Grupa LOTOS S.A. - Annual Report 2010

Description of Financial Instruments

Financial Assets and Liabilities Held for Trading

The Group discloses derivative transactions with positive fair values under financial assets held for trading. Derivative transactions with negative fair values are disclosed under financial liabilities held for trading. Under financial assets and liabilities held for trading the Company discloses valuation of the following types of derivatives: swaps, futures, forwards, options, interest-rate swaps, forward rate agreement.

Fair value of commodity swaps is established by reference to future cash flows connected with the transactions, calculated on the basis of the difference between the average market price and the transaction price. The fair value has been established on the basis of prices quoted on active markets, as provided by an external consultancy (Level 2 in the fair value hierarchy).

Fair value of futures contracts for carbon dioxide (CO₂) allowances (EUA, CER) is established by reference to the difference between the market price, quoted by the European Climate Exchange (ECX) for the valuation date, and the transaction price (Level 1 in the fair value hierarchy).

Fair value of spots and currency forwards is established by reference to future discounted cash flows connected with the transactions, calculated on the basis of the difference between the forward rate and the transaction price. The forward rate is calculated on the basis of the fixing rate quotations of the National Bank of Poland and the interest rate curve implied in fx swaps (Level 2 in the fair value hierarchy).

Apart from the parameters used in the valuation of currency forwards, implied volatility is additionally taken into account in calculating the value of currency options (Level 2 in the fair value hierarchy).

Fair value of FRAs is established by reference to future discounted cash flows connected with the transactions, calculated on the basis of the difference between the forward rate and the transaction price. The forward rate is calculated using the zero-coupon interest rate curve based on 6M or 3M LIBOR, depending on the type of transaction. This is considered Level 2 in the fair value hierarchy.

Financial Assets Available for Sale

Non-current financial assets available for sale measured at fair value as at December 31st 2010 and December 31st 2009 include mainly shares and equity interests for which there is no active market.

Loans Advanced and Receivables

1. On September 23rd 2003 and April 8th 2004, Grupa LOTOS S.A. signed with Rafineria Nafty GLIMAR S.A. loan agreements for the financing of operating and investing activities, including, in particular, the Glimar Hydrocomplex investment project, for an aggregate amount of PLN 90m. By December 31st 2004, Grupa LOTOS S.A. had advanced PLN 48m to Rafineria Nafty GLIMAR S.A. under these agreements. Additionally, in connection with the Letter of Comfort signed by Grupa LOTOS S.A. on February 12th 2004 for Bank Przemysłowo-Handlowy S.A., the Company undertook commitments relating to the co-financing of the Glimar Hydrocomplex investment project and maintaining of an appropriate financial standing of Rafineria Nafty GLIMAR S.A. In the opinion of the Company’s Management Board, these commitments do not represent financial liabilities as at the balance-sheet date.

As at December 31st 2010 and December 31st 2009, an impairment loss was carried for the full value of the receivables under these loans.

Financial Liabilities Measured at Amortised Cost

Financial liabilities measured at amortised cost include loans, overdraft facilities, and liabilities under finance lease.

None of the following economic events or situations requiring disclosure occurred at the Group during the reporting periods ended December 31st 2010 and December 31st 2009:

• The Group did not reclassify any financial assets (IFRS 7, paragraph 12);
• No collateral was established for the benefit of the Group on any class of assets, which would result in credit enhancements (IFRS 7, paragraph 15);
• The Group did not issue any instrument that contains both a liability and an equity component (IFRS 7, paragraph 17);
• The Group met all contractual provisions (IFRS 7, paragraph 18);
• Interest income in connection with impaired financial assets was recognised by the Group as immaterial (IFRS 7, paragraph 20.d);
• The Group does not apply hedge accounting due to the fact that formal requirements are not met; accordingly, changes in fair value of derivative instruments are charged against profit or loss (IFRS 7, paragraph 22);
• The Group did not acquire any financial assets at a price different from their fair value (IFRS 7, paragraph 28);
• The Group did not obtain any assets by taking possession of collateral held as security (IFRS 7, paragraph 38).
 

42.1 Fair Value of Financial Instruments

Dec 31 2010 (PLN '000)	Note	Financial assets at fair value through profit or loss – held for trading	Loans and receivables	Financial assets available for sale	Financial liabilities at fair value through profit or loss – held for trading	Financial liabilities at amortised cost	Total
Shares:		-	-	9,927	-	-	9,927
- non-current	23	-	-	9,915	-	-	9,915
- current	28	-	-	12	-	-	12
Decommissioning fund	23	-	21,668	-	-	-	21,668
Deposits:		-	5,932	-	-	-	5,932
- non-current	23	-	-	-	-	-	-
- current	28	-	5,932	-	-	-	5,932
Security deposits (margins)	23	-	3,108	-	-	-	3,108
Derivative financial instruments:		69,370	-	-	-	-	69,370
- non-current	23	29,667	-	-	-	-	29,667
- current	28	39,703	-	-	-	-	39,703
Trade and other receivables:		-	1,810,637	-	-	-	1,810,637
- non-current	25	-	28,612	-	-	-	28,612
- current		-	1,782,025	-	-	-	1,782,025
Cash and cash equivalents	30	-	391,266	-	-	-	391,266
Trade and other payables:	37.1	-	-	-	-	(2,034,439)	(2,034,439)
- non-current		-	-	-	-	(26,211)	(26,211)
- current		-	-	-	-	(2,008,228)	(2,008,228)
Loans and borrowings:	34	-	-	-	-	(6,335,459)	(6,335,459)
- non-current		-	-	-	-	(4,403,453)	(4,403,453)
- current		-	-	-	-	(1,932,006)	(1,932,006)
Notes	35					(52,670)	(52,670)
- non-current		-	-	-	-	-	-
- current		-	-	-	-	(52,670)	(52,670)
Financial liabilities:		-	-	-	(279,807)	(74,255)	(354,062)
Lease liabilities:	37.3	-	-	-	-	(74,255)	(74,255)
- non-current		-	-	-	-	(71,559)	(71,559)
- current		-	-	-	-	(2,696)	(2,696)
Derivative financial instruments:	37.2	-	-	-	(279,807)	-	(279,807)
- non-current		-	-	-	(107,537)	-	(107,537)
- current		-	-	-	(172,270)	-	(172,270)
Total		69,370	2,232,611	9,927	(279,807)	(8,496,823)	(6,464,722)

As at December 31st 2010, the Group held no financial assets whose terms would be renegotiated due to the possibility of default or impairment.

As at December 31st 2010, the Group did not carry any financial assets or liabilities measured at fair value through profit or loss whose components would be designated as measured at fair value through profit or loss on initial recognition (fair value option).

As at December 31st 2010, the Group did not carry any financial assets held to maturity.

As at December 31st 2010, the carrying value of loans, receivables and financial liabilities measured at amortised cost did not significantly differ from their fair value (not applicable to loans and borrowings bearing interest at a fixed rate). The majority of non-current contracted loans and borrowings bore interest at floating rates, with interest payable in a short term.

As at December 31st 2010, financial assets available for sale measured at fair value comprised mainly shares for which there was no active market.

The methods and assumptions used to measure the fair value of financial instruments have been described in Note 10 and Note 42.

Dec 31 2009 (restated) (PLN '000)	Note	Financial assets at fair value through profit or loss – held for trading	Loans and receivables	Financial assets available for sale	Financial liabilities at fair value through profit or loss – held for trading	Financial liabilities at amortised cost	Total
Shares:		-	-	9,929	-	-	9,929
- non-current	23	-	-	9,917	-	-	9,917
- current	28	-	-	12	-	-	12
Decommissioning fund	23	-	18,851	-	-	-	18,851
Deposits		-	6,130	-	-	-	6,130
- non-current	23	-	6,130	-	-	-	6,130
- current	28	-	-	-	-	-	-
Security deposits (margins)	23	-	3,316	-	-	-	3,316
Derivative financial instruments:		101,879	-	-	-	-	101,879
- non-current	23	54,862	-	-	-	-	54,862
- current	28	47,017	-	-	-	-	47,017
Trade and other receivables:		-	1,515,812	-	-	-	1,515,812
- non-current	25	-	22,061	-	-	-	22,061
- current		-	1,493,751	-	-	-	1,493,751
Cash and cash equivalents	30	-	355,054	-	-	-	355,054
Trade and other payables:	37.1	-	-	-	-	(1,094,702)	(1,094,702)
- non-current		-	-	-	-	(38,894)	(38,894)
- current		-	-	-	-	(1,055,808)	(1,055,808)
Loans (contracted):	34	-	-	-	-	(5,701,071)	(5,701,071)
- non-current		-	-	-	-	(4,942,590)	(4,942,590)
- current		-	-	-	-	(758,481)	(758,481)
Financial liabilities		-	-	-	(236,371)	(83,149)	(319,520)
Lease liabilities:	37.3	-	-	-	-	(83,149)	(83,149)
- non-current		-	-	-	-	(80,304)	(80,304)
- current		-	-	-	-	(2,845)	(2,845)
Derivative financial instruments:	37.2	-	-	-	(236,371)	-	(236,371)
- non-current		-	-	-	(220,085)	-	(220,085)
- current		-	-	-	(16,286)	-	(16,286)
Total		101,879	1,899,163	9,929	(236,371)	(6,878,922)	(5,104,322)

As at December 31st 2009, the Group held no financial assets whose terms would be renegotiated due to the possibility of default or impairment.

As at December 31st 2009, the Group did not carry any financial assets or liabilities measured at fair value through profit or loss whose components would be designated as measured at fair value through profit or loss on initial recognition (fair value option).

As at December 31st 2009, the Group did not carry any financial assets held to maturity.

As at December 31st 2009, the carrying value of loans, receivables and financial liabilities measured at amortised cost did not significantly differ from their fair value (not applicable to loans bearing interest at a fixed rate). The majority of non-current contracted loans and borrowings bore interest at floating rates, with interest payable in a short term.

As at December 31st 2009, financial assets available for sale measured at fair value comprised mainly shares for which there was no active market.

The methods and assumptions used to measure the fair value of financial instruments have been described in Note 10 and Note 42.

42.2 Items of Income, Expenses, Gains and Losses Disclosed in the Statement of Comprehensive Income by Category of Financial Instrument

Year ended Dec 31 2010 (PLN '000)	Note	Financial assets/ liabilities at fair value through profit or loss – held for trading	Loans and receivables	Financial assets available for sale	Financial liabilities at amortised cost	Total
Interest income / (expense)	12.3 12.6	-	18,829	-	(173,267) (1)	(154,438)
Foreign exchange gains/ (losses)	12.3 12.7	-	(78,776)	-	15,848	(62,928)
Reversal/ (recognition) of impairment losses	12.2 12.4 12.6	-	(7,729)	(2)	-	(7,731)
Gains/ (losses) on fair value measurement of derivative financial instruments	12.3 12.6	(75,945)	-	-	-	(75,945)
Gains/ (losses) on realisation of derivative financial instruments	12.3 12.6	(117,091)	-	-	-	(117,091)
Gains/ (losses) on disposal		-	-	-	-	-
Total		(193,036)	(67,676)	(2)	(157,419)	(418,133)

  

Year ended Dec 31 2009 (restated) (PLN '000)	Note	Financial assets/ liabilities at fair value through profit or loss – held for trading	Loans and receivables	Financial assets available for sale	Financial liabilities at amortised cost	Total
Interest income / (expense)	12.3 12.6	-	22,196	-	(169,264) (1)	(147,068)
Foreign exchange gains/ (losses)	12.3 12.7	-	(64,005)	-	513,441	449,436
Reversal/ (recognition) of impairment losses	12.2 12.4 12.6	-	(28,778)	-	-	(28,778)
Gains/ (losses) on fair value measurement of derivative financial instruments	12.3 12.6	(214,594)	-	-	-	(214,594)
Gains/ (losses) on realisation of derivative financial instruments	12.3 12.6	216,047	-	-	-	216,047
Gains/ (losses) on disposal	12.3	-	-	688	-	688
Total		1,453	(70,587)	688	344,177	275,731

  

42.3 Sensitivity Analysis with Respect to Market Risk Related to Fluctuations in FX Rates, Interest Rates, Prices of Carbon Dioxide (CO₂) Emission Allowances and Prices of Raw Materials and Petroleum Products

Below is presented an analysis of the Group's sensitivity to currency risk as at December 31st 2010, along with the effect of such a risk on the financial performance, assuming a 4% increase or decrease in the USD/PLN and EUR/PLN currency exchange rates and constant levels of all other variables:

Dec 31 2010 (PLN '000)	Note	Carrying value in a foreign currency, translated into PLN as at the balance-sheet date	+4% change in exchange rate, effect on year's result		-4% change in exchange rate, effect on year's result
			USD	EUR	USD	EUR
Trade and other receivables	26	213,769	6,404	2,144	(6,404)	(2,144)
Financial assets – derivative financial instruments		69,370	(56,694)	14,855	56,694	(14,855)
Financial assets – other		6,929	237	40	(237)	(40)
Cash and cash equivalents	30	67,049	1,569	1,113	(1,569)	(1,113)
Trade and other payables	37.1	(1,630,563)	(61,098)	(4,123)	61,098	4,123
Loans and borrowings	34	(5,834,653)	(235,866)	(1,478)	235,866	1,478
Financial liabilities – derivative financial instruments	37.2	(279,807)	10,783	27,526	(10,783)	(27,526)
Finance lease liabilities	37.2	(72,475)	-	(2,897)	-	2,897
Total		(7,460,381)	(334,665)	37,180	334,665	(37,180)

As at December 31st 2010, the Parent Undertaking held futures for the purchase of carbon dioxide (CO₂) EU emission allowances (EUA), measured at fair value.

As at December 31st 2010, the financial assets related to positive valuation of the futures for the purchase of carbon dioxide (CO₂) emission allowances amounted to PLN 615 thousand.

As at December 31st 2010, the financial liabilities related to negative valuation of the futures for the purchase of carbon dioxide (CO₂) emission allowances were PLN 463 thousand.

A change in the price of the carbon dioxide (CO₂) emission allowances up or down by 10% could potentially lead to a change in the fair value of financial assets and liabilities related to the futures for the purchase of carbon dioxide (CO₂) emission allowances of PLN (176) 176 thousand.

Below is presented an analysis of the Group’s sensitivity to currency risk as at December 31st 2009, along with the effect of such a risk on the financial performance, assuming a 4% increase or decrease in the USD/PLN and EUR/PLN currency exchange rates and constant levels of all other variables:

Dec 31 2009 (restated) (PLN '000)	Note	Carrying value in a foreign currency, translated into PLN as at the balance-sheet date	+4% change in exchange rate, effect on year's result		-4% change in exchange rate, effect on year's result
			USD	EUR	USD	EUR
Trade and other receivables	26	78,389	1,469	1,668	(1,469)	(1,668)
Financial assets – derivative financial instruments		101,879	(53,432)	32,158	53,432	(32,158)
Financial assets – other		7,335	234	59	(234)	(59)
Cash and cash equivalents	30	26,895	550	527	(550)	(527)
Trade and other payables	37.1	(803,944)	(28,753)	(3,405)	28,753	3,405
Loans (contracted)	34	(5,016,021)	(199,674)	(584)	199,674	584
Financial liabilities – derivative financial instruments	37.2	(236,371)	14,685	938	(14,685)	(938)
Finance lease liabilities	37.2	(81,344)	-	(3,232)	-	3,232
Total		(5,923,182)	(264,921)	28,129	264,921	(28,129)

As at December 31st 2009 the Parent Undertaking held futures for the purchase of carbon dioxide (CO₂) EU emission allowances (EUA), measured at fair value.

As at December 31st 2009, the financial assets related to positive valuation of the futures for the purchase of carbon dioxide (CO₂) emission allowances amounted to PLN 537 thousand.

As at December 31st 2009, the financial liabilities related to negative valuation of the futures for the purchase of carbon dioxide (CO₂) emission allowances were PLN 675 thousand.

A change in the price of the carbon dioxide (CO₂) emission allowances up or down by 10% could potentially lead to a change in the fair value of financial assets and liabilities related to the futures for the purchase of carbon dioxide (CO₂) emission allowances of PLN 107 (107) thousand.

Below is presented an analysis of the Group’s sensitivity to interest rate risk as at December 31st 2010, assuming a 0.2% increase or decrease in the interest rate:

Dec 31 2010 PLN '000	Note	Carrying value	Change
			+0,2%	-0,2%
Cash and cash equivalents	30	391,266	783	(783)
Decommissioning fund	23	21,668	43	(43)
Financial assets – derivative financial instruments (1)		29,742	(1,358)	1,366
Financial assets – other (2)		9,040	18	(18)
Loans (contracted)	34	(6,335,459)	(10,583)	10,583
Finance lease liabilities		(74,255)	(149)	149
Financial liabilities – derivative financial instruments (1)		(228,237)	13,690	(13,839)
Total		(6,186,235)	2,444	(2,585)

  

As at December 31st 2010, the carrying value of financial assets and liabilities (cash and cash equivalents, decommissioning fund, deposits, security deposits (margins), derivative financial instruments and liabilities under contracted loans, finance leases and derivative financial instruments) which are sensitive to interest rate risk amounted to PLN (6,186,235) thousand net.

A change in interest rates up or down by 0.2% could potentially lead to a change in financial assets and liabilities as at December 31st 2010 of PLN 2,444 (2,585) thousand net.

Below is presented an analysis of the Group’s sensitivity to interest rate risk as at December 31st 2009, assuming a 0.2% increase or decrease in the interest rate:

Dec 31 2009 (restated) PLN '000	Note	Carrying value	Change
			+0,2%	-0,2%
Cash and cash equivalents	30	355,054	710	(710)
Decommissioning fund	23	18,851	38	(38)
Financial assets – derivative financial instruments (1)		54,767	4,120	(4,225)
Financial assets – other (2)		9,446	19	(19)
Loans (contracted)	34	(5,701,071)	(9,901)	9,901
Finance lease liabilities		(83,149)	(166)	166
Financial liabilities – derivative financial instruments (1)		(219,720)	12,426	(12,508)
Total		(5,565,822)	7,246	(7,433)

  

As at December 31st 2009, the carrying value of financial assets and liabilities (cash and cash equivalents, decommissioning fund, deposits, security deposits (margins), derivative financial instruments and liabilities under contracted loans, finance leases and derivative financial instruments) which are sensitive to interest rate risk amounted to PLN (5,565,822) thousand net.

A change in interest rates up or down by 0.2% could potentially lead to a change in the value of financial assets and liabilities as at December 31st 2009 of PLN 7,246 (7,433) thousand net.

42.4 Maturity Structure of Financial Liabilities and Derivative Financial Instruments

Maturity structure of financial liabilities as at December 31st 2010:

PLN '000	Note	Carrying value	Contractual cash flows	Up to 6 months	6–12 months	1–2 years	2–5 years	Over 5 years
Secured bank loans and borrowings (other than overdraft facilities)	34	6,060,628	6,153,502	83,942	1,576,180	359,355	1,009,547	3,124,478
Overdraft facilities	34	274,831	275,548	255,198	20,350	-	-	-
Notes	35	52,670	52,670	52,670	-	-	-	-
Finance lease liabilities	37.3	74,255	74,255	1,250	1,446	5,693	27,081	38,785
Trade and other payables	37.1	2,034,439	2,034,439	1,985,605	22,623	24,918	1,293	-
Total		8,496,823	8,590,414	2,378,665	1,620,599	389,966	1,037,921	3,163,263

Maturity structure of financial liabilities as at December 31st 2009:

PLN '000	Note	Carrying value	Contractual cash flows	Up to 6 months	6–12 months	1–2 years	2–5 years	Over 5 years
Secured bank loans and borrowings (other than overdraft facilities)	34	5,190,356	5,291,777	140,616	116,197	1,295,279	864,392	2,875,293
Overdraft facilities	34	510,715	510,715	510,600	115	-	-	-
Finance lease liabilities	37.3	83,149	83,149	1,159	1,686	3,873	19,949	56,482
Trade and other payables	37.1	1,094,702	1,094,702	1,046,171	9,637	15,728	23,166	-
Total		6,878,922	6,980,343	1,698,546	127,635	1,314,880	907,507	2,931,775

  

Maturity structure of derivative financial instruments as at December 31st 2010:

PLN '000	Note	Carrying value *	Contractual cash flows	Up to 6 months	6–12 months	1–2 years	2–5 years	Over 5 years
Commodity swap	28 37.2	(2,045)	(2,045)	(423)	(1,622)	-	-	-
Futures (CO2 emissions)	23 28 37.2	152	152	-	35	117	-	-
Currency forward and spot contracts	28 37.2	(4,113)	(4,113)	4,045	(8,158)	-	-	-
Forward rate agreements (FRAs)	28 37.2	315	315	315	-	-	-	-
Interest rate swap (IRS)	23 37.2	(198,810)	(198,810)	(120,823)	-	-	(62,388)	(15,599)
Currency swap	37.2	(5,936)	(5,936)	(5,936)	-	-	-	-
Total		(210,437)	(210,437)	(122,822)	(9,745)	117	(62,388)	(15,599)

  

Maturity structure of derivative financial instruments as at December 31st 2009:

 

PLN '000	Note	Carrying value *	Contractual cash flows	Up to 6 months	6–12 months	1–2 years	2–5 years	Over 5 years
Futures (CO2 emissions)	23 28 37.2	(138)	(138)	-	132	86	(356)	-
Currency forward and spot contracts	28 37.2	33,777	33,777	32,165	1,612	-	-	-
Interest rate swap (IRS)	23 37.2	(164,953)	(164,953)	-	-	(152,428)	(42,098)	29,573
Currency swap	37.2	(3,178)	(3,178)	(3,178)	-	-	-	-
Total		(134,492)	(134,492)	28,987	1,744	(152,342)	(42,454)	29,573