Integrated Annual Report of LOTOS Capital Group 2015

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)

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)

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)

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)

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

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)

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)

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)	-

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.