding the Optional Redemption Date if the Bonds carry a Non-Investment Grade Rating or no credit rating on the Relevant Announcement Date (each as defined below) or (ii) at their principal amount, together with interest accrued up to, but excluding, the Optional Redemption Date if the Bonds carry an Investment Grade Rating (as defined below) at the Relevant Announcement Date, provided that if, at the Relevant Announcement Date, the Bonds carry a credit rating from more than one Rating Agency at least one of which is an Investment Grade Rating, then sub-paragraph (ii) will apply.
A "Put Event" shall be deemed to occur if:
(a) a Change of Control occurs;
(b) on the date (the "Relevant Announcement Date") that is the earlier of (1) the date of the first public announcement of the relevant Change of Control and (2) the date of the earliest Relevant Potential Change of Control Announcement (as defined below) (if any), the Bonds carry from any Rating Agency (as defined below):
(i) an investment grade credit rating (Baa3/BBB-, or equivalent, or higher) (an "Investment Grade Rating"), and such rating from any Rating Agency is within the Change of Control Period either downgraded to a non-investment grade credit rating (Ba1/BB+, or equivalent, or lower) (a "Non-Investment Grade Rating") or withdrawn and is not within the Change of Control Period subsequently (in the case of a downgrade) upgraded to an investment grade credit rating by such Rating Agency or (in the case of a withdrawal) replaced by, or reinstated to, an investment grade credit rating from any other Rating Agency, or such Rating Agency, as the case may be; or
(ii) a Non-Investment Grade Rating from any Rating Agency; or
(iii) no credit rating and a Negative Rating Event also occurs;
provided that if, at the time of the occurrence of the Change of Control, the Bonds carry a credit rating from more than one Rating Agency, at least one of which is investment grade, then sub-paragraph (i) will apply; and
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(c) in making the relevant decision(s) referred to above, the relevant Rating Agency announces publicly or confirms in writing to the Issuer or the Guarantor that such decision(s) resulted, in whole or in part, from the occurrence of the Change of Control or the Relevant Potential Change of Control Announcement.
For the purposes of this Condition 7.3:
A "Change of Control" shall be deemed to have occurred at each time (whether or not approved by the Board of Directors of the Guarantor) that any person or persons acting in concert or any person or persons acting on behalf of any such person(s) (the "Relevant Person(s)") at any time directly or indirectly come(s) to own or acquire(s) (A) more than 50 per cent. of the issued ordinary share capital of the Guarantor; or (B) such number of the shares in the capital of the Guarantor carrying more than 50 per cent. of the voting rights normally exercisable at a general meeting of the Guarantor, provided that a Change of Control shall be deemed not to have occurred if all or substantially all of the shareholders of the Relevant Person(s) are, or immediately prior to the event which would otherwise have constituted a Change of Control were, the shareholders of the Guarantor with the same (or substantially the same) pro rata interest in the share capital of the Relevant Person(s) as such shareholders have, or as the case may be, had in the share capital of the Guarantor;
"Change of Control Period" means the period commencing on the Relevant Announcement Date and ending 90 days after the Change of Control (or such longer period for which the Bonds are under consideration (such consideration having been announced publicly within the period ending 90 days after the Change of Control) for rating review or, as the case may be, rating by a Rating Agency, such period not to exceed 60 days after the public announcement of such consideration); a "Negative Rating Event" shall be deemed to have occurred if at such time as there is no rating assigned to the Bonds by a Rating Agency (i) the Guarantor does not, either prior to, or not later than 21 days after, the occurrence of the Change of Control seek, and thereafter use all reasonable endeavours to obtain, a rating of the Bonds, or any other unsecured and unsubordinated debt of the Guarantor (and, having not sought, and used all reasonable efforts, to obtain a rating, a Negative Rating Event shall be deemed to have occurred if such rating is not obtained by the end of the Change of Control Period) or (ii) if the Guarantor does so seek and use such endeavours, it is unable, as a result of the occurrence of such Change of Control, to obtain such a rating of at least investment grade by the end of the Change of Control Period;
"Rating Agency" means any of the following: (i) Standard & Poor's Credit Market Services Europe Limited; (ii) Moody's Investors Service, Inc; (iii) Fitch Ratings Ltd.; or (iv) any other rating agency of equivalent international standing specified from time to time by the Issuer or the Guarantor, and, in each case, their respective successors or affiliates; and
"Relevant Potential Change of Control Announcement" means any public announcement or statement by the Guarantor, any actual or potential bidder or any adviser acting on behalf of any actual or potential bidder relating to any potential Change of Control where within 180 days following the date of such announcement or statement, a Change of Control occurs.
Promptly upon the Issuer becoming aware that a Put Event has occurred, the Issuer shall give notice (a "Put Event Notice") to the Bondholders in accordance with Condition 12 specifying the nature of the Put Event and the circumstances giving rise to it and the procedure for exercising the Put Option contained in this Condition 7.3.
To exercise the Put Option to require the Issuer to redeem or, as the case may be, purchase or procure the purchase of a Bond under this Condition 7.3, the holder of this Bond must deliver at the specified office of any Paying Agent at any time during normal business hours of such Paying Agent falling within the period (the "Put Period") of 45 days after the Put Event Notice is given, a duly completed and signed notice in the form (for the time being current) obtainable from the specified office of any Paying Agent (a "Put Option Notice") and in which the holder must specify a bank account (or, if payment is to be made by cheque, an address) to which payment is to be made under this Condition 7.3. The Bond should be delivered together with all Coupons appertaining thereto maturing after the date (the "Optional Redemption Date") which is the seventh day after the last day of the Put Period, failing which an amount will be deducted from the payment to be made by the Issuer on redemption or, as the case may be, purchase of the Bonds corresponding to the aggregate amount payable in respect of such missing Coupons.
The Paying Agent to whom a Bond has been so delivered or, as applicable, the Fiscal Agent shall deliver a duly completed non-transferable receipt to the relevant holder in respect of the Bonds so delivered. Payment in respect of any Bond so delivered shall be made, if the holder duly specifies a bank account in the Put Option Notice to which payment is to be made on the Optional Redemption Date, by transfer to that bank account (or, if an address is specified for payment by cheque, by cheque sent by first class post to such address) and, in
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every other case, on or after the Optional Redemption Date, in each case against presentation and surrender or (as the case may be) endorsement of such receipt at any specified office of any Paying Agent, subject in any such case as provided in Condition 6. A Put Notice, once given, shall be irrevocable.
7.4 Purchases
The Issuer, the Guarantor or any of their respective Subsidiaries (as defined above) may at any time purchase Bonds (provided that all unmatured Coupons appertaining to the Bonds are purchased with the Bonds) in any manner and at any price.
7.5 Cancellations
All Bonds which are (a) redeemed or (b) purchased by or on behalf of the Issuer, the Guarantor or any of their respective Subsidiaries will forthwith be cancelled, together with all relative unmatured Coupons attached to the Bonds or surrendered with the Bonds, and accordingly may not be reissued or resold.
7.6 Notices Final
Upon the expiry of any notice as is referred to in paragraph 7.2 or 7.3 above the Issuer shall be bound to redeem the Bonds to which the notice refers in accordance with the terms of such paragraph.
8. TAXATION
8.1 Payment without Withholding
All payments in respect of the Bonds by or on behalf of the Issuer or the Guarantor shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of any of the Relevant Jurisdictions, unless the withholding or deduction of the Taxes is required by law. In that event, the Issuer or, as the case may be, the Guarantor will pay such additional amounts as may be necessary in order that the net amounts received by the Bondholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Bonds or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Bond or Coupon:
(a) presented for payment by or on behalf of a holder who is liable to the Taxes in respect of the Bond or Coupon by reason of his having some connection with any Relevant Jurisdiction other than the mere holding of the Bond or Coupon; or
(b) presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that a holder would have been entitled to additional amounts on presenting the same for payment on the last day of the period of 30 days assuming that day to have been a Presentation Date (as defined in Condition 6).
8.2 Interpretation
In these Conditions:
(a) "Relevant Date" means the date on which the payment first becomes due but, if the full amount of the money payable has not been received by the Fiscal Agent on or before the due date, it means the date on which, the full amount of the money having been so received, notice to that effect has been duly given to the Bondholders by the Issuer in accordance with Condition 12; and
(b) "Relevant Jurisdiction" means Sweden or any political subdivision or any authority thereof or therein having power to tax (in the case of payments by the Issuer) or Poland or any political subdivision or any authority thereof or therein having power to tax (in the case of payments by the Guarantor) or in either case any other jurisdiction or any political subdivision or any authority thereof or therein having power to tax to which the Issuer or the Guarantor, as the case may be, becomes subject in respect of payments made by it of principal and interest on the Bonds and Coupons.
8.3 Additional Amounts
Any reference in these Conditions to any amounts in respect of the Bonds shall be deemed also to refer to any additional amounts which may be payable under this Condition.
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9. PRESCRIPTION
Bonds and Coupons will become void unless presented for payment within periods of 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date in respect of the Bonds or, as the case may be, the Coupons, subject to the provisions of Condition 6.
10. EVENTS OF DEFAULT
The holder of any Bond may give notice to the Issuer that the Bond is, and it shall accordingly forthwith become, immediately due and repayable at its principal amount, together with interest accrued to the date of repayment, if any of the following events ("Events of Default") shall have occurred and be continuing:
(a) the Issuer fails to pay the principal of or any premium or interest on any of the Bonds when due and such failure continues for a period of seven TARGET2 Settlement Days (as defined in Condition 6.5); or
(b) the Issuer or the Guarantor fails to perform or observe any of its other obligations under these Conditions or the Guarantee and (except in any case where the failure is incapable of remedy, when no continuation or notice as is hereinafter mentioned will be required) the failure continues for the period of 30 days following the service by any Bondholder on the Issuer or the Guarantor (as the case may be) of notice requiring the same to be remedied; or
(c) (i) any other present or future indebtedness of the Issuer or the Guarantor or any Material Subsidiary for or in respect of moneys borrowed or raised becomes due and payable prior to its stated maturity by reason of any actual or potential default, event of default or the like (howsoever described), or (ii) any such indebtedness is not paid when due or, as the case may be, within any applicable grace period, or (iii) the Issuer or the Guarantor or any Material Subsidiary fails to pay when due any amount payable by it under any present or future guarantee for, or indemnity in respect of, any moneys borrowed or raised within any applicable grace period provided, however, that no Event of Default shall have occurred if the aggregate amount of such indebtedness (or its equivalent) or guarantee or indemnity which is not paid when due (after the expiration of any applicable grace period) or is due and payable prior to its stated maturity date is equal to or less than €50,000,000 (or its equivalent in another currency); or
(d) a distress, attachment, execution or other legal process is levied, enforced or sued out on or against the whole or a substantial part of the undertaking or assets of the Issuer or the Guarantor or any Material Subsidiary and is not discharged within 90 days provided that the relevant process relates to an amount owed, asset with a value or obligation with an economic value which is in excess of €50,000,000 (or its equivalent in another currency); or
(e) any mortgage, charge, pledge, lien or other encumbrance, present or future, created or assumed over the whole or any part of the undertaking, assets and revenues of the Issuer or the Guarantor or any Material Subsidiary becomes enforceable and any step is taken to enforce it (including the taking of possession or the appointment of a receiver, manager or other similar person) and is not discharged within 30 days provided that the asset to which the encumbrance relates exceeds €50,000,000 (or its equivalent in another currency); or
(f) proceedings are initiated against the Issuer, the Guarantor or a Material Subsidiary under any applicable liquidation, insolvency, composition, reorganisation or other similar laws or an application is made (or documents filed with a court) for the appointment of an administrative or other receiver, manager, administrator or other similar official, in relation to the Issuer, the Guarantor or a Material Subsidiary or, as the case may be, in relation to the whole or a substantial part of the undertaking or assets of the Issuer, the Guarantor or a Material Subsidiary, or an encumbrancer takes possession of the whole or a substantial part of the undertaking or assets of the Issuer, the Guarantor or a Material Subsidiary, and in any case (other than the appointment of an administrator) is not discharged within 90 days; or
(g) an order is made or an effective resolution passed for the winding-up or dissolution of the Issuer, the Guarantor or any Material Subsidiary, or the Issuer or the Guarantor ceases or threatens to cease to carry on all or substantially all of its business or operations, except for the purpose of and followed by a solvent reconstruction, amalgamation, reorganisation, merger or consolidation (i) on terms approved by an Extraordinary Resolution of the Bondholders, or (ii) in the case of a Material Subsidiary, whereby the undertaking and assets of the Material Subsidiary are transferred to or otherwise vested in the Issuer or the Guarantor (as the case may be) or another Material Subsidiary; or
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(h) the Issuer ceases to be wholly-owned and controlled by the Guarantor; or
(i) any action, condition or thing (including the obtaining or effecting of any necessary consent, approval, authorisation, exemption, filing, licence, order, recording or registration) at any time required to be taken, fulfilled or done in order (i) to enable the Issuer and the Guarantor lawfully to enter into, exercise their respective rights and perform and comply with their respective obligations under the Conditions and the Guarantee, (ii) to ensure that those obligations are legally binding and enforceable and (iii) to make the Conditions and the Guarantee admissible in evidence in the courts of Sweden and Poland is not taken, fulfilled or done; or
(j) it is or will become unlawful for the Issuer or the Guarantor to perform or comply with any one or more of its obligations under any of the Conditions or the Guarantee; or
(k) any event occurs which under the laws of any relevant jurisdiction has an analogous effect to any of the events referred to in paragraphs (d) to (g) above; or
(l) the Guarantee is not (or is claimed by the Guarantor not to be) in full force and effect.
11. REPLACEMENT OF BONDS AND COUPONS
Should any Bond or Coupon be lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office of the Fiscal Agent, upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Bonds or Coupons must be surrendered before replacements will be issued.
12. NOTICES
12.1 Notices to the Bondholders
All notices to the Bondholders will be valid if published in a leading English language daily newspaper published in London or such other English language daily newspaper with general circulation in Europe as the Issuer may decide. It is expected that publication will normally be made in the Financial Times. The Issuer shall also ensure that notices are duly published in a manner which complies with the rules and regulations of any stock exchange or other relevant authority on which the Bonds are for the time being listed. For so long as the Bonds are admitted to trading on the Irish Stock Exchange plc, such notice shall be filed in the Companies Announcement Office of the Irish Stock Exchange plc. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in all required newspapers.
12.2 Notices from the Bondholders
Notices to be given by any Bondholder shall be in writing and given by lodging the same, together with the relative Bond or Bonds, with the Fiscal Agent or, if the Bonds are held in a clearing system, may be given through the clearing system in accordance with the standard rules and procedures.
13. MEETINGS OF BONDHOLDERS AND MODIFICATION
13.1 Meetings of Bondholders
The Agency Agreement contains provisions for convening meetings of the Bondholders to consider any matter affecting their interests, including the modification by Extraordinary Resolution of any of these Conditions or the Guarantee or any of the provisions of the Agency Agreement. The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. in principal amount of the Bonds for the time being outstanding, or at any adjourned meeting one or more persons present whatever the principal amount of the Bonds held or represented by him or them, except that at any meeting the business of which includes the modification of certain of these Conditions the necessary quorum for passing an Extraordinary Resolution will be one or more persons present holding or representing not less than two-thirds, or at any adjourned meeting not less than one-third, of the principal amount of the Bonds for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Bondholders will be binding on all Bondholders, whether or not they are present at the meeting, and on all Couponholders.
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13.2 Modification
The Fiscal Agent may agree, without the consent of the Bondholders or Couponholders, to any modification of any of these Conditions or any of the provisions of the Agency Agreement either (i) for the purpose of curing any ambiguity or of curing, correcting or supplementing any manifest or proven error or any other defective provision contained herein or therein or (ii) in any other manner which is not materially prejudicial to the interests of the Bondholders. Any modification shall be binding on the Bondholders and the Couponholders and, unless the Fiscal Agent agrees otherwise, any modification shall be notified by the Issuer to the Bondholders as soon as practicable thereafter in accordance with Condition 12.
14. FURTHER ISSUES
The Issuer may from time to time without the consent of the Bondholders or Couponholders create and issue further bonds, having terms and conditions the same as those of the Bonds, or the same except for the amount of the first payment of interest, which may be consolidated and form a single series with the outstanding Bonds.
15. GOVERNING LAW AND SUBMISSION TO JURISDICTION
15.1 Governing Law
The Agency Agreement, the Guarantee, the Bonds and the Coupons and any non-contractual obligations arising out of or in connection therewith are governed by, and will be construed in accordance with English law.
15.2 Jurisdiction of English Courts
(a) Subject to Condition 15.2(c) below, the English courts have exclusive jurisdiction to settle any dispute arising out of or in connection with the Bonds and/or the Coupons, including any dispute as to their existence, validity, interpretation, performance, breach or termination or the consequences of their nullity and any dispute relating to any non-contractual obligations arising out of or in connection with the Bonds and/or the Coupons (a "Dispute") and accordingly each of the Issuer, the Guarantor and any Bondholders or Couponholders in relation to any Dispute submits to the exclusive jurisdiction of the English courts.
(b) For the purposes of this Condition 15.2, the Issuer and the Guarantor waive any objection to the English courts on the grounds that they are an inconvenient or inappropriate forum to settle any Dispute.
(c) To the extent allowed by law, the Bondholders and the Couponholders may, in respect of any Dispute or Disputes, take (i) proceedings in any other court with jurisdiction; and (ii) concurrent proceedings in any number of jurisdictions.
15.3 Appointment of Process Agent
Each of the Issuer and the Guarantor irrevocably appoints TMF Corporate Services Limited at 6 St Andrew Street, 5th Floor, London EC4A 4AE, United Kingdom as its agent for service of process in any proceedings before the English courts in relation to any Dispute, and agrees that, in the event of TMF Corporate Services Limited being unable or unwilling for any reason so to act, it will immediately appoint another person as its agent for service of process in England in respect of any Dispute. The Issuer and the Guarantor each agree that failure by a process agent to notify it of any process will not invalidate service. Nothing herein shall affect the right to serve process in any other manner permitted by law.
15.4 Other Documents
Where applicable, the Issuer and the Guarantor have in the Agency Agreement and the Guarantee submitted to the jurisdiction of the English courts and appointed an agent in England for service of process, in terms substantially similar to those set out above.
16. RIGHTS OF THIRD PARTIES
No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Bond, but this does not affect any right or remedy of any person which exists or is available apart from that Act.
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SUMMARY OF PROVISIONS RELATING TO THE BONDS WHILE IN GLOBAL FORM
The following is a summary of the provisions to be contained in the Temporary Global Bond and the Permanent Global Bond (together the "Global Bonds") which will apply to, and in some cases modify, the Terms and Conditions of the Bonds while the Bonds are represented by the Global Bonds.
1. Exchange
The Permanent Global Bond will be exchangeable in whole but not in part (free of charge to the holder) for definitive Bonds only if:
(a) an event of default (as set out in Condition 10) has occurred and is continuing; or
(b) the Issuer has been notified that both Euroclear and Clearstream, Luxembourg have been closed for business for a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or have announced an intention permanently to cease business or have in fact done so and no successor clearing system is available; or
(c) the Issuer has or will become subject to adverse tax consequences which would not be suffered were the Bonds in definitive form.
The Issuer will promptly give notice to Bondholders if an Exchange Event occurs. In the case of (a) or (b) above, the holder of the Permanent Global Bond, acting on the instructions of one or more of the Accountholders (as defined below), may give notice to the Issuer and the Fiscal Agent and, in the case of (c) above, the Issuer may give notice to the Fiscal Agent of its intention to exchange the Permanent Global Bond for definitive Bonds on or after the Exchange Date (as defined below).
On or after the Exchange Date the holder of the Permanent Global Bond may or, in the case of (c) above, shall surrender the Permanent Global Bond to or to the order of the Fiscal Agent. In exchange for the Permanent Global Bond the Issuer will deliver, or procure the delivery of, an equal aggregate principal amount of definitive Bonds (having attached to them all Coupons in respect of interest which has not already been paid on the Permanent Global Bond), security printed in accordance with any applicable legal and stock exchange requirements and in or substantially in the form set out in the Agency Agreement. On exchange of the Permanent Global Bond, the Issuer will procure that it is cancelled and, if the holder so requests, returned to the holder together with any relevant definitive Bonds.
For these purposes, "Exchange Date" means a day specified in the notice requiring exchange falling not less than 60 days after that on which such notice is given, being a day on which banks are open for general business in the place in which the specified office of the Fiscal Agent is located and, except in the case of exchange pursuant to (b) above, in the place in which the relevant clearing system is located.
2. Payments
On or after 17 July 2016, no payment will be made on the Temporary Global Bond unless exchange for an interest in the Permanent Global Bond is improperly withheld or refused. Payments of principal and interest in respect of Bonds represented by a Global Bond will, subject as set out below, be made to the bearer of such Global Bond and, if no further payment falls to be made in respect of the Bonds, against surrender of such Global Bond to the order of the Fiscal Agent or such other Paying Agent as shall have been notified to the Bondholders for such purposes. The Issuer shall procure that the amount so paid shall be entered pro rata in the records of Euroclear and Clearstream, Luxembourg and the nominal amount of the Bonds recorded in the records of Euroclear and Clearstream, Luxembourg and represented by such Global Bond will be reduced accordingly. Each payment so made will discharge the Issuer's obligations in respect thereof. Any failure to make the entries in the records of Euroclear and Clearstream, Luxembourg shall not affect such discharge. Payments of interest on the Temporary Global Bond (if permitted by the first sentence of this paragraph) will be made only upon certification as to non-U.S. beneficial ownership unless such certification has already been made.
3. Notices
For so long as all of the Bonds are represented by one or both of the Global Bonds and such Global Bond(s) is/are held on behalf of Euroclear and/or Clearstream, Luxembourg, notices to Bondholders may be given by delivery of the relevant notice to Euroclear and/or Clearstream, Luxembourg (as the case may be) for communication to the relative Accountholders rather than by publication as required by Condition 12. Any such notice shall be deemed to have been given to the Bondholders on the second day after the day on which such notice is delivered to Euroclear and/or Clearstream, Luxembourg (as the case may be) as aforesaid.
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Whilst any of the Bonds held by a Bondholder are represented by a Global Bond, notices to be given by such Bondholder may be given by such Bondholder (where applicable) through Euroclear and/or Clearstream, Luxembourg and otherwise in such manner as the Fiscal Agent and Euroclear and Clearstream, Luxembourg may approve for this purpose.
4. Accountholders
For so long as all of the Bonds are represented by one or both of the Global Bonds and such Global Bond(s) is/are held on behalf of Euroclear and/or Clearstream, Luxembourg, each person (other than Euroclear or Clearstream, Luxembourg) who is for the time being shown in the records of Euroclear or Clearstream, Luxembourg as the holder of a particular principal amount of Bonds (each an "Accountholder") (in which regard any certificate or other document issued by Euroclear or Clearstream, Luxembourg as to the principal amount of such Bonds standing to the account of any person shall be conclusive and binding for all purposes) shall be treated as the holder of that principal amount for all purposes (including but not limited to, for the purposes of any quorum requirements of, or the right to demand a poll at, meetings of the Bondholders and giving notices to the Issuer pursuant to Condition 12) other than with respect to the payment of principal and interest on the principal amount of such Bonds, the right to which shall be vested, as against the Issuer solely in the bearer of the relevant Global Bond in accordance with and subject to its terms. Each Accountholder must look solely to Euroclear or Clearstream, Luxembourg, as the case may be, for its share of each payment made to the bearer of the relevant Global Bond.
5. Prescription
Claims against the Issuer and the Guarantor in respect of principal and interest on the Bonds represented by a Global Bond will be prescribed after 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date (as defined in Condition 8).
6. Cancellation
Cancellation of any Bond represented by a Global Bond and required by the Terms and Conditions of the Bonds to be cancelled following its redemption or purchase will be effected by endorsement by or on behalf of the Fiscal Agent of the reduction in the principal amount of the relevant Global Bond on the relevant part of the schedule thereto.
7. Put Option
For so long as all of the Bonds are represented by one or both of the Global Bonds and such Global Bond(s) is/are held on behalf of Euroclear and/or Clearstream, Luxembourg, the option of the Bondholders provided for in Condition 7.3 may be exercised by an Accountholder giving notice to the Fiscal Agent in accordance with the standard procedures of Euroclear and Clearstream, Luxembourg (which may include notice being given on his instruction by Euroclear or Clearstream, Luxembourg or any common safekeeper for them to the Fiscal Agent by electronic means) of the principal amount of the Bonds in respect of which such option is exercised and at the same time presenting or procuring the presentation of the relevant Global Bond to the Fiscal Agent for notation accordingly within the time limits set forth in that Condition.
8. Euroclear and Clearstream, Luxembourg
Bonds represented by a Global Bond are transferable in accordance with the rules and procedures for the time being of Euroclear and Clearstream, Luxembourg, as appropriate.
9. Eurosystem Eligibility
The Global Bonds will be issued in New Global Note (NGN) form. This means that the Bonds are intended to be deposited with a common safekeeper for Euroclear and Clearstream, Luxembourg (each acting in its capacity as International Central Securities Depositary) and does not necessarily mean that the Bonds will be recognised as eligible collateral for Eurosystem monetary policy and intra-day credit operations by the Eurosystem, either upon issue or at any or all times during their life. Such recognition will depend upon satisfaction of the Eurosystem eligibility criteria established by the European Central Bank from time to time, which include a ratings requirement.
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USE OF PROCEEDS
The net proceeds of the issue of the Bonds will be on-lent to PKN ORLEN to be used by PKN ORLEN for the general corporate purposes of, and to repay certain credit facilities of, the ORLEN Group.
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SELECTED FINANCIAL INFORMATION OF THE GUARANTOR
Non-Consolidated Statement of Financial Position
The following table shows the non-consolidated statement of financial position of PKN ORLEN as at 31 December 2015 and 31 December 2014:
As at 31 December 2015 2014 (PLN Million) ASSETS Non-current assets Property, plant and equipment ...... 14,303 13,465 Intangible assets ...... 962 334 Shares in related parties ...... 7,568 6,733 Deferred tax assets ...... - 169 Other financial assets ...... 179 970 Other assets ...... 134 131 23,146 21,802 Current assets Inventories ...... 7,715 6,497 Trade and other receivables ...... 4,291 4,960 Other financial assets ...... 788 1,206 Cash ...... 964 3,475 Non-current assets classified as held for sale ...... 77 38 13,835 16,176 Total assets ...... 36,981 37,978 EQUITY AND LIABILITIES EQUITY Share capital ...... 1,058 1,058 Share premium ...... 1,227 1,227 Hedging reserve ...... (143) (1,370) Retained earnings ...... 15,704 15,387 Total equity ...... 17,846 16,302 LIABILITIES Non-current liabilities Loans, borrowings and bonds ...... 8,125 9,212 Provisions ...... 317 355 Deferred tax liabilities ...... 380 - Other financial liabilities ...... 637 1,812 9,459 11,379 Current liabilities Trade and other liabilities ...... 6,651 7,572 Loans, borrowings and bonds ...... 1,117 930 Provisions ...... 383 342 Deferred income ...... 116 97 Other financial liabilities ...... 1,409 1,356 9,676 10,297 Total liabilities ...... 19,135 21,676 Total equity and liabilities ...... 36,981 37,978
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Non-Consolidated Statement of Profit or Loss and Other Comprehensive Income
The following table shows the non-consolidated statement of profit or loss and other comprehensive income of PKN ORLEN for the years ended 31 December 2015 and 31 December 2014:
Year ended 31 December 2015 2014 (PLN Million) Sales revenues ...... 60,466 76,972 revenues from sales of finished goods and services ...... 35,170 42,205 revenues from sales of merchandise and raw materials ...... 25,296 34,767 Cost of sales ...... (55,565) (74,283) cost of finished goods and services sold ...... (30,883) (40,031) cost of merchandise and raw materials sold ...... (24,682) (34,252) Gross profit on sales ...... 4,901 2,689 Distribution expenses ...... (2,306) (2,177) Administrative expenses ...... (867) (823) Other operating income...... 196 311 Other operating expenses ...... (155) (380) Profit/(Loss) from operations ...... 1,769 (380) Finance income ...... 872 1,477 Finance costs, incl...... (1,333) (5,977) recognition of impairment allowances of shares in related parties ...... (800) (4,967) Net finance income and costs ...... (461) (4,500) Profit/(Loss) before tax ...... 1,308 (4,880) Tax expense ...... (260) 208 current tax ...... - (2) deferred tax ...... (260) 210 Net profit/(loss)...... 1,048 (4,672) Other comprehensive income: which will not be reclassified into profit or loss ...... 4 (7) which were or will be reclassified into profit or loss ...... 1,227 (1,538) hedging instruments ...... 1,515 (1,899) deferred tax ...... (288) 361 1,231 (1,545) Total net comprehensive income ...... 2,279 (6,217) Net profit/(loss) and diluted net profit/(loss) per share (in PLN per share) ...... 2.45 (10.92)
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Non-Consolidated Statement of Financial Position
The following table shows the non-consolidated statement of financial position of PKN ORLEN as at 31 March 2016 and 31 December 2015:
As at 31 March 31 December 2016 2015 (unaudited) (PLN Million) ASSETS Non-current assets Property, plant and equipment ...... 14,366 14,303 Intangible assets ...... 1,034 962 Shares in related parties ...... 7,570 7,568 Other financial assets ...... 131 179 Other assets ...... 134 134 23,235 23,146 Current assets Inventories ...... 6,393 7,715 Trade and other receivables ...... 4,426 4,291 Other financial assets ...... 1,312 788 Cash ...... 755 964 Non-current assets classified as held for sale ...... 90 77 12,976 13,835 Total assets ...... 36,211 36,981 EQUITY AND LIABILITIES EQUITY Share capital ...... 1,058 1,058 Share premium ...... 1,227 1,227 Hedging reserve ...... (146) (143) Retained earnings ...... 15,624 15,704 Total equity ...... 17,763 17,846 LIABILITIES Non-current liabilities Loans, borrowings and bonds ...... 7,889 8,125 Provisions ...... 322 317 Deferred tax liabilities ...... 382 380 Other financial liabilities ...... 492 637 9,085 9,459 Current liabilities Trade and other liabilities ...... 5,937 6,651 Loans, borrowings and bonds ...... 1,818 1,117 Provisions ...... 429 383 Deferred income ...... 175 116 Other financial liabilities ...... 1,004 1,409 9,363 9,676 Total liabilities ...... 18,448 19,135 Total equity and liabilities ...... 36,211 36,981
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Non-Consolidated Statement of Profit or Loss and Other Comprehensive Income
The following table shows the non-consolidated statement of profit or loss and other comprehensive income of PKN ORLEN for the three months ended 31 March 2016 and 31 March 2015:
Three months ended 31 March 2016 2015 (unaudited) (PLN Million) Sales revenues ...... 10,568 13,623 revenues from sales of finished goods and services ...... 6,155 8,037 revenues from sales of merchandise and raw materials ...... 4,413 5,586 Cost of sales ...... (9,898) (12,551) cost of finished goods and services sold ...... (5,627) (7,114) cost of merchandise and raw materials sold ...... (4,271) (5,437) Gross profit on sales ...... 670 1,072 Distribution expenses ...... (572) (542) Administrative expenses ...... (191) (223) Other operating income...... 25 63 Other operating expenses ...... (47) (28) Profit/(Loss) from operations ...... (115) 342 Finance income ...... 117 56 Finance costs...... (79) (78) Net finance income and costs ...... 38 (22) Profit/(Loss) before tax ...... (77) 320 Tax expense (deferred tax) ...... (3) (62) Net profit/(loss)...... (80) 258 Other comprehensive income: which were or will be reclassified into profit or loss ...... (3) 291 hedging instruments ...... (4) 359 deferred tax ...... 1 (68) (3) 291 Total net comprehensive income ...... (83) 549 Net profit/(loss) and diluted net profit/(loss) per share (in PLN per share) ...... (0.19) 0.6
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SELECTED FINANCIAL INFORMATION OF THE GROUP
Consolidated Statement of Financial Position
The following table shows the financial position of PKN ORLEN and its consolidated subsidiaries as at 31 December 2015 and 31 December 2014:
As at 31 December 2015 2014 (PLN Million) ASSETS Non-current assets Property, plant and equipment ...... 24,536 22,644 Intangible assets ...... 1,298 703 Investments accounted for under equity method ...... 774 672 Deferred tax assets ...... 365 385 Other financial assets ...... 147 327 Other assets ...... 242 240 27,362 24,971 Current assets Inventories ...... 10,715 9,829 Trade and other receivables ...... 6,641 7,092 Other financial assets ...... 974 862 Cash and cash equivalents ...... 2,348 3,937 Non-current assets classified as held for sale ...... 97 34 20,775 21,754 Total assets ...... 48,137 46,725 EQUITY AND LIABILITIES EQUITY Share capital ...... 1,058 1,058 Share premium ...... 1,227 1,227 Hedging reserve ...... (80) (1,319) Foreign exchange differences on subsidiaries from consolidation ...... 537 509 Retained earnings ...... 19,431 17,296 Total equity attributable to equity owners of the parent ...... 22,173 18,771 Non-controlling interest ...... 2,071 1,615 Total equity ...... 24,244 20,386 LIABILITIES Non-current liabilities Loans, borrowings and bonds ...... 8,131 9,670 Provisions ...... 710 709 Deferred tax liabilities ...... 674 75 Other financial liabilities ...... 712 1,851 10,227 12,305 Current liabilities Trade and other liabilities ...... 10,820 11,257 Loans and borrowings ...... 1,027 987 Provisions ...... 749 648 Other financial liabilities ...... 870 1,020 Other liabilities ...... 200 122 13,666 14,034 Total liabilities ...... 23,893 26,339 Total equity and liabilities ...... 48,137 46,725
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Consolidated Statement of Profit or Loss and Other Comprehensive Income
The following table shows the profit or loss and other comprehensive income of PKN ORLEN and its consolidated subsidiaries for the years ended 31 December 2015 and 31 December 2014:
Year ended 31 December 2015 2014 (PLN Million) Sales revenues ...... 88,336 106,832 revenues from sales of finished goods and services ...... 69,101 80,836 revenues from sales of merchandise and raw materials ...... 19,235 25,996 Cost of sales ...... (77,792) (101,010) cost of finished goods and services sold ...... (59,489) (76,211) cost of merchandise and raw materials sold ...... (18,303) (24,799) Gross profit on sales ...... 10,544 5,822 Distribution expenses ...... (3,971) (3,920) Administrative expenses ...... (1,552) (1,512) Other operating income...... 420 766 Other operating expenses, incl.: ...... (1,354) (5,924) recognition of impairment allowances of property, plant and equipment and intangible assets ...... (1,029) (5,492) Share in profit from investments accounted for under equity method ...... 253 57 Profit/(Loss) from operations ...... 4,340 (4,711) Finance income ...... 390 354 (1,032) (1,889) Finance costs...... Net finance income and costs ...... (642) (1,535) Profit/(Loss) before tax ...... 3,698 (6,246) Tax expense ...... (465) 418 current tax ...... (310) (196) deferred tax ...... (155) 614 Net profit/(loss)...... 3,233 (5,828) Other comprehensive income: which will not be reclassified into profit or loss ...... 3 (16) which were or will be reclassified into profit or loss ...... 1,327 (655) hedging instruments ...... 1,530 (1,758) foreign exchange differences on subsidiaries from consolidation ...... 88 769 deferred tax ...... (291) 334 1,330 (671) Total net comprehensive income ...... 4,563 (6,499) Net profit/(loss) attributable to ...... 3,233 (5,828) equity owners of the parent ...... 2,837 (5,811) non-controlling interest ...... 396 (17) Total net comprehensive income attributable to ...... 4,563 (6,499) equity owners of the parent ...... 4,107 (6,584) non-controlling interest ...... 456 85 Net profit/(loss) and diluted net profit/(loss) per share attributable to equity owners of the parent (in PLN per share) ...... 6.63 (13.59)
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Consolidated Statement of Financial Position
The following table shows the financial position of PKN ORLEN and its consolidated subsidiaries as at 31 March 2016 and 31 December 2015:
As at 31 31 March December 2016 2015 (unaudited) (PLN Million) ASSETS Non-current assets Property, plant and equipment ...... 25,037 24,536 Intangible assets ...... 1,521 1,298 Investments accounted for under equity method ...... 859 774 Deferred tax assets ...... 338 365 Other financial assets ...... 111 147 Other assets ...... 247 242 28,113 27,362 Current assets Inventories ...... 9,236 10,715 Trade and other receivables ...... 6,604 6,641 Other financial assets ...... 742 974 Cash and cash equivalents ...... 3,467 2,348 Non-current assets classified as held for sale ...... 55 97 20,104 20,775 Total assets ...... 48,217 48,137 EQUITY AND LIABILITIES EQUITY Share capital ...... 1,058 1,058 Share premium ...... 1,227 1,227 Hedging reserve ...... (145) (80) Foreign exchange differences on subsidiaries from consolidation ...... 519 537 Retained earnings ...... 19,768 19,431 Total equity attributable to equity owners of the parent ...... 22,427 22,173 Non-controlling interest ...... 2,033 2,071 Total equity ...... 24,460 24,244 LIABILITIES Non-current liabilities Loans, borrowings and bonds ...... 7,893 8,131 Provisions ...... 730 710 Deferred tax liabilities ...... 664 674 Other financial liabilities ...... 567 712 9,854 10,227 Current liabilities Trade and other liabilities ...... 11,041 10,820 Loans and borrowings ...... 1,041 1,027 Provisions ...... 767 749 Deferred income ...... 271 128 Other financial liabilities ...... 748 870 Liabilities directly associated with assets classified as held for sale ...... 35 72 13,903 13,666 Total liabilities ...... 23,757 23,893 Total equity and liabilities ...... 48,217 48,137
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Consolidated Statement of Profit or Loss and Other Comprehensive Income
The following table shows the profit or loss and other comprehensive income of PKN ORLEN and its consolidated subsidiaries for the three months ended 31 March 2016 and 31 March 2015:
Three months ended 31 March 2016 2015 (unaudited) (PLN Million) Sales revenues ...... 16,213 20,005 revenues from sales of finished goods and services ...... 11,993 15,238 revenues from sales of merchandise and raw materials ...... 4,220 4,767 Cost of sales ...... (14,574) (17,523) cost of finished goods and services sold ...... (10,612) (13,061) cost of merchandise and raw materials sold ...... (3,962) (4,462) Gross profit on sales ...... 1,639 2,482 Distribution expenses ...... (1,001) (934) Administrative expenses ...... (362) (388) Other operating income...... 198 81 Other operating expenses ...... (81) (62) Share in profit from investments accounted for under equity method ...... 85 31 Profit from operations ...... 478 1,210 Finance income ...... 45 89 Finance costs...... (89) (265) Net finance income and costs ...... (44) (176) Profit before tax ...... 434 1,034 Tax expense ...... (98) (166) current tax ...... (60) (50) deferred tax ...... (38) (116) Net profit ...... 336 868 Other comprehensive income: which were or will be reclassified into profit or loss ...... (120) 100 hedging instruments ...... (131) 296 foreign exchange differences on subsidiaries from consolidation ...... (14) (140) deferred tax ...... 25 (56) (120) 100 Total net comprehensive income ...... 216 968 Net profit attributable to ...... 336 868 equity owners of the parent ...... 337 756 non-controlling interest ...... (1) 112 Total net comprehensive income attributable to ...... 216 968 equity owners of the parent ...... 254 929 non-controlling interest ...... (38) 39 Net profit and diluted net profit per share attributable to equity owners of the parent (in PLN per share) 0.79 1.77
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DESCRIPTION OF THE ISSUER
Date of Incorporation and legal form
ORLEN Capital AB (publ) is a public limited liability company incorporated in Sweden, formed under the Swedish Companies Act of 2005 (Sw. aktiebolagslagen (2005:551)) and registered with the Swedish Companies Registration Office (Bolagsverket) on 12 June 2014 (with registration number 556974-3114).
Capital stock
As at the date of this Prospectus, the Issuer is a wholly owned subsidiary of PKN ORLEN. The Issuer has no subsidiaries.
The share capital of ORLEN Capital AB (publ) is EUR 60,000 and is comprised of 500,000 shares. The rights of PKN ORLEN as a shareholder in ORLEN Capital AB (publ) are contained in the Articles of Association of ORLEN Capital AB (publ) and ORLEN Capital AB (publ) will be managed in accordance with those articles and with the provisions of Swedish law.
Registered Office
The registered office of ORLEN Capital AB (publ) is at Sveavägen 9, PO Box 162 85, SE-111 57 Stockholm, Sweden and the telephone number of ORLEN Capital AB (publ) is +46 8 402 72 00.
Purpose and Business Activity
The principal objects of ORLEN Capital AB (publ) are set out in its Articles of Association, and are, in summary, to conduct financial activities primarily through the borrowing of funds by way of issuance of bonds and other financial instruments to institutional and private investors and through the direct lending of such funds to Group companies, granting credit facilities and loans, and to conduct any other activities compatible therewith or to provide any related services. ORLEN Capital AB (publ) shall not conduct activities that constitute operations which would require a licence in accordance with the Banking and Financing Business Act (SFS 2004:297). As at the date of this Prospectus the Issuer has lent funds to the Guarantor, and it is intended that Issuer will from time to time lend further money to the Guarantor under intercompany loan agreements.
Management
The four Directors of ORLEN Capital AB (publ) and their respective business addresses and principal activities are as follows:
Name Position(s)
Jacek Matyjasik Chairman of the Board Anna Litewka Managing Director Witold Literacki Director Robert Jasinski Director The business address of each director is Sveavägen 9, PO Box 162 85, SE-111 57 Stockholm, Sweden.
There are no potential conflicts of interest between the private interests or other duties of the directors listed above and their duties to ORLEN Capital AB (publ).
Independent Auditors
The independent auditors of ORLEN Capital AB (publ) are KPMG AB, whose registered office is at P.O. Box 16106, SE-10323 Stockholm, Sweden and whose registration number is 556043-4465. The financial year for ORLEN Capital AB (publ) is 1 January to 31 December.
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DESCRIPTION OF THE GUARANTOR AND THE GROUP
PKN ORLEN
Registration Details
Polski Koncern Naftowy ORLEN Spółka Akcyjna ("PKN ORLEN" or the "Guarantor") is registered under number KRS 0000028860 and operates under the following Polish legislation: the Commercial Companies Code, dated 15 September 2000, the Act on Public Offerings (Act on public offerings, conditions for introducing financial instruments to an organised trading system and on public companies, dated 29 July 2005), the Act on Special State Powers (Act on special rights of the Ministry of the State Treasury in respect of companies conducting activity in the energy, crude oil and fuel gas sectors, dated 18 March 2010) and the Act on Freedom of Economic Activity (Act on the freedom of economic activity, dated 2 July 2004). The registered office of PKN ORLEN is at ul. Chemików 7, 09-411 Płock, Poland, and its telephone number is +48 (24) 365 00 00.
History and Development
PKN ORLEN was formed on 7 September 1999 through the merger of Petrochemia Płock S.A. ("Petrochemia Płock"), a refinery and petrochemical products manufacturer in Poland, and Centrala Produktów Naftowych CPN S.A. ("CPN"), a motor fuel distributor in Poland. Prior to the merger, the shares in Petrochemia Płock and CPN were owned by the State Treasury, Nafta Polska S.A. ("Nafta Polska") and by the employees of the merged companies. PKN ORLEN shares were listed for the first time on the Warsaw Stock Exchange on 26 November 1999. On 12 April 2000, PKN ORLEN changed its name from Polski Koncern Naftowy S.A. to its present name.
THE ORLEN GROUP
Overview of the ORLEN Group
PKN ORLEN and its consolidated subsidiaries together make up the ORLEN Group ("ORLEN Group" or the "Group"). PKN ORLEN is the parent company of the ORLEN Group. The ORLEN Group includes entities located in Poland, Germany, the Czech Republic, Lithuania, Malta, Sweden, the Netherlands, Slovakia, Hungary, Estonia, Latvia, the USA and Canada.
The ORLEN Group is one of the largest oil and gas companies in Central and Eastern Europe in terms of turnover according to the CEE TOP 500 Report published by Coface. In 2015, the ORLEN Group's revenues exceeded PLN 88 billion.
The core business of the ORLEN Group is the processing of crude oil and the production of fuel, petrochemical and chemical goods, as well as sales of fuel products on the retail and wholesale markets. In 2015, PKN ORLEN processed nearly 31 million tonnes of crude oil in total. The ORLEN Group also conducts exploration, recognition and extraction of hydrocarbons, and generates, distributes and trades in electricity and heat.
A major portion of the fuel produced by the ORLEN Group is sold through the ORLEN Group's own retail network. According to PKN ORLEN's estimates, the ORLEN Group owns the largest chain of petrol stations in Central Europe, comprising approximately 2,679 outlets located in Poland, Germany, the Czech Republic and Lithuania. The retail network of the ORLEN Group is supported by a wholesale and logistics infrastructure comprising above ground and underground storage tanks as well as a long-distance pipeline network.
Employees
The table below shows the number of employees of the ORLEN Group for the years ended 31 December 2015 and 31 December 2014:
Year ended 31 December 2015 2014 Employees ...... 19,932 20,305
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OVERVIEW OF OPERATIONS
The ORLEN Group conducts operations in three main reporting segments: Downstream, Retail and Upstream. Activities in the Downstream segment can be further divided into: Refining, Petrochemical Production; Logisitics and Power.
Downstream Refining: The ORLEN Group processes crude oil, mainly into petrol, diesel, and light and heavy heating oils. The ORLEN Group's refining facilities mainly process REBCO, which, due to the technical
requirements required for refining, and its lower price compared to Brent Crude, allows PKN ORLEN to achieve a cost advantage. The ORLEN Group manages a portfolio of six operational refineries, three of which are located in Poland (Płock, Trzebinia and Jedlicze), two in the Czech Republic (Litvinov and Kralupy) and one in Lithuania (Mažeikiai). The ORLEN Group has a seventh refinery at Pardubice, however, the processing of oil ceased at this refinery in 2012 and the site is currently only used for storage. The refineries at Trzebinia and Jedlicze are currently focussed on the specialised production of certain products, including biocomponents, waxes and parafins. The refinery in Płock integrates oil refinery and petrochemical production activity, and includes an olefin plant (operated by Basell ORLEN Polyolefins Sp. z o.o.) and a PX/PTA plant. The refineries in the Czech Republic are also integrated with the petrochemical operations of the ORLEN Group.
Petrochemical The ORLEN Group primarily produce: olefins; polyolefins; PVC; PTA; sodium hydroxide; and Production: nitrogenous fertilisers. The ORLEN Group's petrochemical production facilities consist of the plants operated within each of PKN ORLEN and the Capital Group of Unipetrol (the "Unipetrol
Group"), Basell ORLEN Polyolefins Sp. z o.o. ("BOP") and the Capital Group of ANWIL (the "ANWIL Group"). In 2011, PKN ORLEN commissioned a plant for the production of purified terephthalic acid ("PTA").
Logistics: The ORLEN Group distributes wholesale refining products using a logistics infrastructure consisting of: fuel terminals; land and sea reloading centres; product pipeline networks; and
railway and road transport.
Power: The ORLEN Group also generates heat and electricity. This does not generate material revenues for the ORLEN Group, as such power is principally used by the ORLEN Group's own facilities,
and only surplus amounts are sold externally. Construction of a combined-cycle gas turbine ("CCGT") plant in Włocławek with an operational capacity of 463 MWe is scheduled for the second half of 2016. The second CCGT power plant, with an operational capacity of nearly 600 MWe, in Płock, is expected to be completed at the end of 2017.
Retail The ORLEN Group is engaged in the retail sale of petroleum and non-fuel products through its network of petrol stations located in Poland, the Czech Republic, Germany and Lithuania. The ORLEN Group's retail distribution is supported by: an infrastructure of overground and underground storage tanks; a network of pipelines in Poland, the Czech Republic and Lithuania; a pipeline connection with the Gdańsk terminal in Poland; and oil handling facilities in Butinge, Lithuania.
Upstream The ORLEN Group is involved in the intensification of exploration and extraction activities in order to enable access to its own resources of crude oil and natural gas. The ORLEN Upstream Group is conducting works in eight regions in Poland and has operations in the Alberta province in Canada.
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Sales Volume The following table illustrates the relative balance of activities by showing the sales volume of each reporting segment of the ORLEN Group, for the periods indicated:
For the three months ended For the year ended 31 31 March December
Sales 2016 2015 2015 2014
(thousands of tonnes) Downstream Segment ...... 7,263 6,756 30,380 27,706 Retail Segment ...... 1,910 1,839 7,986 7,776 Upstream Segment ...... 136 71 310 258 ORLEN Group – total...... 9,309 8,666 38,676 35,740
Corporate Functions
In addition to the above reporting segments, certain ORLEN Group companies also conduct service-related activities that are provided to the companies in each of the reporting segments. Such services include: the storage of crude oil and fuels, road and rail transport, maintenance and overhaul services, laboratory, security, design, administrative, insurance and financial services.
The following table shows the revenues, expenses, and profits of the ORLEN Group's corporate functions for the periods indicated:
For the three months ended For the year ended 31 31 March December
Item 2016 2015 2015 2014
(PLN million) Segment revenues, including: ...... 84 67 288 311 Sales revenues from external customers ...... 19 23 82 72 Sales revenues from transactions with other segments ...... 65 44 206 239 Segment expenses ...... (258) (219) (971) (1,007) Other operating income ...... 21 7 91 112 Other operating expenses ...... (16) (11) (119) (86) Other operating income/expenses, net ...... 5 (4) (28) 26 Share in profit from investments accounted for under equity method ...... 0 0 0 (1) Operating profit/(loss) increased by depreciation and amortisation (EBITDA) before impairment allowances ...... (146) (139) (621) (565) Operating profit/(loss) increased by depreciation and amortisation (EBITDA) ...... (146) (139) (626) (565) Profit/(Loss) from operations before impairment allowances ...... (169) (156) (706) (671) Profit/(Loss) from operations ...... (169) (156) (711) (671) CAPEX ...... 20 38 205 230
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Structure and Organisation of the ORLEN Group Corporate Entities as at 31 March 2016
The following chart illustrates the corporate entities within the ORLEN Group and allocates them according to reporting segment, or to general corporate functions.
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Changes in capital relations in 2015 and in the period from 1 January 2016 to the date of this Prospectus: Numbers of Share in the shares capital acquired/ after the Type of Transaction/company Transaction Date disposed of Transaction FOUNDATION OF THE COMPANY AND SHARES AUTHORISATION by ORLEN Upstream Sp. z o.o.: Kiwi Acquisition Corp...... 9 October 2015 1,000 100.00% by UNIPETROL RPA, s.r.o.: UNIPETROL RPA Hungary Kft...... 10 November 2015 1 100.00%
ACQUISITION OF SHARES by PKN ORLEN: Przedsiębiorstwo Inwestycyjno-Remontowe RemWil Sp. z o.o...... 23 January 2015 6,000 100.00% by UNIPETROL a.s.: Česká Rafinérská a.s...... 4 May 2015 303,304 100.00% by ORLEN UPSTREAM Canada Ltd.: Kicking Horse Energy Inc...... 1 December 2015 1,000 100.00% by KIWI ACQUISITION CORP.: 15-31 December FX Energy Inc...... 540,870,587 100.00% 2015 by ANWIL S.A.: Pro-Lab Sp. z o.o...... 18 February 2015 123 99.99% Wircom Sp. z o.o...... 20 November 2015 293 97.05% Wircom Sp. z o.o...... 15 December 2015 2 97.38%
DISPOSAL OF SHARES by ANWIL S.A.: Przedsiębiorstwo Inwestycyjno-Remontowe RemWil Sp. z o.o...... 23 January 2015 6,000 0.00%
INCREASING THE CAPITAL OF THE COMPANY AND SHARES AUTHORIZATION by PKN ORLEN: ORLEN Upstream Sp. z o.o...... 25 March 2015 1,850 100.00% ORLEN Upstream Sp. z o.o...... 1 October 2015 1,059 100.00% ORLEN Upstream Sp. z o.o...... 18 November 2015 30,026 100.00%
MERGERS: Rafineria Trzebinia S.A. (currently ORLEN Południe S.A.), Rafineria Nafty Jedlicze S.A., Fabryka Parafin Naftowax sp. z o.o. and Zakładowa Straż Pożarna Sp. z o.o. by transfer the property to 5 January 2015 703,459 100.00% ORLEN Południe S.A. 1) ...... ORLEN Oil Sp. z o.o. and Platinum Oil Sp. z o.o. by transfer to ORLEN Oil Sp. z o.o. the property 5 January 2015 0 100.00% of Platinum Oil Sp. z o.o...... ORLEN Serwis S.A., ORLEN Automatyka Sp. z o.o. and Przedsiębiorstwo Inwestycyjno – Remontowe RemWil Sp. z o.o. („RemWil") by transfer the property of ORLEN Automatyka Sp. z 20 February 2015 1,207,990 100.00% o.o. and RemWil to ORLEN Serwis S.A...... Baltic Power Sp. z o.o. and Baltic Spark Sp. z o.o. by transfer the property of Baltic Spark Sp. z o.o. 19 March 2015 87 100.00% to Baltic Power Sp. z o.o...... ORLEN PetroTank Sp. z o.o. and ORLEN Paliwa Sp. z o.o. by transfer the property of ORLEN Paliwa Sp. z o.o. to ORLEN PetroTank Sp. z o.o. 30 June 2015 2,658 100.00% (at the same time changing the name from ORLEN PetroTank Sp. z o.o. to ORLEN Paliwa Sp. z o.o.) ...... ORLEN Paliwa Sp. z o.o. and ORLEN Gaz Sp. z o.o. by transfer the property of ORLEN Gaz Sp. z 30 October 2015 4,295 100.00% o.o. to ORLEN Paliwa Sp. z o.o...... Unipetrol RPA s.r.o. and Polymer Institute Brno s.r.o...... 31 December 2015 0 100.00%
REMOVAL FROM NATIONAL REGISTER COURT Orlen Oil Cesko s.r.o. in liquidation ...... 14 February 2015 1 0.00% Raf-Koltrans Sp. z o.o. in liquidation ...... 3 June 2015 18,500 0.00% ZWCh Wistom S.A. in bankruptcy ...... 30 June 2015 7,428 0.00% SIA Balin Energy in liquidation ...... 2 July 2015 500 0.00% Huta Gliwice S.A. in bankruptcy ...... 17 July 2015 724 0.00% CHEMAPOL SCHWEIZ AG in liquidation ...... 21 August 2015 1 0.00% UAB Paslaugos TAU in liquidation...... 30 September 2015 500,000 0.00% OIEPCo in liquidation ...... 31 October 2015 218,612 0.00% Raf-Służba Ratownicza Sp. z o.o. in liquidation ...... 14 December 2015 1,600 0.00% ______(1) On 30 January 2015, PKN ORLEN S.A. was added to the register of shareholders of ORLEN Południe SA in place of the minority shareholders, whose shares were cancelled.
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Changes in the structure of the ORLEN Group from 1 January 2016 to the date of this Prospectus:
• On 1 January 2016, the companies Kicking Horse Energy Inc., KCK Operating Company Ltd., Columbia Natural Resources Canada, Ltd. and Kicking Horse International Exploration Ltd merged into a single entity, owned by ORLEN Upstream Canada Ltd.;
• On 1 January 2016, the mergers of Benzina with Unipetrol RPA and Mogul Slovakia with Unipetrol Slovensko took place;
• On 29 February 2016, a merger of ORLEN Serwis S.A. with ORLEN Wir Sp. z o.o. and Przedsiębiorstwo Usług Technicznych Wircom Sp. z o.o. took place;
• On 29 February 2016, PKN ORLEN sold ORLEN Transport S.A. to TP Sp. z o.o., a subsidiary of Trans Polonia S.A. As a result of this transaction, in the first quarter of 2016 the ORLEN Group recognised a profit on the sale in the amount of PLN 54 million.
Changes in the Group structure are an element of the ORLEN Group strategy, which focuses on core activities and on allocating the resulting available capital for the development of the ORLEN Group.
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STRENGTHS AND STRATEGY OF THE GROUP
The Group's Strengths
The key strengths of the ORLEN Group are as follows:
1. Integration: production units across Poland, the Czech Republic and Lithuania are integrated to enhance the efficiency of the ORLEN Group.
2. Refining Margins: the ability to refine sour crude types improves profitability by affording a greater refining margin.
3. Access to Market: the location of the ORLEN Group production infrastructure close to the Central and Eastern European markets that the ORLEN Group serves affords an advantage not only in reduced transport costs, but also in the flexibility of response to fluctuations in market demand, particularly with respect to producers outside of Europe.
4. Retail Network: the ORLEN Group is able to rely on its extensive retail network for the sale of its products in the markets in which it operates.
5. Brand Strength: the ORLEN Group operates mainly premium brands, with strong brand recognition, most notably within the retail segment in Poland, and is gradually exiting B-branded sites.
6. Petrochemicals: the ORLEN Group has a modern production infrastructure and a diverse product portfolio offered on developing markets, which is further boosted by low naphtha prices.
The Group's Strategy for 2014-2017
Assumptions of the ORLEN Group strategy for the years 2014-2017
The year 2015 was the first full year of the 2014-2017 strategy. It assumes implementation of development projects in the most promising areas through an integrated value chain, financial safety and strength and modern management culture. The strategy focuses on three key areas:
1. Value Creation – the ORLEN Group will focus on building a strong position in large and growth markets, strong customer orientation, operational excellence and strengthening the value chain of an integrated and sustainable development of oil and gas.
2. Financial strength – the ORLEN Group's strategic objective is connected with the steady growth of the DPS (Dividend Per Share). The ORLEN Group's dividend policy assumes the payment of dividends, including the accomplishment of the strategic goal of ensuring its secure financial foundations.
3. People – responsibility for people, the environment and partners: zero tolerance for accidents, business responsibility towards the community, the environment and business partners. Development of human capital and innovation: consistent development of an experienced team of professionals, systematic increase in spending on research and development and the implementation of innovative solutions.
As macroeconomic developments evolve, the strategy of the ORLEN Group must accordingly be amended. Therefore work has been initiated on a revised strategy for the Group for the period 2017 to 2021, and it is currently anticipated by management that such revised strategy will be finalised by the end of 2016.
Capital Expenditures
In the years 2014-2017 the planned expenditures of PLN 10.8 billion will be allocated for the development of the ORLEN Group, of which PLN 6.4 billion will be allocated to the downstream segment, PLN 1.2 billion to the retail segment and PLN 3.2 billion to the upstream segment. Furthermore, the amount of PLN 5.5 billion will be allocated to the modernisation work connected with maintaining high system performance and the fulfilment of regulatory requirements.
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Strategic objectives in the individual segments of the ORLEN Group
Downstream Value drivers Integrated management • comprehensive management of the value chain
• expansion of product mix and the degree of conversion
Operational excellence • consistent improvement in key indicators of efficiency
• optimisation of the structure and the restructuring of the ORLEN Group's assets
Effective sales • adjustment of sales models for best practices
• strengthening the position in the home markets
The development of industrial cogeneration • construction of new power - EC Wloclawek and EC Plock • modernisation of existing assets
Retail Value drivers Modern network: • further development of the owned stations network as well as franchise (DOFO)
• growth in annual average fuel sales per station
Customer orientation: • implementation of new services and products • implementation of new shops formats under ORLEN logo and also new format of Stop Café
Strong brand: • full potential utilisation of loyalty programme • e-commerce development
Upstream Value drivers Organic growth in Poland • concentration on the most promising areas of unconventional deposits • development of conventional projects
Extraction development in Canada: • extraction increase to 16 thousand boe per day • increase of gas and oil (proven and probable) reserves
Opportunistic purchases of assets: • in Poland and other markets dependent on the amount of the free cash flow
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The Summary of Strategic Actions in the ORLEN Group in 2015
The following table shows the goals achieved during 2015 as against each strategic objective:
1 Value creation • EBITDA LIFO of PLN 8.7 billion . • Throughput of 30.9 million tonnes and sales of 38.7 million tonnes. • Acquisition of upstream assets in Canada and Poland. • New contracts for the supply of oil of up to 10.8 million tonnes per year.
Financial strength • Financial leverage as at 31 December 2015 of 28.1 per cent. • Cash flow from operating activities of PLN 5.4 billion. • Dividend payments of PLN 0.7 billion, representing PLN 1.65 per share. • Extension of the average maturity of sources of financing to the fourth quarter of 2019.
People • The ORLEN Group was awarded a number of awards in 2015.
The Realisation of the Strategy by Reporting Segment
The following table shows the breakdown by segment of the achievement of ORLEN Group's strategic objectives in 2015:
Downstream Realisation
2 • EBITDA LIFO of PLN 7.8 billion . • Throughput of 30.9 million tonnes and volume sales of 30.4 million tonnes. • Increased yield of white products (LPG, gasoline and diesel) in the ORLEN Group by 1 p.p. (compared with 2014) to 79 per cent. and a decrease in energy absorptivity by nearly 3
p.p. (compared with 2014). • Construction of new power plants – PP Włocławek (463 MWe) and PP Płock (600MWe). • The contract for the construction of a new polyethylene plant (PE3) in Litvínov. • Adjustment of the PP in Płock to emission standards applicable from 2016.
Retail Realisation
• Record EBITDA LIFO: PLN 1.5 billion. • Volume sales increased by 3 per cent. (compared with 2014), including: an increase in Poland by 4 per cent. and in the Czech Republic by 10 per cent. • Start piloting new formats of convenience stores in 10 stations (5 under the ORLEN brand and 5 under the new brand O!Shop).
• 1,404 points Stop Cafe and Stop Cafe Bistro in Poland; an increase of 154 points. (compared with 2014) and the launch of two test stations with the new format catering Stop Cafe 2.0 • The acquisition of 68 retail stations from OMV in the Czech Republic and 13 "Sun" fuel stations in Germany from Germania Petrol.
Upstream Realisation
• The acquisition of upstream assets in Canada (Kicking Horse Energy) and Poland (FX Energy).
• The increase in total proven and probable oil and gas reserves to 97 million boe. • Average production in 2015 of 7.1 thousand boe/d.
______
1. Before the impairment loss of non-current assets. Impairment losses on assets in 2015 amounted to the negative value of PLN 993 million and was primarily related to impairment losses on exploration assets of the ORLEN Upstream Group in Poland recognised in the second quarter of 2015 in the negative amount of PLN 429 million, impairment losses on petrochemical assets of the Unipetrol Group recognised in third quarter of 2015 in the negative amount of PLN 93 million in connection with the failure of the ethylene production installation in August 2015 and impairment losses of the mining assets in Canada which amounted to the negative value of PLN 423 million recognised in the fourth quarter of 2015. 2. Before the impairment loss of non-current assets of PLN 136 million related mainly to the failure of the ethylene production installation in the
Unipetrol Group of PLN 93 million described above.
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FINANCIAL AND OPERATIONAL PERFORMANCE OF THE GROUP
The following tables show the revenues, financial results, increase in investment expenditure and indebtedness broken down by operating segment for the periods indicated:
Consolidated Statement of Profit or Loss
For the three months ended For the year ended 31 31 March December
Item 2016 2015 2015 2014
(PLN million) Statement of profit or loss Sales revenues ...... 16,213 20,005 88,336 106,832 Cost of sales ...... (14,574) (17,523) (77,792) (101,010)
Gross profit on sales ...... 1,639 2,482 10,544 5,822 Distribution expenses ...... (1,001) (934) (3,971) (3,920) Administrative expenses ...... (362) (388) (1,552) (1,512) Other operating income ...... 198 81 420 766 Other operating expenses ...... (81) (62) (1,354) (5,924) Share in profit from investments accounted for under equity method ...... 85 31 253 57
Profit/(Loss) from operations ...... 478 1,210 4,340 (4,711) Finance income ...... 45 89 390 354 Finance costs ...... (89) (265) (1,032) (1,889)
Net finance income and costs ...... (44) (176) (642) (1,535)
Profit/(Loss) before tax ...... 434 1,034 3,698 (6,246)
Tax expense ...... (98) (166) (465) 418
Net profit/(loss) ...... 336 868 3,233 (5,828)
The sales revenues of the ORLEN Group for the year ended 31 December 2015 amounted to PLN 88,336 million and decreased by PLN 18,496 million compared to the year ended 31 December 2014 and the sales revenues for the three months ended 31 March 2016 amounted to PLN 16,213 million and decreased by PLN 3,792 million compared to the three months ended 31 March 2015. These equate to a decrease of 17.3 per cent., and 18.9 per cent., respectively, and occurred as a result of the lower prices of crude oil and of the ORLEN Group's products.
Gross Profit
The gross profit of the ORLEN Group is its revenue less its cost of sales. Whilst revenues decreased from PLN 106,832 million for the year ended 31 December 2014 to PLN 88,336 million for the year ended 31 December 2015 (a decrease of 17 per cent.) and from PLN 20,005 million for the three months ended 31 March 2015 to PLN 16,213 million for the three months ended 31 March 2016 (a decrease of 19 per cent.), costs of sales also decreased from PLN 101,010 million for the year ended 31 December 2014 to PLN 77,792 million for the year ended 31 December 2015 (a decrease of 23 per cent.) and from PLN 17,523 million for the three months ended 31 March 2015 to PLN 14,574 million for the three months ended 31 March 2016 (a decrease of 17 per cent.), accordingly, the ORLEN Group's gross profit was PLN 10,544 million for the year ended 31 December 2015 compared to PLN 5,822 million for the year ended 31 December 2014 (an increase of 81 per cent.) and PLN 1,639 million for the three months ended 31 March 2016 compared to PLN 2,482 million for the three months ended 31 March 2015 (a decrease of 33.96 per cent.).
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The table below shows the breakdown of the costs structure for the periods indicated:
Operating Expenses Structure For the three months ended For the year ended 31 March 31 December
2016 2015 2015 2014 (PLN (PLN (PLN (PLN million) (per cent.) million) (per cent.) million) (per cent.) million) (per cent.) Materials and energy ...... (9,090) 57 (11,967) 63 (54,542) 65 (70,586) 63 Cost of merchandise and raw materials sold ...... (3,962) 25 (4,462) 24 (18,303) 22 (24,799) 22 External services ...... (958) 6 (1,053) 6 (4,352) 5 (4,316) 4 Employee benefits ...... (567) 3 (534) 3 (2,110) 2 (2,059) 2 Depreciation and amortisation ...... (515) 3 (452) 2 (1,895) 2 (1,991) 2 Taxes and charges ...... (274) 2 (283) 1 (1,152) 1 (653) 1 Other ...... (195) 1 (151) 1 (1,835) 2 (6,383) 5 Change in inventories..... (515) 3 (101) 1 (693) 1 (1,783) 1 Cost of products and services for own use…... 58 0 96 (1) 213 0 204 0 Total ...... (16,018) 100 (18,907) 100 (84,669) 100 (112,366) 100
Figures are subject to rounding adjustments.
The operating expenses of the ORLEN Group were PLN 84,669 million for the year ended 31 December 2015 compared to PLN 112,366 million for the year ended 31 December 2014 (a decrease of 24.6 per cent.) and PLN 16,018 million for the three months ended 31 March 2016 compared to PLN 18,907 million for the same period in 2015 (a decrease of 15.3 per cent.). The largest element of operating expenses is Materials and Energy, representing 58 per cent. of total costs for the first three months of 2016.
EBITDA LIFO, EBITDA and EBIT
The table below shows the ORLEN Group's revenue, EBITDA LIFO, EBITDA, EBIT and net profit for the periods indicated:
For the three months ended For the year ended 31 March 31 December 2016 2015 2015 2014 (PLN million) Revenue ...... 16,213 20,005 88,336 106,832 EBITDA LIFO(1) ...... 1,937 1,910 8,738 5,213 EBITDA ...... 993 1,662 6,235 (2,720) EBIT ...... 478 1,210 4,340 (4,711) Net profit ...... 336 868 3,233 (5,828) ______(1) before impairment allowances of assets according to IAS 36.
Net Profit
After taking into consideration tax charges of PLN 465 million, the net profit of the ORLEN Group for the year ended 31 December 2015 amounted to PLN 3,233 million. After taking into consideration tax charges of PLN 98 million, the net profit of the ORLEN Group for the three months ended 31 March 2016 amounted to PLN 336 million.
EBITDA
In the year ended 31 December 2015, the ORLEN Group generated EBITDA of PLN 6,235 million compared to a loss of PLN 2,720 million for the year ended 31 December 2014. For the three months ended 31 March 2016, the ORLEN Group generated EBITDA of PLN 993 million compared to PLN 1,662 million for the three months ended 31 March 2015.
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EBITDA LIFO
The ORLEN Group's inventories are valued in its financial statements in accordance with IFRS EU at weighted average cost method or purchase price method. Therefore, an upward trend in crude oil prices has a positive effect and a downward trend has a negative impact on the results reported. The application of the LIFO method of inventory valuation results in current production costs being measured at cost of purchased crude oil and, consequently, the results of operations better represent the actual situation.
For the three months ended For the year ended 31 March (1) 31 December(1) Item 2016 2015 2015 2014 (PLN million) Downstream 1,755 1,753 7,776 4,210 Retail ...... 301 282 1,539 1,416 Upstream...... 27 14 44 152 Corporate functions...... (146) (139) (621) (565) EBITDA LIFO ...... 1,937 1,910 8,738 5,213 ______(1) before impairment allowances of assets according to IAS 36. The ORLEN Group compiles EBITDA LIFO to give what it believes is a more accurate representation of the ORLEN Group's performance. This is because the "last-in, first-out" methodology is linked to more recent prices. Although this is not a national standard, it is a standard methodology within the industry. For the year ended 31 December 2015, the ORLEN Group generated adjusted EBITDA (EBITDA LIFO before impairment allowances) of PLN 8,738 million compared to PLN 5,213 million for the year ended 31 December 2014.
For the three months ended 31 March 2016, the ORLEN Group generated EBITDA LIFO of PLN 1,937 million compared to PLN 1,910 million for the three months ended 31 March 2015.
The following chart shows the breakdown by segment of EBITDA LIFO between the three months ended 31 March 2016 and the three months ended 31 March 2015, in PLN million:
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The following chart shows the change in EBITDA LIFO broken down by segment between the three months ended 31 March 2016 and the three months ended 31 March 2015, in PLN million:
Sensitivity Analysis
The ORLEN Group is highly sensitive to fluctuations in margins. The chart below represents the impact on annual EBITDA LIFO, as estimated by management, of fluctuations in the margins which are indicated:
Impact on EBITDA LIFO per year
1. Estimates of changes in the impact of the model downstream margin and the refining margin are calculated assuming that the ORLEN Group has a full processing capacity of crude oil amounting to around 220 million bbl.
2. Estimates of the impact of changes in the model petrochemical margin are calculated assuming that the ORLEN Group sells approximately 480 thousand tonnes of polymers per year.
3. Estimates of the impact of changes in the retail margin are calculated assuming that the ORLEN Group sells an aggregate of approximately 9.8 billion litres of the various fuels that it sells per year.
A change in the model downstream margin or model refining margin of USD 1 per barrel is estimated to have an impact on EBITDA LIFO of approximately USD 220 million per annum. A change in the model petrochemical margin of EUR 100 per tonne is estimated to impact EBITDA LIFO by EUR 48 million per annum. A change in the retail sales margin of 1 grosz per litre (gr/l) is estimated to impact EBITDA LIFO by PLN 98 million per annum.
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Capital Expenditure
The following chart shows the ORLEN Group's total capital expenditure in PLN million for the year ended 31 December 2015 and for the three months ended 31 March 2016, together with a percentage breakdown by segments:
Realised CAPEX for the year ended 31 December 2015 – split by segments
Realised CAPEX for the three months ended 31 March 2016 – split by segments
1,002
784
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Indebtedness
As at 31 December 2015, the ORLEN Group's net indebtedness (representing non-current loans and borrowings plus current loans and borrowings less cash and cash equivalents) amounted to PLN 6,810 million and was higher by PLN 90 million in comparison to the year ended 31 December 2014. The increase principally reflected the following: net indebtedness of purchased companies in the upstream segment, in the total amount of PLN 374 million, the repayment of loans and borrowings, the decrease of cash and cash equivalents balances, the net impact of negative exchange differences from revaluation, indebtedness valuation and the recalculation of the balances of foreign entities in the total amount of PLN 284 million. As at 31 December 2015 and as at 31 December 2014, the maximum possible indebtedness pursuant to facilities available for drawdown amounted to PLN 13,916 million and PLN 14,372 million, respectively. As at 31 December 2015 and as at 31 December 2014, PLN 8,441 million and PLN 7,150 million, respectively, remained unused.
As at 31 March 2016, the ORLEN Group's net indebtedness amounted to PLN 5,467 million and was lower by PLN 1,343 million in comparison with the end of 2015. The balance of the ORLEN Group's net indebtedness decreased as a result of the net repayment of loans and borrowings in the amount of PLN 189 million, an increase in the cash balance of PLN 1,119 million and the net impact of positive exchange differences from the revaluation, indebtedness valuation, and the recalculation of the balances of foreign entities in the total amount of PLN 35 million.
The following tables show breakdowns of the types of financial liabilities of the ORLEN Group, as well as their respective maturity profiles for the periods indicated:
Maturity analysis for financial liabilities as at 31 December 2015:
from 1 to 3 from 3 to 5 Carrying up to 1 year years years above 5 years Total amount (PLN million) Bonds ...... 68 1,003 1,125 2,138 4,334 4,155 floating-rate bonds - undiscounted value ...... 63 993 1,017 - 2,073 1,916 fixed rate bonds - undiscounted value ...... 5 10 108 2,138 2,261 2,239 Loans - undiscounted value 1,053 1,019 2,720 435 5,227 5,000 Trade liabilities ...... 5,430 - - - 5,430 5,430 Investment liabilities ...... 1,508 196 14 90 1,808 1,808 Embedded derivatives and hedging instruments- undiscounted value ...... 693 205 34 - 932 1,006 gross exchange amounts, incl.: ...... 5 8 14 - 27 107 currency interest rate swaps ...... (2) 8 14 - 20 99 net exchange amounts, incl.: ...... 688 197 20 - 905 899 commodity swaps...... 655 151 - - 806 801 Other ...... 306 71 21 82 480 480 9,058 2,494 3,914 2,745 18,211 17,879 Maturity analysis for financial liabilities as at 31 December 2014:
from 1 to 3 from 3 to 5 Carrying up to 1 year years years above 5 years Total amount (PLN million) Bonds ...... 76 842 1,268 2,244 4,430 4,161 floating-rate bonds - undiscounted value ...... 71 832 1,258 - 2,161 1,919 fixed rate bonds - undiscounted value ...... 5 10 10 2,244 2,269 2,242 Loans - undiscounted value 1,055 825 4,645 302 6,827 6,491 Trade liabilities ...... 7,049 - - - 7,049 7,049 Investment liabilities ...... 923 14 110 1 1,048 1,048 Embedded derivatives and hedging instruments- undiscounted value ...... 1,027 1,454 39 5 2,525 2,619 gross exchange amounts, incl.: ...... (10) (2) 17 - 5 112 currency interest rate swaps ...... (11) (2) 17 - 4 111 net exchange amounts, incl.: ...... 1,037 1,456 22 5 2,520 2,507 commodity swaps ...... 981 1,415 - - 2,396 2,383 Other ...... 136 76 16 38 266 266 10,266 3,211 6,078 2,590 22,145 21,634
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OVERVIEW OF THE DOWNSTREAM SEGMENT
The Main Downstream Production Assets of the ORLEN Group
The total capacity of the ORLEN Group amounted to 35.2 million tonnes as of 31 December 2015. PKN ORLEN's production plant in Płock is one of the modern integrated production facilities in Central and Eastern Europe, with an annual capacity of conversion at the level of 16.3 million tonnes per year. According to Wood Mackenzie's ranking, the complex has been classified as a so-called Super-Site, which is a refinery of strategic importance characterised by a large depth of crude oil processing, integration with petrochemical activity, and the generation of high margins.
Within the petrochemical production area, the key installation is Olefin, with a maximum capacity of about 700 thousand tonnes of ethylene and about 380 thousand tonnes of propylene. The monomers which are produced by this installation are used to produce polymers in the BOP and PVC installations in the ANWIL Group. PKN ORLEN also has a modern installation called PX/PTA, with a capacity of 400 thousand tonnes of paraxylene, which in turn enables the production of 600 thousand tonnes of terephthalic acid.
Other Polish PKN ORLEN refineries are located in southern Poland (at Trzebinia and Jedlicze). They specialise mainly in services related to the storage and distribution of fuels; the production of bio-components; base oils; heating oils; and the regeneration of spent oils. At the beginning of 2015, the refineries were merged, and they are currently operating as ORLEN Południe.
Taking capacity into account, the second largest production plant in the ORLEN Group (and the only one in the Baltic countries (Lithuania, Latvia and Estonia)) is a refinery belonging to ORLEN Lietuva. The capacity of the Lithuanian refinery amounts to 10.2 million tonnes per year. This exceeds demand from the local market and enables the export of the plant's products for sale on the worldwide markets.
Crude oil processing in the Unipetrol Group is realised by refineries in Kralupy and in Litvínov. In 2013, the Unipetrol Group signed an agreement for the purchase of an additional 16.4 per cent. of the shares in Ceska Rafinerska a.s. ("Ceska Rafinerska") from Shell. The Unipetrol Group already held 51.22 per cent. of the shares in Ceska Rafinerska. In continuing the process of consolidation of the ORLEN Group's refinery assets during 2014, Unipetrol concluded an agreement with the Italian concern Eni for the purchase of all the remaining 32.4 per cent. of the shares in Ceska Rafinerska. In May 2015, the Unipetrol Group finalised the acquisition of shares from Eni and thus became the sole owner of the refineries belonging to Ceska Rafinerska, which resulted in a higher availability of production capacity and guaranteed the safety of crude oil supplies to the petrochemical segment. The total production capacity of the Unipetrol Group grew to 8.7 million tonnes per year. The Unipetrol Group also possessed petrochemical assets with a total production capacity of approximately 600 thousand tonnes per year, including 320 thousand tonnes of polyethylene and approximately 280 thousand tonnes of polypropylene. The construction of a new Polyethylene 3 installation with a total production capacity of approximately 270 thousand tonnes per year is in progress and will enable an increase in the capacity of the ethylene installation and the deeper integration of petrochemical and refinery production in the Unipetrol Group.
On 13 August 2015, there was a propylene leak at the steam cracker unit at the Chempark Záluží plant in Litvínov. As a result the crude oil production at the Litvínov refinery has been reduced to a minimum. Unipetrol expects to complete the repair works during July 2016. The steam cracker unit is expected to be restarted at 80 per cent. capacity at the end of August 2016. Full capacity is expected to be reached at the end of October 2016. Unipetrol is insured against both property and mechanical damages and business interruption.
On 17 May 2016, an explosion on the Fluid Catalytic Cracking ("FCC") unit at the Kralupy refinery occurred. As a result, the crude oil processing at the Kralupy refinery was suspended. Crude oil processing and polypropylene production at the Litvínov refinery will also be limited. The Unipetrol Group expects that the crude oil processing at the Kralupy refinery will restart in June 2016. The precise impact on the Litvínov refinery, on polypropylene production and the estimation of the negative impact on the Unipetrol Group's financial results are subject to evaluation and analysis.
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With respect to the downstream segment, the following table shows the ORLEN Group's processing capacity and utilisation, broken down by location and for the period indicated:
2015 PRODUCTION ORLEN Group Poland Czech Republic Lithuania (million tonnes) Maximum processing capacity...... 35.2 16.3 8.7 10.2 (per cent.) Utilisation of processing capacity ...... 90 96 84 83 White products yield ...... 79 80 82 74 Utilisation of Olefin installation capacity ...... 74 84 59 - Utilisation of PTA installation capacity ...... 88 88 - - The following table shows the ORLEN Group's sales of refinery and petrochemical products, broken down by location and for the period indicated:
2015 SALES ORLEN Group Poland Czech Republic Lithuania (thousand tonnes) TOTAL 30,3880 15,192 6,726 8,462 REFINERY, including: 25,075 11,682 4,931 8,462 fuels ...... 17,432 6,614 4,159 6,659 heavy fractions ...... 4,544 2,309 600 1,635 other refinery products ...... 3,099 2,759 172 168 PETROCHEMICAL, including: 5,305 3,510 1,795 - olefins ...... 878 784 94 - polyolefins ...... 482 - 482 - benzene ...... 357 212 145 - plastics ...... 445 339 106 - fertilisers ...... 1,146 951 195 - PTA ...... 587 587 - - other petrochemical products ...... 1,410 637 773 -
The following table shows the ORLEN Group's assets and power installations, broken down by location:
LOGISTICS ORLEN Group Poland Czech Republic Lithuania (km) Total length of used pipelines...... 3,753 1,888 1,774 91 Length of used raw material pipelines ...... 1,695 930 674 91 Length of used product pipelines ...... 2,058 958 1,100 -
POWER INDUSTRY Plock Litvinov Mazeikiai Units Power Plant Power Plant Power Plant Heating power installed ...... MWt 2,149 768 694 Electric power installed ...... MWe 345 112 160 Boiler's efficiency ...... % 93.0 90.8 92.8 Boiler's availability ...... % 82.4 74.2 77.0
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The following table shows the profit and loss of the downstream segment for the periods indicated:
For the three months ended For the year ended 31 31 March December
Item 2016 2015 2015 2014
(PLN million) Segment revenues, including: ...... 11,943 15,696 69,611 85,941 Sales revenues from external customers ...... 9,838 12,880 56,987 70,549 Sales revenues from transactions with other segments ...... 2,105 2,816 12,624 15,392 Segment expenses ...... (11,652) (14,554) (64,963) (85,971) Other operating income ...... 163 60 276 468 Other operating expenses ...... (51) (39) (316) (5,329) Other operating income/expenses, net ...... 112 21 (40) (4,861) Share in profit from investments accounted for under equity method ... 85 31 253 58 Operating profit/(loss) under LIFO increased by depreciation and amortisation (EBITDA LIFO) before impairment allowances ...... 1,755 1,753 7,776 4,210 Operating profit/(loss) under LIFO increased by depreciation and amortisation (EBITDA LIFO) ...... 1,749 1,741 7,640 (852) Operating profit/(loss) increased by depreciation and amortisation (EBITDA) ...... 812 1,504 6,130 (3,425) Profit/(Loss) from operations under LIFO before impairment allowances 1,431 1,443 6,507 2,802 Profit/(Loss) from operations under LIFO...... 1,425 1,431 6,371 (2,260) Profit/(Loss) from operations ...... 488 1,194 4,861 (4,833) CAPEX ...... 784 401 2,242 2,714 Sales (thousand tonnes) ...... 7,263 6,756 30,380 27,706
Competition and Market Shares of the ORLEN Group in the Downstream Segment
The largest competitors of the ORLEN Group in Central and Eastern Europe are:
• the Lotos Group – with headquarters in Gdańsk, is the second largest refinery in Poland;
• Mitteldeutschland Refinery in Leuna/Spergau (part of the Total Group) – located in south-eastern Germany, about 150 km from the Polish-German border, this is the most modern of the German refineries;
• PCK Refinery in Schwedt – located northeast of Berlin, about 20 km from the Polish-German border;
• Slovnaft Refinery – an integrated refining and petrochemical group with a dominant position in the Slovak Republic, located near Bratislava, about 350 km from the Polish border; and
• Mozyr Refinery – a leading Belarussian refinery.
Wholesale of Refinery Products
In 2015, the ORLEN Group made wholesale sales of refinery products in Poland, the Czech Republic, Germany, Slovakia, Hungary, Lithuania, Latvia, Estonia, Finland and Ukraine as well as transporting by sea through various Western European transshipment terminals. The ORLEN Group's domestic markets include the Polish, Lithuanian and Czech markets. The ORLEN Group has an extensive portfolio of refinery products, which include: gasoline; diesel; jet fuel; light and heavy heating oil; and a wide range of non-fuel products and semi-products, such as heavy and light heating oils, road bitumen and car and industrial oils.
Growth in total sales of gasoline and diesel oil by the ORLEN Group on the Polish market has led to a market share of 59.5 per cent. according to the ORLEN Group's own estimates. However, this does not account for the illicit fuel trade (also referred to as the "shadow economy"). An increase in regulations may either reduce the shadow economy or record an increase in the consumption of fuels (as captured within official statistics) and could therefore have a disruptive effect on the ORLEN Group's market share.
According to the estimations of management, the ANWIL Group is one of the largest chemical companies by production volume in Central Europe, and, as far as PKN ORLEN is aware, the only commercial producer of polyvinyl chloride (PVC) in Poland and the Czech Republic, as well as one of the major producers of sodium hydroxide and fertilisers in Poland. The ANWIL Group's production capacity is 1,160 thousand tonnes per year of nitrogen fertiliser, approximately 560 thousand tonnes per year of PVC and granules, approximately 360 thousand tonnes per year of sodium hydroxide and about 50 thousand tonnes per year of caprolactam.
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BOP has facilities with total capacities of 820 thousand tonnes, including 320 thousand tonnes of high density polyethylene, 100 thousand tonnes of low density polyethylene and 400 thousand tonnes of polypropylene. BOP products are distributed both in the domestic and also the foreign markets.
Participation in the wholesale fuel market in Poland by sales volume
The chart below shows the development of market share by sales volume in Poland of Gasoline, Diesel oil and total fuels, in each case according to the estimations of management expressed as an increase or decrease of percentage points:
Participation in the wholesale fuel market in the Czech Republic by sales volume
The considerable growth in the production potential of the Unipetrol Group allowed for increasing sales and for the strengthening of the ORLEN Group's position on the Czech market.
The chart below shows the development of market share by sales volume in the Czech Republic of Gasoline, Diesel oil and total fuels, in each case according to the estimations of management expressed as an increase or decrease of percentage points:
Participation in the wholesale fuel market in the Baltic countries by sales volume
The chart below shows the development of market share by sales volume in the Baltic countries of Gasoline, Diesel oil and total fuels, in each case according to the estimations of management expressed as an increase or decrease of percentage points:
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Despite aggressive competition from Scandinavian and Belarussian suppliers, the ORLEN Lietuva Group maintained its position in the fuel sales sector of the Baltic markets, increasing its total share of those markets in 2015 by 7.0 p.p.
Wholesale of Petrochemical Products
The ORLEN Group is one of the largest petrochemical companies in terms of revenue in Central and Eastern Europe according to Fortune Global 500 from 2014. It is also the only commercial producer of monomers and polymers on the Polish market, and of most petrochemical products on the Czech market according to the estimations of management. Competition in the European market as described below is determined by the type of manufactured and offered petrochemicals products.
Polyolefins
The production capacity of high and low density polyethylene in Europe is at a level of about 13,617 thousand tonnes per year. The largest producer of polyethylene is Lyondell Basell Industries, which has a production capacity of about 2,195 thousand tonnes per year (including its 50 per cent. ownership stake in BOP). The company has assets located in Germany, France and Poland. The second largest producer is Ineos Olefins & Polymers Europa, with a production capacity of around 1,745 thousand tonnes per year and assets located in Belgium, France, Germany, Italy and Norway. The third largest producer is SABIC, with a production capacity of about 1,590 thousand tonnes per year and assets located in Germany, the Netherlands and the UK. Other major producers include Total Petrochemicals, Borealis and ExxonMobil. The figures contained in this paragraph are according to the estimations of management based on POLYGLOBE.
Polypropylene
The polypropylene production capacity in Europe is at a level of about 11,584 thousand tonnes per year. The largest producer of polypropylene is Lyondell Basell Industries, which has a production capacity of about 2,365 thousand tonnes per year (including its 50 per cent. stake in BOP). The company has assets located in Germany, France, Italy, Spain, the UK and Poland. The second largest producer is Borealis, a company with a production capacity of around 1,920 thousand tonnes per year and assets located in Belgium, Germany, Austria and Finland. The next largest producers are Total Petrochemicals, with a production capacity of about 1,280 thousand tonnes per year and assets located in Belgium and France, and SABIC, with a production capacity of 1,150 thousand tonnes per year and assets located in the Netherlands and Germany. The total share of BOP and the Unipetrol Group in the European polyethylene and polypropylene production capacity, respectively, is approximately 4 per cent. in each case. The figures contained in this paragraph are according to the estimations of management based on POLYGLOBE.
PTA
The PTA production in the European market in 2015 amounted to about 2,611 thousand tonnes per year (nominal European production capacity is approximately 3,883 thousand tonnes per year). The shortfall resulted from the fact that the actual production recorded by Artlant in 2015 was significantly reduced by the long-term shutdown of this Portuguese manufacturer (since the third quarter of 2014, Artlant's installation had only been operational for three weeks during October 2015, and the re-starting of production is now planned for the second half of 2016).
PTA in Europe is mainly used for the production of PET granulate used in food bottles (accounting for about 85 per cent. of European production), the production of polyester fibers (accounting for about 5 per cent. of European production), and foil (accounting for about 3 per cent. of European production). There are seven PTA producers in the European market. In 2015, a decision was made to close the Indorama Ottana Energia JV production unit, which had a nominal production capacity of 190 thousand tonnes per year. The largest producers of PTA in Europe are: BP Chembel NV, located in Belgium, with a nominal capacity of 1,400 thousand tonnes per year; Artlant in Portugal, with a nominal production capacity of 750 thousand tonnes per year; and PKN ORLEN, with a nominal production capacity of 600 thousand tonnes per year. In 2015, these three producers represented over 72 per cent. of European nominal production capacity. In 2015 the ORLEN Group had a 16 per cent. share in the nominal European production of PTA and, as far as PKN ORLEN is aware, it was the only commercial producer in Europe which has its PTA manufacturing systems fully integrated with the production of paraxylene. Planned future investments into the PTA production in Europe, except for the planned increase in the first half of 2016 in production power by the Indorama Rotterdam installation (representing an increase of 250 thousand tonnes per year), are concentrated in Russia, at Etana (750 thousand tonnes per year – planned for 2020), Mogilev (600 thousand tonnes per year – planned for 2020) and OJSC TANECO (210 thousand tonnes per year – planned for 2021). The figures contained in this paragraph and the one above are according to the estimations of management based on PCI.
Plastics
PVC nominal production capacity in Europe is 7,858 thousand tonnes per year. However, Oltchim and Karpatneftekhim, recording nominal production capacities of approximately 300 thousand tonnes each, have been
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permanently shut down. The leading manufacturers of PVC in Europe are INOVYN (a company established through the merger of Ineos Chlor and Solvay), Kern One and Vynova. The share of normal PVC production capacity held by these companies is estimated, respectively, at 31.5 per cent., 11.0 per cent. and 10.5 per cent. The estimated share of European production capacity held by the ANWIL Group, with a production capacity of 475 thousand tonnes per year, is approximately 6 per cent. The ANWIL Group's main competitors in the domestic and European PVC market are BorsodChem, Inovyn and Vynova. The figures contained in this paragraph are according to the estimations of management.
Fertilisers
The total ammonium nitrate and nitro-chalk production capacity in the 28 countries of the European Union, Switzerland and Norway is about 7,500 thousand tonnes per year. The product is used mainly in agriculture, as a fertiliser. The largest producer is Yara, with a 23 per cent. share in the European market. The next largest manufacturers are Borealis and Azoty Group, with 10 per cent. and 9 per cent. market shares respectively. The share of production capacity held by ANWIL S.A. in the market of ammonium nitrate and nitro-chalk is 6 per cent. The figures contained in this paragraph are according to the estimations of management based on Fertilisers Europe.
The Logistics Assets of the Orlen Group
Efficient logistics infrastructure is essential to effective competition in the markets in which the ORLEN Group operates.
The ORLEN Group uses a network of mutually complementary infrastructure elements: fuel terminals, onshore and offshore handling facilities and networks of raw material pipelines. In 2015, product logistics in the ORLEN Group was based on pipeline use, on railway transport, and also on tank truck carriage.
In 2015, pipeline transport was the primary form for the transport of raw materials and products. The total length of product and raw material pipeline networks, belonging to both external entities and also to its own facilities in Poland, the Czech Republic and Lithuania, was nearly 3.8 thousand km (2.1 thousand km of which are product pipelines, and 1.7 thousand km of which are raw material pipelines).
On the Polish market, PKN ORLEN uses 620 kilometers of pipeline for the transport of fuel products. This pipeline is part-owned by PERN "Przyjaźń", and part-owned by PKN ORLEN. The section of pipeline owned by PKN ORLEN has a total length of 338 km, and consists of two sections: Płock – Ostrów Wielkopolski – Wrocław with a length of 319 km and Wielowieś – Góra (IKS Solino) with a length of 19 km. Crude oil transportation is achieved primarily through the use of a network of pipelines belonging to PERN "Przyjaźń", of a total length of 887 km, as well as by using PKN ORLEN's own 43 km pipeline linking Góra (IKS Solino) and Żółwiniec and connecting to the PERN "Przyjaźń" pipeline.
For the operational purposes of the receipt, dispatch and loading of fuel on the Polish market in 2015, the ORLEN Group used a total of 24 facilities (comprising its own fuel terminals, terminals owned by entities from the ORLEN Group, and third parties' terminals). The total storage capacity within the ORLEN Group's own infrastructure, and based on agreements concluded as at 31 December 2015, amounted to 7 million cubic metres.
In 2015, on the Czech market, the ORLEN Group used 1,774 km of pipeline (1,110 km of product pipeline owned by CEPRO, and 674 km of raw material pipeline owned by MERO) and twelve storage and distribution stations belonging to the state-owned operator CEPRO, along with two storage facilities leased from third parties.
The main component of the logistics infrastructure currently used on the Lithuanian market is the raw material pipeline with a length of 91 km, which links the Butinge terminal with the Mazeikiai refinery. Both the terminal and the pipeline are owned by ORLEN Lietuva.
On the German market, ORLEN Deutschland has taken advantage of the warehouse distribution capacities of five facilities located in the northern part of Germany, which belong to external entities. Fuel transport on this market is performed entirely through the use of road transport.
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Logistics infrastructure used by the ORLEN Group in Europe
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Power Industry
The ORLEN Group is a significant producer of electricity and heat, which are used in large part for its own production needs. According to the estimations of management, the ORLEN Group is also one of the largest consumers of gas in Poland and an active participant in the process of liberalisation of the gas market.
In accordance with the ORLEN Group's strategy, the Group is in the process of upgrading its existing production sources, and is making new investments in the form of gas-steam blocks. Also in accordance with its strategy, the ORLEN Group is focused on extending the periods over which production sources can operate without undergoing maintenance.
The ORLEN Group currently owns energy blocks in three countries. In Poland, they are located in Płock, Włocławek, Jedlicze and Trzebinia. In the Czech Republic, in Litvinov, Spolana, Kolin and Pardubice. The Lithuanian block is located in Mazeikiai.
Energy assets in the ORLEN Group
(a) The PKN ORLEN power plant in Płock
The PKN ORLEN Power Plant in Płock (the "PP") produces heat and electricity in a high-efficiency cogeneration. The total installed electric capacity is 345 MWe and the total installed thermal capacity is 2,149 MWt. As a basic supplier, the PP provides heat in the form of steam, hot water and electricity, which are used for production installations and external customers, including the city of Płock. Different types of fuel may be used for the production of electricity and heat: heavy fuel oil as primary fuel, along with natural gas and post-refining gas. In 2015, the construction of an installation of Catalytic Denitrification and Dedusting continued at the PP in Płock. Alongside the construction of the Catalytic Denitrification and Dedusting installation, the flue gas desulphurisation installation based on wet-limestone technology, which is used to desulphurise flue gas from all boilers, was completed and commissioned in December 2015. After the launch of the aforementioned installations, the PP in Płock met its environmental requirements, which were effective from the beginning of 2016.
(b) The construction of the gas-steam power plant in Włocławek
The gas-steam power plant in Włocławek (of 463 MWe in total power) will be strictly technologically linked to ANWIL Group's production plant. The initial contractual completion date for the investment – 31 December 2015 – was postponed to the second and third quarters of 2016, due to the extension of the construction and installation works. In the fourth quarter of 2015, a series of initial works were carried out. Tests and assessments relating to the electrical and power systems and Transmission System Operators power connections were completed, and gas turbine burners were lit up, inducing turbine rotations. After commissioning, the newly built power plant will serve as the main source of technological heat and electricity for the ANWIL Group, and the surplus of electricity produced will be allocated by Transmission System Operators on the domestic market.
(c) The construction of a gas-steam block in Płock
In April 2015, the site for the construction of a gas-steam block (of 596 MWe) in Płock was handed over to the contractor (comprising Siemens AG and Siemens Polska Sp. z o.o.). As of the beginning of July 2015, the contractor obtained a replacement building permit for the construction project and commenced civil works. All earthworks related to the technological and auxiliary buildings were completed by the end of the year. The foundation slab for the boiler room, the water conditioning station, and the raw and demineralised water tanks were completed. Apart from the construction of the gas-steam block, contract and design works devoted to the infrastructure required for its launch were carried out, i.e., related to the 400kV block line, the 30kV busbars, the multi-chamber reactors for decarbonised water,
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and to the ICT installations. As at 31 December 2015, the technical documentation required for obtaining an environmental decision for the construction of the 400kV line was submitted. Furthermore, a tender for the appointment of the contractor for this line was announced. The completion of this investment is planned for the end of 2017.
(d) Energy trading
The Energy Trading Department of PKN ORLEN is responsible for trade within the entire ORLEN Group, on the Polish, Czech, German and Lithuanian markets. The Active Energy Trading Group, operating in 2015, increased energy production from TG6 (Płock PP) and T700 (Unipetrol) to optimise the work of the turbines. Arbitrage transactions on the wholesale electricity market were also carried out. In 2015, the formation of retail structures was commenced to extend the margin chain and to be able to offer energy to end-users during 2016.
(e) The Polish renewable energy industry
The Polish renewable energy industry is primarily based on wind turbines. 2015 was marked by continuing work on the draft of the proposed act on renewable energy sources to promote further, sustainable development. After the completion of the legislative process, the ORLEN Group will make decisions regarding the legitimacy of the implementation of projects devoted to renewable energy sources. In 2015, PKN ORLEN S.A. opened a pilot project for furnishing a selected group of fuel stations with photovoltaic modules.
(f) The heat and power plant of the ANWIL Group
The plant is an industrial power plant that runs on natural gas and heating oil and co-generates heat and electricity. The total installed electric capacity of the three turbine generators is 91.5 MWe, and in 2015 the total installed thermal capacity of the four boilers increased by about 48 MWt and amounted to 448 MWt. The heat and power plant provides heat in the form of technological steam, heating water and electricity for production installations and for external customers.
(g) The heat and power plant of the ORLEN Południe Group in Trzebinia
This plant supplies its own needs in heating in full, and partly meets its own need for electricity. The heat and power plant currently has three steam boilers and two backpressure turbine sets which produce electricity at a total capacity of 8 MWe, and thermal power at a total capacity of 90 MWt. The basic fuel in the heat and power plant is fine coal. There is also the option to burn heavy fuel oil. Future plans consist of modernising energy assets in order to increase the efficiency of production, to meet future environmental standards, and fully to protect the electricity needs of the Trzebinia refinery. A tender for the modernisation of the heat and power plant was carried out in 2015, administrative decisions were obtained, an economic model for the investment was developed, and the site was prepared for construction works.
(h) The heat and power plant of the ORLEN Południe Group Jedlicze
This plant is the primary source of heat production for its own needs. Currently, in the heat and power plant, there are six steam boilers and a discharge-backpressure turbine set. The total thermal power of the heat and power plant is 61 MWt, and basic fuel in the heat and power plant is fine coal, but it is also possible to burn heavy fuel oil and natural gas. Works related to the reduction of dust emissions from coal boilers are currently in progress. An energy audit was carried out for the heat and power plant, under which applicable effectiveness measures will be implemented. Several modernisation variants for the existing property are being considered.
(i) The heat and power plant in Litvinov in the Unipetrol Group
This plant is based on brown coal and has electric and thermal power which amounts to 112 MWe and 768 MWt respectively. According to the current strategy, energy assets in Litvinov are under modernisation. At the same time, in order to ensure supplies of steam to the petrochemical plant, preparatory works for the construction of a new steam source are in progress.
(j) The heat and power plant in Spolana
This plant has an installed capacity of 70 MWe and 280 MWt, based on brown coal. In 2015, the process of analysing and implementing initiatives to improve the energy efficiency of power plants continued.
(k) The Paramo heat and power plant
This plant includes two production plants, Kolin and Pardubice, in which steam production based on the combustion of natural gas is located. An analysis of the modernisation for the heat and power plant was performed in 2015 in
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Pardubice for the purpose of adapting the plant to the reduced demand for steam, and also to new emission limits. An analysis of the adaptation to new emission limits was also carried out in the Kolin heat and power plant.
(l) The heat and power plant in the ORLEN Lietuva Group
This plant is a source of steam for production processes and operates on a mix of heavy fuel oil and refining gases. The electric power of the plant is 160 MWe and thermal power is 694 MWt. In 2015, an analysis of the adaptation of energy assets to reference requirements was commenced. Continuation of these analyses and the commencement of preparatory works is planned for 2016.
(m) Competitive projects
A significant part of the existing production capacity requires modernization and/or replacement due to its age and high emission rates. The ORLEN Group is also focused on extending the periods over which production sources can operate without undergoing maintenance. It is estimated that approximately 5 GW of production capacity will have been withdrawn from the market by 2020. As at 31 December 2015, the total installed power capacity in Poland was approximately 40 GW according to data from the Energy Market Agency (ARE SA). Sources (without considering renewable energy sources projects) of total power of approximately 5 GW are currently under construction. These units will partially replace the blocks which are put out of service. In the group of implemented investments, approximately 1.7 GW refer to cogeneration projects, including two blocks built by PKN ORLEN (Płock and Włocławek), a gas-steam unit in Stalowa Wola of 450 MW total power (which is a joint project of PGNiG and Tauron), and a gas heat and power plant in Gorzów Wielkopolski, of 138 MW total power, contracted by PGE.
Sales Volume in the Downstream Segment
In 2015, the ORLEN Group achieved a volume sales increase. Downstream segment volumes of the ORLEN Group amounted to 30,380 thousand tonnes and increased by 9.7 per cent. (compared with 2014). Middle distillates, whose sales increased by 18.9 per cent. (compared with 2014), and light distillates, whose sales grew by 17.6 per cent. (compared with 2014), had the biggest effect on the positive sales result. Record-breaking results were recorded for diesel oil, whose sales increased by more than 21.1 per cent. (compared with 2014). The increase in production capacity of the Unipetrol Group after the purchase of 32 per cent. of the shares in Ceska Rafinerska from Eni in 2015 had the largest impact on the sales level recorded by the ORLEN Group. This contributed to strengthening the position of the Unipetrol Group on the Czech market. As a consequence of the improved market situation, higher volume sales were also recorded in markets where the ORLEN Lietuva Group operates, and in Poland.
The following table shows the ORLEN Group's sales in the downstream table by value and volume:
Sales 2015 2014 CHANGE (%) VALUE VOLUME VALUE VOLUME VALUE VOLUME (thousand (thousand (PLN million) tonnes) (PLN million) tonnes) 1 2 3 4 5 6=(2-4)/4 7=(3-5)/5 Downstream Segment Light distillates(1) ...... 11,528 5,437 13,270 4,623 (13.1%) 17.6% Middle distillates(2) ...... 25,062 11,995 28,976 10,092 (13.5%) 18.9% Heavy fractions(3) ...... 4,610 4,544 7,701 4,527 (40.1%) 0.4% Monomers(4) ...... 2,978 878 3,447 837 (13.6%) 4.9% Polymers(5) ...... 2,341 482 2,953 592 (20.7%) (18.6%) Aromas(6) ...... 930 358 1,662 413 (44.0%) (13.3%) Fertilisers(7) ...... 1,057 1,146 1,065 1,143 (0.8%) 0.3% Plastics(8) ...... 1,492 445 1,424 418 4.8% 6.5% PTA ...... 1,532 587 1,767 571 (13.3%) 2.8% Others(9) ...... 5,457 4,508 8,284 4,490 (34.1%) 0.4%
Total ...... 56,987 30,380 70,549 27,706 (19.2%) 9.7% ______(1) Gasoline, LPG. (2) Diesel oil, light heating oil, jet fuel. (3) Heavy heating oil, bitumen, oils. (4) Ethylene, propylene. (5) Polyethylene, polypropylene. (6) Benzene, toluene, paraxylene, ortoxylene. (7) Canwil, ammonium sulphate, ammonium nitrate and other fertilisers. (8) PVC, PVC granulate. (9) Others - includes the sale of other products, goods and materials of the downstream segment, the revenues from the sale of mandatory reserves for the total amount of PLN 2,236 million in 2014 and PLN 1,045 million in 2013 and revenues from sales of services of the downstream segment.
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Structure of sales revenues from the ORLEN Group's downstream segment
The chart below shows the structure of sale revenues from the ORLEN Group's downstream segment:
Markets in the Downstream Segment
The markets on which the ORLEN Group conducts its main operations and its companies in the downstream segment are:
• the Polish market: PKN ORLEN S.A., ORLEN Paliwa sp. z o.o., ORLEN Południe S.A., ORLEN Asfalt Sp. z o.o., ORLEN Oil Sp. z o.o., IKS SOLINO S.A., Petrolot Sp. z o.o., Ship-Service S.A., Anwil S.A.
• the Czech Republic market: Unipetrol RPA s.r.o., Ceska Rafinerska a.s., Paramo a.s., Unipetrol Slovensko s.r.o., Mogul Slovakia s.r.o., Unipetrol Deutschland GmbH, Butadien Kralupy a.s., Unipetrol RPA Hungary Kft., ORLEN Asfalt Ceska Republika s.r.o., Spolana a.s.
• the Baltic countries market: AB ORLEN Lietuva (Lithuania), ORLEN Latvija SIA (Latvia), ORLEN Eesti OU (Estonia).
Sales volume of the ORLEN Group in the downstream segment on domestic markets
The table below shows the sales volume of the ORLEN Group in the downstream segment on domestic markets by country of headquarter of the company carrying out the sales:
CHANGE SALES 2015 2014 (VOLUME) CHANGE (%) 1 2 3 4=(2-3) 5=(2-3)/3
(thousands of tonnes) Markets Poland ...... 15,192 14,660 532 3.6% Lithuania ...... 8,462 7,475 987 13.2% Czech Republic ...... 6,726 5,571 1,155 20.7% Total ...... 30,380 27,706 2,674 9.7%
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The structure of the sales volume of the ORLEN Group in the downstream segment on domestic markets
The chart below shows the sales volume of the ORLEN Group in the downstream segment on domestic markets:
Polish Market
The year 2015 marked the continuation of the growth trend in the Polish economy. According to the preliminary estimates of the Central Statistical Office of Poland, GDP growth was 3.6 per cent. in 2015 and was higher by 0.3 p.p. in comparison with 2014. Positive trends were also recorded on the labour market in the form of reduced unemployment rates. Developments in the Polish economy resulted in an increase in the level of fuel consumption. Data published by the Energy Market Agency indicates that the long-term downward trend in the Polish gasoline and diesel oil consumption rates was reversed. In 2015, the consumption of these fuels grew by 2.6 per cent. and 5.8 per cent., respectively, (compared with 2014). Apart from the improvement in general market conditions, growth in demand was also stimulated by low fuel prices. Record-breaking crude oil price-drops on the international markets resulted in lower fuel price levels, which additionally encouraged vehicle users to use this means of transport more intensively.
The Polish market has been negatively impacted by the "shadow economy" in fuel trading. The volume of diesel oil which is illegally marketed is estimated to be approximately 20 per cent. of the overall consumption of this fuel according to data published by POPiHN (the Polish Organisation of Oil Industry and Trade) and to the Group's internal market research.
The scale of any further growth in diesel oil and gasoline consumption will depend on whether the pace of the growth of the Polish economy will be maintained and on the effects of measures taken to counteract trading in the "shadow economy".
Sales volume of the ORLEN Group in the downstream segment on the Polish market
The following table shows the sales volume of the ORLEN Group in the downstream segment on the Polish market:
CHANGE SALES 2015 2014 (VOLUME) CHANGE (%) 1 2 3 4=(2-3) 5=(2-3)/3 (thousands of tonnes) Polish Market
Light distillates ...... 1,634 1,624 10 0.6% Medium distillates ...... 4,980 4,437 543 12.2% Heavy fractions ...... 2,309 2,563 (254) (9.9%) Monomers ...... 784 689 95 13.8% Aromas ...... 213 186 27 14.5% Fertilisers ...... 951 962 (11) (1.1%) Plastics ...... 339 295 44 14.9% PTA ...... 587 571 16 2.8% 3,395 3,333 62 1.9% Other ...... Total ...... 15,192 14,660 532 3.6%
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Structure of sales volume of the ORLEN Group in the downstream segment on the Polish market
The following chart shows the structure of sales volume of the ORLEN Group in the downstream segment on the Polish market:
ORLEN Group sales in the downstream segment on the Polish market increased in 2015 by 3.6 per cent. (compared with 2014) and reached the level of 15,192 thousand tonnes by the end of 2015. Due to a consistent sales strategy implemented in 2015, the Group recorded a 9.8 per cent. (compared with 2014) growth in wholesale fuel sales.
An increase in the sales of medium distillates results from high diesel oil and jet fuel volumes, the sales of which grew, respectively, by 14.0 per cent. and 14.6 per cent. (compared with 2014).
2015 marked significant growth in the sale of jet fuel. In 2015, the number of air passengers increased in Poland by 13 per cent. (compared with 2014), and according to the Civil Aviation Authority, successive growth is expected in the next years. Maintaining a leading position and increasing the sales volume on such a promising market, is a significant element of the ORLEN Group's sales strategy.
Light distillate sales increased by 0.6 per cent. (compared with 2014). The low level of the gasoline price stimulated a 4.2 per cent. (compared with 2014) growth in sales of this fuel, resulting in reduced LPG sales by 13.8 per cent. (compared with 2014).
Strong competition on the domestic market and a highly changeable macroeconomic environment prompted a search for opportunities to optimise fuel wholesale within the ORLEN Group. The formation of a specialist Office of International Trade was advanced to merge the competencies of marine trading and the central chartering service into one business area within the ORLEN Group. Essential changes in the structure of ORLEN Group companies in the wholesale area were introduced in 2015, resulting in ORLEN Paliwa merging with ORLEN PetroTank and ORLEN Gaz.
According to the estimations of management, ORLEN Paliwa is one of the country's largest sales organisations by revenue, offering a comprehensive portfolio of fuel products.
In the petrochemical area, the ORLEN Group recorded an increase in the sales of its core product groups including monomers, aromas, plastics and PTA, with the exception of a slight reduction in the sales of artificial fertilisers, which resulted from the limited availability of production installations.
Baltic and Ukrainian Markets
In 2015, the volume sales of the ORLEN Group in the Baltic and Ukrainian markets increased by 13.2 per cent. (compared with 2014) and equalled 8,462 thousand tonnes. The sales increase (compared with 2014) was achieved as a result of the high sales rate of products by sea, and also a higher onshore sales volume in the Baltic states (with limited gasoline sales in Ukraine).
The highest sales peaks were recorded for gasoline (by 13.4 per cent., compared with 2014), LPG (by 20.9 per cent., compared with 2014) and diesel oil (by 17.6 per cent., compared with 2014).
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ORLEN Group volume sales in the downstream segment on the markets serviced by the ORLEN Lietuva Group
The following table shows the ORLEN Group volume sales in the downstream segment on the markets serviced by the ORLEN Lietuva Group:
CHANGE SALES 2015 2014 (VOLUME) CHANGE (%) 1 2 3 5=(2-3) 6=(2-3)/3 (thousands of tonnes)
ORLEN Lietuva's Markets Light distillates ...... 2,480 2,178 302 13.9% Medium distillates ...... 4,179 3,611 568 15.7% Heavy fractions ...... 1,635 1,524 111 7.3% 168 162 6 3.7% Other ...... Total ...... 8,462 7,475 987 13.2%
Structure of sales volume of the ORLEN Group in the downstream segment on the markets serviced by the ORLEN Lietuva Group
The following chart shows the structure of sales volume of the ORLEN Group in the downstream segment on the markets serviced by the ORLEN Lietuva Group:
Fuel sales in the Latvian, Lithuanian and Estonian markets decreased by 2.5 per cent. (compared with 2014). The largest drop occurred on the Lithuanian market (of 4.8 per cent., compared with 2014). Lower gasoline sales resulted from the long-term phenomenon of the growing popularity of diesel amongst the vehicle users in this region. Lower on- shore gasoline sales, resulting from reduced consumption, were entirely offset by offshore sales, whilst the commercial terms were significantly improved in this distribution channel.
The demand for diesel oil increased by 7.1 per cent. in the Baltic states, including by 8.6 per cent. (compared with 2014) on the Lithuanian market, by 7.4 per cent. (compared with 2014) on the Latvian market, and by 4.0 per cent. (compared with 2014) on the Estonian market. In 2015, the ORLEN Lietuva Group significantly improved its market share in diesel oil on the Latvian and Estonian markets. The share of the Lithuanian diesel oil market was reduced, mainly due to aggressive competition from Scandinavian suppliers.
The Ukrainian market was overwhelmed by a very difficult political and economic situation. The country is struggling with recession, reflected by a drop in GDP of 9.0 per cent. and inflation of 50 per cent. (according to estimated IMF data). Many Ukrainian clients of the ORLEN Lietuva Group lost their assets located in Ukrainian war zones, including fuel stations and warehouses. Compared to the pre-conflict (2013) consumption levels in the Ukrainian market, estimated 2015 data shows that gasoline consumption has dropped by more than 41 per cent. and diesel oil consumption by nearly 10 per cent.
Despite very difficult operating conditions and decreasing demand of gasoline and decreasing demand on the Ukrainian market, the ORLEN Lietuva Group has maintained 2015 gasoline and diesel oil sales at the same level as in 2014. This represents the highest level of such sales by ORLEN Lietuva to date.
Czech Market
The year 2015 marked the continuation of economic growth in the Czech Republic. A favourable macroeconomic environment stimulated growth in the market consumption of diesel oil by 4.4 per cent. (compared with 2014), while the consumption of gasoline decreased by 0.5 per cent. (compared with 2014).
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In May 2015, Unipetrol completed the process of consolidating its refinery assets in Ceska Rafinerska by acquiring the remaining shares in the company from Eni. Consequently, the Czech company became the sole owner of the Litvinov and Kralupy refineries, and has become the sole producer of fuels in the Czech Republic. The considerable increase in production potential and the strengthening of its position on the market allowed the company to increase its sales by 20.7 per cent. (compared with 2014). Excellent results were achieved in the sales of light distillates, due to an increase in gasoline sales of 54.0 per cent. (compared with 2014). Growth in the sales of medium distillates was achieved due to an increase in the volume of diesel oil sales by 40.7 per cent. (compared with 2014).
The increased production potential was temporarily limited due to a failure of the ethylene installation which occurred in August 2015 at the Litvinov refinery (see "Overview of the Downstream Segment – The Main Downstream Production Assets of the ORLEN Group"). This resulted in a lower level of sales of petrochemical products when compared with 2014. An installation shutdown resulted in the need to modify a series of processes to optimise production and to limit the effect of the breakdown. Due to the coordination of product flows in the ORLEN Group, as well as the purchases of semi-products and finished products on the external market, sales of petrochemical products were maintained at a level which allowed for the fulfillment of all contractual obligations. Unipetrol expects to complete the repair works during July 2016. The steam cracker unit is expected to restart at 80 per cent. capacity at the end of August 2016. Full capacity is expected to be reached at the end of October 2016. Unipetrol is insured against both property and mechanical damages and business interruption.
The crude oil processing at the Kralupy refinery was suspended in May 2016 due to an explosion on the FCC unit (see "Overview of the Downstream Segment – The Main Downstream Production Assets of the ORLEN Group"). The Unipetrol Group expects that the crude oil processing at the Kralupy refinery will restart in June 2016.
Due to the increased sales potential enabled by the purchase of shares in Ceska Rafinerska, the Unipetrol Group has considerably increased its market share on the Czech market. According to estimations of management, Unipetrol Group's share of the gasoline market increased by more than 18 p.p., and its share of the diesel oil market by more than 10 p.p. According to the estimations of management, the Unipetrol Group is currently one of the leaders by volume on the Czech market, satisfying half of the local demand for fuels.
Sales volume of the ORLEN Group in the downstream segment on the Czech market
The following table shows the sales volume of the ORLEN Group in the downstream segment on the Czech market:
CHANGE SALES 2015 2014 (VOLUME) CHANGE (%) 1 2 3 4=(2-3) 5=(2-3)/3
(thousands of tonnes)
Czech market Light distillates ...... 1,323 821 502 61.1% Medium distillates ...... 2,836 2,044 792 38.7% Heavy fractions ...... 600 440 160 36.4% Monomers ...... 94 148 (54) (36.5%) Polymers ...... 482 592 (110) (18.6%) Aromas ...... 145 227 (82) (36.1%) Fertilisers ...... 195 181 14 7.7% Plastics ...... 106 123 (17) (13.8%) Others ...... 945 995 (50) (5.0%)
Total ...... 6,726 5,571 1,155 20.7%
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Structure of sales volume of the ORLEN Group in the downstream segment on the Czech market
The following chart shows the structure of the sales volume of the ORLEN Group in the downstream segment on the Czech market:
In 2015, the Unipetrol Group expanded its client portfolio. Cooperation with major fuel concerns and supermarket chains continued. The Unipetrol Group has been selling its products on the Slovakian, Hungarian, German and Austrian markets, taking full advantage of the capacity for cooperation afforded by the ORLEN Group with companies such as Unipetrol Slovakia and Unipetrol Deutschland.
Sources of Supply
Crude oil
Crude oil deliveries to PKN ORLEN are realised through the "Druzhba" pipeline and by sea using the Gdańsk-Płock pipeline. The ORLEN Lietuva Group is supplied with crude oil by the terminal in Butinge.
The main directions of supply of crude oil for the production process of the Unipetrol Group are the southern section of the pipeline "Druzhba" (for the refinery in Litvinov) and the TAL and IKL pipelines (for the refinery in Kralupy). The Litvinov refinery can also be supplied using the TAL and IKL pipelines.
In 2015, two long-term contracts for the supply of crude oil by pipeline to the refinery in Płock were executed with Mercuria Energy Trading SA and the Rosneft Oil Company ("Rosneft"), respectively. Each contract provides an opportunity to re-negotiate prices annually; in the case of a lack of agreement on this matter, each contract may be terminated. The long-term character of these contracts ensures the safety and continuity of supply, which is over 60 per cent. of the raw material purchased for refineries. These contracts contain supply guarantee clauses based on financial guarantees.
PKN ORLEN provides crude oil to the refinery in Płock and three ORLEN Group refineries located, respectively, in Litvinov and Kralupy in the Czech Republic and in Mazeikiai in Lithuania. In 2015, crude oil supplies to all locations proceeded according to plan.
The crude oil suppliers to all refineries include manufacturers and companies operating in Russia's crude oil market, as well as traders operating in the international crude oil market. Crude oil delivered to Płock came primarily from Russia in the form of REBCO: however, crude oil also came from Saudi Arabia, Kazakhstan, Norway and the United Kingdom. Crude oil delivered to refineries in the Czech Republic was supplied from Russia, Algeria, Azerbaijan, Kazakhstan and Libya. The supply of crude oil to the Mazeikiai refinery came primarily from Russia in the form of REBCO: however, crude oil also came from Algeria, Azerbaijan, Iraq, Kazakhstan and Nigeria. PKN ORLEN thus has the ability to procure other forms of crude oil supply besides REBCO and is not reliant on one supplier of crude oil (see "Crude Oil Supply Agreement entered into between PKN ORLEN and Saudi Aramco").
Natural gas
Purchases of natural gas are based on a long-term contract between PKN ORLEN and PGNiG and on short-term contracts with alternative suppliers. Due to the progressing liberalisation of the gas market and the development of trans-border infrastructure, prices in Poland came close to those on the liquid German market.
The ORLEN Group continues its efforts to ensure stable supply, and reduction in the overall purchase cost, of natural gas, mainly through diversifying its supply sources. In 2015, more than 20 per cent. of natural gas in the ORLEN Group was supplied by alternative suppliers.
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The ORLEN Group also implements a number of exploration and extraction projects in order to obtain its own sources of gas and crude oil. See "Position and Competitive Environment".
OVERVIEW OF THE RETAIL SEGMENT
Retail Segment
For the three months ended For the year ended 31 31 March December
Item 2016 2015 2015 2014
(PLN million) Segment revenues, including: ...... 6,307 7,065 31,122 36,104 Sales revenues from external customers ...... 6,264 7,050 31,052 35,913 Sales revenues from transactions with other segments ...... 43 15 70 191 Segment expenses ...... (6,104) (6,875) (29,934) (35,015) Other operating income ...... 14 14 50 182 Other operating expenses ...... (14) (12) (67) (186) Other operating income/expenses, net ...... 0 2 (17) (4) Operating profit/(loss) increased by depreciation and amortisation (EBITDA) before impairment allowances ...... 301 282 1,539 1,416 Operating profit/(loss) increased by depreciation and amortisation (EBITDA) ...... 300 283 1,539 1,440 Profit/(Loss) from operations under LIFO before impairment allowances 204 191 1,171 1,061 Profit/(Loss) from operations ...... 203 192 1,171 1,085 CAPEX ...... 72 68 448 345 Sales (thousand tonnes) ...... 1,910 1,839 7,986 7,776
The Group's petrol stations in Poland operate under the name of ORLEN in the premium segment and the name of BLISKA in the economy segment. The names used in the Czech Republic are Benzina Plus and Benzina, and the names used in Lithuania are ORLEN Lietuva and Ventus, respectively. The petrol stations in the German market operate in the economy segment under the name of STAR.
The table below shows the number of retail stations of the ORLEN Group, broken down by location:
2015 ORLEN Czech Retail Stations Units Group Poland Germany Republic Lithuania Market share ...... % – 36.7 6.0 15.9 3.6 Number of retail stations ...... number 2,679 1,749 565 339 26 including: Premium ...... number 1,684 1,541 1 117 25 Economical ...... number 903 159 541 202 1 Other ...... number 92 49 23 20 - TOTAL number 2,679 1,749 565 339 26 CODO / COCO ...... number 2,130 1,307 465 332 26 DOFO / DODO ...... number 549 442 100 7 – TOTAL number 2,679 1,749 565 339 26
The table below shows the number of Stop Café and Stop Café Bistro Outlets of the ORLEN Group, broken down by location:
2015 ORLEN Czech Stop Café and Stop Café Bistro Outlets Units Group Poland Republic Lithuania Stop Cafe ...... number 1,027 905 99 23 Stop Cafe Bistro ...... number 531 499 32 – Total number of outlets ...... number 1,558 1,404 131 23
Market Position and Environment
According to the estimations of management, the ORLEN Group is one of the leaders on the retail fuel market in Central Europe by number of fuel stations, with a chain of 2,679 fuel stations operating in the premium and economy segments.
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The number of ORLEN Group stations for its key markets in Poland, Germany, the Czech Republic and Lithuania as at 31 December 2015 is shown in the map below:
In Poland, fuel stations operate under the ORLEN brand in the premium segment and under the BLISKA brand in the economy segment; in the Czech Republic, they operate under the Benzina Plus and Benzina brands; in Lithuania, they operate under the ORLEN and Ventus brands. On the German market, fuel stations have been operating primarily in the economy segment under the STAR brand, and the chain is complemented by twelve Familia market stations.
(a) Poland
At the end of 2015, the ORLEN Group operated a network of 1,749 fuel stations in Poland. An implemented investment programme was focused on the establishment of new fuel stations and highway facilities, the upgrading of existing facilities, and the rebranding of the BLISKA stations to ORLEN. The main focus remained the development of the food offer, as well as new store formats. The corporate fleet and loyalty programmes contributed to the strengthening of the market position of the ORLEN Group in terms of total fuel sales and to an increase in its total fuel sales volume by 3.8 per cent. (compared with 2014).
Share in the retail fuel market in Poland
The following chart shows the change in the share by sales volume of the ORLEN Group in the retail fuel market in Poland:
According to data published in 2015 by POPiHN (the Polish Organisation of Oil Industry and Trade), more than 6,600 fuel stations operated on the Polish market. The share of the ORLEN Group in the total number of stations was reduced by 0.8 p.p. to 26.5 per cent.
The main competitors of PKN ORLEN on the Polish market include foreign concerns such as Shell, BP, Statoil and Lukoil, which together hold 21.9 per cent. of the total number of fuel stations, and the Lotos Group, which has 7.2 per cent. of the total number of fuel stations. The share of fuel stations ownership by foreign concerns and the Lotos Group, respectively, increased by 0.2 and 0.4 p.p., respectively, as compared with 2014.
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Fuel stations network in Poland
The following chart shows the fuel stations network in Poland as at 31 December 2015 according to the estimations of management based on POPiHN data:
Passenger service areas ("MOP")
The continued expansion of the road system in Poland creates an opportunity for the development of MOPs located next to highways and expressways. As of 31 December 2015, there were 69 MOPs on the Polish market, of which 27 (39.1 per cent.) belonged to the ORLEN Group. Four facilities of this type are currently under construction, including two located next to the A1 highway in the Stryków – Tuszyn section, one located on the A4 highway next to the Rzeszów – Korczowa section of the highway, and one next to expressway S8 in the Łódź – Wrocław section of the highway.
(b) Germany
The ORLEN Group has been present in Germany since 2003. As of 31 December 2015, the STAR chain owned by the ORLEN Group included 565 fuel stations managed by ORLEN Deutschland GmbH which, according to the estimates of PKN ORLEN, represented approximately a 6.0 per cent. share of the German retail market in 2015 (the same as in 2014).
Share in the retail fuel market in Germany
The following chart shows the change in the share by sales volume of the ORLEN Group in the retail fuel market in Germany:
The main competitors of ORLEN Deutschland GmbH include such international chains as Aral, Shell, Esso, Total and JET (the latter being the ORLEN Group's main competitor in the economy stations segment).
(c) Czech Republic
The ORLEN Group has retained its position in the market in terms of the number of fuel stations in the Czech Republic. As of 31 December 2015, Benzina managed 339 stations. Effective operations and the optimisation of the retail price management process contributed to an increase of the share of the Czech retail market by 0.8 p.p. to 15.9 per cent. in 2015.
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Share in the retail fuel market in the Czech Republic
The following chart shows the change in the share by sales volume of the ORLEN Group in the retail fuel market in the Czech Republic:
(d) Lithuania
As of 31 December 2015, the ORLEN Group owned 26 fuel stations in Lithuania and increased its retail market share by 0.1 p.p. (compared with 2014) to 3.6 per cent.
Share in the retail fuel market in Lithuania
The following chart shows the change in the share by sales volume of the ORLEN Group in the retail fuel market in Lithuania:
The ORLEN Group's main competitors in the Lithuanian market in this segment are Lukoil, Statoil and Neste.
Sales Volume of Retail Segment
The sales volume of the retail segment of the ORLEN Group increased by 2.7 per cent. in 2015 (compared with 2014), and amounted to 7,986 thousand tonnes. This was a result of higher fuel sales on the Polish, Czech and Lithuanian markets, albeit with a slightly lower volume recorded on the German market.
The ORLEN Group sales in the retail segment
The following table shows the ORLEN Group sales in the retail segment:
Sales 2015 2014 Change (%)f Value Volume Value Volume Value Volume (thousand (thousand (PLN million) tonnes) (PLN million) tonnes) 6= 7= 1 2 3 4 5 (2-4)/4 (3-5)/5 Retail Segment Light distillates(1) ...... 12,084 3,000 13,951 2,916 (13.4%) 2.9% Medium distillates(2) ...... 15,567 4,986 18,659 4,860 (16.6%) 2.6% Other(3) ...... 3,401 0 3,303 0 3.0% –
Total ...... 31,052 7,986 35,913 7,776 (13.5%) 2.7% ______(1) Gasoline, LPG. (2) Diesel; light fuel oil sold by ORLEN Deutschland. (3) Other – includes revenues from sales of non-fuel goods and services.
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Structure of sales revenue of the ORLEN Group in the retail segment
The following chart shows the structure of sales revenue of the ORLEN Group in the retail segment:
Sales Markets
The retail area of the ORLEN Group includes companies operating in all the domestic markets of the ORLEN Group: namely, PKN ORLEN in the Polish market, ORLEN Deutschland GmbH in the German market, Benzina s.r.o. in the Czech market and Ventus Nafta AB in the Lithuanian market.
Sales volume of the ORLEN Group in the retail segment on domestic markets
The following table shows the sales volume of the ORLEN Group in the retail segment on domestic markets:
Sales 2015 2014 Change (volume) Change (%) 1 2 3 4=(2-3) 5=(2-3)/3 (thousands of tonnes) Markets Poland ...... 4,785 4,609 176 3.8% Germany ...... 2,602 2,621 (19) (0.7%) Czech Republic ...... 538 488 50 10.2% Lithuania ...... 61 58 3 5.2%
Total ...... 7,986 7,776 210 2.7%
Structure of sales volume of the ORLEN Group in the retail segment on domestic markets
The following chart shows the structure of sales revenue of the ORLEN Group in the retail segment on domestic markets:
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(a) Poland
Despite a reduction in the number of stations in the chain, the overall sales volume increased in 2015 by 3.5 per cent. (compared with 2014) and amounted to 4,785 thousand tonnes. Completion of a series of development projects and the implementation of efficiency initiatives contributed significantly to the increase in the annual average sales volume of CODO fuel stations by 2.5 per cent. (compared with 2014) to the level of 4.1 million litres.
Sales volume of the ORLEN Group in the retail segment on the Polish market
The following table shows the sales volume of the ORLEN Group in the retail segment on the Polish market:
Sales 2015 2014 Change (volume) Change (%) 1 2 3 4=(2-3) 5=(2-3)/3 (thousands of tonnes) Light distillates ...... 1,686 1,613 73 4.5% Medium distillates ...... 3,099 2,996 103 3.4%
Total ...... 4,785 4,609 176 3.8%
Structure of sales volume of the ORLEN Group in the retail segment on the Polish market
The following chart shows the structure of sales volume of the ORLEN Group in the retail segment on the Polish market:
In 2015, measures aiming at the further development of fleet sales were pursued. Despite considerable competition in the retail segment of the fuel market, and the persistence of the so-called "shadow economy", the ORLEN Group increased the volume in the light distillates channel by nearly 4.5 p.p. (compared with 2014) to the level of 30.2 per cent. of the total sales volume in the retail segment. The sale of medium distillates also increased, by 3.4 per cent. compared to 2014, but represented a slightly reduced proportion of total sales. In 2015, using the Flota and OpenDrive fleet cards, drivers were able to make payments on all Polish highways. In addition, a new functionality was launched, allowing for combining the monitored GPS parameters of the car with locations of the ORLEN Group's stations where expenses for fuel for that car had been made. This solution generates savings in carfleet management costs and increases the safety of transactions. In 2015, sales to the segment of small and medium companies increased by 9 per cent. (compared with 2014). A significant achievement was recorded by the MikroFlota programme, whose sales volumes increased in 2015 by 147 per cent. (compared with 2014) to reach 21 million litres.
In 2015, a considerable increase in the sales revenues of non-fuel products and services was achieved. The key drivers of this success were the further development of: Stop Café and Stop Café Bistro; effective sales-supporting marketing activities; and systematic expansion of existing offers with new products. In the fourth quarter of 2015, a new pilot food format (Stop Café 2.0) was launched in two test stations. In addition, as part of the development of new types of stores, PKN ORLEN started testing ten convenience stores (five under the O!Shop brand and five under the ORLEN brand).
The modernisation and development of automatic car washes, a decrease in malfunction ratios, the shortening of device standstills and measures supporting sales contributed to increased revenues from these services by 13 per cent. (compared with 2014).
Another important element of further improvement in the non-fuel area was the implementation of a system providing a detailed analysis of received data at the end of 2015, allowing a better match of the offer and new promotional activities with the expectations of clients.
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Between 31 December 2014 and 31 December 2015, the retail network was reduced by 19 units, to 1,749 fuel stations. This is the net effect of the: opening of 22 new facilities; completion of the liquidation processes for 36 stations; and reduction of the DOFO segment by five facilities. In 2015, the number of stations in the premium segment operating under the ORLEN brand increased by 93 to 1,541. The increased number of ORLEN stations resulted from the opening of new units in both channels (namely, owned and franchised), the modernisation of existing stations and the continuation of the BLISKA – ORLEN rebranding project commenced in 2013. Customers gained improved access to a wider range of fuel (VERVA fuels) as well as non-fuel offerings (such as food offerings not available in economy stations). This change also allowed for an increase in the number of participants in the VITAY loyalty programme, available in the premium segment. As part of the rebranding project conducted in 2015, 57 BLISKA stations (both owned and franchised) changed their brand to ORLEN (since the start of the project, the brand has been introduced at more than 300 stations). As at 31 December 2015, PKN ORLEN had 159 economy stations operating under the BLISKA brand in its station network. The remaining stations are stations with a so-called "simplified format". The number of these stations was reduced from 95 to 49 in 2015.
As part of an investment project, 22 new, wholly-owned fuel stations (including 4 MOPs) were opened in 2015. Another 16 units were newly built at current station locations, as part of the "Break-down and Build" project. In addition, 21 new stations were opened in 2015 as part of the PKN ORLEN franchise network. Consequently, as at 31 December 2015, the overall number of stations in the DOFO (Dealer Owned Franchise Operated) network amounted to 442. One of the most important factors which impacted further development of this network was the implementation of new terms of cooperation with franchisees. In 2015, approximately 250 partners signed new agreements (these agreements were separate from those relating to stations already incorporated into the network). This process will be continued throughout 2016.
After two years, the process of replacing the price pylons in nearly 1,170 owned stations was completed. As a result, 1,140 stations were included in the automatic repricing system and the process of fuel price management was significantly optimised.
In 2015, PKN ORLEN changed the method of monitoring service standards in its fuel station network on the Polish market. A new Customer Satisfaction Surveying System was introduced, which allowed for the collection of a considerably higher number of individual customer surveys and information about their expectations, opinions and suggestions on possible changes.
In the Fuel Market Forum "Petro Trend 2015", the fuel station on Lazurowa Street in Warsaw was awarded the Petrol Station of the Year 2015 in the Fuel Station Store category, the ORLEN, BLISKA and Stop Café brands received the title "Superbrands Created in Poland", and PKN ORLEN was awarded the title "Business Superbrand". PKN ORLEN was also recognised in the area of fleet sales and received the Fleet Award in the category of "Fuel Cards for Large Fleets". In 2015, the ORLEN brand was awarded the "Customer Service Quality Star" as part of the Polish Service Quality Programme.
(b) Germany
In 2015, the ORLEN Group maintained the sales of light distillates on the German market at the same level as in 2014. Whilst the volume of diesel oil sales increased by 0.5 per cent. (compared with 2014), the decrease in medium distillate sales by 1.3 per cent. compared to 2014 resulted in a decrease in total sales of 0.7 per cent. (compared with 2014) and was an effect of a lower wholesale of light fuel oil by the German company ORLEN Deutschland. In 2015, the average annual flow per station maintained its 2014 level and amounted to 5 million litres.
Sales volume of the ORLEN Group in the retail segment on the German market
The following table shows the sales volume of the ORLEN Group in the retail segment on the German market:
Sales 2015 2014 Change (volume) Change (%) 1 2 3 4=(2-3) 5=(2-3)/3 (thousands of tonnes) Light distillates ...... 1,117 1,117 0 0.0% Medium distillates ...... 1,485 1,504 (19) (1.3%)
Total ...... 2,602 2,621 (19) (0.7%)
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Structure of sales volume of the ORLEN Group in the retail segment on the German market
The following chart shows the structure of sales volume of the ORLEN Group in the retail segment on the German market:
In 2015, the situation on the German fuel market changed. In recent years, the leading networks (Aral, Shell, Esso, Total) operating in the premium segment have lost market share in favor of economy stations (such as STAR, Jet, Tamoil). To reverse this trend, some of the premium networks (Shell, Aral, Total) made a decision to rebrand some of their stations and to enter the economy sector as well. Advertising activities were also undertaken, including offering price discounts for customers.
Due to significant retail price reduction in 2015, a part of the market share lost in preceding years was recovered by the premium stations. With lower retail prices, some of the clients started to purchase premium fuels and to take advantage of the non-fuel offerings available from premium stations.
The results of ORLEN Deutschland were also significantly affected by increased costs due to the introduction of a minimum wage in Germany in 2015. The negative effect of this change was generally offset by positive development activities in the area of non-fuel sales, food and other fuel station services.
In the last quarter of 2015, ORLEN Deutschland purchased from Germania Petrol a package of 13 "Sun" fuel stations operating near Berlin. Six of those fuel stations had been integrated by the end of 2015. As of 31 December 2015, ORLEN Deutschland managed a network of 565 stations, out of which 541 operated in the economy segment under the STAR brand and one under the ORLEN brand (the latter located in Hamburg). The remaining 23 stations are the acquired "Sun" stations and stations operating at supermarkets. Four new stations were opened under the STAR brand and an equal number of stations was closed.
As at 31 December 2015, ORLEN Deutschland completed work on a new cooperation model with dealers running fuel stations owned by the company. The new agreement standardises the terms of cooperation across the entire network and had already been approved by the majority of partners.
(c) Czech Republic
2015 was the second year of high fuel sales on the Czech market. The average annual sales recorded by Benzina stations increased in 2015 by 8.2 per cent. (compared with 2014) and reached 2 million litres.
Sales volume of the ORLEN Group in the retail segment on the Czech market
The following table shows the sales volume of the ORLEN Group in the retail segment on the Czech market:
Sales 2015 2014 Change (volume) Change (%) 1 2 3 4=(2-3) 5=(2-3)/3 (thousands of tonnes) Light distillates ...... 179 167 12 7.2% Medium distillates ...... 359 321 38 11.8%
Total ...... 538 488 50 10.2%
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Structure of sales volume of the ORLEN Group in the retail segment on the Czech market
The following chart shows the structure of sales volume of the ORLEN Group in the retail segment on the Czech market:
LIGHT DISTALLATES
The operating results of the segment are the effect of the implementation of efficiency initiatives. The appearance of stores and their offer to clients were each adapted to the current expectations of customers and new market trends. The new operations model introduced in 2014 resulted in a significant improvement in non-fuel revenues and the reduction of station costs in 2015. In 2015, Benzina recorded an increase in revenue from the sales of non-fuel products and services of nearly 25 per cent. (compared with 2014).
The implementation of a new system for establishing fuel prices and the optimisation of the retail price management process had a considerable impact on the improvement of unit margins and on volume increases. An important initiative to limit the costs of fuel losses was the installation of new measurement devices in nearly 200 stations and the updating of software to monitor the condition of fuels in a further 135 stations.
A new Customer Satisfaction Surveying System was introduced in the entire Benzina network in 2015. The tool allows for collecting individual surveys and information on customer expectations, opinions and suggestions and the level of the customer's satisfaction during their visit to a specific station.
As at 31 December 2015, Benzina s.r.o managed a network of 339 stations operating under two brands: Benzina Plus in the premium segment (117 stations) and Benzina in the economy segment (202 stations), as well as 16 stations under the simplified brand. In addition, four self-service stations will ultimately operate under the Benzina Express brand.
At the end of 2015, an agreement for the purchase of 68 stations located in the Czech Republic from OMV was signed. All stations will be incorporated into the Benzina network from the beginning of 2017.
In 2015, the ORLEN Group commenced the next stage of development of the Stop Café and Stop Café Bistro formats on the Czech market. 33 food facilities were opened across the network. As at 31 December 2015, 131 stations with Stop Café and Stop Café Bistro facilities were operational at Benzina stations. The project will be continued in 2016.
(d) Lithuania
In 2015, the ORLEN Group recorded an increase in sales volume by 5.2 per cent. (compared with 2014) on the Lithuanian market. Diesel oil sales increased by 10.3 per cent. (compared with 2014) and a comparable level of fuel sales offset the lower sales of LPG (compared with 2014). The average annual flow per station increased from 2.8 to 2.9 million litres.
Sales volume of the ORLEN Group in the retail segment on the Lithuanian market
The following table shows the sales volume of the ORLEN Group in the retail segment on the Lithuanian market:
Sales 2015 2014 Change (volume) Change (%) 1 2 3 4=(2-3) 5=(2-3)/3 (thousands of tonnes) Light distillates ...... 18 19 (1) (5.3%) Medium distillates ...... 43 39 4 10.3%
Total ...... 61 58 3 5.2%
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Structure of sales volume of the ORLEN Group in the retail segment on the Lithuanian market
The following chart shows the structure of sales volume of the ORLEN Group in the retail segment on the Lithuanian market:
As at 31 December 2015, the retail network in Lithuania comprised 26 owned stations under the COCO model. 25 stations operated under the ORLEN brand in the premium segment and 1 station under the Ventus brand was operating in the economy segment.
Sources of Supply
The majority of fuels sold on the Polish, Czech and Lithuanian markets come from production within the downstream segment of the ORLEN Group. An exception is the German market, in which the ORLEN Group did not have its own refining assets. The largest suppliers to ORLEN Deutschland GmbH include the following: Deutsche BP AG; Holborn European Marketing Company Limited; Total Deutschland GmbH; Raffinerie Heide GmbH; and Shell Deutschland Oil GmbH. Another important supplier of fuels to ORLEN Deutschland GmbH is Unipetrol RPA s.r.o., a member of the ORLEN Group (delivering 12 per cent. of all supplies as of 31 December 2015).
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OVERVIEW OF THE UPSTREAM SEGMENT
Upstream Segment
For the three months ended For the year ended 31 31 March December
Item 2016 2015 2015 2014
(PLN million) Segment revenues, including: ...... 92 52 215 298 Sales revenues from external customers ...... 92 52 215 298 Sales revenues from transactions with other segments ...... 0 0 0 0 Segment expenses ...... (136) (72) (347) (271) Other operating income ...... 0 0 3 4 Other operating expenses ...... 0 0 (852) (323) Other operating income/expenses, net ...... 0 0 (849) (319) Operating profit/(loss) increased by depreciation and amortisation (EBITDA) before impairment allowances ...... 27 14 44 152 Operating profit/(loss) increased by depreciation and amortisation (EBITDA) ...... 27 14 (808) (170) Profit/(Loss) from operations before impairment allowances ...... (44) (20) (129) 30 Profit/(Loss) from operations ...... (44) (20) (981) (292) CAPEX ...... 126 76 288 499 Sales (thousand tonnes) ...... 136 71 310 258
The table below shows a breakdown of the natural gas and oil reserves, annual output and average production (extraction) of the ORLEN Group by location for the period indicated:
2015 Units Canada Natural gas and oil reserve (proven and probable) ...... million boe 89.0 Output ...... million boe / year 2.6 Average production(1) ...... t boe / day 7.1 Output structure (liquid / gas) ...... % 44 / 56 Net drillings (performed in given year) ...... number 11.6
Poland(2) Natural gas and oil reserves (proven and probable) ...... million boe 8.2 Drillings(3) ...... number 14 Licences(4) ...... number 15 ______(1) average production in the fourth quarter of 2015 amounted to 7.3 thousand boe/day. (2) production from the acquired assets of FX Energy will be included from 2016. (3) cumulative figure. (4) does not include licences owned by PGNiG on which ORLEN Upstream is a partner. Position and Competitive Environment
The ORLEN Group's strategy assumes the intensification of exploration and extraction activities in order to enable access to its own resources of crude oil and natural gas.
The development of competencies in the upstream segment comprised intensive work on the formation of an international team of specialists, capable of creating and managing a diversified portfolio of assets and capable of applying state of the art exploration methods and extraction technologies. Currently, ORLEN Upstream is conducting work in the upstream segment of eight regions in Poland and has operations in the Alberta province in Canada.
Since 2009 the process of exploration of unconventional hydrocarbons (especially shale gas) has developed rapidly in Poland. An intensification in investor activity was noted after 2012, when 20 extraction and exploration companies were operating on the market. In 2012 the number of concessions reached 115 and 24 exploratory drillings were performed.
The results of such work published in the last few years by operators appear to differ from the results obtained for key areas of hydrocarbon extraction from unconventional deposits in North America. The main differences resulted from geological conditions (i.e., a higher depth of formation depositing and a higher complexity level of geological formation). As exploratory work progressed, the majority of operators made a decision to withdraw from the Polish market between 2013 and 2015 (including ExxonMobil, Marathon Oil, Talisman Energy, ENI, Nexen, Total, Mitsui, RAG, Sorgenia, Dart Energy, 3Legs Resources, Chevron and ConocoPhilips), and the pace of works decelerated.
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A similar situation arose in other European countries with potential sources of shale gas. In Romania, Bulgaria, Sweden, Hungary and Lithuania, foreign companies from the industry have withdrawn from exploration and in Ukraine exploration works were suspended. Taking into account the current results of reconnaissance exploration works and the risk profile of shale gas projects, in the context of low hydrocarbons prices it is expected that extraction and exploration companies will be striving to reduce exposure to high-risk, expensive exploration projects as much as possible.
Upstream Activities in Poland
2015 was marked by significant changes to the map of assets owned by the upstream segment of the ORLEN Group. This was related both to the acquisition of new exploration areas, and withdrawals from the less promising parts of the licensed portfolio.
Exploration projects of the ORLEN Group in Poland
The following diagram shows the exploration projects of the ORLEN Group in Poland:
Exploration assets with cooperation: Warsaw South (51% of shares), Bieszczady (49% of shares)
ORLEN Upstream 100% of shares : Karbon, Lublin Shale, Mid-Poland Unconventional, Karpaty, Miocen, Edge
requested areas
Exploration and production assets with cooperation: Sieraków (49% of shares), Płotki** (49% of shares)
ORLEN Upstream 100% of shares: Edge
** Production from Płotki project (100% gas)
In 2015, the segment purchased two concessions owned by Deutsche Erdoel AG and negotiated a Joint Operations Agreement with PGNiG S.A. in respect of eight concessions blocks in the Karpaty region (the Bieszczady project). In October 2015, as part of a tender process, the ORLEN Group obtained a concession from the Ministry of the Environment concerning the Siennów – Rokietnica area situated in the Podkarpackie region, within the geostructural unit referred to as Zapadlisko Przedkarpackie. On 31 December 2015, the purchase of 100 per cent. of the shares in FX Energy Inc. was completed, and thus the portfolio of assets owned by the ORLEN Group in Poland increased to a share in seven production deposits. The total value of the transaction was approximately USD 125 million. Currently, gas extraction is performed in cooperation with PGNiG (FX Energy's share is 49 per cent.). Proven and probable resources owned by the ORLEN Group in Poland equalled 8.2 million boe as at 31 December 2015. Apart from the extraction conducted, the potential of the acquired assets also includes exploration concessions. One of the acquired concessions (the Edge area in the Kujawsko-Pomorskie region), includes the Tuchola deposit discovered in 2013, which is currently being prepared for development. Commercial extraction can start in 2018, and the ORLEN Group owns 100 per cent. of shares in this area.
The effects of the operating activity of the purchased shares in FX Energy will be included in the ORLEN Group's statements for 2016.
The upstream segment is currently conducting works, either individually or in partnership, in 29 concessions situated in eight regions. The share of the ORLEN Group is: 100 per cent. in 14 concessions; 51 per cent. in one concession, and 49 per cent. in 14 concessions.
As part of the works carried out in the Podlasie-Lublin Basin, the drilling of a vertical borehole in the Wołomin licensed area, and an analysis of the data from the borehole, were completed in 2015. In August 2015, the collection of two- dimensional seismic data from the Wodyn-Łuków concession area was carried out, followed by the interpretation of this data. In November 2015, the collection of three-dimensional seismic data in the licensed area was initiated.
In 2015, new two-dimensional seismic data from the Sieradz block was carried out, followed by data interpretation. In the Wielkopolska region, preparatory works were carried out in order to exploit a part of the Sieraków area.
The collection of new seismic two-dimensional data for the Hoczew-Lutowiska area was performed with a partner under the Bieszczady project. This work was completed in the first quarter of 2016 and the data is being processed.
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Upstream Activities in Canada
In Canada, PKN ORLEN runs extraction activities in the Alberta province, using horizontal drilling and hydraulic fracturing techniques. In 2015, 16 such operations were started. As a result, in the fourth quarter of 2015 the production level of 7.3 thousand boe/day was reached, 46 per cent. of which accounted for liquid hydrocarbons (crude oil and condensate).
In December 2015, the acquisition of extraction assets belonging to Kicking Horse Energy, located primarily in the Kakwa area in Alberta, was carried out via a subsidiary of ORLEN Upstream Canada. The purchase of new assets increased the amount of proven and probable hydrocarbon reserves in Canada as well as their extraction levels. The total value of the transaction was approximately CAD 295 million. As at 31 December 2015, production from assets in the Kakwa area exceeded 4.5 thousand boe/day. The effect of the operating activities of the purchased Kicking Horse Energy assets will be included in the ORLEN Group's statements for 2016.
This transaction, performed on the stable Canadian markets, fits the risk profile established in the PKN ORLEN strategy. PKN ORLEN believes that the favourable deposits' parameters and the development of operations in an already well-recognised region minimise the operational risk of the investment. In addition, the efficiency of utilised horizontal drillings and multisectional hydraulic fracturing techniques enables an exchange of experiences between Polish and Canadian teams and an exploitation of synergies. The Canadian market is characterised by wide access to high-end drilling and maintenance services as well as access to qualified personnel experienced in unconventional deposits extraction. The stable tax system and friendly regulatory environment are also significant.
The ORLEN Group's upstream segment also owns 10.7 per cent. of shares in a project concerning the construction of a liquefied gas export terminal, Goldboro LNG, on the eastern shore of Canada (Nova Scotia province). This project is currently in its initial stages.
Assets in Canada
The following diagram shows the ORLEN Group's assets in Canada:
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Sales Volume of the Upstream Segment
Sales volume of the ORLEN Group in the upstream segment
The following table shows the sales volume of the ORLEN Group in the upstream segment:
Sales 2015 2014 Change % Value Volume Value Volume Value Volume (thousand of (thousand of (PLN million) tonnes) (PLN million) tonnes) 1 2 3 4 5 6=(2-4)/4 7=(3-5)/5 Upstream Segment Crude oil ...... 104 96 188 100 (45%) (4%) Natural gas ...... 68 179 84 133 (19%) 35% Others ...... 43 35 26 25 65% 40%
Total ...... 215 310 298 258 (28%) 20%
In 2015, the total sales of the extraction segment on the Canadian market reached the level of 310 thousand tonnes of crude oil, natural gas and NGL (natural gas liquids). Due to the acquisition of 100 per cent. of the shares of FX Energy in December 2015, the additional hydrocarbon sales volume from the Polish market is expected to increase starting from 2016. In December 2015, average extraction from the acquired extraction assets of FX Energy amounted to 1.3 thousand tonnes boe/day. The prices of crude oil and gas had the largest effect on the level of hydrocarbon extraction.
Structure of revenues of the ORLEN Group in the upstream segment
The following chart shows the structure of revenues of the ORLEN Group in the upstream segment:
*) Other refers mainly to Natural Gas Liquids.
Sales volume of the ORLEN Group in the upstream segment
The following chart shows the structure of sales volume of the ORLEN Group in the upstream segment:
*) Other refers mainly to Natural Gas Liquids.
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REGULATORY COMPLIANCE
The complexity of the ORLEN Group's businesses demands compliance with a number of laws, administrative measures, technical regulations, standards and norms in each country in which the ORLEN Group operates. In Poland the ORLEN Group operates through PKN ORLEN, whilst in the Czech Republic it operates through Unipetrol and in Lithuania through ORLEN Lietuva. The principal areas of regulation concern the following: taxes; crude oil and fuels mandatory reserves; petroleum products quality standards (including bio-fuels); protection of the environment and climate; health and safety protection; fuel depots; petrol stations; specific regulations on chemicals; as well as competition and consumer protection. The most important administrative measures are the licences, permits and consents necessary to fully operate its businesses. The ORLEN Group holds all regulatory licences necessary for the conduct of its operations and is in compliance with all requirements set out in those licences and applicable law and regulations.
(a) Legal requirements for the energy sector
The ORLEN Group companies operating in Poland, the Czech Republic and Lithuania require and hold current licences for their activities in: production, storage, and revenues relating to fuels; production and revenues relating to electric energy; and production and revenues relating to heating.
(b) Environmental protection requirements
The most important legal acts relate to environmental protection, balancing of emissions (and reduction of emissions) and the emissions trading scheme for greenhouse gas emissions (CO2 allowances).
The ORLEN Group holds all necessary environmental licences for the conduct of its operations, and is in compliance with all material applicable environmental regulations. No material claims for non-compliance have been brought against the ORLEN Group in the last three years. See the section entitled "Environment" below.
(c) Requirements concerning fuel quality
Pursuant to national regulations and EU directives, ORLEN Group companies operating in Poland, the Czech Republic and Lithuania are obliged to deliver to the market fuels meeting required quality specifications. This involves motor fuels containing the requisite portion of bio-components, or pure bio-fuels for transport use as specified by national regulations to meet the NIT.
(d) Requirements for the maintenance of mandatory stocks
Under Polish regulations, prior to 2015 PKN ORLEN was required to maintain mandatory reserves of crude oil and fuels corresponding to 76 out of the 90 days required of average daily fuel production or import of crude oil or fuels. The reserves for the remaining 14 days were stored by the Polish Material Reserves Agency. From 1 January 2015, in return for a gradual reduction of the level of mandatory reserves to be maintained from 76 days to 53 days by the end of 2017, PKN ORLEN is required to pay an additional fee concerning mandatory reserves. In 2015, the mandatory reserves level was reduced by 8 days to the level of 68 days, and the additional fee concerning mandatory reserves amounted to 43 PLN/tonne of crude oil and 99 PLN/tonne of LPG. During 2016, there will be a further reduction of the mandatory reserves level from 68 to 60 days. As a result of the change of the mandatory reserves system, there will be a partial release of capital which had been immobilised until now in physically maintained mandatory reserves of crude oil and fuels.
In accordance with Czech law, mandatory reserves of crude oil and fuels are maintained in their entirety by a special state-owned agency, the Strategic Reserves Administration (Správy Státních Hmotných Rezerv). The expenses are fully covered by the state budget, and so Unipetrol has no obligation to employ its capital in financing the strategic mandatory reserves of the Czech Republic.
ORLEN Lietuva's requirement to maintain mandatory stocks is slightly lower than the ORLEN Group's mandatory level in Poland as the Lithuanian Oil Products Agency (Valstybine Imone Lietuvos Naftos Produktu Agentura) is obliged to maintain a mandatory stock of crude oil and/or petroleum products to last 30 days, calculated by reference to the average daily internal consumption of the previous calendar year. The remaining level, i.e. 60 days out of 90 days of Lithuanian stocks, is maintained by ORLEN Lietuva.
(e) Requirements concerning competition and consumer protection
The ORLEN Group companies operating in Poland, the Czech Republic and Lithuania are obliged to adhere to regulations concerning the protection of competition and consumers, including prohibitions on: abuse of a dominant position; collusive agreements; and violating consumer protection laws. In addition, the ORLEN Group must notify any
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intention to concentrate operations in the domestic fuel sector, and must submit, for quality inspection purposes, goods and services sold at petrol stations.
(f) Standards of technical devices
The ORLEN Group companies operating in Poland, the Czech Republic and Lithuania are obliged to submit all technical devices for inspection and to obtain permits for the use of all technical devices that may create a hazard for human life and health, property and the environment.
(g) Regulatory bodies
The main regulatory bodies relevant to the activities of the ORLEN Group in Poland are: the Energy Regulatory Office; the Ministry of Energy; the Ministry of Finance; the Ministry of Economic Development; the Office of Competition and Consumer Protection; the Ministry of the Treasury; the Ministry of the Environment; the Inspectorate for Environmental Protection; the Office of Technical Inspection; and the Material Reserves Agency.
The main regulatory bodies relevant to the activities of the ORLEN Group in the Czech Republic are: the Ministry of Industry and Trade; the Ministry of Finance; the Ministry of the Environment; the Office for Czech Environmental Inspection; the Energy Regulator Office; the Office of Czech Trade Inspection; the State Tax Authorities; and the Office on Protection of Competition (Anti-Monopoly Office).
The main regulatory bodies relevant to the activities of the ORLEN Group in Lithuania are: the Ministry of the Economy; the Ministry of the Environment; the Environmental Protection Agency; the Ministry of Transport and Communications; the State Energy Inspectorate under the Ministry of Energy; the Environmental Protection Department of Šiauliai Region; the Council of Competition; and the State Tax Inspectorate.
(h) Taxation
Those ORLEN Group companies operating in Poland, the Czech Republic and Lithuania are subject to several taxes including value added tax, excise tax and corporate income tax. The most significant tax charge in the core business companies of the ORLEN Group is excise tax. The most significant customs charge is value added tax on crude oil importation. Energy products (especially fuel or other goods made from crude oil) are all taxable goods. Excise duty on petrol is expressed as a defined amount, depending on the type of product. Both excise duty and value added tax are passed on to customers. The legislature is conducting work on the introduction of a retail sales tax. The tax is to apply to store chains and retail sellers who generate a defined level of sales revenue.
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ENVIRONMENT
The main purpose of the environmental protection measures taken by the ORLEN Group is to fulfil business strategies, maintain the highest ecological neutrality possible, and promote the "green" image of the ORLEN Group, effectively managing waste and consolidating and reinforcing competencies in the area of environmental services.
The environmental projects carried out in 2015 were primarily related to the adaptation of installations to the new environmental requirements and standards effective as of 1 January 2016. These included obtaining indefinite integrated permits for the use of installations, as well as investments related to the construction of pro-environmental installations.
The most important environmental investment of 2015 at the production plant in Płock was the construction of systems for denitrification, and dedusting for individual and joint power plant boiler and flue gas desulphurisation installations. Subsequently, two K1 and K4 boilers were equipped with systems to reduce emissions of nitrogen oxides and dust. Currently, six out of eight boilers are equipped with reducing installations. During 2016, another boiler will be opened. December 2015 saw the launch of flue gas desulphurisation, which allowed for reduction of SO2 emissions from the power plant by more than 11 per cent. as compared with 2014.
The most important projects carried out in the remaining ORLEN Group companies in 2015 included: the replacement of contamination emission measurement analysers; the modernisation of the sewage installations of the Unipetrol Group; the installation of new heaters utilising secondary heat from hot water in the ORLEN Lietuva HP Plant; the modernisation of technological tanks; the extension of hydro-geological monitoring in IKS SOLINO S.A.; and the liquidation of the Freon system in the ANWIL Group.
In 2015, PKN ORLEN signed an updated version of the World Responsible Care Card ("RC"), which expresses support for and confirms the company's commitment to the development of the RC Programme throughout the world. PKN ORLEN has been a supporter of the RC Programme for more than 18 years. In addition, the PKN ORLEN obtained a prolongation of its RC Management System Framework Certificate, which confirms the conformity of the implemented system with the guidelines of the European Chemical Industry Council and the principles and criteria approved by the Polish Chemical Industry Chamber.
(a) CO2 emission rights
On 26 February 2014, the European Commission approved the draft plant list with a preliminary number of CO2 emission rights granted free-of-charge. The legislative process is being finalised at the domestic level. As a part of CO2 emissions management, the ORLEN Group annually monitors CO2 emissions for the plants covered by the emission trade system, and compares the number of rights, as well as determining the manner of the systematic balancing of the identified shortages/surpluses by way of intra-group transactions or forward/futures and spot transactions.
(b) Industrial emissions
The Industrial Emissions Directive will introduce emission standards for sulphur dioxide, nitrogen dioxide and dust that are more restrictive than the existing standards. In order to meet those requirements, the ORLEN Group constructed the flue gases desulphurisation, denitrification and dedusting installation, which will reduce emissions of sulphur and nitrogen dioxide as well as dust from the Płock plant by more than 90 per cent.
(c) Colour energy certificates
The colour energy certificates system supports producers of electric energy from renewable sources and high efficiency cogeneration. The number of colour energy certificates awarded free of charge depends on the size of the energy production and the structure of the fuel used. The current support mechanism for high efficiency cogeneration is valid until the end of 2018. After 2018 a new support mechanism may be introduced, but its implementation and form are not certain at this moment. The ORLEN Group will therefore be exposed to a risk of discontinuation of the cogeneration support system.
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SAFETY
The ORLEN Group treats safety as a top priority. As part of its Integrated Management System Policy, PKN ORLEN is committed to maintaining high standards of occupational health and safety, both in and out of the workplace. PKN ORLEN expects the ORLEN Group to share the same dedication to maintaining the highest possible safety standards. The Policy is implemented in PKN ORLEN and all the ORLEN Group companies.
In 2015, work was commenced to perfect the existing work safety model in force in the ORLEN Group by implementing the "OSH strategy for 2016-2017". This serves as a tool for providing effective management of planned measures in terms of a widely understood work safety culture across the ORLEN Group. It is provided to all companies of the ORLEN Group and promotes their development in two main directions: improving the cross-group standards of the ORLEN Group; and fulfilling the individual needs of particular companies.
To increase the effectiveness of measures in the area of safety, the so-called Total Recordable Rate ("TRR") was implemented across all companies of the ORLEN Group in 2015. The new rate contains information on the accident rate both among ORLEN Group employees and among the contracted and outsourced companies. The value of the overall TRR rate in 2015 in the ORLEN Group was 1.34 (when external contractors are included), and the total number of accidents at work – for both employees and contractors – decreased by 6 per cent. (compared with 2014) and equalled 72.
To standardise the safety management system in the ORLEN Group, new process safety event rates (T1 PSER, T2 PSER) were introduced in August 2015. Reporting via these rates enables comparison between the ORLEN Group and other companies in terms of process safety. Furthermore, a Process Safety Platform was created and contains information on the implementation of new initiatives, the current value of process safety rates and recorded emergency events in the ORLEN Group and in other companies from the chemical industry.
INSURANCE
The ORLEN Group insures its property against any sudden, unforeseen or accidental event, including but not limited to fire, explosion, natural disasters, acts of terrorism, machinery breakdown and loss resulting directly from business interruption caused by damage to property. Additionally, the ORLEN Group insures against general third party liability, public liability, directors and officers liability, employers liability, product liability and liability relating to environmental risks. The ORLEN Group believes that its insurance is in accordance with customary practice in the industry.
INFORMATION TECHNOLOGY
A large portion of the ORLEN Group's operations are based on IT systems. The ORLEN Group takes measures to enhance its IT security, such as defining and continuously updating its IT security policies and standards and covering its IT systems by way of maintenance contracts. The ORLEN Group performs regular audits and security reviews of its systems.
PKN ORLEN keeps data in two independent backup systems in two separate locations.
• In the main Data Centre in Płock, where data is secured on enterprise storage units, and also via a backup system which stores and backs up data for all of the ORLEN Group's systems; and
• In the Disaster Recovery Centre near Warsaw, where data from all of the ORLEN Group's systems is transferred online, and also secured on enterprise storage units.
All backup for the Main Data Centre is conducted in accordance with the ORLEN Group's internal backup policy. The backup process is fully monitored. Additionally, the backup from the Main Data Centre is also transferred for added protection to the Disaster Recovery Centre.
The ORLEN Group tests the procedure of restoring backup data regularly. All ORLEN Group companies are fully integrated in the IT system and use centralised IT infrastructure.
INTELLECTUAL PROPERTY
The ORLEN Group uses its best endeavours to protect its trading brands and reputation in the market from use by competitors. Consequently, appropriate intellectual property protections are applied to all materially significant trading names and their associated devices and logos, including trade mark registration with: (i) the Polish Patent Office; (ii) national offices under the Paris Convention for the Protection of Industrial Property; (iii) the International Bureau of the World Intellectual Property Organisation in Geneva; and (iv) the Office for Harmonisation in the Internal Market in Alicante, along with domain name registration where appropriate. In addition, through regular monitoring and the use of
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a trade mark infringement alert service, the ORLEN Group challenges any infringement of its registered trademarks where continued use by an individual or competitor organisation is considered to be to the detriment of the ORLEN Group's businesses.
RESEARCH AND TECHNOLOGICAL DEVELOPMENT
The ORLEN Group conducts a range of research and development projects to develop new products, processes and technologies. Such activity is conducted individually within a number of the ORLEN Group's companies and focusses on: improving fuel composition; developing higher performance fuels; analysing the efficiency of output of the ORLEN Group's plants; reduction of energy consumption; analysing CO2 emissions across all refineries; research related to advanced second and third generation biofuels including bioethanol from cellulose and lignocellulose as well as biodiesel from algae; developing oils for specific purposes; and efficient waste oil segregation.
PKN ORLEN has also used research into the improvement of yields and energy efficiency in atmospheric and vacuum columns in order to modernise the DRW IV installation in the Płock production plant. In addition, the operation of the feeder furnaces in the flue gas desulfurization installations has been analysed in order to reduce carbon dioxide emissions. Research has further been conducted in order to expand the production capacity of the polymer modified asphalt bases.
ADMINISTRATIVE, MANAGING AND SUPERVISORY BODIES
According to the Code of Commercial Partnerships and Companies, the Management Board and Supervisory Board are PKN ORLEN's managing and supervisory bodies, respectively.
Management Board's Operation
The main goal of the PKN ORLEN Management Board's activity is to increase the assets assigned to it by the shareholders whilst respecting the rights and interests of entities other than shareholders who are involved in the operations of the ORLEN Group and in particular the ORLEN Group's creditors and employees.
The Management Board ensures the transparency and effectiveness of the ORLEN Group's management system, and ensures that PKN ORLEN's affairs are managed in accordance with the provisions of law and good practice.
The Management Board's scope of activities includes the management of all of PKN ORLEN's affairs not reserved by either the Code of Commercial Partnerships or Companies or the PKN ORLEN Statute. All Management Board members are obliged and authorised to manage PKN ORLEN's affairs.
The PKN ORLEN Management Board consists of between five and nine members (including the President, Vice- President and other members of the Management Board). Management Board members are appointed and recalled by the Supervisory Board. However, one member of the PKN ORLEN Management Board is appointed and recalled by the Supervisory Board at the request of a minister responsible for the State Treasury, for as long as the State Treasury holds at least one share in PKN ORLEN. Particular Management Board members or the entire Management Board may be recalled at any time before the end of the term of office which applies equally to Management Board members and the entire Management Board.
The Management Board's term of office is the same for all members and expires upon the completion of an Ordinary General Meeting in which the financial statements for the second full financial year of its term of office are approved. The current term of the Management Board terminates on the date of the Ordinary General Meeting approving PKN ORLEN's financial statements for 2016.
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The Management Board comprises the members listed below:
Date of initial Name and surname Position appointment Year of expiry Wojciech Jasiński ...... Management Board, Chief Executive Officer 16 December 2015 2017 Sławomir Robert Jędrzejczyk ...... Management Board Vice President, Chief Financial 18 September 2008 2017 Officer Mirosław Kochalski ...... Management Board Vice President, Corporate Affairs 8 February 2016 2017 Piotr Chełmiński ...... Management Board Member, Business 10 March 2012 2017 Development/Power and Heat Generation Officer Operations Zbigniew Leszczyński ...... Management Board Member, Sales 8 February 2016 2017 Krystian Pater ...... Management Board Member, Production 15 March 2007 2017
Wojciech Jasiński, Chief Executive Officer of the Management Board of PKN ORLEN
Mr Wojciech Jasiński holds a degree in Law and Administration from the University of Warsaw. During the period 1972-1986 he worked at the Płock branch of the National Bank of Poland, and also as legal counsel in the Tax Chamber. From 1990 to 1991 Mr Jasiński served as the Delegate of the Government's Plenipotentiary for Local Government Reform in the Voivodeship. From 1992 to 1997 he worked in the Supreme Audit Office (the "NIK") and as part of the NIK's delegation to the Finance and Budget Team in the State Budget Department in Warsaw. Between 1997 and 2000, he was first a Member, and then the President, of the Management Board of Srebrna, a company located in Warsaw. From 1998-2000 he was a Member of the Supervisory Board of Bank Ochrony Środowiska. From September 2000 to July 2001, he held the position of Undersecretary of State in the Ministry of Justice. During 2006- 2007 he was the Polish Minister of State Treasury.
From 2001 until September 2015, Mr Jasiński was a Member of the Polish Parliament, in which he held the following positions of responsibility: Chairman of the Standing Subcommittee for the Banking System and Monetary Policy; Chairman of the Economy Committee; and Chairman of the Public Finance Committee. He was also a member of the State Treasury Committee in the Polish Parliament.
On 25 February 2016 he was appointed as a Member of the Supervisory Board of PKO Bank Polski S.A.
Sławomir Jędrzejczyk, Chief Financial Officer and Vice-President of the Management Board
Mr Sławomir Jędrzejczyk is responsible for the following company functions: treasury; controlling; accounting; supply chain management; investor relations; mergers and acquisitions; and information technology. His main responsibilities include implementing PKN ORLEN's strategy, which is geared towards increasing value, engaging with capital markets financings, and increasing cash flows through operational excellence, divestments, and projects designed at improving working capital. Currently, he also serves as Vice-Chairman of the Supervisory Board of Unipetrol, a.s. Since 1 January 2014, Mr Sławomir Jędrzejczyk has been a Member of the Board of Directors of TriOil Ressources Ltd., Canada.
On 18 September 2008, Mr Jędrzejczyk was appointed a Member of the Management Board of PKN ORLEN. On 6 March 2014, the Supervisory Board of PKN ORLEN reappointed Mr Jędrzejczyk to the position of Vice-President of the Management Board for a three year term of office beginning on 16 May 2014 (namely, the day following the Ordinary General Meeting approving the financial statements for 2013).
Mr Jędrzejczyk graduated from the Łódź University of Technology and is an Association of Chartered Certified Accountants Certified Internal Auditor. From 2005 to 2008 he served as President of the Management Board and Chief Executive Officer of Emitel. Previously, he had worked for two companies listed on the Warsaw Stock Exchange, as Head of the Controlling Division of Telekomunikacja Polska S.A and as a Member of the Management Board and Chief Financial Officer at Impexmetal S.A. He also worked for the Audit and Business Advisory Department of PricewaterhouseCoopers. Since 1 January 2014 Mr Jędrzejczyk has been a member of the Board of Directors of Orlen Upstream Canada Ltd.
Mirosław Kochalski, Vice President of the Management Board, Corporate Affairs
Mr Mirosław Kochalski is a graduate of the Faculty of History at the Nicolaus Copernicus University in Toruń. He completed postgraduate studies at the National School of Public Administration and the Warsaw School of Economics. In 1994, he worked at the Chancellery of the Prime Minister as a Chief Specialist. From 1995 to 1999, Mr Kochalski worked at the Public Procurement Office as a Director (of the Public Procurement Bulletin, and of the Training and Promotion Department), and then as a Chief Executive Officer. From 1999 to 2002 he held the position of Director of the Supplies and Non-fuel Purchases Department at PKN ORLEN S.A. From 2003 to 2006 he was a local government employee of the City of Warsaw, acting first as a Director in the Public Procurement Office and subsequently as President of the City of Warsaw. From 2006 to 2008 Mr Kochalski held the position of President of the Management
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Board of Ciech S.A. In 2010 he worked as a Managing Director at Coifer Impex SRL in Bucharest. From 2012 to 2015 he acted as Director of the Centre for Document Personalization in the Ministry of Interior.
Piotr Chełmiński, Member of the Management Board, Business Development and Power and Heat Generation Officer
Mr Piotr Chełmiński is a graduate of the Warsaw University of Life Sciences. He completed postgraduate management studies at the University of Management and Marketing in Warsaw (a partner institution of the University of Denver) and also studied in the Faculty of Gas Energy at the Institution of Heat Engineering in the Warsaw University of Technology, specialising in gas turbines and gas-steam systems. From 1995 to 1996 he served as Vice-President for Sales, Marketing and Exports at Okocimskie Zaklady Piwowarskie S.A. From 1996 to 1999 he worked for Eckes Granini GmbH & Co. KG as Regional Director for the Central and Eastern Europe Region, and additionally as President of its subsidiary, Aronia S.A. During 1999–2001 he was a Member of the Board of Directors of Browar Dojlidy Sp. z o.o. Between 2001 and 2006 he served as Member of the Management Board and Supervisory Board of Kamis-Przyprawy S.A. From 2006 to 2009 he served as Vice-President for Sales and Marketing, Gamet S.A. in Toruń, and as a Member of the Board of Directors of Gamet Holdings S.A. in Luxembourg. Between December 2009 and April 2011 Mr Chełmiński held the post of President of the Directors and Chief Executive Officer at Unipetrol a.s.. Mr Chełmiński currently serves as Chairman of the Supervisory Board of ANWIL S.A. and Vice-Chairman of the Supervisory Board of Basell ORLEN Polyolefins Sp. z o.o.
Zbigniew Leszczyński, Member of the Management Board, Sales
Mr Zbigniew Leszczyński is responsible for refining and wholesale petrochemical products, retail sales, logistics, and sales efficiency and development. On 8 February 2016, the Supervisory Board of PKN ORLEN S.A. appointed Mr Leszczyński to PKN ORLEN's Management Board. Mr Leszczyński is a graduate of the University of Warsaw's Faculty of Accounting and Finance. He has also completed postgraduate courses in "Company management in the European Union" (at the Warsaw School of Economics), "Designing and operating computer networks" (at the Nicolaus Copernicus University in Toruń) and "Project management" (at the Kozminski University).
Mr Leszczyński served Capital Group ORLEN for more than nine years where he was responsible for the construction and development of the fuel station network at ORLEN Paliwa, as well as supporting and developing wholesale refining products at PKN ORLEN. He has served as the Vice-President of the Management Board of the PKN ORLEN Foundation, providing expert advice on the oil, mining and gas sectors. Mr Leszczyński has also served as the President of the Management Board of Wodociągi i Kanalizacja w Opolu Sp. z o.o.; President of the Management Board of Rynex Sp. z o.o.; President of the Management Board of Wisła Płock S.A.; and Head of Sales and Marketing at Kompania Węglowa S.A. He has in addition provided advisory, supervisory and project management services as a sole trader.
Krystian Pater, Member of the Management Board, Production
Mr Krystian Pater is a graduate of the Nicolaus Copernicus University's Faculty of Chemistry. He has completed postgraduate courses in Chemical Engineering and Equipment (at the Warsaw University of Technology), Management and Marketing (at Paweł Włodkowic University College) and Petroleum Sector Management and Enterprise Value Management (at the Warsaw School of Economics). Mr Pater became an employee of Petrochemia Płock S.A. in 1993 and from 2005-2007 he served as Executive Director responsible for Refining Production at PKN ORLEN. Currently, he is Member of the Management Board of AB ORLEN Lietuva and a Member of the Supervisory Board of Unipetrol a.s.. Additionally, he serves as a Member of the Management Board of the European Petroleum Refiners Association and as Chairman of the Association of Oil Industry Workers in Płock.
The Management Board members' place of work is PKN ORLEN's registered office (ul. Chemików 7, 09-411 Płock, Poland).
The Management Board members' activities conducted outside PKN ORLEN do not represent any conflicts of interest with the activities of PKN ORLEN.
Supervisory Board's Operation
The PKN ORLEN Supervisory Board supervises PKN ORLEN's activity in all areas of its business. In particular, the Supervisory Board has the competencies specified both in the Code of Commercial Partnerships and Companies and also in PKN ORLEN's Statute. The Supervisory Board takes appropriate action to obtain regular and exhaustive information from the Management Board on all significant matters regarding PKN ORLEN's activities, on the risks related to those activities and on appropriate methods of managing that risk.
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Supervisory Board Members
The Supervisory Board members are appointed for a term of office common to each member. This term of office expires upon the completion of an Ordinary General Meeting which approves the financial statements for the second full financial year of the term of office. The current term of the Supervisory Board terminates on the date of the Ordinary General Meeting which approves the financial statements of PKN ORLEN for 2015 and which is due to be held on 3 June 2016. Individual Supervisory Board members, or the entire Supervisory Board, may be recalled at any time before the end of the relevant term of office. A chairperson of the Supervisory Board is appointed at the PKN ORLEN General Meeting, whereas the deputy chairperson and secretary are elected by the Supervisory Board from among the remaining Board members.
The PKN ORLEN Supervisory Board consists of between six and nine members. The State Treasury is entitled to appoint and recall one Supervisory Board member, while the other Supervisory Board members are appointed and recalled by the General Meeting.
The Supervisory Board is comprised of the members listed below:
Name and surname Position Date of appointment Year of expiry Angelina Anna Sarota Chairman of the Supervisory Board 27 June 2013 2016 Radosław L. Kwaśnicki Member of the Supervisory Board (Vice-Chairman of 15 May 2014 2016 Supervisory Board) Mateusz H. Bochacik Member of the Supervisory Board (Secretary of the 29 January 2016 2016 Supervisory Board) Adrian Dworzyński Member of the Supervisory Board (Independent 29 January 2016 2016 Member of the Supervisory Board) Artur Gabor Member of the Supervisory Board (Independent 27 June 2013 2016 Member of the Supervisory Board) Agnieszka Krzętowska Member of the Supervisory Board (Independent 29 January 2016 2016 Member of the Supervisory Board) Remigiusz Nowakowski Member of the Supervisory Board 23 November 2015 2016 Arkadiusz Siwko Member of the Supervisory Board 29 January 2016 2016
Mr Remigiusz Nowakowski has declared that he serves as a board member for the Tauron Group, whose business activities could be considered to be in competition with PKN ORLEN. Mr Remigiusz Nowakowski has further declared that he gained Tauron Polska Energia SA Supervisory Board approval for his membership of the PKN ORLEN Supervisory Board. To prevent potential conflicts of interests, Mr Nowakowski declared that he will not participate in any board discussions at the Tauron Group, nor participate in company votes, if these actions could create a conflict of interest with the activities of PKN ORLEN.
Notwithstanding Mr Nowakowski's declaration, as far as is known to PKN ORLEN, no potential conflicts of interest exist between any duties to PKN ORLEN of the members of the Supervisory Board and their private interests or other duties.
Governance
The Supervisory Board has established five permanent committees: the Nomination and Remuneration Committee; the Audit Committee; the Corporate Governance Committee; the Strategy and Development Committee; and the Social Responsibility Committee (CSR Committee). Below is an overview of the activities each of the Supervisory Board Committees.
Nomination and Remuneration Committee
The aim of the Nomination and Remuneration Committee is to assist the ORLEN Group in accomplishing its strategic objectives, by providing the Supervisory Board with opinions and conclusions regarding the development of the ORLEN Group's management structure (including organisational solutions), the remuneration system and the recruitment of staff with the skills required to ensure the ORLEN Group's success. The Committee's tasks include:
(a) initiating and issuing opinions on the appointment of Management Board members; (b) giving opinions on solutions proposed by the Management Board with respect to the ORLEN Group's management system, which aim to ensure the effective, cohesive and secure management of the ORLEN Group; (c) performing periodic reviews and recommending rules for establishing incentive schemes for Management Board members and senior executives, in accordance with the ORLEN Group's interest; (d) performing periodic reviews of the remuneration system for Management Board members and executives reporting directly to Management Board members (including managerial contracts and incentive schemes) and
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submitting to the Supervisory Board proposals concerning the development of those schemes within the context of the ORLEN Group's strategic goals; (e) providing the Supervisory Board with its opinions regarding performance-based remuneration; and (f) assessing the ORLEN Group's management of human resources.
The Nomination and Remuneration Committee is appointed by the Supervisory Board from among its members. The committee consist of between three and five members. A Committee chairperson is elected by resolution of the Committee from among the Committee members.
As at the date of this Prospectus, the Nomination and Remuneration Committee comprises the members listed below:
Angelina Sarota (Chairman) Mateusz Bochacik Adrian Dworzyński Agnieszka Krzętowska
Audit Committee
The Audit Committee's aim is to advise the Supervisory Board on the proper implementation of the rules of accounting and financial reporting; on PKN ORLEN's and the ORLEN Group's internal audit, as well as on cooperation with the ORLEN Group's statutory auditors. The Committee's tasks include:
(a) monitoring the ORLEN Group's statutory auditors' work and providing the Supervisory Board with recommendations as to the selection and remuneration of the ORLEN Group's statutory auditors; (b) discussing with the ORLEN Group's statutory auditors (before the start of each annual audit of the financial statements) the nature and scope of the audit, as well as monitoring the coordination of the ORLEN Group's statutory auditors' work; (c) reviewing the ORLEN Group's interim and annual financial statements (non-consolidated and consolidated), with a particular focus on: • any changes in accounting standards, rules and practices; • the main areas subject to evaluation; • major adjustments resulting from the audit; • going-concern statements; and • compliance with applicable accounting regulations. (d) discussing any problems or concerns that may arise from the audit of financial statements; (e) analysing the letters to the Management Board which are drawn up by ORLEN Group's statutory auditors, and assessing the independence and impartiality of the audits and the Management Board's responses to them; (f) giving an opinion on annual and multi-annual financial plans; (g) giving an opinion on dividend policy, profit distribution and any issues of securities; (h) reviewing the management accounting system; (i) reviewing the internal audit system, including financial, operational, compliance, risk assessment and management controls; (j) analysing the ORLEN Group's internal audit reports and considering the main observations of other internal analysts, as well as the Management Board's responses to those observations. Such activity includes the assessment of the internal auditors' level of independence and consulting on the Management Board's intended appointment or dismissal of the head of the unit responsible for the internal audit; (k) reviewing, on an annual basis, the internal audit programme, coordinating internal and external audit activities and examining the conditions for performing internal audits; (l) cooperating with the organisational units within the ORLEN Group that are responsible for audit and control, including an assessment of their work on a periodic basis;
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(m) considering any issues connected with the ORLEN Group's audit that are raised by the Committee or the Supervisory Board; and (n) informing the Supervisory Board of any significant issues related to the Audit Committee's own activities. Audit Committee meetings are held not less than once a quarter and in each instance before the ORLEN Group's financial statements are published.
The Audit Committee is appointed by the Supervisory Board from among its members. The Committee consists of between three and five members (including at least two independent members and at least one with skills and experience in the areas of accounting and finance). A Committee chairperson is elected by a resolution of the Committee, from among the Committee members.
As at the date of this Prospectus, the Audit Committee comprises the members listed below:
Artur Gabor (Chairman) Agnieszka Krzętowska Remigiusz Nowakowski Artur Gabor and Agnieszka Krzętowska are independent Supervisory Board members. Both of them also satisfy the qualifying criteria in relation to skills and experience in the areas of accounting and finance.
Corporate Governance Committee
The aim of the Corporate Governance Committee is to evaluate the implementation of the ORLEN Group's corporate governance principles. The Committee's tasks include:
(a) submitting recommendations to the Supervisory Board as to the implementation of the corporate governance principles; (b) issuing opinions on corporate governance documents; (c) evaluating such reports concerning compliance with corporate governance principles as are prepared for the Warsaw Stock Exchange; (d) issuing opinions on the proposed amendments of PKN ORLEN's corporate documents; and (e) monitoring the management of PKN ORLEN in terms of its legal and regulatory compliance, including PKN ORLEN's compliance with its ethical and corporate governance principles. The Corporate Governance Committee is appointed by the Supervisory Board from among its members. The committee consists of between three and five members. A Committee chairperson is elected by a resolution of the Committee from among the Committee members.
As at the date of this Prospectus, the Corporate Governance Committee comprises the members listed below:
Adrian Dworzyński (Chairman) Mateusz Bochacik Radosław L. Kwaśnicki Angelina Sarota
Strategy and Development Committee
The aim of the Strategy and Development Committee is to issue opinions and submit recommendations to the Supervisory Board on planned investments and divestments which exert a material impact on the ORLEN Group's assets. The Committee's tasks include:
(a) assessing the effect of planned and completed investments and divestments on the ORLEN Group's assets; (b) evaluating the activities, contracts, letters of intent and other documents relating to acquisitions, sales, encumbrances or any other disposals of PKN ORLEN's material assets; (c) issuing opinions on any strategic documents which the Management Board submits to the Supervisory Board; and
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(d) issuing opinions on PKN ORLEN's development strategy, including its long-term financial plans. The Strategy and Development Committee is appointed by the Supervisory Board from among its members. The Committee consist of three to five members. A Committee chairperson is elected by a resolution of the Committee from among the Committee members.
As at the date of this Prospectus, the Strategy and Development Committee comprises the members listed below:
Remigiusz Nowakowski (Chairman) Adrian Dworzyński Artur Gabor Angelina Sarota Arkadiusz Siwko
Social Responsibility Committee
The aim of the Social Responsibility Committee is to support the achievement of PKN ORLEN's strategic objectives by considering the social, ethical and environmental issues that relate to PKN ORLEN's operations and PKN ORLEN's contacts with other stakeholders. The Committee's tasks include:
(a) supervision of the implementation of the Corporate Social Responsibility ("CSR") strategy;
(b) monitoring the management of PKN ORLEN in terms of its compliance with the requirements of PKN ORLEN's internal policy document "Values and Principles of Conduct";
(c) periodic assessment of PKN ORLEN's activities in the field of CSR, including the drafting of the relevant sections of the annual report which summarise the CSR activities completed by PKN ORLEN.
The Social Responsibility Committee is appointed by the Supervisory Board from among its members. The committee consists of between three and five members. A Committee chairperson is elected by a resolution of the Committee from among the Committee members.
As at the date of this Prospectus, the Social Responsibility Committee comprises the members listed below:
Artur Gabor (Chairman) Mateusz Bochacik Radosław L. Kwaśnicki Agnieszka Krzętowska
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SHAREHOLDERS
PKN ORLEN's shares are listed on the main market of the Warsaw Stock Exchange (within the continuous trading system) and are included in the company indexes WIG20, WIG30 and WIG as well as the industry index WIG- PALIWA (WIG-FUELS). Since 19 November 2009 PKN ORLEN's shares have been included on the Warsaw Stock Exchange's Respect Index, a specific index for the quoting of companies engaged in CSR activities.
There are no restrictions as to the transfer of ownership rights in PKN ORLEN shares.
The table below provides a list of PKN ORLEN shareholders as at 21 April 2016 with holdings in excess of 5 per cent. and specifies the number of shares owned, the nominal value of the shares owned and the percentage share of respective shareholders in the ORLEN Group's equity capital. Except as stated below, one share in PKN ORLEN gives the right to one vote at the General Meeting.
The following table shows the shareholding structure of PKN ORLEN as at the date of this Prospectus:
Number of Nominal value of Share in share capital Shareholders shares/voting rights shares (PLN) (per cent.) State Treasury ...... 117,710,196 147,137,745.00 27.52 ING OFE* ...... 39,000,000 48,750,000.00 9.12 Aviva OFE* ...... 31,400,000 39,250,000.00 7.34 Other ...... 239,598,865 299,498,581.25 56.02
Total ...... 427,709,061 534,636,326.25 100.00 ______*According to information from the Extraordinary General Shareholders' Meeting of PKN ORLEN of 29 January 2016. Currently, the main shareholder in PKN ORLEN is the State Treasury with a total of 27.52 per cent. of shares. According to the provisions of PKN ORLEN's Statute, as long as the State Treasury is a shareholder in PKN ORLEN, i.e., holds at least one share, then:
(a) one member of the PKN ORLEN Management Board is appointed and recalled by the Supervisory Board at the request of a minister responsible for the State Treasury; and
(b) the minister responsible for the State Treasury also has the right to appoint and dismiss one member of the PKN ORLEN Supervisory Board and the related right to veto Supervisory Board resolutions approving the sale or encumbrance, in any way, of shares in the following companies: Naftoport Sp. z o.o. and Inowroclawskie Kopalnie Soli S.A. The resolutions require an 'in favour' vote to be cast by a Supervisory Board member appointed by the State Treasury.
Additionally, specific rights vested in State Treasury shareholders may also arise out of commonly applicable provisions of law. Such entitlements arise in particular from the Act on Specific Rights, whose powers are vested in the Minister responsible for the State Treasury. Pursuant to the Act, the Minister responsible for the State Treasury has the right (within 14 days of the Minister being informed of the adoption of the relevant resolution, or the management board having taken an act in law, but no later than 30 days after the resolution has been adopted or the act in law taken) to veto resolutions of PKN ORLEN's Management Board concerning the following matters:
(a) the dissolution of PKN ORLEN;
(b) the disposal, change of function of, cessation or exploitation of PKN ORLEN's assets as disclosed in the uniform list of facilities, installations, appliances and services comprising critical infrastructure as referred to in article 5b(7)(1) of the Act of 26 April 2007 on Crisis Management (unified text of the Journal of Laws, 2013, position 1166, as amended);
(c) a change in PKN ORLEN's business activity;
(d) the disposal or lease of PKN ORLEN's enterprise or part thereof or the establishment of a limited property right thereon;
(e) the adoption of the operational and financial plan, investment activity plan or long-term strategic plan; or
(f) moving PKN ORLEN's seat abroad, provided that such a resolution or action, if performed, would actually pose a real threat to the operations, business continuity and integrity of PKN ORLEN's critical infrastructure.
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The voting rights of PKN ORLEN's shareholders are restricted to the extent that, at a General Meeting of shareholders, no shareholder may exercise more than 10 per cent. of the total votes existing as at the date of the General Meeting. However, such restriction does not apply for the purpose of determining the duties of an acquirer of a significant stake in accordance with any of the following legislation: the Competition and Consumer Protection Act of 16 February 2007; the Accounting Act of 29 September 1994; the Act of 22 September 2006 (on Transparency of Financial Relations between Public Authorities and Public Entrepreneurs and on Financial Transparency of Certain Entrepreneurs); or the Act of 29 July 2005 (on Public Offering and Terms for Introducing Financial Instruments to the Organised Trading System and Public Companies).
The restriction does not apply to the State Treasury or to a depository bank which issued depositary receipts in connection with PKN ORLEN's shares under an agreement with PKN ORLEN (whereby the bank exercises voting rights in respect of PKN ORLEN's shares). Voting rights exercised by a subsidiary are deemed to be exercised by the parent company within the meaning of the Acts described in the preceding paragraph. In order to calculate the number of votes held by a shareholder, the voting rights derived from the shares are added to the number of votes that the particular shareholder would acquire in the event of converting the depositary receipts held by them into shares.
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COURT AND ARBITRATION PROCEEDINGS
The proceedings described below remain pending and might have, might have had, or did have, a significant impact on the ORLEN Group's financial standing or profitability whether they relate to matters within or outside the normal course of the ORLEN Group's business activity. Proceedings having a significant impact meet the following criteria: either (i) the value of the dispute is not less than 10 per cent. of PKN ORLEN's shareholders' equity (as of 31 March 2016, 10 per cent. of PKN ORLEN's shareholders' equity amounted to PLN 1.78 billion), or (ii) the proceedings have been reported in PKN ORLEN's consolidated quarterly financial reports.
Proceedings Involving ORLEN Group Members as Defendants
(a) Sale of assets and receivables in relation to the purchase of Unipetrol Shares
The claim by Agrofert Holding a.s. ("Agrofert") is for compensation for losses related, among other things, to alleged unfair competition on the part of PKN ORLEN and alleged damage to the reputation of Agrofert in relation to the purchase by PKN ORLEN of shares in Unipetrol a.s. The claim was for the payment of PLN 3,071 million (representing CZK 19,464 million at the exchange rate as at 31 March 2016). On 21 October 2010 the Court of Arbitration in Prague (attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic in Prague) dismissed Agrofert's claim against PKN ORLEN and ordered Agrofert to pay PKN ORLEN's costs. On 3 October 2011, the Common Court in Prague overruled the ruling of the Court of Arbitration that had been handed down on 21 October 2010. However, this judgment was overruled by the Court of Appeal in Prague in a ruling handed down on 24 January 2014. On 7 April 2014, Agrofert appealed the decision of the Court of Appeal. On 7 April 2015, the Court of Appeal dismissed the appeal of Agrofert. On 4 September 2015, Agrofert appealed to the Czech Supreme Court. The appeal proceedings in the Supreme Court are pending.
(b) Tax proceedings against ORLEN Południe S.A. (previously Rafineria Trzebinia S.A.)
On 14 May 2014 and 20 May 2014 ORLEN Południe S.A. received the decisions of the Head of the Customs Office in Kraków determining excise tax liabilities for May - August 2004 in the amount of PLN 132 million. ORLEN Południe S.A. paid the entire liability with interest. At the same time, provisions recognised for this purpose in prior years were used. ORLEN Południe S.A. appealed the decisions in relation to the tax liability for May – August 2004 to the Voivodeship Administrative Court (VAC) in Kraków. On 26 February 2015 the VAC in Kraków gave its judgment dismissing the company's claim. On 5 May 2015 ORLEN Południe S.A. submitted annulment claims against the judgment of the VAC to the Supreme Administrative Court in Warsaw, which were not recognised until the date of approval of the foregoing financial statements.
In view of the European Court of Justice judgment in a similar case, the company has submitted applications for renewal of administrative proceedings. In a decision issued on 23 July 2015 the Director of the Customs Chamber in Kraków refused to reopen the proceedings due to the ongoing proceedings before the Supreme Administrative Court. Since the decision of the Director of the Customs Chamber in Kraków refusing to reopen the proceedings ORLEN Południe S.A. has filed an appeal, which was dismissed. ORLEN Południe S.A. filed complaints against these decisions on 16 November 2015, which were dismissed by the Voivodeship Administrative Court in Kraków on 11 February 2016. ORLEN Południe S.A. plans to submit annulment claims against the above mentioned judgments.
(c) Proceedings concerning a claim for system fees by ENERGA-OPERATOR S.A. (the legal successor of Zakład Energetyczny Płock S.A.)
ENERGA–OPERATOR S.A. initiated a claim against PKN ORLEN for payment of system fees from the period 5 July 2001 to 30 June 2002. The value of the claim is PLN 46 million, plus statutory interest. In a judgment handed down on 27 October 2014, the District Court in Warsaw ordered PKN ORLEN to pay to ENERGA-OPERATOR S.A. the claimed amount in its entirety, plus statutory interest accruing from 30 June 2004 to the date of judgment. PKN ORLEN subsequently filed an appeal against that judgment. On 19 April 2016, the Court of Appeal dismissed part of the claim in the amount of approximately PLN 30 million, but upheld the claim in part in the amount of approximately PLN 16 million (plus statutory interest). The parties have the right to submit an application for annulment against the judgment. PKN ORLEN will consider an application for annulment following receipt of the Court's written decision.
On 29 June 2015, PKN ORLEN received a further claim from ENERGA-OPERATOR S.A. in the amount of approximately PLN 13.3 million. On 10 July 2015, PKN ORLEN filed a response to the claim. On 22 December 2015, the District Court in Łódź dismissed the claim and ordered ENERGA–OPERATOR S.A. to pay PKN ORLEN's costs in relaton to the action. On 29 January 2016, ENERGA-OPERATOR S.A. appealed against the judgment of the District Court in Łódź. PKN ORLEN have responded to the appeal. The parties await the date of the next hearing.
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(d) Action against Unipetrol RPA
On 23 May 2012, Unipetrol RPA received a motion from the Ostrava District Court which had been lodged by I.P.-95 s.r.o. for damages in connection with Unipetrol's filing for I.P.-95 s.r.o.'s bankruptcy in November 2009. The total amount claimed is approximately CZK 1,789 million (according to the NBP exchange rate as of 31 March 2016, corresponding to approximately PLN 282 million). Unipetrol RPA is one of eight entities challenged to pay severally the above amount. The case is being considered by the Ostrava District Court.
(e) Claim by OBR S.A for breach of intellectual property rights.
On 5 September 2014, OBR S.A. filed an action against PKN ORLEN in the District Court in Łódź for a claim in respect of an alleged breach of patent rights by PKN ORLEN (relating to the technique of the separation of hydrodesulfurization products of heavy residue after extractive distillation of crude oil). The amount of the claim is approximately PLN 83 million. The damages claimed relate to (i) the market value of the licence fee payable for the use of the patented solution and (ii) the obligation to repay the benefits derived from the use of this solution. On 16 October 2014, PKN ORLEN responded to the lawsuit. On 11 December 2014, the value of the claim was increased to PLN 247 million. A court order of 21 May 2015 directed the parties to mediate the dispute. As of the date of the Prospectus, mediation is ongoing.
Proceedings Involving ORLEN Group Members as Plaintiffs
(a) Claim by ORLEN Południe S.A (previously Rafineria Trzebinia S.A.)
ORLEN Południe S.A. is acting as an auxiliary prosecutor in proceedings, first started in 2010, that concern losses in relation to an installation for the esterification of biodiesel oils. Rafineria Trzebinia S.A. has filed a claim for approximately PLN 79 million in relation to its investments in the esterification of biodiesel oils. Criminal proceedings in relation to this matter are also ongoing.
(b) Proceedings by AB ORLEN Lietuva in relation to an accident at the Terminal in Butingė
AB ORLEN Lietuva is a plaintiff in proceedings against the following defendants: RESORT MARITIME S.A., The London Steamship Owners' Mutual Insurance Association Limited; Sigma Tankers Inc.; Cardiff Maritime Inc.; Heidenreich Marine; Heidenreich Maritime Inc.; and Heidmar Inc. AB ORLEN Lietuva is claiming damages consequent on the collision of a tanker ship with a buoy at the Butinge Terminal on 29 December 2005. The proceedings were initiated in December 2006. The claim amounts to approximately PLN 73 million (approximately EUR 17.26 million as at 31 March 2016). In October 2014, the parties agreed to move the dispute to the English courts. A date for the next hearing is pending.
(c) Tax proceedings relating to UNIPETROL RPA s.r.o.
In 2010, UNIPETROL RPA s.r.o., (a legal successor of CHEMOPETROL a.s.) for a tax refund in respect of taxes paid in 2005 by CHEMOPETROL a.s. The claim concerns an unused investment relief attributable to CHEMOPETROL a.s.. The value of the claim amounts to approximately PLN 51 million (approximately CZK 325 million as at 31 March 2010). The case was examined by the tax authorities and by the appellate courts. On 14 October 2015, the Czech Supreme Administrative Court approved the application for annulment submitted by UNIPETROL RPA s.r.o and accordingly overruled the judgment of the Court in Usti by the Elbe River (which had been handed down on 25 February 2015). The Czech Supreme Administrative Court accordingly referred the case to the Court in Usti by the Elbe River for its reconsideration.
(d) Arbitration proceedings against Basell Europe Holdings B.V.
On 20 December 2012, PKN ORLEN sent an arbitration request to Basell Europe Holdings B.V. in relation to an ad hoc proceeding before the Court of Arbitration in London. The request related to a claim arising under a Joint Venture Agreement between PKN ORLEN and Basell Europe Holdings B.V signed in 2002. The claim concerns the use, in relation to the terms of the Joint Venture Agreement, of so-called "cash discounts" by Basell Sales & Marketing Company. On 27 February 2014, PKN ORLEN submitted a claim against Basell Europe Holdings B.V. for (inter alia) (i) payment to Basell ORLEN Polyolefins Sp. z o.o. in the amount of approximately PLN 128 million (representing approximately EUR 30 million as at 31 March 2016), plus statutory interest, or (ii) in the alternative, payment from Basell Europe Holdings B.V. to PKN ORLEN in the amount of approximately PLN 57 million. These quantums may be subject to adjustment during arbitration proceedings. On 10 April 2014, PKN ORLEN submitted an application for the suspension of the arbitral proceedings until 1 November 2014. Basell Europe Holdings B.V. accepted this request. On 1 November 2014, the arbitration proceedings were resumed. On 24-26 March 2015, a hearing was held in London at which the parties summarised their cases, and during which witnesses and experts were interviewed. On 27 March 2015, the Court of Arbitration issued a procedural ordinance which established the schedule for further proceedings, including an order for the submission of further pleadings by the parties. On 29 May 2015 the two parties submitted
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further statements of case and mutual claims for costs incurred. On 12 May 2016, the Arbitration Court issued a judgment in which it dismissed PKN ORLEN's claim and ordered PKN ORLEN to pay the amount of USD 2,921,988.
(e) Dispute between ORLEN Lietuva and Lietuvos Geležinkeliai
On 31 December 2014, ORLEN Lietuva filed a motion for arbitration against Lietuvos Gelezinkeliai ("LG") in the Court of Arbitration in Vilnius. Pursuant to its contract with LG, ORLEN Lietuva is demanding the conversion of rail transport tariffs in order to secure the resultant savings in the amount estimated as of December 2015 at not less than PLN 162 million (EUR 38 million as at 31 March 2016). On 31 December 2015, LG submitted four counterclaims in which LG claimed from ORLEN Lietuva fees for rail transport in the amount of approximately PLN 76 million (EUR 18 million as at 31 March 2016). Three of these claims were combined by the Court, which held that the case could not be considered owing to the priority of the arbitral tribunal's hearing of the matter. Proceedings relating to the fourth claim have also been suspended by the court until the arbitral ruling on ORLEN Lietuva's claim is known. LG has appealed against these decisions by the Court. As of the date of this Prospectus, the hearing date on appeal is pending.
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KEY AGREEMENTS RELATING TO THE OPERATIONS OF THE GROUP
Supply of Goods and Services Agreements
(a) Supply Agreement between ORLEN Deutschland and Lekkerland Deutschland
On 10 February 2015, ORLEN Deutschland GmbH entered into a supply agreement with Lekkerland Deutschland GmbH & Co. KG. Under the agreement, Lekkerland Deutschland is to deliver to the petrol stations of ORLEN Deutschland non-fuel goods and services from 1 February 2015 until 31 January 2018. The estimated net value of the agreement amounts to EUR 780 million (namely, PLN 3,277 million as of 10 February 2015).
(b) Supply Agreement between PKN ORLEN and Kolporter
On 30 January 2014 PKN ORLEN signed an agreement with Kolporter Spółka z ograniczoną odpowiedzialnością S.K.A ("Kolporter"). Under the agreement, Kolporter is to deliver non-fuel goods to PKN ORLEN fuel stations for an indefinite period. The estimated net value of the agreement in the period of first five years amounts to approximately PLN 3.3 billion.
Crude Oil Supply Agreements
(a) Crude Oil Supply Agreement entered into between PKN ORLEN and Saudi Aramco
On 6 May 2016 PKN ORLEN signed an agreement with Saudi Aramco, which is headquartered in Dhahran, Saudi Arabia. Under this agreement, Saudi Aramco is required to supply ORLEN Capital Group refineries with crude oil in the amount of approximately 200 thousand tonnes per month. The agreement was signed for the period from 1 May 2016 to 31 December 2016 and it will be automatically extended yearly for the following contract year unless it is terminated in line with the provisions contained therein.
(b) Crude Oil Supply Agreement entered into between PKN ORLEN and Tatneft Europe AG
On 23 December 2015 PKN ORLEN signed an agreement with Tatneft Europe AG for delivery of 3.6 – 7.2 million tonnes of crude oil to PKN ORLEN. The deliveries will be realised starting from 1 January 2016 to 31 December 2018.
(c) Crude Oil Supply Agreements entered into between PKN ORLEN and Rosneft
On 30 December 2015, PKN ORLEN and Rosneft executed an annex to the agreement first entered into between the parties on 1 February 2013 which related to the delivery of 18-25.2 million tonnes of crude oil to PKN ORLEN. The applicable deliveries began on February 2016 and will be made until 31 January 2019. The estimated maximum value of the deliveries as at 31 January 2019 (assuming the applicability of current market conditions), is approximately PLN 26,000 million.
On 21 June 2013, PKN ORLEN entered into an agreement with Rosneft for REBCO crude oil deliveries to Unipetrol RPA s.r.o., through the Przyjazn pipeline, of up to 8.28 million tonnes. The agreement came into effect on 1 July 2013 and is valid until 30 June 2016. On 28 March 2014, PKN ORLEN and Rosneft executed an annex to the original agreement of 21 June 2013. The annex provides for an increase in the crude oil volumes delivered to Unipetrol RPA s.r.o. of 50 thousand tonnes of REBCO crude oil per month. The annex came into effect on 1 April 2014 and is valid until 30 June 2016. On 30 April 2015, PKN ORLEN and Rosneft executed a second annex to the agreement dated 21 June 2013. This second annex provides for an increase in the crude oil volumes delivered to Unipetrol RPA s.r.o. by approximately 120 thousand tonnes of REBCO crude oil per month. The annex came into effect on 1 May 2015 and is valid until 30 June 2016.
(d) Spot Contracts
The fixed term contracts referred to above ensure the continuity of raw material supplies to the refinery plants, and contain supply guarantee clauses based on financial guarantees. These contracts provide approximately 45 per cent. of the ORLEN Group's crude oil supplies. The remaining 55 per cent. of crude oil supplies comes from spot contracts.
Spot crude oil supply agreements are standardised. The majority of the spot crude oil supply agreements are governed by English law. Any disputes arising from such agreements are referred to English courts or courts of arbitration seated in England.
The agreements stipulate quality standards, the method of testing crude oil and also documentation requirements. The price of crude oil is in USD. The points at which the risk of losing a product, or title to purchased goods which are transferred, is governed by appropriate contractual provisions (which normally refer to the INCOTERMS 2000 rules, or other standard general terms and conditions). Most spot contracts may be terminated by either party in the event of the other party's bankruptcy. The agreements also typically stipulate the procedure to be applied if supplies cannot be
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delivered or received due to circumstances not attributable to either party. In such cases, the performance obligation typically expires if such a situation continues for more than 30 days. This also constitutes grounds for each party to terminate the contract with immediate effect.
(e) Crude Oil and Zielona Góra Condensates Supply Agreement
This agreement was entered into between PGNiG (as the seller) and Rafineria Trzebinia S.A. (as the buyer). The agreement concerns the sale of crude oil and Zielona Góra condensates (the "Goods"). The volume of supplies is set forth annually. However, for the fourth quarter of 2012, it amounted to an exceptional amount of 19,500 tonnes per month (with a margin of +/- 15 per cent.). The seller's receivables under the agreement are backed by the buyer by: (i) a statement on submission to enforcement, (ii) an agreement on the assignment of claims under agreements on the sale of products obtained from processing the Goods and (iii) a capped mortgage over the buyer's real property. The agreement was entered into for an indefinite term. However, each party may terminate the agreement upon six months' notice.
Petroleum Products Sale Agreements Entered into by the ORLEN Group
As of the date of the Prospectus, the ORLEN Group was a party to the following material agreements concerning the sale of petroleum products:
(a) On 11 January 2016, the ORLEN Group entered into an agreement with Shell Polska Sp. z o.o. under which PKN ORLEN will sell gasoline and diesel oil to Shell Polska Sp. z o.o. from 1 January 2016 to 31 December 2016. The total estimated net value of the agreement amounts to PLN 2.1 billion.
(b) On 11 January 2016, the ORLEN Group entered into an agreement with BP Europa SE under which PKN ORLEN will sell gasoline and diesel oil to BP Europa from 1 January 2016 to 31 December 2016. The total estimated net value of the agreement amounts to PLN 4,500 million.
(c) On 11 January 2016, the ORLEN Group entered into an agreement with Lukoil Polska Sp. z o.o. under which PKN ORLEN will sell gasoline and diesel oil to Lukoil Polska Sp. z o. o. from 1 January 2016 to 31 December 2016. The total estimated net value of the agreement amounts to PLN 1,300 million.
(d) On 18 January 2016, the ORLEN Group entered into an agreement with Vitol Group for the purchase of crude oil and gas as well as the sale of products. The total estimated value of the agreements signed between the ORLEN Group and companies from the Vitol Group in the period from 3 October 2015 to 19 January 2016 amounts to approximately PLN 1,830 million.
(e) On 31 January 2014, Unipetrol RPA s.r.o. ("Unipetrol RPA"), a subsidiary of Unipetrol a.s., entered into two agreements with Shell Czech Republic a.s. ("Shell Czech Republic"), a member of the Shell group. The first agreement concerned sales by Unipetrol RPA of fuels to Shell Czech Republic for the period between 31 January 2014 and 31 December 2018. Under the second agreement, Unipetrol RPA will acquire inventories of crude oil and refining products from Shell Czech Republic.
(f) On 7 December 2010, PKN ORLEN and SK Eurochem Sp. z o.o. entered into an agreement for the supply and sale of PTA (purified terephtalic acid). The agreement was concluded for an indefinite term on 7 December 2010 and was amended by subsequent annexes. The PTA is delivered by pipeline, and ownership is transferred at the time of delivery. The pipeline used for carrying the shipments remains the property of PKN ORLEN.
(g) On 16 February 2015, PKN ORLEN executed a spot agreement with Statoil ASA for crude oil deliveries by Statoil ASA to PKN ORLEN. The total estimated value of all the agreements signed between the ORLEN Group and companies from the Statoil Group in the twelve months to 16 February 2015 amounts to approximately PLN 1,884 million. These agreements between the ORLEN Group and companies from the Statoil group relate to the purchase of products and crude oil.
(h) On 2 March 2015, PKN ORLEN executed a spot agreement with Vitol S.A for crude oil deliveries to AB ORLEN Lietuva. The total estimated value of all the agreements signed between the ORLEN Group and companies from the Vitol group in the period from 23 December 2014 to 3 March 2015 amounts to approximately PLN 1,665 million. The agreements between the ORLEN Group and companies from the Vitol Group concern the sale and purchase of products and crude oil.
(i) On 4 March 2015, the ORLEN Group entered into agreements with Eni Group. The total estimated value of all the agreements signed between the ORLEN Group and Eni Group in the period from 18 June 2014 to 5 March 2015 amounts to approximately PLN 1,630 million. The agreements between the ORLEN Group and the Eni Group concern the purchase of products and crude oil.
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(j) On 16 April 2015, the ORLEN Group entered into an agreement with the Trafigura Group. The total estimated value of all the agreements signed between ORLEN Group and the Trafigura Group in the twelve months to 16 April 2015 amounts to approximately PLN 1,600 million. The agreements between the ORLEN Group and the Trafigura Group concern the sales of products and the purchase of crude oil.
(k) On 27 May 2015, the ORLEN Group entered into an agreement with the Lukoil Group. The total estimated value of all the agreements signed between ORLEN Group and the Lukoil Group in the period from 13 January 2015 to 28 May 2015 amounts to approximately PLN 1,730 million. The agreements between ORLEN Group and the Lukoil Group concern the sales of products and the purchase of crude oil.
(l) On 22 June 2015, the ORLEN Group entered into an agreement with the Mercuria Group. The total estimated value of all the agreements signed between the ORLEN Group and the Mercuria Group in the period from 29 July 2014 to 23 June 2015 amounts to approximately PLN 1,800 million. The agreements between the ORLEN Group and the Mercuria Group concern the purchase of crude oil.
(m) On 23 June 2015, the ORLEN Group entered into an agreement with the Glencore Group. The total estimated value of all the agreements signed between the ORLEN Group and the Glencore Group in the period from 15 October 2014 to 24 June 2015 amounts to approximately PLN 1,800 million. The agreements between the ORLEN Group and the Glencore Group concern the purchase of crude oil.
(n) On 25 June 2015, ORLEN Deutschland GmbH entered into an agreement with BP Europe SE. The agreement concerned the sale of fuels to ORLEN Deutschland fuel stations in Germany until 31 December 2015. The estimated net value of the agreement amounts to EUR 1,220 million (approximately PLN 5,070 million as at 25 June 2015). The total estimated value of agreements signed between the ORLEN Group and the BP Group in the period from 13 January 2015 to 25 June 2015 amounts to approximately PLN 5,550 million. The agreements between the ORLEN Group and the BP Group concern the sale and purchase of products and the purchase of crude oil.
(o) On 27 July 2015, the ORLEN Group entered into an agreement with the Total Group. The total estimated value of all the agreements signed between the ORLEN Group and the Total Group in the period from 24 October 2014 to 28 July 2015 amounts to approximately PLN 1,790 million. The agreements between the ORLEN Group and the Total Group concern the sale of products and the purchase of crude oil.
(p) On 30 July 2015, the ORLEN Group entered into an agreement with the Vitol Group. The total estimated value of all the agreements signed between the ORLEN Group and the Vitol Group in the period from 4 March 2015 to 31 July 2015 amounts to approximately PLN 1,710 million. The agreements between the ORLEN Group and the Vitol Group concern the purchase of crude oil.
(q) On 22 September 2015, the ORLEN Group entered into an agreement with the Trafigura Group. The total estimated value of all the agreements signed between PKN ORLEN and the Trafigura Group in the period from 18 April 2015 to 23 September 2015 amounts to approximately PLN 1,200 million. The total estimated value of agreements signed between PKN ORLEN subsidiaries and the Trafigura Group in the period from 18 April 2015 to 23 September 2015 amounts to approximately PLN 1,000 million. The agreements between the ORLEN Group and the Trafigura Group concern sales of products and the purchase of crude oil.
(r) On 23 September 2015, the ORLEN Group entered into an agreement with the Gunvor Group. The total estimated value of all the agreements signed between PKN ORLEN and companies from the Gunvor Group in the last twelve months amounts to approximately PLN 1,100 million. The total estimated value of agreements signed between PKN ORLEN subsidiaries and the Gunvor Group in the last twelve months amounts to approximately PLN 1,300 million. The agreements between the ORLEN Group and the Gunvor Group concern the sales of products and the purchase of crude oil.
(s) On 2 October 2015, the ORLEN Group entered into an agreement with the Vitol Group. The total estimated value of all the agreements signed between the ORLEN Group and the Vitol Group in the period from 1 August 2015 to 2 October 2015 amounts to approximately PLN 1,760 million. The agreements between the ORLEN Group and the Vitol Group concern the purchase of crude oil and natural gas.
(t) On 12 October 2015, the ORLEN Group entered into an agreement with the Socar Group. The total estimated value of all the agreements signed between the ORLEN Group and the Socar Group in the last twelve months amounts to approximately PLN 1,700 million. The agreements between the ORLEN Group and the Socar Group concern the purchase of crude oil.
(u) On 9 November 2015, the ORLEN Group entered into an agreement with the Glencore Group. The total estimated value of all the agreements signed between the ORLEN Group and the Glencore Group in the period
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from 25 June 2015 to 10 November 2015 amounts to approximately PLN 1,850 million. The agreements between ORLEN Capital Group and the Glencore Group concern the purchase of crude oil and rapeseed oil.
(v) On 20 November 2015, the ORLEN Group entered into an agreement with the Mercuria Group. The total estimated value of all the agreements signed between ORLEN Capital Group and companies from the Mercuria Group in the period from 24 June 2015 to 20 November 2015 amounts to approximately PLN 2,100 million. The agreements between the ORLEN Group and companies from the Mercuria Group concern the purchase of crude oil and natural gas.
Facility Agreement to Refinance Existing Credit and Fund PKN ORLEN's Operations (the "Facility Agreement")
On 25 April 2014, PKN ORLEN signed the Facility Agreement with a syndicate of 17 banks for up to EUR 2 billion (approximately PLN 8,406 million as at 25 April 2014). The Facility Agreement replaced the facility agreement dated 28 April 2011 that had a maximum debt value of EUR 2,625 million and which was signed with a syndicate of 14 banks. The Facility Agreement is valid for five years and provides for two one year options for the extension of the contractual period. According to the Facility Agreement, EUR 1.5 billion (approximately PLN 6,305 million as at 25 April 2014) may be used to repay debt existing under the facility agreement dated 28 April 2011, with the remaining proceeds of up to EUR 500 million (i.e. approximately PLN 2,102 million as at 25 April 2014) to be used for the general corporate purposes of the ORLEN Group.
Investment Agreements
(a) Agreements for the construction and servicing of the power plant in Płock
On 2 December 2014, PKN ORLEN entered into an agreement with Siemens AG and Siemens Spolka z o.o. for the construction to a "turn key" standard of a cogeneration CCGT at the Płock power plant. The Supervisory Board of PKN ORLEN gave its consent for entry into this agreement on 25 November 2014. The estimated net value of the agreement amounts to approximately PLN 1.3 billion. The maximum level of contractual penalties contemplated under this agreement amounts to 25 per cent. of the agreement's value. Payment of such contractual penalties extinguishes the right to compensation for damages in excess of such penalties. The total budget for the construction and servicing of the power plant in Płock (excluding the aforementioned construction agreement dated 2 December 2014) has been estimated at approximately PLN 1.65 billion.
On 2 December 2014, PKN ORLEN also entered into an agreement with Siemens AG and Siemens Spolka z o.o. for the servicing of the main CCGT machines. This agreement will be valid for 12 years from the initial date of the power plant's operation. The estimated net value of the agreement over the course of its term will amount to approximately PLN 0.3 billion.
(b) Agreements for building and service of power plant in Wloclawek
On 4 December 2012, PKN ORLEN entered into an agreement with General Electric International Inc. (acting through General Electric International S.A., a Polish company) and SNC-LAVALIN POLSKA sp. z o.o., for the construction of a power plant in Wloclawek. The Supervisory Board of PKN ORLEN gave its consent for entry into this agreement on 29 November 2012. The estimated net value of the agreement amounts to approximately PLN 1.1 billion.
On 4 December 2012, PKN ORLEN also entered into an agreement with General Electric International Inc. for the servicing of the Wloclawek power plant. This agreement will be valid for 12 years from the initial date of the power plant's operation. The estimated net value of the agreement over the course of its term will amount to approximately PLN 200 million.
(c) Contract for the construction of the new polyethylene unit with Technip Italy S.p.A.
On 9 September 2015, UNIPETROL RPA, s.r.o., a wholly-owned subsidiary of Unipetrol, a.s., signed an engineering, procurement and construction contract with Technip Italy S.p.A. in relation to the construction of the new polyethylene unit ("PE3") at Litvínov plant.
As is the case with the two existing polythylene units already in operation, PE3 will be producing high density polyethylene. The total value of the contract is EUR 213 million. Total capital expenditure for the whole PE3 project, including the cost of the applicable licence (which has already been purchased), and works to be performed by other contractors, will be approximately CZK 8.5 billion.
The PE3 unit will consist of two lines: a natural line with a production capacity of 270 kilotonnes per year, and a black line with a production capacity of 100 kilotonnes per year. The total production capacity of the unit will be 270 kilotonnes per year; that is, if the black line is utilised at 100 per cent. of its capacity, the natural line will in turn produce a maximum of 170 kilotonnes per year.
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As at the date of the Prospectus, the companies Metrostav and ČKD Praha DIZ are on site at the Litvínov plant, performing all the preparatory works needed for the construction of the PE3 unit itself. Technip Italy S.p.A has begun construction works during the second quarter 2016. The end of the construction phase of the project is planned for the first quarter of 2018, and commissioning of the plant for mid-2018.
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TAXATION
The following is a general description of certain Polish, Swedish and other tax considerations relating to the Bonds. It does not purport to be a complete analysis of all tax considerations relating to the Bonds whether in those countries or elsewhere. Prospective purchasers of Bonds should consult their own tax advisers as to the consequences under the tax laws of the country of which they are resident for tax purposes and the tax laws of Poland and Sweden of acquiring, holding and disposing of Bonds and receiving payments of interest, principal and/or other amounts under the Bonds. This summary is based upon the law as in effect on the date of this Prospectus and is subject to any change in law that may take effect after such date.
Investors should also note that the appointment by an investor in Bonds, or any person through which an investor holds Bonds, of a custodian, collection agent or similar person in relation to such Bonds in any jurisdiction may have tax implications. Investors should consult their own tax advisers in relation to the tax consequences for them of any such appointment.
Republic of Poland
The following is a discussion of certain Polish tax considerations relevant to an investor resident in Poland or which is otherwise subject to Polish taxation. This statement should not be deemed to be tax advice. It is based on Polish tax laws and, as its interpretation refers to the position as at the date of this Prospectus, it may thus be subject to change including a change with retroactive effect. Any change may negatively affect tax treatment, as described below. This description does not purport to be complete with respect to all tax information that may be relevant to investors due to their personal circumstances. Prospective purchasers of the Bonds are advised to consult their professional tax advisor regarding the tax consequences of the purchase, ownership, disposal, redemption or transfer without consideration of the Bonds. The information provided below does not cover the tax consequences concerning income tax exemptions applicable to specific taxable items or specific taxpayers (e.g. domestic or foreign investment funds).
The references to "interest" as well as to any other terms in the paragraphs below means "interest" or any other term as understood in Polish tax law.
1. INCOME TAX
1.1 Taxation of Polish tax resident individuals (natural persons)
Under Article 3.1 of the Polish Personal Income Tax Act dated 26 July 1991, as amended (the "PIT Act"), natural persons are subject to tax liability affecting their entire income (revenues) regardless of the location of the source of such revenues (unlimited tax liability) if they have their place of residence in the territory of the Republic of Poland. According to Article 3.1a of the PIT Act, a person whose place of residence is in the Republic of Poland is the natural person who:
• has his/her centre of personal or economic interests (centre of life interests) within the territory of the Republic of Poland; or
• is present in the territory of the Republic of Poland for more than 183 days in a tax year.
These rules apply without prejudice to double taxation conventions signed by the Republic of Poland (Article 4a of the PIT Act).
(a) Capital gains from disposal of the Bonds
Capital gains from the disposal of the Bonds, derived by a Polish tax resident individual from the Bonds held as non-business assets, are not cumulated with general income subject to progressive tax rates and are subject to 19 per cent. flat-rate tax. Additionally, no tax is withheld by a tax remitter, but the tax should be settled by the taxpayer by 30 April of the following year.
If an individual holds the Bonds as a business asset, in principle, the income should be taxed in the same way as other business income. The tax, at 19 per cent. flat rate or the 18 per cent. to 32 per cent. progressive tax rate depending on the choice and certain conditions being met by the individual, should be settled by the individual himself/herself.
(b) Withholding tax on interest (including discount) income
According to Article 30a.1.2 of the PIT Act, interest income, including discounts, derived by a Polish tax resident individual (as defined above) does not cumulate with general income subject to the progressive tax rate but is subject to 19 per cent. flat-rate tax.
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Withholding tax incurred outside Poland (including countries which have not concluded a tax treaty with Poland), up to an amount equal to the tax paid abroad, but not higher than 19 per cent. tax on the interest amount, could be deducted from the Polish tax liability. Double tax treaties in particular can provide other methods of withholding tax settlements.
Under Article 41.4 of the PIT Act, the interest payer, other than an individual not acting within the scope of his/her business activity, should withhold the 19 per cent. Polish tax upon any interest payment. In practice, the obligation to withhold tax applies only to Polish interest payers and not to foreign payers. Under Article 41.4d of the PIT Act (and under Article 41.10 of the PIT Act with respect to securities held on omnibus accounts), tax on interest or discount on securities is withheld by entities keeping securities accounts for taxpayers, in their capacity as tax remitters, if the income (revenue) is earned in the territory of Poland and is associated with the securities registered in these accounts, and, further, if relevant payments are made to the taxpayers through those entities. However, given that the interest on the Bonds should not be classified as having originated from Poland, the withholding tax should not be withheld. Under Article 45.3b of the PIT Act (Article 45.3c of the PIT Act with respect to securities held on omnibus accounts), if the tax is not withheld, the individual is obliged to settle the tax himself/herself by 30 April of the following year.
If a Polish tax resident individual holds the Bonds as a business asset, in principle, interest should not be subject to withholding tax but taxed in the same way as other business income. The tax at 19 per cent. flat rate or at the 18 per cent. to 32 per cent. progressive tax rate depending on the choice and certain conditions being met by the individual, should be settled by the individual himself/herself.
1.2 Taxation of a Polish tax resident corporate income taxpayer
A Polish tax resident, i.e. corporate income taxpayer having its registered office or place of management in Poland should be subject to 19 per cent. income tax on the Bonds (both on any capital gain and on interest/discount) following the same principles as those which apply to any other income received from business activity. As a rule, for Polish income tax purposes, interest is recognised as taxable revenue on a cash basis, that is when it is received and not when it has accrued. In respect of capital gains, the cost of acquiring the Bonds should be recognised at the time the revenue is achieved. The taxpayer independently (without the involvement of the tax remitter) settles tax on interest (discount) or capital gains on Bonds, which is aggregated with other income derived from business operations conducted by the taxpayer.
1.3 Bonds held by a non-Polish tax resident individual or corporate
Non-Polish tax residents are:
• natural persons, if they do not have their place of residence in the territory of the Republic of Poland (Article 3.2a of the PIT Act);
• corporate income taxpayers, if they do not have their registered office or place of management in Poland (Article 3.2 of the Polish Corporate Income Tax Act dated 15 February 1992, as amended).
Non-Polish residents are subject to Polish income tax only on their income earned in Poland. Although there are no clear provisions of Polish tax law, if the Bonds are issued by a foreign entity, in principle, interest should not be considered as having been earned in Poland. Capital gains should also not be considered as arising in Poland unless the securities are traded on a stock exchange in Poland (the Warsaw Stock Exchange). However, if the latter is the case, most of the tax treaties concluded by Poland provide for Polish tax exemption on capital gains earned in Poland by a foreign tax resident. In order to benefit from a tax treaty, a foreign investor should present a relevant certificate of its tax residency.
Certain payments (those corresponding to interest) made by the Guarantor will be subject to Polish withholding tax if they are classified by the tax authorities as interest derived from Poland. If this is the case, domestic 19 per cent. (in the case of non-resident individuals) or 20 per cent. (in the case of non-resident corporates) withholding tax will apply unless the interest recipient benefits from a reduced rate or an exemption under the relevant double tax treaty. In order to benefit from a reduced rate or an exemption under the relevant double tax treaty, the interest recipient needs to produce the relevant certificate of tax residency (other documents may be required in specific cases).
If a foreign recipient of income acts through a permanent establishment in Poland, to which the interest is related, as a matter of principle it should be treated in the same manner as a Polish tax resident.
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2. PCC – TAX ON CIVIL LAW TRANSACTIONS
PCC is levied on civil law transactions, such as a sale or exchange of rights, if such rights are exercisable in Poland or, if exercisable abroad and the acquirer is a Polish resident and the transaction is carried out in Poland. As a rule, given that the issuer is a non-Polish entity, the Bonds should not be considered as rights exercisable in Poland.
Neither an issuance of Bonds nor redemption of Bonds is subject to PCC.
PCC on the sale or exchange of Bonds (which, as a rule are considered to be rights) is 1 per cent. of their market value. It is payable within 14 days after the sale or exchange agreement has been entered into. However, if such agreement has been entered into in notarial form, the tax due should be withheld and paid by the notary public. PCC on sale of the Bonds is payable by the entity acquiring the Bonds. In the case of exchange agreements, PCC should be payable by both parties jointly and severally.
However, the sale of the Bonds: (i) to investment firms or foreign investment firms, (ii) made with the intermediation of investment firms or foreign investment firms; (iii) made through organised trading, or (iv) made outside an organised trading by investment firms or foreign investment firms if the proprietary rights were acquired by those firms through organised trading, as defined in the Act on Trading in Financial Instruments, is exempt from PCC.
3. TAX ON INHERITANCE AND DONATIONS
Tax on inheritance and donations is levied on the acquisition by natural persons of property located, and economic rights (including securities) exercised in Poland, by way of among others, inheritance, ordinary legacy, further legacy, legacy per vindicationem, bequest, donation or donor's order. The tax on inheritance on donations is also imposed on the acquisition of property located abroad or of property rights exercised abroad if, on the date of the opening of the succession or conclusion of a donation agreement, the acquirer was a Polish citizen or had a permanent residence in Poland.
The tax liability is born by the person acquiring the property or economic rights. The tax base is, usually, the value of the acquired property and economic rights, after the deduction of any debts and encumbrances (net value), determined as at the date of acquisition and at the market prices prevailing on the date on which the tax obligation arises.
The rates of the tax on inheritances and donations vary and are determined by the degree of consanguinity or affinity or any other personal relationship between the heir and the testator or the donor and the donee.
The taxpayers are required to file, within one month of the date on which the tax liability arose, a tax return disclosing the acquisition of property or economic rights on an appropriate form with the head of the relevant tax office. The tax is payable within 14 days of receiving the decision of the head of the relevant tax office assessing the amount of the tax liability. If the agreement is concluded in the form of a notarial deed, the tax on inheritance and donations shall be collected and remitted by the notary public.
Securities acquired by close relatives (a spouse, descendants, ascendants, stepchildren, siblings, stepfather and stepmother) are tax-exempt subject to filing an appropriate notice with the head of the relevant tax office in due time. The aforementioned exemption applies if, at the time of acquisition, the acquirer was a citizen of any of the EU (EEA) member state.
Tax is not levied on an acquisition of economic rights exercised in the territory of Poland (including securities) if on the date of such acquisition neither the transferee nor the decedent nor donor were Polish citizens and had no place of permanent residence or registered office in the territory of the Republic of Poland.
4. REMITTER'S LIABILITY
Under Article 30.1 of the Tax Ordinance dated 29 August 1997, as amended, a remitter which has not carried out its obligation to calculate and withhold due tax from a taxpayer, and to transfer the appropriate amount of tax to a relevant tax office, is liable for tax not withheld or tax withheld but not transferred to a relevant tax office. The remitter is liable for those obligations with all of its assets. The provisions on the remitter's liability do not apply only if separate provisions provide otherwise or if the tax has not been withheld due to the taxpayer's fault.
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Sweden
The following summary outlines certain Swedish tax consequences relating to holders of Bonds. The summary is based on the laws of Sweden as currently in effect and is intended to provide general information only. The summary does not address, inter alia, situations where the Bonds are held in an investment savings account (investeringssparkonto), the rules regarding reporting obligations for, among others, payers of interest, or credit of foreign taxes. Investors should consult their professional tax advisors regarding the Swedish tax and other tax consequences (including the applicability and effect of tax treaties for the avoidance of double taxation) of acquiring, owning and disposing of Bonds in their particular circumstances.
Holders not tax resident in Sweden
Payments of any principal amount or any amount that is considered to be interest for Swedish tax purposes to the holder of any Bond should not be subject to Swedish income tax, provided that such a holder (i) is not resident in Sweden for Swedish tax purposes and (ii) does not have a permanent establishment in Sweden to which the Bonds are effectively connected.
Swedish withholding tax, or Swedish tax deduction, is not imposed on payments of any principal amount or any amount that is considered to be interest for Swedish tax purposes for a holder who is not resident in Sweden for Swedish tax purposes.
Holders tax resident in Sweden
In general, for Swedish corporations and private individuals (and estates of deceased individuals) with residence in Sweden for Swedish tax purposes, all capital income (for example, income that is considered to be interest for Swedish tax purposes and capital gains on Bonds) will be taxable. Specific tax consequences, however, may be applicable to certain categories of corporations, for example, life insurance companies. Moreover, specific tax consequences may be applicable if, and to the extent, a holder of Bonds realizes a capital loss on the Bonds and to any currency exchange gains or losses.
If amounts that are deemed as interest for Swedish tax purposes are paid by a legal entity domiciled in Sweden, including a Swedish branch, to a private individual (or an estate of a deceased individual) with residence in Sweden for Swedish tax purposes, Swedish preliminary taxes are normally withheld by the legal entity on such payments. Swedish preliminary taxes should normally also be withheld on other returns on the Bonds (but not capital gains), if the return is paid together with such payments of interest referred to above.
The proposed financial transactions tax ("FTT")
On 14 February 2013, the European Commission published a proposal (the "Commission's Proposal") for a Directive for a common FTT in Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia (the "participating Member States"). However, Estonia has since stated that it will not participate.
The Commission's Proposal has very broad scope and could, if introduced, apply to certain dealings in the Bonds (including secondary market transactions) in certain circumstances.
Under the Commission's Proposal, the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in the Bonds where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, "established" in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.
However, the FTT proposal remains subject to negotiation between the participating Member States. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member States may decide to participate.
Prospective holders of the Bonds are advised to seek their own professional advice in relation to the FTT.
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SUBSCRIPTION AND SALE
BNP Paribas, Société Générale, Citigroup Global Markets Limited, Unicredit Bank AG, Banco Santander S.A., ING Bank N.V., London Branch and PKO Bank Polski S.A. (the "Joint Lead Managers") have, pursuant to a Subscription Agreement dated 3 June 2016, jointly and severally agreed with the Issuer and the Guarantor, subject to the satisfaction of certain conditions, to subscribe the Bonds at 2.500 per cent. of their principal amount less commissions. The Issuer has agreed to pay to the Joint Lead Managers the commissions and certain costs and expenses incurred by the Joint Lead Managers in connection with the issue of the Bonds. A portion of the net proceeds of the issue of the Bonds will be used by the Guarantor to repay certain credit facilities of the Group. As a result, the Joint Lead Managers or members of their respective groups that are lenders under such credit facilities will receive a portion of the net proceeds of this issue of Bonds. The Subscription Agreement entitles the Joint Lead Managers to terminate it in certain circumstances prior to payment being made to the Issuer. The yield of the Bonds is 2.702 per cent. on an annual basis. The yield is calculated as at 7 June 2016 on the basis of the issue price. It is not an indication of future yield.
General
Neither the Issuer nor the Guarantor nor any Joint Lead Manager has made any representation that any action will be taken in any jurisdiction by the Joint Lead Managers or the Issuer or the Guarantor that would permit a public offering of the Bonds, or possession or distribution of this Prospectus (in preliminary, proof or final form) or any other offering or publicity material relating to the Bonds (including roadshow materials and investor presentations), in any country or jurisdiction where action for that purpose is required. Each Joint Lead Manager has agreed that it will comply to the best of its knowledge and belief in all material respects with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers Bonds or has in its possession or distributes this Prospectus (in preliminary, proof or final form) or any such other material, in all cases at its own expense. It will also ensure that no obligations are imposed on the Issuer, the Guarantor or any other Joint Lead Manager in any such jurisdiction as a result of any of the foregoing actions.
United States
The Bonds have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act.
The Bonds are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code and regulations thereunder.
Each Joint Lead Manager has represented and agreed that, except as permitted by the Subscription Agreement, it has not offered, sold or delivered and will not offer, sell or deliver the Bonds, (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date (as defined in the Subscription Agreement) within the United States or to, or for the account or benefit of, U.S. persons, and it will have sent to each dealer to which it sells Bonds during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Bonds within the United States or to, or for the account or benefit of, U.S. persons.
In addition, until 40 days after the commencement of the offering, an offer or sale of Bonds within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act.
United Kingdom
Each Joint Lead Manager has represented and agreed that:
(1) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the "FSMA") received by it in connection with the issue or sale of any Bonds in circumstances in which section 21 (1) of the FSMA does not apply to the Issuer or the Guarantor; and
(2) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Bonds in, from or otherwise involving the United Kingdom.
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GLOSSARY OF TECHNICAL TERMS
"ARE SA" means Agencja Rynku Energii S.A. (being the Polish Energy Market Agency).
"bbl" means barrel, a unit of volume for crude oil and petroleum products.
"boe" means a barrel of oil equivalent, namely the amount of energy that is equivalent to the amount of energy found in a barrel of crude oil.
"Brent" means Brent crude oil, a sweet crude oil that is used as a benchmark for the prices of other crude oils.
"COCO" means Company Owned Company Operated.
"CODO" means Company Owned Dealer Operated.
"CO2" means Carbon Dioxide.
"COMI" means centre of main interest.
"DODO" means Dealer Owned Dealer Operated.
"DOFO" means Dealer Owned Franchise Operated.
"EBIT" means profit/loss from operations.
"EBITDA" means profit/loss from operations, before depreciation and amortisation.
"EBITDA LIFO" means profit/loss from operations, before depreciation and amortisation according to the inventory valuation under the LIFO (Last-in, First-out) method.
"Energy Regulatory Office" means Urząd Regulacji Energetyki (being the Polish Energy Regulator).
"ESP" means electrostatic precipitators.
"ETS Directive" means EU Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC.
"FCC" means fluid catalytic cracking.
"FGD" means wet flue gas desulphurisation.
"GDP" means gross domestic product.
"gr/l" means grosz per litre.
"HDPE" means high-density polyethylene.
"IFRS" means International Financial Reporting Standards.
"IFRS EU" means International Financial Reporting Standards as adopted by the European Union.
"Integrated Management System" means a management system that integrates all of an organisation's systems and processes into one complete framework, enabling an organisation to work as a single unit with unified objectives.
"LDPE" means low-density polyethylene.
"LNG" means liquefied natural gas.
"Member State" means any one of the states which have acceded to the Treaty on the European Union and the Treaties establishing the European Communities (as amended).
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"MW" means megawatt, a unit of power.
"MWe" means a megawatt electrical, it refers to electrical power.
"MWt" means a megawatt thermal, it refers to thermal power produced.
"NOx" means Nitrogen Oxides.
"OPEC" means the Organization of Petroleum Exporting Countries.
"PET" means Polyethylene Terephthalate.
"Polish Material Reserves Agency" means the Polish central government body responsible for stocking and managing materials according to state interests.
"Polyethylene" is a type of polyolefin. The high pressure process of ethylene produces LDPE and the medium pressure polymerisation of ethylene produces HDPE. LDPE is more flexible and has better clarity; HDPE has greater strength and less creep (the continuous yield of material under stress) and is less permeable to gases.
"Polyolefin" is the collective name given to those polymers that are made from olefins (ethylene, propylene). Polyolefins are high molecular weight compounds made by joining together hundreds or thousands of molecules which consist of monomers. Molecular weight, structure and composition affect a number of the properties of polymers.
"Polypropylene" means polypropylene – a type of polyolefin which is the product of propylene polymerisation reaction. Polypropylene is the lowest density polymer. It has fair-to-good impact strength (the ability of a material to withstand shock loading) and excellent colourability. Polypropylene has good resistance to heat and low water absorption.
"pp" Means the unit for the arithmetic difference of two percentages.
"PTA" means purified terephthalic acid.
"PVC" means polyvinyl chloride.
"PX" means paraxylene.
"REBCO" means Russian export blend crude oil.
"SCR" means selective catalytic reduction.
"SO2" means Sulphur Dioxide.
"SPM" means single point mooring.
"Správy Státních Hmotných means the Czech Republic central government body responsible for stocking Rezerv" and managing materials according to state interests.
"State Treasury" means the Ministry of the State Treasury of the Republic of Poland.
"t" means tonne, a unit of mass.
"Valstybine Imone Lietuvos Naftos means the Lithuanian central government body responsible for stocking and Produktu Agentura" managing materials according to state interests.
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GENERAL INFORMATION
1. An application has been made to list the Bonds on the Irish Stock Exchange plc by the Issuer, through the Listing Agent, Arthur Cox Listing Services Limited ("Arthur Cox"). Arthur Cox is acting solely in its capacity as listing agent for the Issuer in relation to the Bonds and is not itself seeking admission to the Official List or to trading on the Market. It is expected that listing of the Bonds on the Official List and admission of the Bonds to trading on the Market will be granted on or before 7 June 2016, subject only to the issue of a Temporary Global Bond or a Permanent Global Bond. Transactions will normally be effected for delivery on the third working day after the day of the transaction.
2. The Issuer estimates that the expenses associated with the listing of the Bonds on the Official List and admission of the Bonds to trading on the Market are expected to amount to approximately €6,900.
3. Each of the Issuer and the Guarantor has obtained all necessary consents, approvals and authorisations in connection with the issue and performance of the Bonds and the guarantee relating to the Bonds. The issue of the Bonds was authorised by resolution no. 9 of the Board of Directors of the Issuer passed on 18 May 2016 and the giving of the guarantee relating to the Bonds by the Guarantor was authorised by resolution no. 5575/16 of the Management Board of the Guarantor passed on 9 May 2016 and resolution no. 1685/16 of the Supervisory Board of the Guarantor passed on 16 May 2016.
4. There has been no material adverse change in the prospects of the Issuer, nor any significant change in the financial or trading position of the Issuer since 31 December 2015. There has been no material adverse change in the prospects of the Guarantor or the Group since 31 December 2015, nor any significant change in the financial or trading position of the Guarantor or the Group since 31 March 2016.
5. Except as disclosed under "Court and Arbitration Proceedings" on pages 102 to 104 of this Prospectus, the Guarantor is not, nor has been, involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Guarantor is aware) during the 12 months preceding the date of this Prospectus, and the Issuer is not nor has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Issuer is aware) since its incorporation, which may have or has had in the recent past significant effects on the financial position or profitability of the Issuer, the Guarantor or the Group.
6. Each bearer Bond (other than the Temporary Global Bond) and Coupon will bear the following legend: "Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code".
7. The Bonds have been accepted for clearance through the Euroclear and Clearstream, Luxembourg systems (which are the entities in charge of keeping the records) with a Common Code of 142967332. The International Securities Identification Number (ISIN) for the Bonds is XS1429673327. The address of Euroclear is 1 Boulevard du Roi Albert II, B-1210 Brussels, Belgium and the address of Clearstream, Luxembourg is 42 Avenue JF Kennedy L-1855 Luxembourg.
8. There are no material contracts entered into other than in the ordinary course of the Issuer's or Guarantor's business, which could result in any member of the Group being under an obligation or entitlement that is material to the Issuer's or Guarantor's ability to meet its obligations to Bondholders in respect of the Bonds.
9. Where information in this Prospectus has been sourced from third parties, this information has been accurately reproduced and as far as the Issuer and the Guarantor are aware and are able to ascertain from the information published by such third parties no facts have been omitted which would render the reproduced information inaccurate or misleading. The source of third party information is identified where used.
10. From the date on which this Prospectus is made available to the public, physical copies (and accurate English translations where the documents in question are not in English) of the following documents will be available, during usual business hours on any weekday (Saturdays and public holidays excepted), for inspection at the offices of the Issuer, the Guarantor and the Agent:
• the Agency Agreement (which includes the form of the Global Bonds, the Definitive Bonds and the Coupons);
• the Articles of Association of the Guarantor;
• the Deed of Guarantee;
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• the Certificate of Registration (Registreringsbevis) and the Articles of Association (bolagsordning) of the Issuer;
• the published annual report, audited consolidated financial statements, audit opinion, report and supplementary report on the consolidated financial statements of the Guarantor for the financial year ended 31 December 2015;
• the published annual report, audited consolidated financial statements, audit opinion, report and supplementary report on the consolidated financial statements of the Guarantor for the financial year ended 31 December 2014;
• the published annual report, audited unconsolidated financial statements, audit opinion, report and supplementary report on the unconsolidated financial statements of the Guarantor for the financial year ended 31 December 2015;
• the published annual report, audited unconsolidated financial statements, audit opinion, report and supplementary report on the unconsolidated financial statements of the Guarantor for the financial year ended 31 December 2014;
• the published quarterly report, reviewed interim condensed consolidated financial statements and review report on the interim condensed consolidated financial statements of the Guarantor for the three months ended 31 March 2016;
• the published annual report, audited financial statements, audit opinion and report on the financial statements of the Issuer for the financial years ended 31 December 2015;
• the published annual report, audited financial statements, audit opinion and report on the financial statements of the Issuer for the financial year ended 31 December 2014;
• a copy of this Prospectus together with any supplement to this Prospectus or further Prospectus; and
• all reports, letters and other documents, balance sheets, valuations and statements by any expert any part of which is extracted or referred to in this Prospectus.
The Prospectus will be published on the website of the Central Bank at: http://www.centralbank.ie/REGULATION/SECURITIES-MARKETS/PROSPECTUS/Pages/approved prospectus.aspx and the Guarantor at: http://www.orlen.pl/EN/InvestorRelations/Pages/default.aspx.
11. Any websites referred to herein do not form part of this Prospectus.
12. KPMG Audyt Sp. z. o.o., whose registered office is at ul. Inflancka 4A, 00-189 Warsaw, Poland, Independent Public Accountants, entered in the register of entities authorised to audit financial statements in Poland under number 458, have audited and issued unqualified audit opinions on the consolidated financial statements of the Guarantor for the two years ended 31 December 2015 and 31 December 2014. KPMG Audyt Sp. z. o.o. carries out its activities in accordance with section 7 of the Polish Accounting Act and International Standards on Auditing as adopted by the National Council of Certified Auditors as the National Standards on Assurance.
13. KPMG AB, whose registered office is at P.O. Box 16106, SE-10323 Stockholm, Sweden has been appointed as auditor of the Issuer with Per Gustafsson as the principally responsible auditor. KPMG AB has audited and issued unqualified audit opinions on the financial statements of the Issuer for the two years ended 31 December 2015 and 31 December 2014. KPMG AB carries out its activities in accordance with FAR (Föreningen Auktoriserade Revisorer) (which is a professional institute for authorised public accountants in Sweden) and International Standards on Auditing.
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Issuer ORLEN Capital AB (publ) Sveavägen 9 P.O. Box 16285 SE-111 57 Stockholm Sweden
Guarantor Polski Koncern Naftowy ORLEN Spółka Akcyjna ul. Chemików 7 09-411 Płock Poland
Joint Lead Managers
BNP Paribas Société Générale 10 Harewood Avenue 29, boulevard Haussmann London NW1 6AA 75009 Paris United Kingdom France
Citigroup Global Markets Limited Unicredit Bank AG Citigroup Centre Arabellastrasse 12 33 Canada Square 81925 Munich London E14 5LB Federal Republic of Germany United Kingdom
Banco Santander S.A. ING Bank N.V., London Branch Av. de Cantabria s/n 60 London Wall 28660 Boadilla del Monte London EC2M 5TQ Madrid United Kingdom Spain PKO Bank Polski S.A. ul. Puławska 15 02-515 Warsaw
Poland
Auditors of the Issuer Auditors of the Guarantor KPMG AB KPMG Audyt Sp. z. o.o. P.O. Box 16106 ul. Inflancka 4A 10323 Stockholm 00-189 Warsaw Sweden Poland Fiscal Agent Citibank, N.A., London Branch Citigroup Centre Canada Square Canary Wharf London E14 5LB United Kingdom
Legal Advisers
To the Issuer and the To the Joint Lead Managers Guarantor as to English law as to English law Clifford Chance LLP Allen & Overy LLP 10 Upper Bank Street One Bishops Square London E14 5JJ London E1 6AD United Kingdom United Kingdom
To the Guarantor as to Polish law To the Issuer and the Guarantor as to To the Joint Lead Managers as to Swedish law Polish law
Clifford Chance Advokatfirman Vinge KB Allen & Overy, Janicka, Krużewski, Smålandsgatan 20 A. Pędzich sp. k. Namiotkiewicz i Wspólnicy Box 1703 Rondo ONZ 1 Spółka Komandytowa SE-111 87 Stockholm 00-124 Warsaw Norway House Sweden Poland ul. Lwowska 19 00-660 Warsaw Poland
60-40626686
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