The PGNiG Group's good financial performance in Q4 2009 was due primarily to an improved margin on sales of methane-rich gas in the second half of the year. In 2009, the PGNiG Group's result on methane-rich gas sales improved year on year. However, it was not enough to allow the Group to report a positive margin in that segment of its activity for the entire 2009. The PGNiG Group's results for both Q4 and the entire 2009 were also driven by three charges, including an impairment loss for receivables on gas deliveries to Zakłady Chemiczne Police S.A.; an impairment loss recognised on mining assets, as well as a partial release of an impairment charge for property, plant and equipment at three gas companies.

2009 Results Improve over 2008 Figures

In the entire 2009, the PGNiG Group reported an almost 40% increase in net profit, to PLN 1,204m, compared with PLN 866m in 2008. At the same time, operating profit rose by 67%, to PLN 1,334m, in 2009, compared with PLN 801m in 2008. Sales revenue gained 5%, rising to PLN 19,290m in 2009, from PLN 18,432m in 2008.

The strengthening of the PGNiG Group's financial position was achieved chiefly on the back of higher profitability of methane-rich gas sales in H2 2009. The average annual growth rate of the selling price exceeded the growth rate of the gas acquisition cost, which substantially reduced the Group's losses on sales of methane-rich gas relative to 2008. The change in the structure of high-methane gas sources also played an important role. Given the limited availability of imported gas, the Company drew larger amounts of gas from the underground storage facilities and increased its own production at nitrogen removal facilities.

The margin on methane-rich gas sales in the entire 2009 was approximately -3%, compared with -7% in 2008. The significant fluctuations in the margin result from the applied tariff setting model whereby tariffs are set for longer periods, which does not work all too well in the present market environment of highly volatile prices and it only shows how important the tariff setting mechanism and its flexibility are. It seems only necessary that this model be modified to ensure quicker reaction to the changing market environment.

PGNiG Group (PLNm)	Q4 2008	Q4 2009	change	2008	2009	change
Sales revenue	5,519		2%	18,432		5%
EBIT			n/a
EBITDA			n/a
Net profit/(loss)		1,289	n/a		1,204	39%

Weaker Demand from Industrial Customer, Stronger Sales to Retail Customers

The results reported by the PGNiG Group in 2009 were somewhat limited by natural gas sales being lower by 600m m³ on the 2008 sales. In 2009, industrial customers alone purchased almost 700m m³ of gas less than in the previous year. Natural gas sales in the entire 2009 fell 4%, to 13.284bn m³. The most significant setback was seen in Q2 and Q3 2009, when the sales were down by 656m m³ year on year. The weaker demand for gas from the industrial customers was an effect of the economic slowdown. The most dramatic decrease in the demand was recorded in the segment of nitrogen plants whose gas purchases were down 17% on 2008. In Q4 2009, the largest decline was again seen in that group of customers whose gas purchases were 7% lower year on year. However, the Q4 figures suggest that industrial customers are slowly recovering from the economic slowdown.

On the other hand, in 2009 gas consumption among retail customers was 3% higher relative to 2008. In Q4 2009, gas sales grew 2%, to 4.001bn m³, which was due to lower air temperatures compared with the corresponding period in 2008. The colder weather drove higher gas consumption for heating purposes by retail customers, which offset the lower demand for gas from industrial plants.

Gas Production Volume Stable

In 2009, natural gas production was 4.105bn m³ and remained slightly higher than in 2008. In Q4 2009, the production volume was also similar to the volume reported for Q4 2008, and stood at 1.099bn m³.

The production volume growth in Q4 2009 was slightly lower than in Q3 2009 due to the limited capacity of the Denitriding Plant in Grodzisk Wielkopolski. The Plant is in the process of implementing  of a capital expenditure programme and operates in a test mode, which translates into irregular outputs.

PGNiG is in the time-consuming process of expanding its output capacities which will grow substantially in two years' time when the Lubiatów-Międzychód-Grotów gas mining plant is to be become operational. At the same time, smaller fields are one by one developed by the Company. In 2009, gas production commenced in such fields as Żołynia, Łukowa, Grodzisko Dolne, Pilzno or Roszków. An analysis of the current and planned course of production shows that in 2010 and 2011 natural gas output will reach approximately 4.3bn m³ per year.

More Crude from Domestic Sources

In 2009, crude oil and condensate production was 504 thousand tonnes, a 2% increase on 2008. In Q4 2009, output stayed flat year on year at 138 thousand tonnes.

As a result of the collapse of crude prices in late 2008 and in the beginning of 2009, in the entire 2009 the average unit selling price of crude oil in the Polish złoty was lower by PLN 249 per tonne (16%) relative to 2008. As a result, sales revenue fell PLN 115m (15%), to PLN 664m.

In Q4 2009, the average crude price was higher by USD 19 per boe (33%) year on year. A slight appreciation of the Polish złoty and the narrowing of the gap between the selling price and market prices resulted in an increase in the average unit selling price by PLN 442 per tonne (42%) in Q4 2009. As a result, during the quarter revenue on sales of crude oil and condensate grew by PLN 65m (45%), to PLN 210m.

Ambitious Capital Expenditure Programme

In 2010, the PGNiG Group intends to spend approximately PLN 5bn on the implementation of the objectives of its Strategy for 2008-2015. The year 2010 is another year of significant expenditure on projects of great importance to Poland's energy security, and also one of the years with the highest spending on PGNiG's upstream capacities in the Company's history. PGNiG continues work on extension of the Lubiatów-Międzychód-Grotów mine, and if the current rate of progress in the project execution continues, the mine is expected to be back in operation in 2012, which is a year earlier than planned. Therefore, the years 2010-2011 will be a period when the Company incurs largest expenditure on that field, which is estimated at around PLN 1bn in total. The Company intends to spend PLN 850m-900m on exploration of deposits in Poland and abroad, which is in line with the 2009 figure. In 2010, we will also continue work on the extension of underground gas storage facilities, including the Kosakowo and Mogilno caverns and the largest underground facility in Wierzchowice.

The financial results reported by the PGNiG Group in 2009, after recovering the losses incurred in the first half of 2008, caused by the gas tariff's failure to reflect the actual market conditions, should allow the Company to implement all planned projects, which are particularly important to the process of increasing the Company's market value.

Some of the funding for the projects will come from external sources. In H1 2010, PGNiG will invite Polish banks to acquire a bond issue worth approximately  PLN 3bn. In H2 2010,  an issue of Eurobonds is planned. Proceeds of the bond issue will be used mainly to repay the credit line expiring in the middle of the year, while proceeds from the Eurobond issue will be used to finance future investment projects.

As at the end of 2009, the PGNiG Group's total debt was over PLN 2bn, that is PLN 1.1bn higher than at the end of 2008.

Joanna Zakrzewska

Spokesperson for PGNiG S.A.