32. Objectives and policies of financial risk management

The Group is exposed to financial risks, including:

• market risk (risk related to prices of raw materials and petroleum products, risk related to prices of CO₂ allowances, currency risk, interest rate risk),
• liquidity risk,
• credit risk related to financial and trade transactions.

The Parent operates a Financial Risk Management Office, which coordinates and exercises ongoing supervision of the Group's financial risk management processes.

Furthermore, the Price Risk and Trading Committee, appointed by the Management Board, supervises the work on development of policies and procedures, and monitors implementation of the Group's strategy in the area of its responsibilities. Specifically, the Committee provides opinions on or initiates key price and trading risk management initiatives, makes recommendations, and submits proposals for actions that require the Management Board's approval.

In addition, to ensure effective management of liquidity, debt structure and external finance raising by companies of the LOTOS Group, the Management Board has appointed the Liquidity Optimisation and Financing Coordination Team.

Financial risk management seeks to achieve the following key objectives:

• increase the probability that budget and strategic objectives are met,
• limit volatility of cash flows,
• ensure short-term financial liquidity,,
• maximise the result on market risk management within the assumed risk level limits,
• create value in the long-term.

With a view to implementing the above objectives, the Group has put in place relevant tools and developed a number of documents, which were then approved at the relevant decision-making levels and which define the framework for ensuring effectiveness and safety of the Company's financial activities, including:

• methodology for quantifying exposures to particular risks,
• acceptable financial instruments,
• methodology of assessing financial risk management,
• risk management limits,
• the reporting method,
• credit limits,
• documentation and operating standards,
• division of responsibilities in transaction execution, risk assessment and monitoring, and transaction recording and settlement between different organisational units.

The Parent monitors and reports all managed market risks on an ongoing basis. Grupa LOTOS S.A. uses liquid derivatives which can be measured by applying commonly used valuation models. The valuation of the underlying position and derivatives is based on market inputs provided by reliable sources. Opening positions with respect to risks which do not arise as part of the Company’s core business is prohibited.

On January 1st 2011, the Parent commenced hedge accounting with respect to cash flows (i.e. foreign-currency facilities used to finance the 10+ Programme, designated as hedges of future USD-denominated petroleum product sale transactions). In H2 2012, the scope of cash flow hedge accounting was extended to include newly established hedging relationships of the same nature.

32.1 Risk related to prices of raw materials and petroleum products

The Group considers risk related to prices of raw materials and petroleum products to be particularly important.

The Company identifies the following factors of this risk:

• volatility of the refining margin, measured as the difference between the liquid index of a reference petroleum product basket (e.g. aviation fuel, gasoline, diesel oil, fuel oil) and the liquid index of reference feedstock (e.g. Urals crude),
• volatility of prices with respect to the raw material and product inventory volumes deviating from the required levels of mandatory and operational stocks,
• volatility of differentials between the reference indices and indices used in commercial contracts (e.g. Urals-Brent differential, i.e. the difference between different types of crude oil),
• use of non-standard pricing formulae in commercial contracts.

In order to secure fixed petroleum product prices for future deliveries to customers, the Group has implemented a system whereby the risk can be transferred from the customers onto the Group. This requires execution of appropriate price risk hedging transactions and implementation of procedures providing protection against credit and operational risks.

As part of the measures discussed above, in 2012 and 2013, in connection with sales of bitumen components the Group entered into commodity swap contracts, which helped it maintain its original price risk profile. The swap contracts concluded in that period were partially settled in the year when they were entered into, and partly in the following year.

Open commodity swaps as at December 31st 2013:

Type of contract	Reference index	Contract execution period	Valuation period	Amount in tonnes in the valuation period	Average weighted price (USD/t)	Fair value (PLN ‘000)
						Financial assets	Financial liabilities
Commodity swap	3.5 PCT Barges FOB Rotterdam	Sep–Nov 2013	Mar–Oct 2014	20,989	572.90	736	-
Total						736	-

Open commodity swaps as at December 31st 2012:

Type of contract	Reference index	Contract execution period	Valuation period	Amount in tonnes in the valuation period	Average weighted price (USD/t)	Fair value (PLN ‘000)
						Financial assets	Financial liabilities
Commodity swap	3.5 PCT Barges FOB Rotterdam	Dec 2012	Jun–Nov 2013	14,092	591.25	-	(335)
Commodity swap	Gasoil .1 Cargoes CIF NWE / Basis ARA	Dec 2012	Jun–Nov 2013	(3,000)	915.00	45	(2)
Total						45	(337)

The Management Board points out that the importance of price risk management and of trading activities within the Group has been steadily growing. In connection with the need to manage new processes and to enhance the efficiency of ongoing operations in this area, and in order to improve the operational safety, the Group is implementing an ERTM IT system (Energy Trading and Risk Management).

32.1.1 Market risk sensitivity analysis: fluctuations in prices of raw materials and petroleum products

An analysis of the sensitivity as at December 31st 2013 and December 31st 2012 of financial transactions to the risk of fluctuations in prices of raw materials and petroleum products, assuming a +/- 10% price change is presented below:

PLN ’000	Carrying amount	Dec 31 2013 Change		Carrying amount	Dec 31 2012 Change
		10%	-10%		10%	-10%
Financial assets (1)	736	3,695	(3,695)	45	(778)	778
Financial liabilities (1)	-	-	-	(337)	2,481	(2,481)
Total	736	3,695	(3,695)	(292)	1,703	(1,703)

32.2 Risk related to prices of carbon (CO₂) allowances

The risk related to prices of carbon dioxide allowances is managed by the Parent in line with the Strategy for Managing the Risk Related to Prices of Carbon Dioxide (CO₂) Allowances by Grupa LOTOS S.A.

The Group determines its underlying CO₂ allowances position, which represents the difference between the number of CO₂ allowances (held or estimated) and CO₂ emissions (released or estimated) for each individual trading period (phase), for which emission allowances are granted.

As part of risk management procedures, the Group sets a volume limit for the total position in CO₂ allowances (the underlying position adjusted for the position resulting from executed contracts, i.e. transactions involving purchase/sale of emission allowances) based on the number of allowances granted for a given phase. The Group monitors the total position for a given phase, representing the aggregate of total positions for individual years within the phase.

Depending on the market situation and within the set limits, the Group maintains an appropriate total position in carbon allowances by entering into financial transactions on an on-going basis. The limit reflecting the risk of loss on the transactions (maximum loss limit) is defined by reference to the Group’s equity.

Below are presented underlying, contract and total position as at December 31st 2013 and December 31st 2012.

Underlying CO₂ allowances position as at December 31st 2013 (tonnes):

Period	EUA *	CER *	ERU *	TOTAL
Phase III (2013-2020)	(1,238,485)	383	29,000	(1,209,102)

The presented above underlying position is based on the following assumptions as to the allowances and carbon dioxide emission volumes, and the fact that 993 thousand EUA, 383 CER and 29 thousand ERU were registered in the Company's account as at December 31st 2013:

Phase III (2013-2020), tonnes	2013	2014	2015	2016	2017	2018	2019	TOTAL
Allowances allocated under the National Allocation Plan (1)	1,521,342	1,492,657	1,462,140	1,428,944	1,396,948	1,366,559	1,335,827	10,004,417
Carbon dioxide (CO2) emissions (2)	(1,676,529)	(1,779,653)	(1,779,653)	(1,779,653)	(1,661,606)	(1,779,653)	(1,779,653)	(12,236,400)
Surplus/shortage	(155,187)	(286,996)	(317,513)	(350,709)	(264,658)	(413,094)	(443,826)	(2,231,983)

As at December 31st 2013, the Gropup. did not receive its free allocation of CO₂ emission allowances for 2013, which it should have received by the end of February 2013. The Group assumes that there is little probability that these allowances will not be received before the final offsetting date, i.e. April 30th 2014, as by the by the date of publication of these financial statements, i.e. February 26th 2014, the European Commission announced its approval of the allowance limits planned for the last group of member states, including Poland. The Management Board would also like to note that the Group holds around 60% of the allowances it is required to surrender, and that the balance could be purchased without any material effect on liquidity until free credits are received.

Underlying CO₂ allowances position as at December 31st 2012 (tonnes):

Period	EUA	CER	SUMA
Phase II (2008-2012)	(520,169)	-	(520,169)
Phase III (2013-2020)	(363,376)	-	(363,376)

As at December 31st 2012, the underlying position was based on the following assumptions as to the volume of allowances and carbon dioxide emissions in phase II and phase III:

Phase II (2008-2012), tonnes	2012	Total
Allowances in the account	1,458,144	1,458,144
Carbon dioxide (CO2) emissions (1)	(1,978,313)	(1,978,313)
Surplus/shortage	(520,169)	(520,169)

Phase III (2013-2020), tonnes	2013	2014	Total
Allowances allocated under the National Allocation Plan (1)	1,610,712	1,607,843	3,218,555
Carbon dioxide (CO2) emissions (2)	(1,737,054)	(1,844,877)	(3,581,931)
Surplus/shortage	(126,342)	(237,034)	(363,376)

To manage risk related to carbon dioxide emission allowances, the Group evaluates the risk of deficit of free emission allowances allocated under the NAP on a case-by-case basis.

If required, futures contracts to purchase carbon (CO₂) allowances open as at the last day of the reporting period are settled by the Group through physical delivery, with the intention to potentially use the allowances to offset the Group's actual CO₂ emissions. Valuation of transactions to be settled through physical delivery is not disclosed under financial assets/liabilities in the financial statements.

However, the Company internally monitors and performs the valuation of its open futures positions as part of an overall assessment of the effectiveness of its CO₂ risk management (off balance sheet).

The EUA futures transactions which were open as at December 31st 2013 will be settled through physical delivery and the Company expects to use the purchased emission allowances for its own needs. As at December 31st 2012, the Parent held open CER futures contracts which it intended to settle through physical delivery. The transactions were not disclosed in the financial statements as at the last day of the reporting period, and their fair values were recorded only as an off-balance sheet item.
Further, in 2012 the Group entered into EUA/CER swaps, as that was justified by the spread between those two types of emission allowances.

Open CO₂ allowances contracts as at December 31st 2013:

Type of contract	Contract execution period	Contract settlement period	Number of allowances in the period	Average weighted price (EUR/t)	Phase	Fair value (PLN ‘000)*
						Financial assets	Financial liabilities
Futures EUA	Aug 2012 –Dec 2013	Dec 2014 −Dec 2017	1,696,000	5.58	Phase III	1,182	(5,230)
Total						1,182	(5,230)

Open CO₂ allowances contracts as at December 31st 2012:

Type of contract	Contract execution period	Contract settlement period	Number of allowances in the period	Average weighted price (EUR/t)	Phase	Fair value (PLN ‘000)*
						Financial assets	Financial liabilities
Futures CER	Dec 2012	Mar 2013	620,000	0.42	Phase II	-	(641)
Total						-	(641)

Type of contract	Contract execution period	Contract settlement period	Number of allowances in the period	Average weighted price (EUR/t)	Phase	Fair value (PLN ‘000)**
						Financial assets	Financial liabilities
Futures EUA	Aug–Nov 2012	Dec 2013 -Dec 2014	523,000	8.53	Phase III	-	(3,787)
Total						-	(3,787)

Given the underlying position described above and the effected transactions, the Company's aggregate position (in tonnes) in emission allowances as at December 31st 2013 was as follows:

	EUA position			CER position			ERU position
Period	Underlying	Contracts	Total	Underlying	Contracts	Total	Underlying	Contracts	Total
Phase III (2013-2020)	(1,238,485)	1,696,000	457,515	383	-	383	29,000	-	29,000

Given the underlying position described above and the effected transactions, the Company's aggregate position (in tonnes) in emission allowances as at December 31st 2012 was as follows:

	EUA position			CER position
Period	Underlying	Contracts	Total	Underlying	Contracts	Total
Phase II (2008-2012)	(520,169)	-	(520,169)	-	620,000	620,000
Phase III (2013-2020)	(363,376)	523,000	159,624	-	-	-

For information on CO₂ emission allowances see Note 34.

32.2.1 Market risk sensitivity analysis: fluctuations in prices of carbon dioxide (CO₂) emission allowances

As at December 31st 2013 and December 31st 2012 the Group held futures for the purchase of carbon dioxide emission allowances.

Below is presented an analysis of the sensitivity to risk of changes in prices of carbon dioxide emission allowances (+/- 10%) for the estimated fair value of the derivative instruments disclosed in the statement of financial position:

PLN ’000	Dec 31 2013			Dec 31 2012
	Carrying amount	Change		Carrying amount	Change
		10%	-10%		10%	-10%
Financial liabilities (1)	-	-	-	(3,787)	1,446	(1,446)
Total	-	-	-	(3,787)	1,446	(1,446)

The Group does not perform a sensitivity analysis for the fair value of futures contracts to purchase CO₂ emission allowances held by it as at the end of the reporting period if it intends to settle the contracts through physical delivery and use them to cover allowance deficits, and therefore the table above does not present a sensitivity analysis for EUA futures held as at December 31st 2013 and CER futures held as at December 31st 2012, which were intended to settle through physical delivery to cover allowance deficits in settlement of carbon dioxide emission for the period.

32.3 Currency risk

Currency risk is managed by the Group in line with the Strategy of Currency Risk Management at Grupa LOTOS S.A. The exposure management horizon is linked with the Group’s budget horizon, which varies from three to five consecutive quarters depending on the time of the year. The four-quarter period is treated as the basis for determining the exposure management horizon. The base map of currency positions takes into account principally the volumes and price formulae for purchases of raw materials and sales of products, investments, deposits, and credit facilities denominated in foreign currencies, as well as valuation of derivatives, and may be adjusted for a ratio reflecting the volatility in the prices of raw materials and petroleum products. The strategy provides for the calculation of the following limits:

• position limit (open currency contracts must not increase the Company’s underlying position and must not exceed the volume of the underlying position);
• maximum loss and liquidity limits are expressed as a percentage of the Company’s equity (the liquidity limit is calculated in order to reduce the risk of excessive accumulation of financial transactions over a limited period of time, the settlement of which could result in liquidity and operating problems);
• gross total and global currency position limits for the entire management period as well as for sub-periods.

For the purpose of the limits calculation, equity is remeasured on a quarterly basis. Moreover, when loss on risk management exceeds a pre-defined threshold, limits are immediately revised in order to prevent any significant exceeding of the maximum loss limit set by the Management Board of the Parent.

In order to optimise execution of foreign exchange transactions at the Group, the Parent offers to its subsidiaries direct quotations of such transactions based on framework agreements and applicable operational procedures.

USD is used in market price quotations for crude oil and petroleum products. For this reason it was decided that USD is the most appropriate currency for contracting and repaying long-term credit facilities to finance the 10+ Programme, as this would reduce the structurally long position, and consequently also the strategic currency risk.

The underlying currency position represents all material cash flows (identified during currency risk identification process) whose value, expressed in the Group's functional currency, over the risk management period depends on exchange rates, adjusted for a ratio reflecting the decreasing probability of generating such cash flows.

The Group. has a structural long position in USD (it benefits from a rise in the USD/PLN exchange rate) as its cash inflows dependent on the USD exchange rate (mainly revenue from sale of petroleum products) are higher than the corresponding cash outflows (e.g. on purchase of crude oil, credit facility repayment).

As at December 31st 2013, the Group projects that in 2014 it will also have a long position in EUR, driven by a change of the price formulae under biocomponent purchase agreements, which were based on EUR in the previous reporting period and now are based mainly on USD, meaning that cash flows under these transactions are part of the USD position.

Underlying currency position of the Parent as at December 31st 2013:

Period	USD '000	EUR '000
2014	445,543	2,008

Underlying currency position of the Parent as at December 31st 2012:

Period	USD '000	EUR '000
2013	654,698	(173,187)

The Parent actively manages its currency position within the set limits, taking into account expected market developments.

The Group’s companies execute transactions to hedge their currency risk.

Each currency swap comprises a pair of transactions, which in this analysis are assigned to purchase or sale under Currency swap.

Open currency contracts as at December 31st 2013:

Type of contract	Purchase/sale	Contract execution period	Contract settlement period	Currency pair (base/quote)	Amount in base currency ('000)	Weighted average exchange rate	Amount in quote currency ('000)	Fair value (PLN ‘000)
								Financial assets	Financial liabilities
Currency spot	Purchase	Dec 2013	Jan 2014	USD/PLN	21,000	3.0178	(63,374)	-	(125)
Currency spot	Purchase	Dec 2013	Jan 2014	EUR/PLN	1,500	4.1500	(6,225)	-	(4)
Currency forward	Purchase	Dec 2013	Jan 2014	USD/PLN	20,000	3.0551	(61,102)	-	(783)
Currency forward	Purchase	Dec 2013	Jan 2014	EUR/PLN	4,700	4.1720	(19,608)	-	(105)
Currency forward	Sale	Aug–Nov 2013	Mar–Oct 2014	USD/PLN	(169,000)	3.2487	549,030	34,924	-
Currency spot	Purchase	Dec 2013	Sep 2014	USD/PLN	25,000	3.0932	(77,330)	-	(845)
Currency spot	Purchase	Dec 2013	Jan 2014	EUR/USD	1,850	1.3800	(2,553)	-	(18)
Currency spot	Sale	Sep–Dec 2013	Jan–Dec 2014	USD/PLN	(393,450)	3.1371	1,234,292	38,275	-
Currency spot	Sale	Dec 2013	Jan 2014	EUR/USD	(7,500)	1.3764	10,323	-	(10)
							Total	73,199	(1,890)

Open currency contracts as at December 31st 2012:

Type of contract	Purchase/sale	Contract execution period	Contract settlement period	Currency pair (base/quote)	Amount in base currency ('000)	Weighted average exchange rate	Amount in quote currency ('000)	Fair value (PLN ‘000)
								Financial assets	Financial liabilities
Currency spot	Purchase	Dec 2012	Jan 2013	USD/PLN	54,000	3.0951	(167,135)	234	-
Currency spot	Purchase	Dec 2012	Jan 2013	EUR/PLN	1,891	4.0925	(7,739)	-	(9)
Forward walutowy	Purchase	Sep–Dec 2012	Jan–Apr 2013	USD/PLN	110,500	3.1760	(350,948)	57	(7,436)
Forward walutowy	Purchase	Aug–Dec 2012	Jan–Jul 2013	EUR/USD	146,000	1.2828	(187,289)	17,029	-
Forward walutowy	Sale	Aug–Dec 2012	Jan–Nov 2013	USD/PLN	(324,000)	3.3091	1,072,148	56,132	(1,381)
Forward walutowy	Sale	Dec 2012	Jan 2013	EUR/PLN	(15,000)	4.0717	61,076	-	(335)
Currency spot	Purchase	Aug–Dec 2012	Jan–Jul 2013	USD/PLN	74,000	3.2998	(244,185)	-	(12,672)
Currency spot	Purchase	Dec 2012	Jan 2013	EUR/PLN	15,500	4.1474	(64,285)	-	(832)
Currency spot	Purchase	Oct–Dec 2012	Jan–Jul 2013	EUR/USD	31,610	1.2948	(40,929)	2,478	-
Currency spot	Sale	Aug–Dec 2012	Jan–Jul 2013	USD/PLN	(399,500)	3.1968	1,277,122	34,041	(4,529)
							Total	109,971	(27,194)

Total currency position of the Group as at December 31st 2013:

Period	USD/PLN position			EUR/PLN position
	Underlying (USD ’000)	Contracts (USD ’000)	Total (USD ’000)	Underlying (EUR ’000)	Contracts (EUR ’000)	Total (EUR ’000)
2014	445,543	(422,907 )	22,636	2,008	300	2,308

Total currency position of the Group as at December 31st 2012:

Period	USD/PLN position			EUR/PLN position
	Underlying (USD ’000)	Contracts (USD ’000)	Total (USD ’000)	Underlying (EUR ’000)	Contracts (EUR ’000)	Total (EUR ’000)
2013	654,698	(654,766)	(68)	(173,187)	180,001	6,814

32.3.1 Sensitivity analysis with respect to market risk related to fluctuations in currency exchange rates

Currency structure of selected financial instruments as at December 31st 2013:

31 grudnia 2013       (PLN '000)	Note	USD	USD translated into PLN	EUR	EUR translated into PLN	Carrying amount in foreign currency translated into PLN as at the balance-sheet date
Classes of financial instruments
Financial assets
Trade receivables		121,143	364,884	10,922	45,112	409,996
Other receivables		-	-	15	63	63
Notes		59,268	178,516	-	-	178,516
Cash and cash equivalents		23,339	70,280	8,492	28,635	98,915
Other financial assets:		436,078	1,313,611	9,961	41,313	1,354,924
Loans advanced to related entities		361,974	1,090,321	7,208	29,895	1,120,216
Deposits		3,105	9,352	603	2,501	11,853
Security deposit (margin)		-	-	2,150	8,917	8,917
Cash blocked in bank accounts	18	70,999	213,938	-	-	213,938
Total		639,828	1,927,291	29,390	115,123	2,042,414
Financial liabilities
Borrowings		2,096,295	6,320,969	1,180	4,892	6,325,861
Trade payables		622,316	1,931,556	11,589	50,877	1,982,433
Other liabilities		9,084	27,829	3,909	16,211	44,040
Notes		6,674	377,210	-	-	377,210
Finance lease liabilities		-	-	21,259	88,164	88,164
Total		2,734,369	8,657,564	37,937	160,144	8,817,708

Currency structure of selected financial instruments as at December 31st 2012:

Dec 31 2012       (PLN ’000)	USD	USD translated into PLN EUR	EUR	EUR translated into PLN	Carrying amountin foreign currency translated into PLN as at the balance-sheet date
Classes of financial instruments
Financial assets
Trade receivables	87,225	270,367	12,697	51,922	322,289
Other receivables	13	41	154	630	671
Notes	53,119	164,647	-	-	164,647
Cash and cash equivalents	5,321	16,416	2,205	8,992	25,408
Other financial assets:	371,510	1,151,237	12,313	50,338	1,201,575
Loans advanced to related entities	359,032	1,112,561	10,099	41,287	1,153,848
Deposits	12,478	38,676	-	-	38,676
Security deposit (margin)	-	-	2,214	9,051	9,051
Total	517,188	1,602,708	27,369	111,882	1,714,590
Financial liabilities
Borrowings	2,291,949	7,108,363	5,307	21,672	7,130,035
Trade payables	573,352	1,777,160	8,456	31,319	1,808,479
Other liabilities	10,070	31,200	10,085	41,172	72,372
Notes	53,119	164,162	-	-	164,162
Finance lease liabilities	-	-	39,885	163,058	163,058
Total	2,928,490	9,080,885	63,733	257,221	9,338,106

Sensitivity analysis to currency risk as at December 31st 2013, along with the effect on the net profit or loss, assuming a 4% increase or decrease in the USD/PLN and EUR/PLN exchange rates is presented below:

Dec 31 2013   PLN '000	4% increase in exchange rate effect on net profit/loss for the year		4% decrease in exchange rate effect on net profit/loss for the year
	USD	EUR	USD	EUR
Classes of financial instruments
Financial assets
Trade receivables	14,595	1,804	(14,595)	(1,804)
Other receivables	-	3	-	(3)
Derivative financial instruments	(75,226)	(41)	75,226	41
Notes	7,141	-	(7,141)	-
Cash and cash equivalents	2,812	1,145	(2,812)	(1,145)
Other financial assets:	52,544	1,653	(52,544)	(1,653)
Loans advanced to related entities	43,613	1,196	(43,613)	(1,196)
Deposits	374	100	(374)	(100)
Security deposits (margins)	-	357	-	(357)
Cash blocked in bank accounts	8,557	-	(8,557)	-
Total financial assets	1,866	4,564	(1,866)	(4,564)
Financial liabilities
Borrowings	96,997 (1)	196	(96,997) (1)	(196)
Trade payables	77,262	2,035	(77,262)	(2,035)
Derivative financial instruments	(13,591)	(132)	13,591	132
Other liabilities	1,113	648	(1,113)	(648)
Notes	15,088	-	(15,088)	-
Finance lease liabilities	-	3,527	-	(3,527)
Total financial liabilities	176,869	6,274	(176,869)	(6,274)
Total	(175,003)	(1,710)	175,003	1,710

Sensitivity analysis to currency risk as at December 31st 2012, along with the effect on the net profit or loss, assuming a 4% increase or decrease in the USD/PLN and EUR/PLN exchange rates is presented below:

Dec 31 2012   PLN '000	4% increase in exchange rate effect on net profit/loss for the year		% decrease in exchange rate effect on net profit/loss for the year
	USD	EUR	USD	EUR
Classes of financial instruments
Financial assets
Trade receivables	10,815	2,077	(10,815)	(2,077)
Other receivables	2	25	(2)	(25)
Derivative financial instruments	(85,181)	29,022	85,181	(29,022)
Notes	6,586	-	(6,586)	-
Cash and cash equivalents	657	360	(657)	(360)
Other financial assets:	46,049	2,013	(46,049)	(2,013)
Loans advanced to related entities	44,502	1,651	(44,502)	(1,651)
Deposits	1,547	-	(1,547)	-
Security deposits (margins)	-	362	-	(362)
Total financial assets	(21,072)	33,497	21,072	(33,497)
Financial liabilities
Borrowings	110,782 (1)	867	(110,782) (1)	(867)
Trade payables	71,086	1,253	(71,086)	(1,253)
Derivative financial instruments	1,816	(240)	(1,816)	240
Other liabilities	1,248	1,647	(1,248)	(1,647)
Notes	6,566	-	(6,566)	-
Finance lease liabilities	-	6,522	-	(6,522)
Total financial liabilities	191,498	10,049	(191,498)	(10,049)
Total	(212,570)	23,448	212,570	(23,448)

32.4 Interest rate risk

The underlying interest rate position is attributable to cash flows whose amounts depend on the future interest rate levels. This position is driven primarily by the expected repayment schedules under the credit facilities contracted to finance and refinance stocks and to finance an investment under the 10+ Programme, as well as the amount of interest computed by reference to the floating LIBOR USD rate. The structure of limits is based on the underlying position’s nominal value hedge ratio. In a long-term perspective, a partial risk mitigation effect was achieved through the choice of a fixed interest rate for a tranche of the term facility contracted to finance the 10+ Programme (credit facility designated in the table as 'Bank Syndicate 3'; see Note 27.1.)

Underlying interest rate position as at December 31st 2013 and December 31st 2012:

Period	Underlying position (USD '000)
	2013	2012
2013	-	(1,757,021)
2014	(1,497,343)	(1,267,629)
2015	(1,123,111)	(1,143,396)
2016	(991,787)	(1,012,073)
2017	(856,356)	(876,641)
2018	(708,447)	(728,733)
2019	(542,210)	(562,495)
2020	(374,926)	(395,211)

Open interest rate contracts as at December 31st 2013:

Type of contract	Contract execution period	Period	Notional amount (USD '000)	Company pays	Company receives	Financial assets (PLN '000)	Financial liabilities (PLN '000)
Interest rate swap (IRS)	Mar 2009–May 2009	Jul 2011–Jan 2018	200,000	3.33% - 4.045%	6M LIBOR	-	(70,543)
Interest rate swap (IRS)	Mar 2012	Jan 2015–Jan 2019	50,000	2.476%	3M LIBOR	-	(1,720)
					Total	-	(72,263)

Open interest rate contracts as at December 31st 2012:

Type of contract	Contract execution period	Period	Notional amount (USD '000)	Company pays	Company receives	Financial assets (PLN '000)	Financial liabilities (PLN '000)
Interest rate swap (IRS)	Sep 2008–May 2009	Oct 2008–Jan 2018	600,000	3.33% - 4.22%	6M LIBOR	-	(141,756)
Interest rate swap (IRS)	Mar 2012	Jan 2015–Jan 2019	50,000	2.476%	36M LIBOR	-	(6,251)
Interest rate swap (IRS)	Sep 2008	Jan 2009–Jan 2013	(100,000)	6M LIBOR	4.0%	11,318	-
					Total	11,318	(148,007)

Total interest rate position as at December 31st 2013:

Period	Underlying position (USD’000)	Fixed interest rate facilities (USD’000)	Contract position (USD’000)	Variable interest rate deposits (USD’000)	Total position (USD’000)	Hedge ratio
2014	(1,497,343)	342,014	200,000	88,926	(866,403)	42%
2015	(1,123,111)	307,950	250,000	91,598	(473,563)	58%
2016	(991,787)	271,942	250,000	99,822	(370,023)	63%
2017	(856,356)	234,807	250,000	102,094	(269,455)	69%
2018	(708,447)	194,252	50,000	114,982	(349,213)	51%
2019	(542,210)	148,670	-	117,133	(276,407)	49%
2020	(374,926)	102,802	-	109,312	(162,812)	57%

Total interest rate position as at December 31st 2012:

Period	Underlying position (USD’000)	Fixed interest rate facilities (USD’000)	Contract position (USD’000)	Variable interest rate deposits (USD’000)	Total position (USD’000)	Hedge ratio
2013	(1,757,021)	376,656	200,000	72,300	(1,108,065)	37%
2014	(1,267,629)	347,576	200,000	89,935	(630,118)	50%
2015	(1,143,396)	313,512	250,000	90,750	(489,134)	57%
2016	(1,012,073)	277,504	250,000	97,926	(386,643)	62%
2017	(876,641)	240,369	250,000	98,837	(287,435)	67%
2018	(728,733)	199,814	50,000	111,556	(367,363)	50%
2019	(562,495)	154,233	-	114,608	(293,654)	48%
2020	(395,211)	108,364	-	111,076	(175,771)	56%

32.4.1 Market risk sensitivity analysis: fluctuations in interest rates

Below is presented an analysis of the Group’s sensitivity to interest rate risk as at December 31st 2013, assuming a 0.2% change in interest rates:

Dec 31 2013 PLN ’000	Note	Carrying amount	Change
			+0.2%	-0.2%
Classes of financial instruments
Financial assets
Cash and cash equivalents	20	503,686	1,007	(1,007)
Other financial assets:		284,486	569	(569)
Oil and Gas Facility Decommissioning Fund	18	29,866	60	(60)
Deposits	18	29,653	59	(59)
Security deposits (margins)	18	11,029	22	(22)
Cash blocked in bank accounts	18	213,938	428	(428)
Total		788,172	1,576	(1,576)
Financial liabilities
Borrowings	27.1	5,862,115	9,663 (1)	(9,663) (1)
Notes	27	198,240	396	(396)
Finance lease liabilities	27.3	151,031	302	(302)
Derivative financial instruments (2)	28	72,263	(6,017)	6,081
Total		6,283,649	4,344	(4,280)

Below is presented an analysis of the Group’s sensitivity to interest rate risk as at December 31st 2012, assuming a 0.2% change in interest rates:

Dec 31 2012 PLN ’000	Note	Carrying amount	Change
			+0.2%	-0.2%
Classes of financial instruments
Financial assets
Derivative financial instruments (1)	28	11,318	(1)	1
Cash and cash equivalents	20	268,333	537	(537)
Other financial assets:		161,207	322	(322)
Oil and Gas Facility Decommissioning Fund	18	27,481	55	(55)
Deposits	18	122,563	245	(245)
Security deposits (margins)	18	11,163	22	(22)
Total		440,858	858	(858)
Financial liabilities
Borrowings	27.1	6,390,591	10,490 (2)	(10,490) (2)
Finance lease liabilities	27.3	166,109	332	(332)
Derivative financial instruments (1)	28	148,007	(7,693)	7,792
Total		6,704,707	3,129	(3,030)

In the case of derivative financial instruments, for the purpose of interest rate sensitivity analysis the interest rate curve is moved up or down by a hypothetical change in reference interest rates (3M LIBOR, 6M LIBOR). This sensitivity analysis has been performed with reference to the balance of instruments held as at December 31st 2013 and December 31st 2012. The effect of the interest rate changes on the fair value has been examined assuming that the currency exchange rates remain unchanged.

32.5 Liquidity risk

The liquidity risk management process at the Group consists in monitoring projected cash flows and the portfolio of financial assets and liabilities, matching maturities of the assets and liabilities, analysing working capital, and optimising cash flows within the Group. This process requires that units operating in different business areas closely cooperate in activities undertaken in order to ensure safe and effective allocation of the liquidity.

In 2012, the Group implemented real cash-pooling services for most of its Polish subsidiaries, whereby the Parent manages on an on-going basis the structure comprising the subsidiaries covered by the cash-pooling services to optimise liquidity and interest balances.

In the period covered by the budget, liquidity is monitored on an ongoing basis across the Group as part of the financial risk management. In the mid- and long term, it is monitored as part of the planning process, which helps to develop a long-term financial strategy.

In the area of financial risk, in addition to active management of market risk, the Group observes the following liquidity management rules:

• no margins in derivatives trading on the OTC market,
• limited possibility of early termination of financial transactions,
• limits for low-liquidity spot financial instruments,
• credit limits for counterparties in financial and trade transactions,
• adequate quality and diversification of available financing sources,
• internal control processes and organisational efficiency facilitating prompt contingency response.

Below is presented an information on the contractual maturities of financial liabilities as at December 31st 2013 and December 31st 2013.

Contractual maturities of financial liabilities as at December 31st 2013:

Dec 31 2013 PLN ’000	Note	Carrying amount	Contractual cash flows	Up to 6 months	6–12 months	1–2 years	2–5 years	Over 5 years
Borrowings (other than overdraft facilities)	27.1	5,363,201	5,674,778	969,472	462,779	501,883	1,774,901	1,965,743
Overdraft facilities	27.1	498,914	498,914	498,914	-	-	-	-
Notes	27	198,240	198,485	-	15,060	15,060	168,365	-
Finance lease liabilities	27.3	151,031	191,646	18,032	16,962	33,213	89,623	33,816
Trade payables	30	2,396,086	2,396,086	2,394,530	1,556	-	-	-
Other financial liabilities	30	200,690	200,690	131,576	68,879	235	-	-
Total		8,808,162	9,160,599	4,012,524	565,236	550,391	2,032,889	1,999,559

Contractual maturities of financial liabilities as at December 31st 2012:

Dec 31 2012 (restated) PLN ’000	Note	Carrying amount	Contractual cash flows	Up to 6 months	6–12 months	1–2 years	2–5 years	Over 5 years
Borrowings (other than overdraft facilities)	27.1	5,857,893	6,125,075	1,371,533	368,530	499,013	1,340,723	2,545,276
Overdraft facilities	27.1	532,698	532,698	532,698	-	-	-	-
Finance lease liabilities	27.3	166,109	229,246	19,342	17,452	34,325	100,488	57,639
Trade payables	30	2,174,451	2,174,451	2,173,656	795	-	-	-
Other financial liabilities	30	254,436	254,436	239,569	13,663	509	695	-
Total		8,985,587	9,315,906	4,336,798	400,440	533,847	1,441,906	2,602,915

Maturities of derivative financial instruments as at December 31st 2013:

Dec 31 2013 PLN ’000	Note	Carrying amount *	Contractual cash flows	Up to 6 months	6–12 months	1–2 years	2–5 years	Over 5 years
Commodity swap	28	736	736	409	327	-	-	-
Currency forward and spot contracts		33,907	41,180	24,229	16,951	-	-	-
Interest rate swap (IRS)		(72,263)	(73,301)	(20,446)	1,055	(17,772)	(33,866)	(2,272)
Currency swap		37,402	43,863	29,416	14,447	-	-	-
Total		(218)	12,478	33,608	32,780	(17,772)	(33,866)	(2,272)

Maturities of derivative financial instruments as at December 31st 2012:

Dec 31 2012 PLN '000 Note Carrying amount * Contractual cash flows Up to 6 months 6–12 months 1–2 years 2–5 years Over 5 years Commodity swap 28 (292) (291) (24) (267) - - - Futures (CO2 emissions)** (3,787) (3,787) - (2,494) (1,293) - - Currency forward and spot contracts 64,291 75,811 68,656 7,155 - - - Interest rate swap (IRS) (136,689) (138,662) (51,223) 1,543 (19,147) (50,271) (19,564) Currency swap 18,486 25,463 23,790 1,673 - - - Total   (57,991) (41,466) 41,199 7,610 (20,440) (50,271) (19,564)

32.6 Credit risk

Management of credit risk related to counterparties in financial transactions consists in the verification of creditworthiness of the current and potential counterparties and monitoring of credit exposure against the granted limits. Credit exposure includes bank deposits and derivatives measurement.

The counterparties must have an appropriate credit rating assigned by leading rating agencies, or hold guarantees from institutions meeting the minimum rating requirement. The Group enters into financial transactions with reputable firms with sound credit standing, and diversifies the group of institutions with which it maintains relationship.

As at December 31st 2013, the concentration of credit risk exposure to any single counterparty in financial transactions of the Group did not exceed PLN 249,010 thousand (3.49% of the Parent’s equity), while at December 31st 2012 the amount was PLN 153,189 thousand (2.17% of the Parent’s equity). For information on the structure of the Group's borrowings by lender see Note 27.1.

As regards management of counterparty risk in non-financial transactions, all customers who request trading on credit terms are subject to credit assessment, whose results determine the level of possible credit limits. The Parent defines guidelines for managing counterparty risk in non-financial transactions to ensure that appropriate standards of credit analysis and operational security are observed across the entire Group.

As at December 31st 2013, concentration of risk with any single business partner of the Group did not exceed PLN 161,066 thousand (2.26% of the Company's equity).

Credit risk is measured by the maximum exposure to risk of individual classes of financial assets. Carrying amounts of financial assets represent the maximum credit risk exposure.

Maximum financial assets credit risk exposures as at the end of the reporting period:

PLN ’000	Note	Dec 31 2013	Dec 31 2012 (restated)
Derivative financial instruments	28	73,935	121,334
Trade receivables	18	1,594,746	1,632,837
Cash and cash equivalents	20	503,686	268,333
Other financial assets:	18	379,378	259,673
Total		2,551,745	2,282,177

In the Management Board’s opinion, the risk related to non-performing financial assets is reflected in the recognised impairment losses. For information on impairment of financial assets, see Notes 9.4 and 18.1.

For information on concentrations of trade receivables credit risk, see Note 18.1.

For aging analysis of receivables past due but not impaired, see Note 18.1.