11.2 Objectives and policies of financial risk management

The Group is exposed to financial risks, including:

  • market risk (risk of movements in commodity and petroleum product prices, risk of movements in prices of CO2 allowances, currency risk, interest rate risk),
  • liquidity risk,
  • credit risk in financial and trade transactions.

The Parent has appropriate units (Finance Management Office, Financial Risk Analysis and Control Office) reporting to the Chief Financial Officer, who coordinates and exercises ongoing supervision of the LOTOS 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 the 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, issues 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 of budget and strategic objectives being 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 appropriate 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,
  • separation of responsibilities for execution of transactions, risk analysis and control, documentation of and accounting for transactions, and their allocation to different corporate units.

The Parent monitors and reports all managed market risks on an ongoing basis. The Parent 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 July 2019, as part of the refinancing of foreign-currency loans used to finance the 10+ Programme, the existing hedging relationships were terminated and new financing agreements were created to maintain the type of hedge accounting applied (cash flow hedge) and designated as the hedged item for future sales of oil products denominated in USD.

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