Basic information

Polski Koncern Naftowy ORLEN Spółka Akcyjna with its headquarters in Płock, 7 Chemików Street (“Company”, “ORLEN”, “Issuer”, “Parent Company”) was founded by incorporation of Petrochemia Płock S.A. with Centrala Produktów Naftowych S.A., on 7 September 1999. There is no controlling entity for ORLEN, therefore, ORLEN is the ultimate parent company of the ORLEN Group. On 1 August 2022, ORLEN merged with Grupa LOTOS, and on 2 November 2022 with PGNiG. The transaction were made through an exchange of equity interests, where ORLEN increased the share capital by issuing shares, which were then allocated to the shareholders of Grupa LOTOS and PGNiG. After the merger, the ORLEN Group increased the scope of its operations mainly in the Upstream and Gas segment (additional information in notes 7.3.1 and 7.3.2).

ORLEN along with the entities comprising the Capital Group of Polski Koncern Naftowy ORLEN S.A. (“ORLEN Group”, “Group”) is one of the biggest and most modern multi - power companies in Central Europe, operating mainly on the Polish, Lithuanian, Czech, Slovak, German and Canadian and Norwegian markets. The Group also possesses entities located in Malta, Sweden, Hungary, Cyprus, Estonia, Switzerland, Great Britain, United Arab Emirates, Libya, Pakistan, the Netherlands, Belgium, Austria, France, Croatia, Ireland, Colombia, Tanzania, Mozambique, Ukraine, Latvia and China.

Since 26 November 1999 ORLEN shares are listed on the main market of the Warsaw Stock Exchange (WSE) in the continuous quotations system.

The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards adopted for application by the European Union (IFRS EU). The accounting principles applied by the Group are based on standards and interpretations adopted by the European Union and applicable to the period beginning on 1 January 2022 or earlier periods.

The consolidated financial statements have been prepared on a historical cost basis, except derivatives and investment property measured at fair value and financial assets measured at fair value. This consolidated financial statements have been prepared using the accrual basis of accounting except from the consolidated financial statement of cash flows.

The scope of consolidated financial statements is also compliant with the Minister of Finance Regulation of 29 March 2018 on current and periodical information to be published by issuers of securities and conditions of consideration of information required by the law of non-member country's law as equal (Official Journal 2018, item 757) and covers the annual reporting period from 1 January to 31 December 2022 and the comparative period from 1 January to 31 December 2021.

Presented consolidated financial statements present a true and fair view of the ORLEN Group’s financial position as at 31 December 2022, results of its operations and cash flows for the year ended 31 December 2022 .

The consolidated financial statements have been prepared on the assumption that the ORLEN Group will continue to operate as a going concern in the foreseeable future.

As part of the assessment of the Group's ability to continue as a going concern, the Management Board analysed the existing risks, and in particular assessed the armed conflict in Ukraine as well as the risks related to climate change on the Group's operations (note 4.3 and 8).

As at the date of approval of these consolidated financial statements, there is no evidence indicating that ORLEN Group will not be able to continue its operations as a going concern.

The Parent Company and the entities comprising ORLEN Group have unlimited period of operations.

The functional currency of the Parent Company and presentation currency of this consolidated financial statements is Polish Złoty (PLN). Possible differences in the amount of PLN 1 million when summing up the items presented in the explanatory notes result from the adopted rounding.

Transactions denominated in foreign currencies are initially disclosed at the exchange rate of the functional currency as at the transaction date. At the end of a reporting period:

• monetary items denominated in foreign currencies are translated at the exchange rate of the functional currency quoted by the National Bank of Poland for the reporting date.
• non-cash items measured at historical cost in a foreign currency are translated at the exchange rate as at the date of the transaction.
• non-cash items measured at fair value, expressed in a foreign currency, are converted using the exchange rates that were in effect on the date on which the fair value was determined.

Foreign currency differences arising on settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition are taken to profit or loss. Exchange differences constituting part of the profit/loss on the valuation of the hedging instrument in hedge accounting purposes are recognized in other comprehensive income.

Translation into PLN of financial statements of foreign entities, for consolidation purposes:

• particular assets and liabilities – at spot exchange rate as at the end of the reporting period,
• items of the statement of profit or loss and other comprehensive income and the statement of cash flows - at the average exchange rate for the reporting period (arithmetic average of daily average exchange rates published by the National Bank of Poland ("NBP") in a given period).

Różnice kursowe powstałe w wyniku powyższych przeliczeń ujmowane są w kapitale własnym w pozycji różnice kursowe z przeliczenia jednostek działających za granicą. W momencie zbycia podmiotu zagranicznego, zakumulowane różnice kursowe ujęte w kapitale własnym, dotyczące danego podmiotu zagranicznego, ujmowane są w rachunku zysków i strat jako wynik na zbyciu.

Foreign exchange differences resulting from the above recalculations are recognised in equity in the line exchange differences on translating foreign operations. Upon disposal of a foreign operation, foreign exchange differences accumulated in equity are transferred to the statement of profit or loss and disclosed as part of the overall net gain/(loss) on the disposal.

To hedge against foreign currency risk, the Group enters into currency derivative contracts (for a description of the accounting policies applied by the Group to derivative financial instruments are presented in note 16).

4.1. Accounting principles

Significant accounting principles and significant values based on judgements and estimates are presented as a part of the specific explanatory notes to the consolidated financial statements. The Group applied the accounting principles consistently to all presented reporting periods, except for the change in the presentation of the measurement and settlement of derivatives not designated for hedge accounting purposes in the consolidated statement of cash flows described in note 4.2.

4.2. Restated of comparative data

The Group has changed in these consolidated financial statements for 2022 the presentation of the valuation and settlement of derivative financial instruments not designated as hedge accounting purposes. Until now the inflows and outflows from the settlement of these instruments have been presented under investing activities. The derivative financial instruments traded by the Group, whether or not they are designated as hedging instruments in hedge accounting, are an integral part of the Group's risk management process, which aims to reduce the impact of market volatility and unpredictability on the Group's financial performance. Thus, the economic purpose of entering into these derivative financial instruments is the same. In addition, in relation to contracts for the purchase and sale of gas, the Group manages the risk of a net open position, with the result that a derivative financial instrument from the date of its conclusion to its maturity can only be designated as a hedging instrument in hedge accounting for part of that period and, as a result, it would be impossible to allocate the settlement inflows and outflows of such instruments between operating and investing activities.
As a result of the above change in presentation, the effect of all flows related to the derivative instruments concluded by the Group, as well as flows related to security deposits related to these instruments, will be recognized as part of operating activities, which is consistent with the method of analyzing cash flows related to derivatives which are the basis for decisions made by the Management Board of ORLEN, and will also allow for providing more useful data to users of the Group's consolidated financial statements.

The table below shows the impact of the above changes on the on the comparative data presented in Consolidated Financial Statement for 2021:

4.3. Climate changes and their impact on the applied accounting principles

Events and conditions resulting from climate change and the ongoing process of energy transformation and related risks have an increasing impact on the Group's operations, both in terms of business models, processes taking place in the Group and its ability to obtain financing, as well as attract investors and customers. Climate changes have become the main determinant of sustainable development management at the ORLEN Group in recent years. The existing standards and management systems limiting the direct impact on the environment have evolved towards strategic activities aimed at reducing the impact of the ORLEN Group on climate change, as well as adapting business models to the impact of the physical consequences of these changes on the Group's assets. Regulatory factors related to climate change are also important, including, in particular, the changing provisions of EU and national law, constantly increasing environmental protection requirements and imposing on enterprises the need to incur additional environmental charges or take adaptive measures to avoid or minimize them. The Group companies are subject to, inter alia, EU regulation establishing a greenhouse gases Emission Allowance Trading System (EU ETS Directive). In addition, they bear fees for the use of the environment under the Environmental Protection Law and Water Law, as well as are obliged, inter alia, to achieve the National Index Target (NIT) and the National Reduction Target (NCR). The impact of the Group's CO₂ emission costs and environmental charges incurred by the Group in 2022 is presented in note 13.9.2, while the accounting principles applied by the Group with regard to the creation of provisions for estimated costs of CO₂ emissions and other environmental risks are described in the note 14.11. ORLEN centrally manages the risk related to the cost of settling CO₂ emissions in the Group. The policy of hedging the market risk related to changes in CO₂ prices is implemented mainly with the use of derivative instruments in order to mitigate the risk of changes in cash flows, as described in more detail in note 16.5.1.2.

The growing climatic and regulatory pressure also affects the general economic conditions in the markets in which the Group companies operate, translating into the availability and prices of selected goods, as well as interest rates, exchange rates, inflation rates, as well as the availability of financing. Environmental regulations are gradually supplemented with guidelines on sustainable finance, under which the funds obtained must be allocated to investments that reduce the risk of climate change and environmental risks. As described in more detail in note 14.7.3 ORLEN issued sustainable development bonds in 2020 and 2021 with a total value of PLN 2 billion, as well as in 2021 it established an issue program of medium-term Eurobonds, under which it issued green Eurobonds in May 2021 with a total nominal value of EUR 500 million and plans further issues of this type of bonds in the future, in order to meet the needs under the developed principles of financing green investments.

In connection with the mergers with Grupa LOTOS and PGNiG, at the beginning of 2023, the Group presented an updated Strategy until 2030, under which it assumes continuation of the development directions of the ORLEN Capital Group published in 2020, also setting new goals for the Concern. The ongoing integration with former capital groups LOTOS, PGNiG and Energa Group opens up new development opportunities, including support for the energy transformation through the use of a wide group of assets of the multi-energy concern. As part of the presented update, sustainable development continues to play an important role, as well as the pursuit of emission neutrality in 2050 , in order to meet the climate goals set out in the Paris Agreement and the European Union in the future. As part of achieving this goal by 2030, the Concern assumes a 25% reduction in carbon dioxide emissions in the refinery, petrochemical and mining segment, a 40% reduction in carbon dioxide emission intensity in the energy segment and a 15% reduction in the emission index (NCI) (where the indicated reductions refer to the base year - 2019). In addition, the Group assumes the implementation of a number of significant CAPEX investment projects, increasing the energy efficiency of the currently existing production assets and enabling the Group's independence from fossil fuels, as well as investment projects in the Energy sector based mainly on renewable energy sources and supported by gas power, investments assuming the development and operation of SRM, as well as projects related to the production of biofuels, biogas and biomethane. The Group implements a hydrogen strategy supporting the reduction of CO₂ emissions, develops an electric car charging infrastructure and other projects related to reducing GHG emissions, including Carbon Capture, Storage and Use (CCUS). The Group is also successively implementing a program in the area of research, development and innovation, the activities of which are focused on the implementation of new technologies and improvement of existing technological processes, with particular emphasis on the development of green technologies. Additionally, the ORLEN Group plans to invest in the most innovative and promising areas and technologies as part of the ORLEN Venture Capital and PGNiG Ventures, company established for this purpose.

The impact of significant activities undertaken in this regard, affecting the financial data for 2022, is presented in individual notes to these consolidated financial statements.

In addition, in 2022, the Group appointed the Management Board Representative and the Climate and Sustainable Development Council. The main tasks of the new corporate body include the analysis of risks and opportunities related to the energy transformation and climate change, as well as raising the standard of communication with investors and the business environment on environmental issues. The Board is headed by ORLEN Management Board Member for Strategy and Sustainable Development, who is the Plenipotentiary for Climate and Sustainable Development. The Climate and Sustainable Development Council reports to the Management Board through meetings of the Group's Strategy Committee.

The risks identified by the Group related to the energy transformation and climate change relate to the following areas:

• physical risks related to climate change related mainly to the issue of adequate access to water, intense weather phenomena or temperature increase
• risks related to business activity, in particular regulatory risks related to new or rapidly changing environmental protection requirements, proper monitoring and reporting of the Group's impact, market changes, technological progress and stigmatization of the industry in the context of climate change
• opportunities arising from the energy transformation related to the emphasis on improving energy efficiency, investing in new energy sources, offering new products and services, the possibility of entering new markets and diversifying the company's operations
• risks related to the transformation of business models related to planned initiatives related in particular to the implementation of initiatives related to decarbonisation, new projects for the development of renewable energy sources and other integrated development initiatives.

When preparing these Consolidated Financial Statements, the Management Board analysed the impact of climate change and energy transformation, on significant judgments and estimates made by the Group, especially in the context of the decarbonisation strategy with specific commitments to reduce emissions and achieve climate neutrality.

In accordance with IFRS, when making assumptions and estimates, the Management Board relies on rational and factually supported assumptions reflecting the most appropriate assessment of the management regarding all economic conditions that may occur in the foreseeable future. Nevertheless, the estimates of the impact of climate change and energy transformation on the Group's operations are subject to very high uncertainty and may change significantly in subsequent periods, depending on the pace of the transformation. External sources of climate change and energy transition data that could form the basis of estimates often differ significantly in terms of projections of future price levels and their volatility, as well as assumed supply and demand . In the Group's opinion, factors such as the final shape and the moment of implementation of subsequent legal regulations, including those regarding the revision of the European emissions trading system and European directives on renewable energy sources and improving energy efficiency, will be of particular importance. No less important from the Group's perspective is the direction of legislative activities regarding a significant increase in environmental standards for new combustion engine vehicles and the ban on the sale of new combustion engine cars in the EU from 2035, which may translate into lower income from fuel sales. Increasing pressure on decarbonisation may also result in higher costs of traditional raw materials and changes in consumer preferences and transport habits, while uncertainty as to the reliability and scalability of new technological solutions may result in failure to achieve the assumed returns on planned investments in the future.

Management considered the impact of climate change on key estimates presented in the consolidated financial statements, including:

• estimates of future cash flows used to assess the impairment of property, plant and equipment, intangible assets (including goodwill) and right-of-use assets (for more information in note 14.4);
• estimates of the economic useful lives of non-current assets (more information in note  14.1);
• estimates of provisions and selected contingent liabilities (more information in note 14.11);

The Group also considered the existence of additional potential contingent liabilities related to regulatory requirements, including those requiring the removal of environmental damage, additional fees or penalties resulting from environmental protection requirements, as well as the existence of potential onerous contracts, or the need to restructure to achieve climate goals. Based on the analysis, as at December 31, 2022, the Group did not identify any contingent liabilities related to climate change.

Based on the analysis of climate-related risks, the Management Board assessed that assuming that the Group continues to implement appropriate adaptation measures, weather changes resulting from climate change and the ongoing energy transformation will not have a significant impact on the assessment of the Group's going concern both in the short term and in the foreseeable future.

Interest rate benchmark reform (the IBOR Reform)

On 1 January 2018 came into force the following Regulation (EU) 2016/1011 of the European Parliament and of the Council dated 8 June 2016 concerning indices used as benchmarks in financial instruments and financial contracts („the IBOR Reform”). The regulation, together with the amendment in February 2021, established a new standard for the determination and application of reference rates used in the financial market. Consequently:

• publication of GBP, CHF and JPY LIBOR, EONIA and USD LIBOR 1W i 2M rates has been discontinued,
• after 30 June 2023, the publication of USD LIBOR O/N 1M, 3M, 6M, 12M rates will terminate (there are ongoing consultations regarding the possible publication of these rates until the end of September 2024),
• the approach to setting WIBOR and EURIBOR rates was reformed adapting the methodology for their determination to the new requirements. Quotations of the adjusted WIBOR and EURIBOR rates were continued in 2022.

On the domestic market, a National Working Group on reference rate reform was established in July 2022 with the task of introducing a new overnight-based interest rate benchmark to the market. This index will replace the WIBOR index. The work of the National Working Group aims to ensure that the development and usage of the new index is credible, transparent and reliable. On 1 September 2022, the Steering Committee of the National Working Group decided to select the WIRON index, which is a Risk-Free Rate index based on actual overnight transactions, as an alternative index to WIBOR. WIRON will be administered by the GPW Benchmark S.A.

The Steering Committee of the National Working Group adopted a 'Roadmap' in September 2022, defining a timetable of activities. The Roadmap assumes that the benchmark reform will be implemented by the end of 2024, with the simultaneous implementation of a new WIRON-based financial products offer in 2023-2024. Publication of the WIBOR index is scheduled to cease in early 2025. WIRON is expected to become the key interest rate benchmark to be used in financial contracts and instruments.

The IBOR Reform resulted in amendments to IFRS, which were published in two phases:

• Amendments to IFRS 9 “Financial Instruments”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: Disclosures” - Interest Rate Benchmark Reform – Phase 1 (effective for annual periods beginning on or after 1 January 2020),
• Amendments to IFRS 9 “Financial Instruments”, IAS 39 “Financial Instruments: Recognition and Measurement”, IFRS 7 “Financial Instruments: Disclosures”, IFRS 4 “Insurance Contracts” and IFRS 16 “Leases” - Interest Rate Benchmark Reform — Phase 2 (effective for annual periods beginning on or after 1 January 2021).

According to information presented in the Consolidated Financial Statements of 2021 (Note 5), Phase 1 amendments did not have a material impact on the Group as it does not apply hedge accounting for interest rate hedging instruments.

With regard to the changes introduced under Phase 2, the Group intends to adopt the following arrangements with respect to the financial instruments that will change as a consequence of the IBOR Reform:

• in case the contractual terms of bank loans and borrowings are changed as a direct result of the IBOR Reform and the new rate on which the contractual cash flows are based, is the economic equivalent of the existing rate valid directly prior to the change, the Group will change the principle for determining the contractual cash flows prospectively by changing the effective interest rate. For any other changes amended during this period that are not directly related to the reform, the Group will apply the relevant requirements defined by IFRS 9,
• in case the lease agreement is changed as a direct result of the IBOR Reform and the new rate of determination of lease payments is the economic equivalent of the existing rate, the Group will revalue lease liability to reflect changed lease payments using an updated discount rate,
• if the IBOR Reform results a change in the hedging instruments, the hedged item and the hedged risk, the Group will amend the hedge documentation without terminating the hedging relationship.

The Group presents below the information on the nature and scope of the risks to which the Group is exposed in connection with the IBOR Reform, together with an indication of the derivative and non-derivative financial instruments held by the Group affected by the reform, the actions taken by the Group to manage the risks arising from the reform and the assessment of that reform’s impact on the Group’s activities and presented financial data.

Nature and scope of risk

The Group having reviewed in 2021 the impact of IBOR Reform on its various lines of business in terms of: risk management, including operational, liquidity and systemic risk has not identified any significant changes during 2022.

The Group continues to monitor the market and data from the various industry working groups managing the transition to the new reference rates, including in particular communications from the regulators responsible for LIBOR rates (including the Financial Conduct Authority (FCA) and the Commodity Futures Trading Commission) and communications of the National Working Group regarding a substitute for the WIBOR rate.

Operational risk

The Group has reviewed its existing commercial and financial contracts and has not identified a risk of termination of contracts that are material to the continuation of Group's business, based on benchmarks subject to the IBOR Reform. The Group has neither identified a risk of incurring additional costs or incurring losses or lost benefits due to the lack of adequate provisions in existing commercial and financial contracts specifying the rules for the continuation of these contracts in the event that the benchmark is not published ("fallback clauses").

The Group plans to agree potential amendments to existing contracts to enable the exemptions in IFRS 9 to be applied.

Some commercial and financial contracts still require a change in the provisions relating to benchmarks for which termination dates of their publication have been determined. If bilateral negotiations with Group's counterparties are not successfully concluded before the termination of publication of the existing benchmarks in the financial contracts, there is uncertainty about the future interest rate. That situation leads to additional interest rate risk that was not considered at the time of contracting and is not addressed in Group's interest rate risk management strategy. The Group currently assesses this risk as low, as the applicable USD LIBOR ON, 1M and 3M quotes has been assured at least until 30 June 2023 and WIBOR rate till the end of 2024.

In addition, if there is no agreement on the implementation of the IBOR Reform for existing contracts, there is a risk of disputes with counterparties which may result in contract termination and additional costs. The Group works closely with its counterparties and assesses the probability of such risk as low.

With regard to the WIBOR rate , there is still a risk that the administrator of this rate, GPW Benchmark S.A. will develop a replacement that will be substantially different from the current one. Nevertheless, the extent of potential changes in this respect and their impact on the Group financial statements at the moment is too early to estimate.

Liquidity risk

The current IBOR rates and the alternative benchmarks to be adopted by the Group are significantly different. IBOR rates are forward-looking rates set for a specific period (e.g. three months) at the beginning of such period and take into account the credit spread in the interbank market. Alternative benchmarks are typically risk-free overnight rates published at the end of the day that do not include a credit spread.

These differences will create additional uncertainty regarding interest payments at variable rates, however in Group's opinion will not have a material impact on liquidity management.

Systemic risk

The Group has identified the need to implement replacements for the currently acquired market data used in the IT system to manage risk in transactions concluded on financial market. The Group has taken activities to perform the necessary system work to ensure amending relevant system updates on time. There is a risk that such implementation will not be fully operational on time, resulting in the need for additional manual procedures involving operational risk.

Transition process to alternative reference rates

Considering its financial liabilities, the Group uses as at 31 December 2022 the following interest rate benchmarks: LIBOR USD ON, 1M, 3M. The IBOR Reform relates to the following Group’s financial instruments: bank loans and bonds.

Throughout 2022, the Group used a variety of products based on the reformed WIBOR and EURIBOR indexes under the existing terms and conditions.

Detailed information of non-derivative financial instruments for which a transition to alternative reference rates will be made in 2023 are performed below.

In new trade and financial assets and liabilities which termination is longer than announced dates of publication LIBOR USD and WIBOR and where there is a reference to a variable interest rate, the general provisions for an alternative benchmark are applied or such benchmarks whose quotes are assured are used.

The few existing international trade contracts used penalty interest formulas for late payment based on USD LIBOR which were supplemented by the provisions of fallback clauses. Similar work has begun to incorporate the provisions of fallback clauses into commercial contracts where the WIBOR rate appears.The IBOR Reform has no material impact in relation to Group's cash flow and fair value hedge accounting.

Other initial application of new amendments to the existing standards effective for the financial statement for 2022 did not have a material impact on the ORLEN Group's 2022 financial statements.

Standards adopted by International Accounting Standards Board (IASB), approved by the European Union but not yet effective 

• IFRS 17 “Insurance Contracts” including amendments to IFRS 17 issued by IASB on 25 June 2020 - adopted by the EU on 19 November 2021 (effective for annual periods beginning on or after 1 January 2023),
• Amendments to IFRS 17 “Insurance contracts” – Initial Application of IFRS 17 and IFRS 9 – Comparative Information, adopted by the EU on 8 September 2022 (effective for annual periods beginning on or after 1 January 2023),
• Amendments to IAS 1 “Presentation of Financial Statements” – Disclosure of Accounting Policies adopted by the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023),
• Amendments to IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” – Definition of Accounting Estimates adopted by the EU on 2 March 2022 (effective for annual periods beginning on or after 1 January 2023),
• Amendments to IAS 12 “Income Taxes” – Deferred Tax related to Assets and Liabilities arising from a Single Transaction adopted by the EU on 11 August 2022 (effective for annual periods beginning on or after 1 January 2023).

Standards adopted by International Accounting Standards Board (IASB), waiting for approval by the European Union

• Amendments to IAS 1 “Presentation of Financial Statements” - Classification of Liabilities as Current or Non-Current (effective for annual periods beginning on or after 1 January 2023),
• Amendments to IAS 1 “Presentation of Financial Statements” - Non-current Liabilities with Covenants (effective for annual periods beginning on or after 1 January 2024),
• Amendments to IFRS 16 “Leases” - Lease Liability in a Sale and Leaseback (effective for annual periods beginning on or after 1 January 2024),
• IFRS 14 “Regulatory Deferral Accounts” - the European Commission has decided not to launch the endorsement process of this interim standard and to wait for the final standard,
• Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred indefinitely until the research project on the equity method has been concluded).

The Group expects that the above-mentioned standards will not have a material impact on the consolidated financial statements of ORLEN Group.

The Group intends to adopt new IFRS standards listed above that are published by the International Accounting Standards Board, but not effective as at the date of publication this financial statements, in accordance with their effective date.

The above changes affecting on assets and liabilities and financial result of Group concerned mainly:

1. Taking into account the final results of impairment tests of fixed assets:
   
   - net impact on assets (PLN 2,943 millions) the changes resulted mainly from the valuation of the assets of: the ORLEN Unipetrol Group (PLN 687 million), ORLEN Lietuva (PLN 1,128 million) and ORLEN (PLN 951 million, including PLN 585 million relating to former PGNiG and valuation of mining operations in Poland and Pakistan), additional information in note 14.4.
2. Recognition of compensations due to electricity trading companies as a result of the use of frozen electricity prices in settlements with eligible customers: reduction of cost of sales and trade receivables in the amount of PLN 98 million (mainly ORLEN);
3. Revaluation of inventory impairment allowances, decrease in cost of sales and increase in inventory by PLN 485 million;
   
   
4. 4. Revaluation of provisions for onerous contacts in the amount of PLN (152) million in connection with the introduction of the act on freezing energy prices from 2023;
5. Recognition of revenues and costs affecting the items of sales revenues, cost of sales, trade receivables and other trade receivables and payables and other payables;
6. Deferred and current tax adjustments resulting from the above points as well as from the need to recognise a new tax on windfall profits in the Czech Republic;
7. Other adjustments made as part of the audit of the statements of the ORLEN Group companies.

7.1. Group structure

SELECTED ACCOUNTING PRINCIPLES

Basis of consolidation

The consolidated financial statements of the Group include assets, liabilities, equity, income, expenses and cash flows of the Parent Company and its subsidiaries that are presented as those of a single economic entity and are prepared as at the same reporting period as separate financial statements of the Parent Company and using uniform accounting principles in relation to similar transactions and other events in similar circumstances.

Where necessary, adjustments are made to separate financial statements to ensure consistency between the accounting policies applied by a given entity and those applied by the Group.

Subsidiaries are consolidated with the full method from the acquisition date (the date of assuming control of the company) until the date the control is lost, except for subsidiaries whose financial data is immaterial, therefore they are not consolidated and are valued at purchase price.

Acquisition of control of an entity representing a business is accounted for with the acquisition method. Identifiable acquired assets and assumed liabilities of an acquiree which is a business within the meaning of IFRS 3 are recognised as at the acquisition date and are measured at fair value. The excess of the acquisition cost (the consideration transferred (at fair value), any non-controlling interest in the acquiree measured in accordance with IFRS 3, and − in a business combination achieved in stages − the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree) over the net of the acquisition-date fair value of the identifiable assets acquired and the liabilities assumed, is recognised as goodwill. If the acquisition cost is lower than the net of the acquisition-date fair value of the identifiable assets acquired and the liabilities assumed, the difference is recognised as gain in profit or loss as at the acquisition date (gain on bargain purchase). The transaction costs are recognised in profit or loss when incurred and in the case of issue costs, they are recognized as a decrease in equity.

The subsidiaries are consolidated using full consolidation method, non-controlling interests shall be presented in the consolidated statement of financial position as non-controlling interest, separately from the equity of the owners of the Parent Company.

If the Parent loses control of a subsidiary in a reporting period, the consolidated financial statements account for the subsidiary's results for such part of the reporting year in which control was held by the Parent.

Joint operations are presented by recognition of respective share in assets, liabilities, revenues and cost.

The joint ventures as well as investments in associates are accounted for under equity method. The Group's share in net profit or loss of the investee is recognised in the line Share in profit from investments accounted for using the equity method as a part of the result of operating activity. For investments in associates - the Group has a significant influence if it holds, directly or indirectly (i.e. through subsidiaries), from 20% to 49% of the voting rights of an entity, in which the Group invested, unless it can be clearly stated otherwise. If an entity holds, directly or indirectly (e.g. through subsidiaries), 20% or more of the voting power of the investee, it is presumed that the entity has significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the entity holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the entity does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence.

PROFESSIONAL JUDGEMENT

Investments in subsidiaries and jointly controlled entities

The Group, regardless of the nature of its involvement in the entity (the entity in which it invested) defines its status by assessment, whether it controls the entity in which the investment was made, and whether it has a joint control in a joint venture, after consideration of all the facts and circumstances.

ORLEN as the Parent Company is a multi-segment entity, appropriately allocated to all operating segments and corporate functions.

The list of entities included in the lower-level Capital Groups presented in the consolidation diagram

7.2. Changes in shareholder structure of the ORLEN GROUP from 1 January to 31 December 2021

• on 17 February 2022, the name of the company was changed from UAB Mockavos terminalas to UAB ORLEN Mockavos terminalas;
• on 7 March 2022, Polska Press Sp. z o.o. acquired 100% of shares in a limited liability in PL24 Sp. z o.o.;
• on 17 March 2022, the transfer of ownership of 10 registered shares in the share capital of Konsorcjum Olejów Przepracowanych - Organizacja Odzysku Opakowań i Olejów S.A. of shares was made to ORLEN Południe S.A, as a result of which the share of ORLEN Południe S.A. in the share capital of the Konsorcjum Olejów Przepracowanych - Organizacja Odzysku Opakowań i Olejów Spółka Akcyjna increased to 90%;
• on 5 May 2022, the Extraordinary General Meeting of ORLEN Neptun I sp.z o.o. adopted a resolution on making an in-kind contribution in the form of shares owned by ORLEN and representing 100% of the share capital of ORLEN Neptun II - ORLEN Neptun XI. In connection with the above, ORLEN Neptun I sp.z o. o. has its own capital group, which includes 10 ORLEN Neptun companies, II-XI. Thus, ORLEN Neptun II-XI companies no longer report directly to ORLEN.
• on 25 May 2022, a change of name from ENERGA OZE S.A. to ENERGA Wytwarzanie S.A was registered in the National Court Register;
• on 26 May 2022, a new company was established in the ENERGA Group in the Wytwarzanie Business Line - Energa LBW 1 Sp. z o.o.;
• on 1 August 2022, a merger ORLEN with Grupa LOTOS took place and the acquisition of companies from the former Grupa LOTOS, which at the time of the merger became part of the ORLEN Group, i.e: LOTOS Oil Sp. z o.o., LOTOS Asfalt Sp. z o.o, LOTOS Kolej Sp. z o.o., LOTOS Serwis Sp. z o.o., LOTOS Petrobaltic Group, LOTOS Upstream Group, LOTOS SPV 3 Sp. z o.o., LOTOS SPV 4 Sp. z o.o., LOTOS SPV 5 Sp. z o.o. , LOTOS SPV 6 Sp. z o.o., LOTOS Green H2 Sp. z o.o., LOTOS Lab Sp. z o.o., LOTOS Ochrona Sp. z o.o., LOTOS Straż Sp. z o.o More information in note 7.3.1;
• on 19 August 2022, a new company was established: ORLEN Trading Switzerland GmbH with its headquarters in Switzerland. The company was registered on 24 August 2022;
• on 2 November 2022, a merger of ORLEN with PGNiG S.A., took place and the acquisition of companies from the former PGNIG Group, which at the time of the merger became part of the ORLEN Group, i.e: Exalo Drilling Group, Gas Storage Poland Group, GEOFIZYKA Toruń S.A., PGNiG Obrót Detaliczny Group, PGNiG Serwis Group, PGNiG Supply & Trading Group, PGNiG Technologie Group, PGNiG TERMIKA Group, PGNiG Upstream North Africa B.V., PGNiG Upstream Norway AS, Polska Spółka Gazownictwa Group, Polski Gaz Towarzystwo Ubezpieczeń Wzajemnych Group, PGNiG GAZOPROJEKT S.A., Gas-Trading S.A,Group, PGNiG SPV6 Sp. z o.o., PGNiG SPV7 Sp. z o.o., PGNiG Upstream Polska Sp. z o.o., PGNiG SPV9 Sp. z o.o., PGNiG SPV10 Sp. z o.o., LLC Karpatgazvydobuvannya, Solgen Sp. z o.o. More information in note
   7.3.2.; 
• on 30 November 2022, ORLEN signed with Aramco Overseas Company B.V. the promised agreement for the sale to Aramco of 30% of shares in Rafineria Gdańska Sp. z o. o. As a consequence, the Group recognized in other operating activities the result on the sale of shares in Rafineria Gdańska in the amount of PLN (527) million, which is the difference between the value of 30% of net assets as at the transaction date and the value of the payment received from Aramco. The investment in Rafineria Gdańska maintained after the transaction is recognized by the Group as a joint operation. More information in note 7.4 and 13.11;
• on 1 December 2022, ORLEN Unipetrol RPA s.r.o. acquired 100% of shares in Normbenz Magyarorság Kft with its registered office in Budapest. More information in note 7.3.3;
• on 30 December 2022, a change in the name of PGNiG SPV 8 sp. z o.o. was registered with the National Court Register on PGNiG Upstream Polska Sp. z o. o.

Information on jointly controlled entities and associates is presented in note 14.3.

7.3. Settlement of acquisition of merger with Grupa LOTOS S.A. in accordance with IFRS 3 Business Combinations

7.3.1. Settlement of acquisition of Grupa LOTOS shares in accordance with IFRS 3

On 1 August 2022, the District Court for Łódź-Śródmieście in Łódź, XX Commercial Division of the National Court Register, registered the merger of ORLEN with Grupa LOTOS S.A. ("Grupa LOTOS"), ("Merger") and amendments to the Articles of Association of ORLEN adopted by the Extraordinary General Meeting of ORLEN on 21 July 2022, including the increase of the Company's share capital and changes in the composition of the Supervisory Board and the Management Board of the Company.

The merger took place pursuant to Article 492 § 1(1) of the Code of Commercial Companies, therefore, on 1 August 2022, i.e. on the date of recorder in the business register of the National Court Register by the district court, ORLEN took over all the assets of Grupa LOTOS and, subject to exceptions resulting from legal regulations, entered into all rights and obligations of LOTOS Group under universal succession. In particular, as of the Merger date, the permits, concessions and licenses granted to LOTOS Group were transferred to the Company, unless a relevant act of law or decision awarding a specific permit, concession, license or exemption provide otherwise. At the same time, the share capital of the Company was increased by issuing shares, issued by the Company to Grupa LOTOS’ shareholders (“Merger Shares”).

Share capital was increased from PLN 534,636,326.25 to the amount of PLN 783,059,906.25 by Merger Shares issuing, 198,738,864 E series ordinary bearer shares with the nominal value of PLN 1.25 each, with the aggregate nominal value of PLN 248,423,580. Shareholders of Grupa LOTOS will be allotted Merger Shares: in accordance with the agreed share swap ratio, under which the shareholders of Grupa LOTOS received 1.075 ORLEN shares (Merger Shares) for 1 share of Grupa LOTOS.
Due to the fact that the number of allotted shares had to be a natural number, in exchange for non-allotted fractions of the Merger Shares resulting from the application of the Share Swap Ratio, the shareholders of Grupa LOTOS received appropriate additional payments in cash.

Reasons and strategic goals for the Merger

LOTOS Group, which was taken over by ORLEN as part of the Merger, was the second largest oil company in Poland, dealing in the extraction and processing of crude oil as well as wholesale and retail sale of petroleum products. Grupa LOTOS was a producer and supplier of, among others, unleaded petrol, diesel fuel, heating diesel oil (light fuel oil), aviation fuel and heavy fuel oil. The corporation also specializes in the production and sale of lubricating oils and asphalts. The companies from the former LOTOS Group, which at the time of the Merger became part of the ORLEN Group, are involved in the extraction of hydrocarbons in the Polish Exclusive Economic Zone of the Baltic Sea, as well as conducting exploration and production works in the field of exploitation of crude oil fields within the area of the Norwegian Continental Shelf and on the territory of Lithuania.

The merger transaction with Grupa LOTOS is the next step in the ORLEN Group's strategy of building a strong and diversified multi-energy corporation, capable of confronting energy transition, assuming a gradual abandonment of hydrocarbons and conventional fuels in favour of new and more sustainable energy sources. The merged corporation will have greater opportunities to diversify its business and compete against the leading actors in the European and global market, as well as implementing investments supporting the corporation's efforts to achieve operating excellence in the existing areas of its operations, including oil extraction and refinery production. By 2030, the ORLEN Group is to become one of the largest integrated producers of petrochemicals in Europe. What is more, in response to the challenges of transformation, the corporation plans to invest significant funds in the development of plastics recycling technologies. In addition, through the merger, the ORLEN Group implements its strategic goals aimed at maintaining and strengthening its position as a regional leader in the retail sector, with more than 3,500 petrol stations in 7 Central and Eastern European markets, with an extensive network of electric vehicle charges. At the same time, the merged corporation will have the scale of operations and means necessary to develop in the most innovative and often not yet commercialised areas such as the hydrogen technologies. Here the competence and assets of Grupa LOTOS would be of key importance. As a result, the completed merger with Grupa LOTOS and the related initiatives will contribute to increasing energy security both of Poland and the entire region, which is of crucial importance given the current geopolitical context.

Meeting the required conditions for the Merger

Key conditions that had to be met in order to complete the merger with Grupa LOTOS S.A. were as follows:

1. adopt relevant merger resolutions by Grupa LOTOS’ General Meeting of containing, in particular, consent to the Merger Plan and approve the proposed amendments to ORLEN’s Statutes in connection with the merger - adopted on 20 July 2022;
2. adopt relevant merger resolutions by the ORLEN’s General Meeting, including in particular, the increase of the ORLEN’s share capital in connection with the Merger, on establishing consolidated text of Statues inclusive of the amendments made in connection with the Merger, as an amendment to the Statues, and on the consent to admit and introduce the merger shares to be traded in the regulated market – adopted on 21 July 2022;
3. compliance with the requirements set out in the European Commission’s Decision of 14 July 2020 and implementation of Remedies for divestment and performance of part of the behavioural obligations (remaining part of obligations is extended over time in the post-Merger period) - described below;
4. obtaining the approval of the Council of Ministers of the Republic of Poland for the Merger as required by Article 13(5) in conjunction with Article 13(1)(9) and 13(1)(23) of the Act of the Management of State Assets- the Council of Ministers approved on 19 July 2022;
5. no objection being raised by the supervising authority with regard to the secondary acquisition by the State Treasury of a major stake in the Acquiring. Company- the decision regarding the lack of objection was issued on 27 June 2022.
   
   

Compliance of the requirements set out in the European Commission’s Decision and implementation of Remedies

On 27 February 2018, a letter of intent was signed between the Company and the State Treasury on concentration between the Company and Grupa LOTOS. Carrying out a concentration in accordance with the applicable regulations required the consent of the European Commission. As a result of the proceeding, on 14 July 2020, the European Commission issued a positive conditional decision on the Concentration pursuant to Art. 8 sec. 2, second paragraph of Council Regulation (EC) No. 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation) (Journal of Laws of the EU. L No. 24, p. 1). In connection with the above, the Company was obliged to implement the Remedies specified in the decision in order to prevent the occurrence of negative effects of the planned concentration on competition in the relevant markets. Remedies included commitments of structural and behavioural nature, relating to the structure and policy of the companies participating in the concentration - ORLEN and Grupa LOTOS, including commitments to conclude agreements also covering divestments of assets in following areas: (i) fuel production and wholesale operations; (ii) fuel logistics; (iii) retail activity; (iv) aviation fuel activities; (v) biofuel production and (vi) asphalt market. Remedies were found to be an integral part of the decision and a necessary condition for the concentration. To implement them, the Company and Grupa LOTOS entered into a number of preliminary or conditional agreements obliging the Company and Grupa LOTOS to make certain divestments ,which were approved by European Commission on 20 June 2022, thus allowing for finalization of the merger with Grupa LOTOS. Implementation of the Remedies, including the conclusion of final contracts with individual buyers and, depending on the case, the entry into force of conditional contracts were to take place within 6 months from the day of their approval by European Commission.

As at the date of preparation of these consolidated financial statements, all Remedial Measures were implemented.

In order to implement Remedies in fuels production market and fuels wholesales market area following agreements were concluded by the Company on 30 November 2022 with:

1. Aramco Overseas Company B.V. („Aramco”) promised sale contract for Aramco 100% of shares in LOTOS SPV 1 Sp. z o.o. (“LOTOS SPV 1”), to which as a result of division of LOTOS Paliwa Sp. z o.o. (“LOTOS Paliwa”) on 31 October 2022 an organized part of the enterprise of this company, covering the activity in the field of wholesale fuel sales, was contributed, for a price consisting of a fixed element in the amount of approx. PLN 1 billion and a variable element, depending on the amount of net debt and working capital of LOTOS SPV 1 on the day of signing of promised contract;
2. Aramco promised sale contract for Aramco 30% of shares in Rafineria Gdańska Sp. z o.o. (“Rafineria Gdańska”), to which the Gdańsk refinery (“Refinery”) was contributed in kind, for price, consisting of a fixed element in amount of approx. PLN 1.15 billion and a variable element, dependant on the amount of net debt and working capital of Rafineria Gdańska on the day of signing of promised agreement. Additional information in note 7.4,
3. Aramco i Rafineria Gdańsk joint venture agreement (“JV Agreement”) specifying the terms of cooperation of partners in Rafineria Gdańska, including the corporate governance adopted therein and the powers granted to them;
4. LOTOS SPV 1 and Rafineria Gdańsk processing agreement (“Processing Agreement”), which will apply during the term of JV Contract. On the basis of Processing Agreement, Rafineria Gdańska will render services for ORLEN and LOTOS SPV 1 (“Processors”) related to with the processing of raw materials supplied by the Processors for the purpose of obtaining refinery products for Processors. Each of the Processors will own the raw materials it supplies and the refinery products obtained from these raw materials;
5. LOTOS SPV 1 and Rafineria Gdańska Offtake Agreement, which will apply during the term of JV Contract. On the basis of Offtake Agreement LOTOS SPV 1 will be entitled, but not obliged, to purchase certain amounts of diesel oil and unleaded gasoline from the Company each year (the "Products");
6. LOTOS SPV 1 a framework agreement specifying the terms and conditions of maintaining by the Company on commission LOTOS SPV 1 mandatory stocks of crude oil, applicable in the period of 10 years from the date of its entry into force;
7. LOTOS SPV 1 framework agreement specifying the terms and conditions of the Company's commissioned services by LOTOS SPV 1 railway logistics outsourcing services, valid during the term of the Processing Agreement and the Offtake Agreement.

As part of the implementation of Remedial Measures in the area of the biofuels market on 3 October 2022, the Group signed 100% share sale agreement in LOTOS Biopaliwa to Rossi Biofuel Zrt. The 100% share sale agreement in LOTOS Biopaliwa is accompanied by 4 year contract, which was entered into by ORLEN for purchase of biocomponents produced in Czechowice-Dziedzice.

In order to implement Remedies in retail fuel market area on 30 November 2022, the Company signed with:

1. MOL Hungarian Oil and Gas Public Limited Company („MOL”) promised sales contract for MOL 100% shares in LOTOS Paliwa, for price, consisting of a fixed element of approximately USD 610 million and a variable element dependent on the amount of net debt and working capital of LOTOS Paliwa on the date on which the promised contract was signed.
2. LOTOS Paliwa a contract for the sale of fuels to this company, valid for a period of up to 8 years from the date of its entry into force.
3. LOTOS Paliwa license agreement specifying the terms of use by LOTOS Paliwa of trademarks used at LOTOS stations for the purposes of their rebranding after the acquisition of shares in LOTOS Paliwa by MOL, in force for a period of 5 years from the date of its entry into force.

In addition, on 2 November 2022 was registered division of LOTOS Paliwa, as a result of which, to LOTOS SPV5 Sp. z o.o. an organized part of the enterprise was contributed in the form of part of the service stations not covered by the Remedies. 

In order to implement Remedies in aviation fuels market area on 30 November 2022 the Company signed with Aramco promised sale contract for Aramco all shares held by the Company in LOTOS-Air BP Polska sp. z o.o. („LOTOS-Air BP”). In connection with the above, all the conditions for the entry into force of the agreements concluded between the Company and LOTOS-Air BP on 12 January 2022, i.e.:

1. conditional sales contract for LOTOS-Air BP aviation fuels, in force for a period of up to 15 years from the date of its entry into force;
2. conditional aviation fuel composition agreement LOTOS-Air BP at the Company's fuel terminal, valid for a period of up to 15 years from the date of its entry into force;
3. conditional agreement for operational support services in the event of force majeure between ORLEN, ORLEN Aviation and LOTOS-Air BP valid for a period of up to 15 years from the date of its entry into force.

In order to implement Remedies in fuels logistics market area following agreements, the following events took place:

1. On 1 December 2022, ORLEN and LOTOS Terminale S.A. headquartered in Czechowice Dziedzice (“LOTOS Terminale”) with the participation of Unimot S.A concluded an agreement on the Transfer of an Organized Part of the Enterprise under which ORLEN contributed in kind to LOTOS Terminale four fuel depots located in Gdańsk, Szczecin, Gutków and Bolesławiec.
2. On the same day, an agreement was concluded between ORLEN, Unimot S.A. and LOTOS Terminale regarding the provision of real estate and settlement of expenditures related to the implementation of investments in the construction of a fuel depot in Szczecin.
3. On 7 April 2023 a disposition agreement was concluded between ORLEN S.A. and Unimot Investments spółka z ograniczoną odpowiedzialnością ("Unimot Investments"), which transferred on Unimot Investments 100% shares in LOTOS Terminale. At the same time conditional fuels depot agreement signed on 12 January 2022 entered into force between ORLEN and Unimot Investments, which allows ORLEN to use the warehouses in fuels depots located in Gdańsk, Szczecin, Gutkowo and Bolesławiec belonging to LOTOS Terminale, concluded for a period of 10 years starting from the date of its entry into force;

In order to implement Remedies in bitumen market area the following events took place:

1. On 2 November 2022 division was registered of Rafineria Gdańska Sp. z o.o. (formerely LOTOS Asfalt) as result of which, to company LOTOS SPV2 Sp. z o.o. an organized part of the enterprise in the form of the Rafineria Gdańska sp. z o.o. company's Bitumen Business was contributed. In addition, the name of the company was changed from LOTOS SPV 2 to Uni - Bitumen Sp. z o.o. On 15 November 2022 ORLEN signed a contribution-in-kind agreement based on which shares in Uni-Bitumen Sp. z o.o. have been contributed to LOTOS Terminale, resulting in the company LOTOS Terminale became the owner of 100% of the company's shares.
2. On 7 April 2023 was signed a disposition agreement between ORLEN S.A., and Unimot Investments spółka z ograniczoną odpowiedzialnością (“Unimot Investments”), transferring on Unimot Investments 100% of shares in LOTOS Terminale. At the same time, entered into force signed on 12 January 2023  bitumen sales agreement for Uni-Bitumen Sp. z o.o., which will be concluded for a period of 10 years from its entry into force with option to extend this period by another two 5 years periods on terms previously agreed between parties. 

Pursuant to the obligations resulting from the decision of the European Commission of 14 July 2020, a number of protective mechanisms were introduced in relation to the divested activities (excluding the sold activities including shares in Rafineria Gdańska) to separate the activities of the companies covered by the Remedial Measures from other activities of the ORLEN Group, which were expected to function until the final disposal of these investments. In connection with above, the Group conducted a detailed analysis of the facts and circumstances related to the functioning of the above-mentioned protective mechanisms in order to determine whether the criteria for exercising control specified in IFRS 10 are met.

In particular, the protection mechanisms included, among others:

• obligation to maintain the divested activities in a non-deteriorated condition,
• obligation to separate the activities of the divested companies from other activities of the ORLEN Group,
• obligation to limit the flow of confidential information related to the Divested Activities.

On the basis of analysis, the Group performed professional judgment, and assessed that as at the merger date , as well as, during the period to sale of the companies, that were subject to divestment as part of the implementation of the Remedies, the Group did not control the companies according to MSSF 10, with the exception of Rafineria Gdańska, to which the above mechanisms did not apply. As a result, on the day of merger, the Group classified investments in LOTOS Terminale S.A., LOTOS Infrastruktura S.A., RCEkoenergia Sp. z o.o., LOTOS SPV 2 Sp. z o.o., LOTOS Paliwa sp.z o.o., LOTOS SPV 1 Sp. z o.o., LOTOS Biopaliwa sp.z o.o., LOTOS-Air BP Polska Sp. z o.o., as financial assets measured at fair value through profit or loss in accordance with IFRS 9 and were presented in position of other assets.

In addition, on the day of merger, the Group analysed the classification of the group of assets of Rafineria Gdańska Sp. z o.o. relating to the refining and bitumen (asphalt) activities as held for sale in accordance with IFRS 5. The groups of assets relating to the refining and asphalt activities were acquired by the Group solely for the purpose of sale as part of Remedial Measures, will be sold within 1 year and will be ready for sale in the short term following the acquisition date (slightly more than 3 months from the merger date). Thus, the Group assessed that, as at the merger date, they meet the criteria to be recognised as held for sale in accordance with IFRS 5. Refining activity after the sale of 30% of shares in Rafineria Gdańska Sp. z o. o. to Aramco will be covered by a joint venture agreement between ORLEN and Aramco and Rafineria Gdańska and, based on a separate analysis, the Group assessed that, as a consequence, the investment in Rafineria Gdańska maintained after the transaction will be recognised as a joint operation. Addittional information in note 7.4.

Additional agreements in connection with the Merger

ORLEN concluded a conditional framework sales agreement with MOL (“Framework Agreement”) as a result of which companies belonging to the ORLEN Capital Group will purchase from MOL to 144 fuel stations located in Hungary and to 41 fuel stations located in Slovakia for the total price not exceeding EUR 229 million (“Transactions”). The price is subject to be corrected as of the Transaction settlement day due to changes in the level of net debt and working capital of the acquiring assets in relation to their reference values. On 1 December 2022 as part of the implementation of the above agreements ORLEN Unipetrol RPA, concluded with MOL Hungarian Oil and Gas Public Limited Company purchase agreement of 100% of shares in Normbenz Magyarorság Kft, being owner of 79 petrol stations located in Hungary. More information in note 7.3.3.

Additionally ORLEN concluded with Saudi Arabian Oil Company a long term agreement on crude oil deliveries to the ORLEN Capital Group companies. On the base of the agreement,  after the merger ORLEN will secure deliveries of the crude oil from Saudi Arabian Oil Company to ORLEN Group in the amount from 200 to 337 thousand barrels daily.

ORLEN also concluded with Saudi Arabian Oil Company and Saudi Basic Industries Corporation a memorandum of understanding on cooperation to analyse, prepare and realize common investments in petrochemical segment. As potential areas of cooperation will be analysed, among others, development projects in olefins and olefin derivatives, including aroma derivatives, in Poland and in Central and Eastern Europe.

ORLEN also signed with Saudi Arabian Oil Company a memorandum of understanding on cooperation for the common analyses, preparation and realization of research and development projects, as well within the sustainable development technology.

Agreement with the State Treasury

On 20 July 2022 there has been signed an agreement between the Company and the State Treasury regarding the planned merger of the Company with Grupa LOTOS S.A. (“Agreement”).

The Agreement sets forth the Company’s declarations of intent not constituting a contractual obligation of the Company regarding: (i) realization of the energy policy of Poland for crude oil and liquid fuels (traditional) and (ii) continuation of employment policy towards employees of Grupa LOTOS, who will become employees of the Company’s capital group after the merger, assuring proper and safe operating of the workplaces belonging to Grupa LOTOS before the merger and also Company’s commitment to continue key investments that are realised by Grupa LOTOS before the Merger, indicated in the Agreement.

The parties of the Agreement assumes that after the merger of the Company with Grupa LOTOS the key investments of Grupa LOTOS, indicated in the Agreement, will be continued in the minimum scope specified in the Agreement (“Investment Commitments”). The Company declared that immediately after the Merger it will verify the conditions for continuation of these investments.

The Company declared also that after the Merger and subject to the exceptions described in the Agreement it will take steps towards: (i) diversifying of the supplies of natural resources, in particular crude oil and independence of Poland from Russian crude oil deliveries, (ii) strengthening of the Company's position on the production and distribution of liquid fuels (traditional) market while endeavouring to reduce their emissivity, (iii) development of the Company on the petrochemical products market, including searching for and undertaking investments, (iv) research and projects on the use of alternative fuels, as well as electromobility and (v) maintaining the proper operation of refinery in Gdańsk.

Declaration on the Company’s realization of the energy policy of Poland will be realised in the scope permitted by the generally applicable law and provisions of the Company’s Articles of Association.

The Agreement is not legally binding except for selected provisions regulating, among others, execution of the Investment Commitments, including the Company’s liability for breach of these obligations.

In case of culpable non-performance or improper performance of legally binding Investment Commitments by the Company and ineffective expiry of the deadlines provided by the parties of the Agreement to develop the recovery plan for non-performance or improper performance of the Investment Commitments, the Company will be obliged to pay contractual penalties to the State Treasury, which are in a precisely defined amount described in the Agreement.

Subject to the exceptions set out in the Agreement, it will remain in force for a period of 10 years from the date of its conclusion and will be automatically extended in the circumstances defined in the Agreement, for the period necessary for realization of the Investment Commitments. The Agreement entered into force in principle on the date of the merger of the Company with Grupa LOTOS, i.e. with the date of entry the merger in the relevant register.

In the Company’s opinion, as at the date of preparation of these consolidated financial statements, there is no risk that the conditions contained in an agreement with the State Treasury could not be met.

Provisional settlement of the transaction

The merger transaction with Grupa LOTOS is accounted for using the acquisition method in accordance with IFRS 3 Business Combinations. The transaction was made through an exchange of equity interests, where ORLEN increased the share capital by issuing shares, which were then allocated to the shareholders of Grupa LOTOS, therefore the Company assessed the facts and circumstances of the transaction in order to determine which of the merging companies is an entity poignant.

Based on its professional judgment, the Company assessed that it is the acquirer which obtained control over Grupa LOTOS through the merger transaction on 1 August 2022.

As at the date of preparation of these consolidated financial statements, the accounting for the merger has not been completed, and the process of measuring the acquired net assets to fair value is at a very early stage. Therefore, the Group presented provisional values ​​of identifiable assets and liabilities which, apart from the exceptions described below, correspond to their book values ​​as at the merger date. In particular, the Group decided to involve independent experts in order to carry out the valuation at fair value of the acquired assets and assumed liabilities. This valuation is currently performed by external experts and will affect the final fair value of the presented net assets under settlement. In addition, the Group is in the process of analysing and identifying and measuring to fair value potential contingent liabilities assumed in connection with the merger with LOTOS Group, resulting from regulatory, legal, environmental and other risks. In addition, the Group is in the process of analysing and identifying and measuring to fair value potential contingent liabilities assumed in connection with the merger with LOTOS Group, resulting from regulatory, legal, environmental and other risks. The Group plans to make the final settlement of the purchase transaction within 12 months from the merger date.

The provisional value of identifiable assets acquired and liabilities of LOTOS Group assumed recognised as at the acquisition date are as follows:

* The fair value of the payment made for the takeover in the amount of PLN 15,124 million is the sum of the nominal value of the issued Merger Shares in the amount of PLN 248 million, which increased the share capital and the surplus of the issue over nominal value in the amount of PLN 14,876 million, determined based on the market price of one share according to the closing price on the day of the merger in the amount of PLN 76.10

As part of the transaction, the previously existing relations between the ORLEN Group and the former LOTOS Group were settled at the estimated fair value of PLN 91 million, which corresponded to the net value of mutual receivables and liabilities between companies from both capital groups resulting mainly from trade agreements, as well as receivables and liabilities between ORLEN and Grupa LOTOS S.A., in progress that expired as at 1 August 2022 by operation of law as a result of registration of the merger. The Group presented under Other assets investments in companies covered by Remedial Measures classified as financial assets measured at fair value through profit or loss at the estimated fair value of PLN 3,640 million. The shown provisional fair value was estimated based on payments received to date from buyers as part of the implementation of Remedies. The fair value of investments in companies subject to Remedial Measures classified as financial assets measured at fair value through profit or loss, estimated as at the merger date, will change in subsequent reporting periods as the Group finally determines the final sale prices between parties of particular agreements.

Under the items Assets held for sale and Liabilities directly related to assets classified as held for sale, the Group recognised the assets and liabilities of Rafineria Gdańska relating to the Remedied bitumen and refining operations, at their book value as at the merger date.

The provisional fair value of the acquired trade receivables and other receivables as at the takeover date was PLN 5,662 million, with the gross value of these receivables resulting from the concluded contracts amounting to PLN 5,741 million as at that date. In accordance with the best estimates, the Group considers the repayment of the disclosed trade and other receivables in the amount of PLN 5,662 million as probable.

In relation to the data presented as part of the interim settlement of the merger with LOTOS Group in Consolidated Quarterly Report for IV quarter of 2022 as a result of additional reconciliations of mutual settlements between the ORLEN Group and previous LOTOS Capital Group at the merger day changes were made to selected items of net assets and the value of previously existing relationships. In addition, the estimated fair value of investments in companies covered by the Remedies was updated, which in relation to the implementation of Remedies, was based on payments received so far from buyers.

The provisional value of the identifiable assets acquired and liabilities assumed as at the merger date exceeds the fair value of the consideration transferred, therefore, taking into account the value of the previously existing connections, a gain on a bargain purchase of PLN 5,915 million was generated on the provisional settlement of the merger.

The profit on a bargain purchase may change within 12 months from the date of the merger as part of the final settlement of the merger with Grupa LOTOS S.A.

Taking into account the specific requirements of IFRS 3 Business Combinations with regard to the possibility of recognising a possible gain on a bargain purchase, the Group intends to review the procedures for identifying and measuring all items affecting the calculation of the result on the transaction before recognising the final settlement of the transaction.

The interchange parity under the merger plan has been established based on various generally accepted valuation methods. For the purposes of the valuation, it was assumed that both entities operate as independent companies, and the unit valuations do not take into account the expected remedies required by the European Commission or potential synergies. The valuation analysis included, among others, valuation based on market multipliers and valuation based on the sum of the parts method, historical stocks of both merging companies, including volume-weighted average prices and target prices estimated by independent stock market analysts. The established share exchange parity was approved by the shareholders of both merging entities under the merger resolutions. In the Group's opinion, to the occurrence of a profit on a bargain purchase was mainly from the recently observed underestimation of the market value of the shares of ORLEN and Grupa LOTOS (in the case of both companies, the book value of consolidated net assets as at the merger date significantly exceeded their capitalization).These valuations were mainly influenced by the macroeconomic situation and high market volatility caused by the Russian invasion in Ukraine. Moreover, the excess of the value of the acquired net assets over the estimated fair value of the consideration transferred was caused by the fact that in order to establish the exchange parity the effect of remedial measures was not taken into account as a one-off event., that will materialize after the merger of the two companies.

The impact of the merger with LOTOS Group on the Group's revenues and net results for the 2022 amounted to PLN 25,346 million and PLN 3,041 million, respectively. If the merger had taken place at the beginning of the period, the Group's sales revenues would have amounted to PLN 302,035 million and net profit (decreased by the bargain purchase of the LOTOS Group) would have been PLN 33,749 million.

The costs related to the issue of the Merger Shares as part of the merger with LOTOS Group amounted to PLN 25 million and were recognised as a decrease in equity under Share premium.

7.3.2. Settlement of merger with PGNiG S.A.in accordance with IFRS 3

Description of the transaction

On 2 November 2022, the District Court for Łódź-Śródmieście in Łódź, XX Commercial Division of the National Court Register, registered the merger of ORLEN with company Polskie Górnictwo Naftowe i Gazownictwo S.A. („PGNiG”) (“Merger”), the increase of the Company's share capital and amendments to the Articles of Association of ORLEN adopted by the Extraordinary General Meeting of ORLEN on 28 September 2022.

The merger took place pursuant to Article 492 § 1(1) of the Polish Code of Commercial Companies, therefore, on 2 November 2022, i.e. on the date of recorder in the business register of the National Court Register by the district court, ORLEN took over all the assets of PGNiG and, subject to exceptions resulting from legal regulations, assumed all rights and obligations of PGNiG under universal succession. In particular, as of the date of Merger, the permits, concessions and licenses granted to PGNiG were transferred to the Company, unless a relevant act of law or decision awarding a specific permit, concession, license or exemption provide otherwise. At the same time, the share capital of the Company was increased by issuing shares, issued by the Company to PGNiG’ shareholders (“Merger Shares”).

Share capital was increased from PLN 783,059,906.25 to the amount of PLN 1,451,177,561.25 by issuing of Merger Shares, i.e. 534,494,124 F series ordinary bearer shares of the Company with the nominal value of PLN 1.25 each, with the aggregate nominal value of PLN 668,117,655. Shareholders of PGNiG was allotted Merger Shares: in accordance with the agreed share swap ratio, under which the shareholders of PGNiG received 0.0925 ORLEN shares (Merger Shares) for 1 share of PGNIG, with reservation that the number of allotted shares was a natural number, while the non-allotted fractions of the Merger Shares resulting from the application of the share swap ratio was compensated to the shareholders of PGNiG by way of payouts.

Reasons and strategic goals for the Merger

PGNiG, over which was taken over by ORLEN as part of the Merger, together with companies indirectly and directly dependent on PGNiG, was one of the largest gas and oil companies in Central and Eastern Europe, conducting its activities, inter alia, in Poland, Germany, Norway, Great Britain, Czech Republic, Slovakia, Hungary, United Arab Emirates, Libya, Pakistan, Lithuania, the Netherlands, Belgium, Austria, Denmark, France, Croatia, Ireland, Colombia, Tanzania, Mozambique and Ukraine. The activities of the former PGNiG Group were exploration and production of natural gas and crude oil, import of natural gas, as well as storage, sale and distribution of gaseous and liquid fuels, and the production of heat and electricity. The former PGNiG Group, through its subsidiaries, also provided (in terms of projects) specialized geophysical and drilling and maintenance services all over the world. The main areas of activity of PGNiG and companies belonging to the former PGNiG Group included: exploration and production, trade and storage, distribution and production. The main activities of each of these areas of activity include: obtaining hydrocarbons from deposits and preparing them for sale, trading in natural gas in Poland and on foreign markets, supplying the distribution network with high-methane and nitrogen-rich gas, as well as small amounts of coke-oven gas to retail and corporate customers, and generation of heat and electricity, heat distribution and implementation of large power engineering projects, mainly focused on the use of natural gas as fuel.

The progressing energy transformation driven by dynamic technological development, improved cost effectiveness of generating energy from RES and alternative fuels, climate policy, the evolution of social preferences as well as greater corporate and public environmental awareness, represents a significant challenge for companies in the fuel and energy sector, as it assumes a gradual shift from hydrocarbons and conventional fuels to new and more sustainable energy sources. The merger of the Company with PGNiG creates new opportunities for coherent, coordinated development that will enable the businesses to diversify their operations and remain competitive in the long run. The merged corporation will pursue operating excellence in the existing areas of its operation and through the development of new segments. The consolidation of the Company and PGNiG will increase the impact of the merged group on the entire sector thanks to, among other things, the improved coordination of efforts aimed at decarbonising the Polish economy by 2050. In this context, the goal of the multi-utility group’s strategy will be to grow the natural gas segment, with natural gas being the key resource for the petrochemical and energy sectors. The merger between the Company and PGNiG, which took place following the integration of Grupa LOTOS into the Company, will result in optimizing and integrating the extraction of hydrocarbons by the merged company in the current markets and coordinated operations aimed at diversifying the sources of energy materials, including further development of the diversified LNG supply portfolio. The upstream consolidation will boost the efficiency of managing raw materials, mitigating the risk of volatility in the crude and gas markets and will allow for making better use of PGNiG’s potential in terms of prospecting and exploration, including drilling. In consequence, the merger will contribute to improving the energy security of Poland and the entire region, which is of crucial importance given the current geopolitical context.

The Merger of PGNiG and the Company follows global trends in the fuel and power industry: the consolidation of financial strengths and reconfiguration of production assets towards low-emission are considered as priority of the transformation strategy of regional and global companies. The merger will create a multi-utility group with diversified and complementary revenue structure, based on strong operating and financial supports, which will accelerate and facilitate the achievement of strategic objectives assumed in both entities.

Before the Merger, PGNiG's operations were divided into seven domestic branches: (i) Wholesale Trade Branch, (ii) Sanok Branch, (iii) Zielona Góra Branch, (iv) Geology and Mining Branch, (v) Odolanów Branch , (vi) the Central Measurement and Research Laboratory, and (vii) the Rescue Borehole Mining Station, as well as two foreign branches: (i) the Ras Al Khamah Branch in the United Arab Emirates and (ii) the Operator Branch in Pakistan. On the day of the Merger, an organizational (self-balancing) unit was separated in ORLEN operating under the name "Group of Branch Polskie Górnictwo Naftowe i Gazownictwo ORLEN" with its registered office in Warsaw, including the branch under the name "Polski Koncern Naftowy ORLEN Spółka Akcyjna - Central Branch of Polskie Górnictwo Naftowe i Gazownictwo ORLEN and Gazownictwo in Warsaw” and its subordinate branches corresponding to the previously operating branches of PGNiG specified above.

Meeting the required conditions for the Merger

Key conditions that had to be met in order to complete the merger with Polskie Górnictwo Naftowe i Gazownictwo S.A. were as follows:

1. adopt relevant merger resolutions by PGNiG’s General Meeting of containing, in particular, consent to the Merger Plan and approve the proposed amendments to ORLEN’s Statutes in connection with the merger - adopted on 10 October 2022;
2. adopt relevant merger resolutions by the ORLEN’s General Meeting, including in particular, the increase of the ORLEN’s share capital in connection with the Merger, on establishing consolidated text of Statues inclusive of the amendments made in connection with the Merger, as an amendment to the Statues, and on the consent to admit and introduce the Merger Shares to be traded in the regulated market – adopted on 28 September 2022;
3. obtaining the approval of the Council of Ministers of the Republic of Poland for the Merger as required by Article 13(5) in conjunction with Article 13(1)(9) and 13(1)(23) of the Act of the Management of State Assets - the Council of Ministers approved on 27 September 2022;
4. no objection being raised by the supervising authority with regard to the secondary acquisition by the State Treasury of a major stake in the Acquiring in the meaning of Article 3(7)(2) of the Act on the Control of Certain Investments - the decision regarding the lack of objection was issued on 22 September 2022;
5. no objection being raised by the concession-granting authority referred to Article 36a(8) of the Geological and Mining Law, until the merger of the Company and PGNiG in terms of the transfer of concessions held by PGNiG to the Company, within 60 days of notification to the concession-granting authority of the intention to merge the companies. The application for the transfer of the concessions was submitted by the Company on 30 August 2022.

In addition, in connection with the Merger, it is necessary to meet the requirements specified on 16 March 2022 in the Polish Office of Competition and Consumer Protection (UOKiK) conditional positive consent regarding concentration and implementation of a remedy. The positive decision of the Chairman of UOKiK was submitted under condition of implementing the remedy in the form of divesting or cause permanent and irreversible getting rid of control over Gas Storage Poland Sp. z o.o. (GSP), the subsidiary of PGNiG to an independent investor. ORLEN and PGNiG have 12 months from the date of merger for realization of the above mentioned remedy. The Company's obligations resulting from the decision of the President of UOKiK provides also an obligation to conclude an agreement entrusting GSP or its legal successor with the duties of a gas fuel storage system operator for a period of at least 10 years. GSP may be sold only to an entity that guarantees that the activity of the operator of the gaseous fuel storage system will be carried out taking into account the energy security of the state. GSP is the operator of the gas fuel storage system. After the merger, the natural gas storage facilities became the property of ORLEN.

Agreement with the State Treasury

On 27 September 2022 an agreement was signed between the Company and the State Treasury regarding the planned merger of the Company and PGNiG (“Agreement”), which entered into force on the day of the Merger.

The Agreement sets forth the Company’s declarations of intent not constituting a contractual obligation of the Company regarding: (i) realization of the energy policy of Poland to the extent which concerns the diversification of natural gas supply sources and the development of this fuel on the market and (ii) continuation of employment policy towards employees of PGNiG Group, who will become employees of the Company’s capital group after the merger, assuring proper and safe operating of the workplaces belonging to PGNiG Group before the merger and also Company’s commitment to continue, after merger of the Company with PGNiG, key investments that are realized or being prepared by PGNiG before the merger, indicated in the Agreement, in the minimum scope specified in the Agreement (“Investment Commitments”).

The Company declared also that after the merger and subject to the exceptions described in the Agreement - in the scope permitted by the generally applicable law and provisions of the Company’s Articles of Association - the strategy undertaken by the Company in the field of extraction, trade and distribution of natural gas will be consistent with the Energy Policy of Poland, which main thesis is to ensure long-term energy security of the Republic of Poland and diversification of natural gas supply sources.

The Agreement is not obligatory except for selected provisions regulating, among others, execution of the Investment Commitments, including the Company’s liability for breach of these obligations.

In case of culpable non-performance or improper performance of legally binding Investment Commitments by the Company and ineffective expiry of the deadlines provided by the parties of the Agreement to develop the recovery plan in order to remove such a state of non-performance or improper performance of the Investment Commitments, the Company will be obliged to pay contractual penalties to the State Treasury, which are in a precisely defined amount described in the Agreement.

Subject to the exceptions set out in the Agreement, it will remain in force for a period of 10 years from the date of its conclusion and will be automatically extended in the circumstances defined in the Agreement, for the period necessary for realization of the Investment Commitments. The Agreement entered into force in principle on the date of the merger of the Company with PGNiG, i.e. with the date of entry the merger in the relevant register.

In the Company’s opinion, as at the date of preparation of these consolidated financial statements, there is no risk that the conditions contained in an agreement with the State Treasury could not be met.

Provisional settlement of acquisition transaction

The merger transaction between ORLEN and PGNiG is accounted for using the acquisition method in accordance with IFRS 3 Business Combinations. Taking into consideration, that the transaction was made by exchanging equity interests, where ORLEN increased the share capital by issuing shares, which was then allocated to the shareholders of PGNiG, as well as the fact, that as a result of the transaction the State Treasury increased its share in the share capital and voting rights at the General Meeting of the Parent Company – ORLEN from approximately 31.14% to approximately 49.9%, the Group assessed the facts and circumstances related to the transaction in order to determine, which of the companies is the acquirer.

The analysis of the factors indicated by IFRS 3 in relation to identification of the acquirer, such as: the composition of the senior management of the combined entity, relative size of the merging capital groups, the composition of the management body and the terms of the transaction indicated, that ORLEN is the acquirer. As part of the analysis the Group also considered the issue of relative voting rights in the combined entity. Existing shareholders of ORLEN after the merger, still constitute the majority of the shareholders of the merged entity. The fact of strengthening the position of the State Treasury in the combined entity, without considering other circumstances, could constitute a premise for recognising a merger transaction with PGNiG as a reverse merger, and PGNiG company as acquirer. As part of the analysis carried out by the Group, the above was the only premise in favour of recognizing, that PGNIG acts as the acquirer. Nevertheless, given additional facts and circumstances, including importance and factual position of the State Treasury, as shareholder of ORLEN, as well as, PGNiG before and after the merger transaction, the Group did not recognise this premise as prevailing in relation to the other analysed factors indicating ORLEN as the acquiring entity.

In connection with the above, based on the professional judgment made, the Group assessed that ORLEN is the acquirer which, as a result of the Merger, gained control over PGNiG on 2 November 2022.

As at the date of preparation of these consolidated financial statements, the accounting for the merger has not been completed, and the process of measuring the acquired net assets to fair value is at a very early stage. Therefore, the Group presented provisional values of all identifiable assets and liabilities which correspond to their book values as at the merger date. In particular, the Group decided to involve independent experts in order to carry out the valuation at fair value of the acquired assets and assumed liabilities. This valuation will be performed by external experts in subsequent periods and will affect the final fair value of the presented net assets under settlement. In addition, the Group is in the process of analysing and identifying and measuring to fair value potential contingent liabilities assumed in connection with the merger with PGNiG Group, resulting from regulatory, legal, environmental and other risksThe Group plans to make the final settlement of the purchase transaction within 12 months from the merger date.

The provisional value of identifiable assets acquired and liabilities of PGNiG Group assumed recognised as at the acquisition date are as follows:

* The fair value of the payment for the acquisition in the amount of PLN 31,022 million is the sum of the nominal value of the issued Merger Shares in the amount of PLN 668 million, which increased the share capital and the surplus of the issue over nominal value in the amount of PLN 30,354 million, determined based on the market price of one share according to the closing price on the day of the merger in the amount PLN 58.04.

As part of the transaction, the previously existing relations between Grupa ORLEN and former PGNiG Group were settled at the estimated fair value of PLN 3,598 million, which corresponded to the net value of receivables and liabilities between companies from both groups, which were outstanding as at 2 November 2022, mainly due to commercial contracts, as well as receivables and liabilities between ORLEN and PGNiG S.A., which expired by operation of law as a result of registration of the merger.

The provisional fair value of the acquired trade receivables and other receivables as at the takeover date was PLN 8,414 million, with the gross value of these receivables resulting from the concluded contracts amounting to PLN 9,462 million as at that date. In accordance with the best estimates, the Group considers the repayment of the disclosed trade and other receivables in the amount of PLN 8,414 million as probable.

In relation to the data presented as part of the interim settlement of the merger with PGNIG Group in Consolidated Quarterly Report for 4th quarter of 2022 changes were made to selected items of net assets, mainly as a result of reclassifications to agreeing presentation financial data to accounting policy of ORLEN Group and additional reconciliations of mutual settlements between the companies from PGNIG Group at the merger.

The provisional value of the identifiable assets acquired and liabilities assumed as at the merger date exceeds the fair value of the consideration transferred, therefore, taking into account the value of the previously existing connections, a gain on a bargain purchase of PLN 8,251 million was generated on the provisional settlement of the merger.

The profit on a bargain purchase may change within 12 months from the date of the merger as part of the final settlement of the merger with PGNiG.

Taking into account the specific requirements of IFRS 3 Business Combinations with regard to the possibility of recognizing a possible gain on a bargain purchase, the Group intends to review the procedures for identifying and measuring all items affecting the calculation of the result on the transaction before recognizing the final settlement of the transaction.

The interchange parity under the merger plan has been established based on various generally accepted valuation methods. At the time the parity was established, the merger of ORLEN and LOTOS Group was still underway and the exact impact of the merger on ORLEN's quotations was not known. For the purposes of the valuation, it was assumed that the combined ORLEN group with LOTOS Group is the sum of both companies and that the potential future synergies associated with the merger exceed the costs associated with the implementation of remedial measures, and that the remedial measures will be implemented in accordance with the plan and arrangements with the European Commission. The analysis of the valuation prepared in order to determine the exchange parity as part of the merger with PGNiG included, among others, market-based valuation methods: historical share prices of both merging companies, including volume-weighted average prices and target prices estimated by independent stock market analysts, and valuation based on the analysis of comparable companies of the relevant to the operating segments of the merging companies. The established share exchange parity was approved by the shareholders of both merging entities as part of the merger resolutions. In the Group's opinion, the gain on a bargain purchase was mainly due to the underestimation of the market value of shares of Polish companies from the oil&gas sector in the period immediately preceding the merger. In the case of companies from this sector, the book value of consolidated net assets in the period in which the merger took place significantly exceeded their capitalization (market value). The low market valuations of Polish companies from the oil&gas sector were mainly influenced by a significant outflow of capital from the capital markets of Central Europe, caused, among others, by Russia's invasion of Ukraine and investors' concerns about the deterioration of the macroeconomic situation.

The impact of the merger with PGNiG on the Group's revenues and net results for the 2022 amounted to PLN 53,833 million and PLN 7,429 million, respectively. If the merger had taken place at the beginning of the period, the Group's sales revenues would have amounted to PLN 384,059 million and net profit (decreased by the bargain purchase of the PGNiG Group) would have been PLN 31,144 million.

The costs related to the issue of the Merger Shares as part of the merger with PGNiG Group amounted to PLN 27 million and were recognised as a decrease in equity under Share premium.

7.3.3. Settlement of acquisition of Normbenz shares in accordance with IFRS 3

On 1 December 2022, ORLEN Unipetrol RPA s.r.o. concluded agreements with MOL Hungarian Oil and Gas Public Limited Company (“MOL”), as a result of which ORLEN Unipetrol acquired 100% of shares in Normbenz Magyarorság Kft with its registered office in Budapest (“Normbenz”). As a result of the transaction, ORLEN Unipetrol became the owner of 79 petrol stations located in Hungary.

The concluded transaction is a consequence of earlier negotiations and agreements signed between ORLEN and MOL, in connection with the sale to MOL of stations belonging to the former LOTOS Group as part of the implementation of Remedies.

Under the agreements signed with MOL, the relevant companies from the ORLEN Unipetrol Group will acquire up to 41 stations located in Slovakia and up to 65 up more fuel stations located in Hungary.

As a result of the acquisition of shares in Normbenz Magyarorság, the Group will strengthen its presence on foreign markets by expanding the retail sales network to a new market, Hungary, where the Group has been present in the wholesale area so far.

Provisional settlement of the transaction

As at the date of preparation of these consolidated financial statements, the accounting settlement of the merger has not been completed, and the process of fair value measurement of the acquired net assets is at a very early stage. Therefore, the Group presented provisional values of all identifiable assets and liabilities that correspond to their book values as at the date of the combination. This valuation of the acquired assets and assumed liabilities will be performed in subsequent periods by independent experts engaged by the Group and will affect the final fair value of the net assets presented as part of the settlement. The Group plans to finalize the acquisition transaction within 12 months from the merger date.

The provisional value of acquired Normbenz identifiable assets and liabilities assumed recognised as at the acquisition date are as follows:

The net cash outflow related to the acquisition of Normbenz, being the difference between the net cash acquired (recognised as cash flows from investing activities) and the paid cash transferred as consideration, amounted to PLN 463 million.

The provisional goodwill recognized as a result of the acquisition presents mainly the value of the expected benefits and synergies in the Group as part of the implemented strategy for the development of the service station network in the markets of Central and Eastern Europe, which also assumes an increase in the share of foreign stations in the entire network. As at 31 December 2022, the Group has not identified impairment in relation to the recognised provisional goodwill.

If the acquisition of Normbenz shares took place at the beginning of the annual reporting period, the Group’s sales revenues would be PLN 278,516 million and net profit would be PLN 35,586 million. The share of Normbenz in the sales revenues and in profit generated by the ORLEN Group for 2022 was not material.

7.4. Change of shareholding structure in Rafineria Gdańska

On 30 November 2022 ORLEN signed with Aramco Overseas Company B.V. the final agreement on sales to Aramco of 30% of shares in Rafineria Gdańska Sp. z o. o., for the price which consists of fixed element in the amount of approximately PLN 1.15 billion and variable element, depending on the level of net debt and working capital of Rafineria Gdańska as on the day of signing of the final agreement.

Moreover, on 30 November 2022, the Company signed with:

• Aramco and Rafineria Gdańska a joint venture agreement specifying the terms of cooperation between shareholders in Rafineria Gdańska, including the corporate governance adopted therein and the powers granted to them, and
• LOTOS SPV 1 (current name: Aramco Fuels Poland ) and Rafineria Gdańska a processing agreement, which will be effective for contractual period of joint venture agreement.

The processing agreement grants ORLEN and Aramco Fuels Poland, as processors, access to the production capacity of the refinery in Gdańsk in the proportion of 70% and 30%, respectively, and excludes the possibility of using the refinery's production capacity by third parties. Thus, the processors have exclusive access to the refinery's production capacity and, consequently, derive substantially all economic benefits from the assets of Rafineria Gdańska. Moreover, based on the signed agreement, the processors are obliged to cover the fixed costs of the refinery's operation, even during its shutdown, so the liabilities incurred by Rafineria Gdańska are covered almost exclusively by cash flows obtained from the processors, which indicates that the processors have obligations arising from the liabilities of Rafineria Gdańska and are the mainly source of cash flows contributing to the continuity of this company's operations.

On the basis of the conducted analysis, the Group assessed that the maintained investment in Rafineria Gdańska, which was maintained, is a joint operation.

As a consequence, as at 30 November 2022, the Group recognised in other operating expenses the result on the sale of shares in Rafineria Gdańska in the amount of PLN (527) million, being the difference between the value of 30% of net assets as at the transaction date and the value of the payment received from Aramco. The value of the assets disposed amounted to PLN 7,779 million, including PLN 535 million of cash. The value of liabilities disposed amounted to PLN 2,218 million.

As indicated in note 7.3.1 as at the date of preparation of these consolidated financial statements, the process of fair value measurement of the acquired assets and assumed liabilities of Grupa LOTOS has not been completed, as a result of which the carrying amounts of Rafineria Gdańska, which are the basis for determining shown in the result on the sale of 30% of its shares to Aramco and the recognised values of assets and liabilities in a joint operation at the time of initial recognition. Therefore, the reported values of 70% of assets and liabilities as well as the currently recognized result on the sale of 30% of shares to Aramco may change as a result of the final settlement of the merger with Grupa LOTOS, for which the Group has 12 months from the merger date.

In accordance with the principles set out in IFRS 11 Joint Arrangements, as at 31 December 2022, the Group presented its participation in the joint operation regarding the investment in Rafineria Gdańska by recognition the relevant parts of assets, liabilities, revenues and costs resulting from the rights and obligations assigned to it under the signed agreements. Thus, the Group recognised in individual items of the consolidated statement of financial position 70% of the assets and liabilities of Rafineria Gdańska held and incurred jointly with the second processor (including production assets of the refining activity of this company) and an appropriate share in assets and liabilities to which other settlement rules based on joint operation agreements.

Value of assets and liabilities of the joint operation in Rafineria Gdańska recognised as at the moment of initial recognition (based on 70% share):

7.5. Change in the ORLEN Group structure after the end of the reporting period

• on 2 January 2023 ORLEN Unipetrol RPA s.r.o. acquired 100% of shares in REMAQ s.r.o. (REMAQ) with its headquarters in Otrokovice, Czech Republic. REMAQ is a leading company in the region of Central and Eastern Europe, focusing its core activity on chemical and mechanical recycling activities. Additional information about the acquisition in note
   18.2.
• on 1 March 2023 was registered with the National Court Register the change of name PGNiG SPV 7 sp. z o.o. to PGNiG BioEvolution sp. z o.o.
• on 7 April 2023, was registered with the National Court Register the change of name ORLEN Neptun I sp. z o.o to ORLEN Neptun sp. z o.o