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32. Objectives and policies of financial risk management
The Group is exposed to financial risks, including:
- market risk (risk related to prices of commodities 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 will be met,
- limit cash flow volatility,
- ensure short-term financial liquidity,
- optimise the expected level of cash flows and risk,
- support operating, investment and financial processes, and 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, approved at the relevant decision-making levels, defining the framework for ensuring effectiveness and safety of the Group’s financial activities, including:
- the methodology for quantifying exposures to particular risks,
- the time horizon for hedging a given risk,
- acceptable financial instruments,
- the method of assessing financial risk management,
- limits within risk management,
- the reporting method,
- credit limits,
- documentation and operating standards,
- division of responsibilities for execution of transactions, risk analysis and control, as well as documentation of and accounting for transactions, among various corporate 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 derivative financial instruments is performed based on market inputs provided by reliable sources. Opening positions with respect to risks which do not arise as part of the Group’s core business is prohibited.
In 2015, the Parent continued to apply the hedge accounting policies implemented in 2011 and 2012 with respect to its cash flows (i.e. foreign-currency facilities used to finance the 10+ Programme, designated as hedges of future USD-denominated petroleum product sale transactions).
32.1 Risk related to prices of commodities and petroleum products
The Group considers risk related to prices of commodities 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 commodity (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.
On February 16th 2015, the Parent’s Management Board approved the “Grupa LOTOS S.A.’s commodity and petroleum products price risk management policy”, which introduced the classification system for transaction portfolios, defined their business functions, described how risk is understood and how portfolio exposures are set, specified permitted financial instruments and limitations on their use, and transaction execution standards, and also provided guidelines on how to evaluate risk management performance and set relevant limits. Where permitted by the policy, the Management Board of Grupa LOTOS S.A. delegates setting transaction limits to lower-level decision-makers.
Under the approved policy, the Company may continue to offer its customers petroleum products at fixed prices. The transactions executed in 2015 covered bitumen components. To preserve the original price risk profile the Group entered into commodity swaps and options.
Under the approved policy, to take advantage of the contango environment on the futures market and improve the margin, the Group entered into commodity swaps based on the Brent (Dtd) index and purchased (and recorded as inventory) additional volumes of crude oil.
Open commodity swaps as at December 31st 2015:
Type of contract | Underlying index | Valuation period | Amount in tonnes in the valuation period | Fair value (PLN '000) | |
---|---|---|---|---|---|
Financial assets | Financial liabilities | ||||
Commodity swap | 3.5 PCT Barges FOB Rotterdam | Mar 2016-Nov 2017 | 92,845 | 22 | (58,042) |
Commodity swap | Gasoil 0.1 pct Crg CIF NWE_ARA | May 2016-Nov 2017 | (2,603) | 839 | (13) |
Commodity swap | Brent (Dtd) | Mar-May 2016 | (249,931) | 197,73 | - |
Total | 198,591 | (58,055) |
The above swap transactions for a total of 92,845 tonnes based on the 3.5 PCT Barges FOB Rotterdam liquid index in the period from March 2016 to November 2017 and (2,603) tonnes based on the Gasoil 0.1 pct Crg CIF NWE ARA liquid index in the period from May 2016 to November 2017 were entered into to reverse the risk profile relating to the prices of commodities and petroleum products and arising in connection with the sale of bitumen components at fixed prices. The swap transactions for a total of (249,931) tonnes based on the Brent (Dtd) index in the period from March to May 2016 were entered into in contango.
Open commodity swaps as at December 31st 2014:
Type of contract | Underlying index | Valuation period | Amount in tonnes in the valuation period | Fair value (PLN '000) | |
---|---|---|---|---|---|
Financial assets | Financial liabilities | ||||
Commodity swap | 3.5 PCT Barges FOB Rotterdam | Apr 2015-Sep 2017 | 41,69 | - | (29,338) |
Total | - | (29,338) |
The above swap transactions for a total of 41,690 tonnes based on the 3.5 PCT Barges FOB Rotterdam liquid index in the period from April 2015 to September 2017 were entered into to reverse the risk profile relating to the prices of commodities and petroleum products and arising in connection with the sale of bitumen components at fixed prices.
Open commodity option as at December 31st 2015:
Type of contract | Underlying index | Valuation period | Amount in tonnes in the valuation period | Fair value (PLN '000) | |
---|---|---|---|---|---|
Financial assets | Financial liabilities | ||||
Commodity options | 3.5 PCT Barges FOB Rotterdam | Mar 2016-Oct 2017 | 27,105 | 363 | - |
Total | 363 | - |
The above options for a total of 27,105 tonnes based on the 3.5 PCT Barges FOB Rotterdam liquid index in the period from March 2016 to October 2017 were entered into to reverse the risk profile relating to the prices of commodities and petroleum products and arising in connection with the sale of bitumen components at fixed prices.
The Company’s Management Board points out that the importance of price risk management and of trading activities within the Group has been steadily growing. Given the need to manage new processes and enhance the efficiency of ongoing operations in this area, as well as to improve operational safety, the Group implemented an ERTM (Energy Trading and Risk Management) IT system in 2014.
32.1.1 Market risk sensitivity analysis: fluctuations in prices of commodities and petroleum products
Below is presented an analysis of the sensitivity of the Company’s financial transactions to the risk of fluctuations in prices of commodities and petroleum products as at December 31st 2015 and 2014, assuming a price change (+/-) equal to the annual implied volatility of the underlying index:
PLN '000 | Carrying amount | Dec 31 2015 Change* |
Carrying amount | Dec 31 2014 Change** |
||
---|---|---|---|---|---|---|
+ implied volatility | - implied volatility | +34,22% | -34,22% | |||
Financial assets (1) | 198,954 | (93,473) | 95,080 | - | - | - |
Financial liabilities (1) | (58,055) | 27,125 | (27,131) | (29,338) | 15,325 | (15,325) |
Total | 140,899 | (66,348) | 67,949 | 29,338 | 15,325 | (15,325) |
(1) Total commodity swaps and options.
* With respect to the instruments held as at December 31st 2015, the above deviations of underlying index prices have been calculated based on the annual implied volatility of the index on which the executed transactions of December 31st 2015 are based, posted on the SuperDerivatives website. The volatility was +/- 43.48% for the 3.5 PCT Barges FOB Rotterdam index, +/- 32.9% for the Gasoil 0.1 pct Crg CIF NWE_ARA index, and +/- 35.65% for the Brent (Dtd) index.
** With respect to the instruments held as at December 31st 2014, the above deviations of underlying index prices have been calculated based on the annual implied volatility of the index on which the executed transactions of December 31st 2014 are based, published by SuperDerivatives.
The effect of the underlying index price changes on the fair value has been examined assuming that the currency exchange rates remain unchanged.
32.2 Risk related to prices of carbon (CO2) allowances
The risk related to prices of carbon dioxide emissions allowances is managed within the Parent on an ongoing basis in line with the assumptions set forth in the strategy for managing the risk related to prices of carbon dioxide (CO2) approved by the Management Board of Grupa LOTOS S.A. The Group balances its future CO2 emission allowance deficits and surpluses depending on the market situation and within defined limits. In line with the approved strategy and limits, the Parent executes the following transactions for emission units:
- EUA (Emission Unit Allowance) – represents an allowance to emit one tonne of CO2,
- CER (Certified Emission Reduction Unit) – represents one tonne of CO2 equivalent (tCO2e) effectively reduced. Certified emission reduction units are obtained in connection with investment projects implemented in developing countries where no CO2 emission limits have been defined.
- ERU (Emission Reduction Unit) – represents one tonne of CO2 equivalent (tCO2e) effectively reduced. ERUs are certified emission units, obtained through investment projects implemented in countries where the CO2 reduction costs are lower.
As at December 31st 2015, the deficit of allowances in the 2013–2020 trading period (Phase III) was 1,095,003 tonnes. Taking into account derivative transactions for a total of 1,715,000 tonnes, however, the Parent holds surplus emissions allowances for 619,997 tonnes, which have been purchased in view of the market situation and the anticipated strategic deficit in emission allowances after 2020.
As at December 31st 2014, the deficit of allowances in the 2013–2020 trading period (Phase III) was 573,770 tonnes. Taking into account derivative transactions for a total of 1,149,000 tonnes, however, the Parent holds surplus emissions allowances for 575,230 tonnes, which have been purchased in view of the market situation and the anticipated strategic deficit in emission allowances after 2020.
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. The valuation of contracts settled through physical delivery is not disclosed under financial assets/liabilities in the financial statements. However, the Group internally monitors and performs the valuation of such contracts as part of an overall assessment of the effectiveness of its CO2 risk management (off balance sheet).
EUA futures contracts open as at December 31st 2014 which the Group considered likely to be settled through physical delivery and used for the Group’s own purposes are not disclosed in the financial statements as at the last day of the reporting period, and their fair value is recorded only as an off-balance sheet item.
In 2014, the Group swapped its ERUs for 29,000 tonnes for EUAs due to the spread between those two types of emission allowances.
Contract position as at December 31st 2015 and 2014:
Open CO2 allowances contracts as at December 31st 2015:
Type of contract | Contract settlement period | Number of allowances in the period | Phase | Fair value (PLN '000)* | |
---|---|---|---|---|---|
Financial assets | Financial liabilities | ||||
EUA Futures | Dec 2016−Dec 2019 | 1,715,000 | Phase III | 5,857 | (191) |
Total | 5,857 | (191) |
* Off-balance-sheet value, used exclusively for statistical purposes and as part of monitoring in risk management.
Open CO2 allowances contracts as at December 31st 2014:
Type of contract | Contract settlement period | Number of allowances in the period | Phase | Fair value (PLN '000)* | |
---|---|---|---|---|---|
Financial assets | Financial liabilities | ||||
EUA Futures | Dec 2015-Dec 2018 | 1,149,000 | Phase III | 6,062 | (402) |
Total | 6,062 | (402) |
* Off-balance-sheet value, used exclusively for statistical purposes and as part of monitoring in risk management.
For information on carbon dioxide (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 2015 and 2014, the Group held futures for the purchase of carbon dioxide (CO2) emission allowances.
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 own allowance deficits under the carbon emission reduction system. Therefore, no sensitivity analysis has been performed with reference to the EUA futures held as at December 31st 2015 and 2014.
32.3 Currency risk
In its operations the Group is exposed to currency risks related to:
- trading in commodities and petroleum products and other merchandise,
- investment cash flows,
- cash flows from financing activities, including deposits and borrowings,
- valuation of derivative instruments,
indexed to or denominated in a currency other than the functional currency.
Since August 20th 2015, currency risk has been managed in line with the assumptions stipulated in the Grupa LOTOS S.A. Currency Risk Management Policy. Under the new policy, exposure is understood as material positions exposed to currency risk and affecting the liquidity in the management horizon in accordance with the scheduled payment dates. The central risk metric is Cash-Flow-at-Risk (CFaR), computed based on the CorporateMetrics™ methodology, with the CFaR value limit and the maximum hedge ratio being the key limits. The exposure management horizon is linked with the budget forecast horizon, which varies from three to five consecutive quarters depending on the time of the year.
The Group actively manages its currency exposure by optimising the expected values of cash flows and risk within applicable limits, taking into account expected market developments.
As USD is used in market price quotations for crude oil and petroleum products, 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 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).
Under the EFRA project, Group companies concluded EUR/USD currency contracts designed to hedge euro-denominated capital expenditure against the US dollar as the main financing currency.
Open currency contracts as at December 31st 2015:
Type of contract | Purchase/sale | Contract settlement period | Currency pair (base/quote) | Amount in base currency (‘000) | Fair value (PLN '000) | |
---|---|---|---|---|---|---|
Financial assets | Financial liabilities | |||||
Currency spot | Purchase | Jan 2016 | USD/PLN | 13,000 | 227 | - |
Currency spot | Purchase | Jan 2016 | EUR/PLN | 500,000 | - | - |
Currency forward | Purchase | Oct 2016−Jun 2018 | EUR/USD | 186,700 | 8,663 | (6) |
Currency forward | Sale | Jan−Sep 2016 | USD/PLN | (128,000) | 5,192 | (903) |
Currency swap | Purchase | Feb 2016 | USD/PLN | 100,000 | 2,088 | - |
Currency swap | Sale | Jan−Jul 2016 | USD/PLN | (362,000) | 1,063 | (33,924) |
Total | 17,233 | (34,833) |
Open currency contracts as at December 31st 2014:
Type of contract | Purchase/sale | Contract settlement period | Currency pair (base/quote) | Amount in base currency (‘000) | Fair value (PLN '000) | |
---|---|---|---|---|---|---|
Financial assets | Financial liabilities | |||||
Currency spot | Purchase | Jan 2015 | USD/PLN | 14,000 | - | (548) |
Currency spot | Purchase | Jan 2015 | EUR/PLN | 3,000 | - | (76) |
Currency forward | Purchase | Jan−Feb 2015 | USD/PLN | 16,000 | - | (331) |
Currency forward | Purchase | Feb 2015 | EUR/PLN | 5,000 | 253 | - |
Currency forward | Purchase | Mar-15 | EUR/USD | 5,000 | - | (1,386) |
Currency forward | Sale | Jan−Sep 2015 | USD/PLN | (251,000) | - | (53,938) |
Currency forward | Sale | Feb 2015 | EUR/PLN | (5,000) | 11 | (86) |
Currency forward | Sale | Mar-15 | EUR/USD | (3,500) | 272 | - |
Currency swap | Purchase | Feb 2015 | USD/PLN | 16,000 | 3,894 | - |
Currency swap | Purchase | Apr 2015 | EUR/USD | 5,500 | - | (672) |
Currency swap | Sale | Jan-Jul 2015 | USD/PLN | (207,300) | - | (36,685) |
Total | 4,43 | (93,722) |
32.3.1 Sensitivity analysis with respect to market risk associated with fluctuations in currency exchange rates
Currency structure of selected financial instruments as at December 31st 2015:
Dec 31 2015 (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 | 61,664 | 240,553 | 5,917 | 25,043 | 265,596 | |
Cash and cash equivalents | 33,184 | 129,511 | 16,415 | 69,957 | 199,468 | |
Notes | 71,567 | 279,191 | - | - | 279,191 | |
Other financial assets: | 250,322 | 976,577 | 43,791 | 186,604 | 1,163,181 | |
Loans advanced to related entities | 200,776 | 783,232 | - | - | 783,232 | |
Deposits | 7,750 | 30,238 | 42,934 | 182,965 | 213,203 | |
Security deposit | - | - | 745 | 3,176 | 3,176 | |
Cash for work related to the removal of the MOPU from the YME field | 18 | 27,808 | 108,540 | - | - | 108,540 |
Other receivables | 13,988 | 54,567 | 112 | 463 | 55,030 | |
Total | 416,737 | 1,625,832 | 66,123 | 281,604 | 1,907,436 | |
Financial liabilities | ||||||
Borrowings | 1,601,594 | 6,268,236 | 2,257 | 9,620 | 6,277,856 | |
Notes | 127,465 | 497,410 | - | - | 497,410 | |
Finance lease liabilities | - | - | 16,170 | 68,907 | 68,907 | |
Trade payables | 208,414 | 813,054 | 7,855 | 34,100 | 847,154 | |
Other financial liabilities | 6,915 | 26,368 | 9,472 | 40,364 | 66,732 | |
Total | 1,944,388 | 7,605,068 | 35,754 | 152,991 | 7,758,059 |
Currency structure of selected financial instruments as at December 31st 2014:
Dec 31 2014 (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 | 61,228 | 214,662 | 5,076 | 21,652 | 236,314 | |
Cash and cash equivalents | 8,965 | 33,745 | 9,990 | 42,508 | 76,253 | |
Notes | 65,418 | 229,434 | - | - | 229,434 | |
Other financial assets: | 317,964 | 1,137,610 | 1,454 | 6,198 | 1,143,808 | |
Loans advanced to related entities | 264,274 | 926,790 | 1,410 | 6,010 | 932,800 | |
Deposits | 8,962 | 31,432 | - | - | 31,432 | |
Cash for work related to the removal of the MOPU from the YME field | 18 | 44,725 | 179,377 | - | - | 179,377 |
Other receivables | 3 | 11 | 44 | 188 | 199 | |
Total | 453,575 | 1,615,451 | 16,520 | 70,358 | 1,685,809 | |
Financial liabilities | ||||||
Borrowings | 1,869,172 | 6,575,835 | 2,241 | 9,550 | 6,585,385 | |
Notes | 126,359 | 443,978 | - | - | 443,978 | |
Finance lease liabilities | - | - | 18,764 | 79,976 | 79,976 | |
Trade payables | 375,997 | 1,318,705 | 8,750 | 37,255 | 1,355,960 | |
Other financial liabilities | 7,985 | 28,768 | 4,701 | 19,988 | 48,756 | |
Total | 2,379,513 | 8,367,286 | 34,456 | 146,769 | 8,514,055 |
For the purposes of sensitivity analysis, the currency structure presented above also accounts for intra-Group foreign currency transactions sensitive to changes in foreign exchange rates, which affect the Group’s currency risk pursuant to IAS 21 The Effects of Changes in Foreign Exchange Rates with respect to recognition of relevant foreign exchange gains or losses in the Group’s net profit or loss.
Apart from currency spots, forwards and swaps, the Group held foreign-currency derivatives, including commodity swaps, commodity options, interest-rate swaps and futures. Depending on the type of derivative, the Group applies the appropriate method of fair value measurement, which also determines the method of calculating the effect of changes of foreign exchange rates on the value of individual derivatives (for more detailed information on the derivative measurement methods see Note 7.24).The tables below, presenting sensitivity of financial instruments to currency risk as at December 31st 2015 and December 31st 2014, also present the effect of currency rate changes on the carrying amounts of the derivative financial instruments.
Currency risk sensitivity analysis as at December 31st 2015, including the effect on financial performance, assuming a 10.675% change of the USD/PLN exchange rate and a 6.9% change of the EUR/PLN exchange rate:
Dec 31 2015 PLN '000 | Effect of exchange rate increase/decrease on net profit/loss for the year | |||
---|---|---|---|---|
+10,675% | +6,9% | -10,675% | -6,9% | |
USD | EUR | USD | EUR | |
Classes of financial instruments | ||||
Financial assets | ||||
Derivative financial instruments | (58,908) | 54,659 | 59,510 | (54,659) |
Trade receivables | 25,679 | 1,728 | (25,679) | (1,728) |
Cash and cash equivalents | 13,825 | 4,827 | (13,825) | (4,827) |
Notes | 29,804 | - | (29,804) | - |
Other financial assets: | 104,250 | 12,876 | (104,250) | (12,876) |
Loans advanced to related entities | 83,610 | - | (83,610) | - |
Deposits | 3,228 | 12,625 | (3,228) | (12,625) |
Security deposits (margins) | - | 219 | - | (219) |
Cash blocked in bank accounts | 11,587 | - | (11,587) | - |
Other receivables | 5,825 | 32 | (5,825) | (32) |
Total financial assets | 114,65 | 74,090 | (114,048) | (74,090) |
Financial liabilities | ||||
Borrowings | 177,753 (1) | 664 | (177,753) (1) | (664) |
Notes | 53,099 | - | (53,099) | - |
Finance lease liabilities | - | 4,755 | - | (4,755) |
Derivative financial instruments | 173,924 | (305) | (173,918) | 305 |
Trade payables | 86,794 | 2,353 | (86,794) | (2,353) |
Other financial liabilities | 2,815 | 2,785 | (2,815) | (2,785) |
Total financial liabilities | 494,385 | 10,252 | (494,379) | (10,252) |
Total | (379,735) | 63,838 | 380,331 | (63,838) |
(1) The calculation of the effect of an exchange rate change on the balance-sheet item takes into account the effect of cash flow hedge accounting. Assuming a 10.675% change of the USD/PLN exchange rate, the effect of cash flow hedge accounting would potentially lead to a change of PLN (434,990) thousand/PLN 434,990 thousand in the fair value of borrowings. Furthermore, the calculation takes into account the effect of paid front-end arrangement fees (measured at the exchange rate effective on the payment date), reducing financial liabilities under borrowings, which would potentially result in a change of PLN 4,968 thousand/PLN (4,968) thousand in the fair value of borrowings, assuming a 10.675% change of the USD/PLN exchange rate.
The above deviations of carrying amounts in PLN, which are dependent on currency exchange rates, were calculated on the basis of an implied annual change of the exchange rates as at December 31st 2015 by 10.675% (USD/PLN) and 6.9% (EUR/PLN), published by Reuters. This sensitivity analysis has been performed with reference to the balance of instruments held as at December 31st 2015.
Below is presented an analysis of the Company’s sensitivity to currency risk as at December 31st 2014, along with the effect on the net profit or loss, assuming a 12.142% increase or decrease in the USD/PLN exchange rate and a 7.2% increase or decrease in the EUR/PLN exchange rate.
Dec 31 2014 PLN '000 |
Effect of exchange rate increase/decrease on net profit/loss for the year | |||
---|---|---|---|---|
+12.142% | +7.2% | -12.142% | -7.2% | |
USD | EUR | USD | EUR | |
Classes of financial instruments | ||||
Financial assets | ||||
Derivative financial instruments | 6,099 | (307) | (6,099) | 307 |
Trade receivables | 26,064 | 1,559 | (26,064) | (1,559) |
Cash and cash equivalents | 4,097 | 3,061 | (4,097) | (3,061) |
Notes | 27,858 | - | (27,858) | - |
Other financial assets: | 138,128 | 447 | (138,128) | (447,000) |
Loans advanced to related entities | 112,531 | 433 | (112,531) | (433) |
Deposits | 3,816 | - | (3,816) | - |
Cash blocked in bank accounts | 21,780 | - | (21,780) | - |
Other receivables | 1 | 14 | (1) | (14) |
Total financial assets | 202,246 | 4,760 | (202,246) | (4,760) |
Financial liabilities | ||||
Borrowings | 307,057 (1) | 688 | (307,057) (1) | (688) |
Notes | 53,908 | - | (53,908) | - |
Finance lease liabilities | - | 5,758 | - | (5,758) |
Derivative financial instruments | 185,269 | (3,374) | (185,269) | 3,374 |
Trade payables | 160,117 | 2,682 | (160,117) | (2,682) |
Other financial liabilities | 3,493 | 1,439 | (3,493) | (1,439) |
Total financial liabilities | 709,844 | 7,193 | (709,844) | (7,193) |
Total | (507,598) | (2,433) | 507,598 | 2,433 |
(1) The calculation of the effect of an exchange rate change on the balance-sheet item takes into account the effect of cash flow hedge accounting. Assuming a 12.142% change of the USD/PLN exchange rate, the effect of cash flow hedge accounting would potentially lead to a change of PLN (498,143) thousand/PLN 498,143 thousand in the fair value of borrowings. Furthermore, the calculation takes into account the effect of paid front-end arrangement fees (measured at the exchange rate effective on the payment date), reducing financial liabilities under borrowings, which would potentially result in a change of PLN 6,762 thousand/PLN (6,762) thousand in the fair value of borrowings, assuming a 12.142% change of the USD/PLN exchange rate.
The above deviations of carrying amounts in PLN, which are dependent on currency exchange rates, were calculated on the basis of an implied annual change of the exchange rates as at December 31st 2014 by 12.142% (USD/PLN) and 7.2% (EUR/PLN), published by Reuters. This sensitivity analysis has been performed with reference to the balance of instruments held as at December 31st 2014. The purpose of taking a different approach to setting the percentage change in exchange rates in 2014 was to better reflect the fluctuations in exchange rates on financial markets.
32.4 Interest rate risk
The Parent is exposed to the risk of changes in cash flows caused by interest rate movements, as certain assets and liabilities held by the Parent have interest income and expense driven by floating interest rates. This position is driven primarily by the investment credit facilities under the 10+ and EFRA Programmes, as well as a financing and refinancing credit facility where the amount of interest is computed by reference to the floating LIBOR USD rate. The Parent manages the interest rate risk within the granted limits using interest rate swaps.
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).
Open interest rate contracts as at December 31st 2015:
Type of contract | Period | Notional amount (USD ‘000) | Company receives | Financial assets (PLN ‘000) | Financial liabilities (PLN ‘000) |
---|---|---|---|---|---|
Interest rate swap (IRS) | Jul 2011-Jan 2018 | 200,000 | 6M LIBOR | - | (61,260) |
Interest rate swap (IRS) | Jan 2015-Jan 2019 | 50,000 | 3M LIBOR | 992 | (11,003) |
Total | 992 | (72,263) |
In the listing above, IRS transactions are aggregated according to the currency of the notional amount and the reference rate. The ‘Period’ column shows the earliest start date and the latest end date of the period for contracts classified in a given group.
Open interest rate contracts as at December 31st 2014:
Type of contract | Period | Notional amount (USD ‘000) | Company receives | Financial assets (PLN ‘000) | Financial liabilities (PLN ‘000) |
---|---|---|---|---|---|
Interest rate swap (IRS) | Jul 2011-Jan 2018 | 200,000 | 6M LIBOR | - | (69,290) |
Interest rate swap (IRS) | Jan 2015-Jan 2019 | 50,000 | 3M LIBOR | - | (6,194) |
Total | - | (75,484) |
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 2015, assuming a 1.14% change in interest rates:
Dec 31 2015 PLN '000 |
Note | Carrying amount | Change | |
---|---|---|---|---|
+1.14% | -1.14% | |||
Classes of financial instruments | ||||
Financial assets | ||||
Derivative financial instruments (1) | 28 | 992 | (33,397) | 36,285 |
Cash and cash equivalents | 20 | 859,699 | 9,801 | (9,801) |
Other financial assets: | 677,978 | 7,728 | (7,728) | |
Oil and gas extraction facility decommissioning fund | 18 | 31,794 | 362 | (362) |
Deposits | 18 | 85,519 | 975 | (975) |
Security deposit | 18 | 3,176 | 36 | (36) |
Cash earmarked for the EFRA project | 18 | 438,329 | 4,997 | (4,997) |
Cash for work related to the removal of the MOPU from the YME field | 18 | 108,540 | 1,237 | (1,237) |
Cash for other capital expenditure commitments | 18 | 10,620 | 121 | (121) |
Total | 1,538,669 | (15,868) | 18,756 | |
Financial liabilities | ||||
Bank borrowings | 27.1 | 6,481,034 | 61,685 (2) | (61,685) (1) |
Non-bank borrowings | 27.2 | 92,146 | 1,050 | (1,050) |
Notes | 27.3 | 218,100 | 2,486 | (2,486) |
Finance lease liabilities | 27.4 | 208,028 | 2,372 | (2,372) |
Derivative financial instruments (1) | 28 | 72,263 | (25,352) | 26,330 |
Total | 7,071,571 | 42,241 | (41,263) |
(1) Interest rate swap (IRS). The difference between the change in the valuation amount, when the interest rate curve moves up or down 1.14%, arises at the time of calculating and discounting future cash flows (relating to the contract settlement) as at the valuation date. The cash flows are discounted at different interest rates (in the first case the interest rate curve is moved up 1.14%, in the second case the curve is moved down 1.14%).
(2) Net of fixed interest borrowings and paid front-end fees reducing liabilities under borrowings.
Below is presented an analysis of the Company’s sensitivity to interest rate risk as at December 31st 2014, assuming a 0.72% change in interest rates:
Dec 31 2014 PLN '000 |
Note | Carrying amount | Change | |
---|---|---|---|---|
+0.72% | -0.72% | |||
Classes of financial instruments | ||||
Financial assets | ||||
Cash and cash equivalents | 20 | 348,215 | 2,507 | (2,507) |
Other financial assets: | 241,720 | 1,741 | (1,741) | |
Oil and gas extraction facility decommissioning fund | 18 | 30,911 | 223 | (223) |
Deposits | 18 | 31,432 | 226 | (226) |
Security deposits (margins) | 18 | - | - | - |
Cash blocked in bank accounts | 18 | 179,377 | 1,292 | (1,292) |
Total | 589,935 | 4,248 | (4,248) | |
Financial liabilities | ||||
Bank borrowings | 27.1 | 6,215,612 | 36,963 (1) | (36,963) (1) |
Non-bank borrowings | 27.2 | 102,783 | 740 | (740) |
Notes | 27.3 | 213,479 | 1,537 | (1,537) |
Finance lease liabilities | 27.4 | 131,794 | 949 | (949) |
Derivative financial instruments (2) | 28 | 75,484 | (20,063) | 20,681 |
Total | 6,739,152 | 20,126 | (19,508) |
(1) Net of fixed rate borrowings and paid arrangement fees reducing liabilities under borrowings.
(2) Interest rate swap (IRS). The difference between the change in the valuation amount, when the interest rate curve moves up or down 0.72%, arises at the time of calculating and discounting future cash flows (relating to the contract settlement) as at the valuation date. The cash flows are discounted at different interest rates (in the first case the interest rate curve is moved up 0.72%, in the second case the curve is moved down 0.72%).
This sensitivity analysis has been performed with reference to the balance of instruments held as at December 31st 2015 and December 31st 2014. The effect of the interest rate changes on the fair value has been examined assuming that the currency exchange rates remain unchanged. In the case of derivative instruments held as at December 31st 2015, for the purpose of interest rate sensitivity analysis the interest rate curve is moved up or down by the annual historical volatility as at December 31st 2015, calculated based on historical volatility data for the interest rates of interest rate swaps (IRS) with a 6-month interest payment period and 3-year expiry term, published by Reuters. As regards the instruments held as at December 31st 2014, a hypothetical change of reference interest rates (3M LIBOR, 6M LIBOR) was used. The purpose of taking a different approach to setting the percentage change in interest rates in 2014 was to better reflect the fluctuations in interest rates on financial markets.
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.
The majority of the Group’s Polish subsidiaries participate in a real cash-pooling arrangement, whereby the Parent manages the structure on an on-going basis 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 derivative financial instrument 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,
- ensuring adequate quality and diversification of available financing sources,
- internal control processes and organisational efficiency facilitating prompt contingency response.
Contractual maturities of financial liabilities as at December 31st 2015 and December 31st 2014:
Contractual maturities of financial liabilities as at December 31st 2015:
Dec 31 2015 PLN '000 |
Note | Carrying amount | Contractual cash flows | Up to 6 months | 6-12 months | 1-2 years | 2-5 years | Over 5 years |
---|---|---|---|---|---|---|---|---|
Bank borrowings (other than overdraft facilities) | 27.1 | 5,899,405 | 6,993,805 | 437,891 | 1,353,819 | 132,216 | 2,797,770 | 2,272,109 |
Overdraft facilities | 27.1 | 581,629 | 581,629 | 581,629 | - | - | - | - |
Non-bank borrowings | 27.2 | 92,146 | 106,994 | 7,698 | 7,687 | 15,586 | 42,838 | 33,185 |
Notes | 27.3 | 218,100 | 218,100 | - | 218,100 | - | - | - |
Finance lease liabilities | 27.4 | 208,028 | 287,491 | 25,901 | 28,747 | 57,162 | 141,546 | 34,135 |
Trade payables | 30 | 1,232,510 | 1,232,510 | 1,232,494 | 16 | - | - | - |
Other financial liabilities | 30 | 181,731 | 181,731 | 168,498 | 4,325 | 6,360 | 956 | 1,592 |
Total | 8,413,549 | 9,602,260 | 2,454,111 | 1,612,694 | 211,324 | 2,983,110 | 2,341,021 |
Contractual maturities of financial liabilities as at December 31st 2014:
Dec 31 2014 PLN '000 |
Note | Carrying amount | Contractual cash flows | Up to 6 months | 6-12 months | 1-2 years | 2-5 years | Over 5 years |
---|---|---|---|---|---|---|---|---|
Bank borrowings (other than overdraft facilities) | 27.1 | 5,700,710 | 6,470,152 | 394,908 | 1,596,229 | 857,460 | 1,924,878 | 1,696,677 |
Overdraft facilities | 27.1 | 514,902 | 514,902 | 514,902 | - | - | - | - |
Non-bank borrowings | 27.2 | 102,783 | 122,641 | 3,306 | 12,343 | 13,782 | 47,123 | 46,087 |
Notes | 27.3 | 213,479 | 213,732 | - | 17,687 | 35,072 | 160,973 | - |
Finance lease liabilities | 27.4 | 131,794 | 163,404 | 17,500 | 17,786 | 35,441 | 74,166 | 18,511 |
Trade payables | 30 | 1,692,839 | 1,692,839 | 1,692,755 | 84 | - | - | - |
Other financial liabilities | 30 | 196,844 | 196,844 | 183,552 | 8,754 | 4,538 | - | - |
Total | 8,553,351 | 9,374,514 | 2,806,923 | 1,652,883 | 946,293 | 2,207,140 | 1,761,275 |
Maturity structure of derivative financial instruments as at December 31st 2015:
Dec 31 2015 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 | 140,536 | 140,559 | 191,269 | (42,405) | (8,305) | - | - |
Commodity options | 28 | 363 | 363 | 3 | 46 | 314 | - | - |
Currency forward and spot contracts | 28 | 13,173 | 13,875 | (629) | 6,878 | 6,815 | 811 | - |
Interest rate swap (IRS) | 28 | (71,271) | (72,032) | (30,911) | 3,946 | (20,963) | (25,944) | 1,840 |
Currency swap | 28 | (30,773) | (30,915) | (30,915) | - | - | - | - |
Total | 52,028 | 51,850 | 128,817 | (31,535) | (22,139) | (25,133) | 1,840 |
Maturity structure of derivative financial instruments as at December 31st 2014:
Dec 31 2014 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 | (29,337) | (29,337) | (2,414) | (17,440) | (7,670) | (1,813) | - |
Currency forward and spot contracts | 28 | (55,829) | (52,648) | (43,928) | (8,720) | - | - | - |
Interest rate swap (IRS) | 28 | (75,484) | (76,610) | (23,975) | 1,629 | (20,792) | (33,472) | - |
Currency swap | 28 | (33,463) | (31,655) | (27,983) | (3,672) | - | - | - |
Total | (194,113) | (190,250) | (98,300) | (28,203) | (28,462) | (35,285) | - |
* Carrying amount (positive fair value of derivative financial instruments plus negative fair value of derivative financial instruments) represents the fair value of derivative financial instruments disclosed in the statement of financial position (excluding CO2 emission allowance futures purchased to be used for settlement).
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 2015 and December 31st 2014, the concentration of credit risk exposure to any single counterparty in financial transactions of the Group did not exceed PLN 839.799 thousand and PLN 284.174 thousand, respectively (or 13.95% and 4.44% of the Parent’s equity, respectively). 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 2015 and December 31st 2014, the concentration of credit risk exposure to any single counterparty in trade transactions of the Group did not exceed PLN 163,009 thousand and PLN 141,880 thousand, respectively (or 2.71% and 2.21% of the Parent’s equity, respectively).
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 2015 | Dec 31 2014 |
---|---|---|---|
Derivative financial instruments | 28; 31.2 | 217,179 | 4,430 |
Trade receivables | 18 | 1,550,900 | 1,406,501 |
Cash and cash equivalents | 20 | 859,699 | 348,215 |
Other financial assets | 18 | 818,457 | 1,332,033 |
Total | 31.1 | 3,446,235 | 3,091,179 |
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 ageing analysis of receivables past due but not impaired, see Note 18.1.
The Notes to the consolidated financial statements are an integral part of the statements.
(This is a translation of a document originally issued in Polish)