21. Financial Instruments

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. Financial assets and liabilities held for trading include the following types of derivatives: forwards, futures, swaps, and options.

Fair value of full barrel 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. Commodity swaps are valued on the basis of a hypothetical offsetting position (closing transaction) with the use of the arithmetic mean of market quotations.

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.

Fair value of 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 implied interest rate curve based on fx swaps. Apart from the above parameters used in the valuation of currency forwards, implied volatility is additionally taken into account in calculating the value of currency options.

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 on the basis of the zero-coupon interest rate curve.

Financial Assets Available for Sale

Non-current financial assets available for sale measured at fair value as at December 31st 2008 and December 31st 2007 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 2008 and December 31st 2007, assets under the advanced loans were fully covered by an allowance. As at December 31st 2008 and December 31st 2007, the Company had provisions of PLN 15,853 thousand for potential liabilities under these agreements (see Note 31).

On January 19th 2005, the District Court of Nowy Sącz declared Rafineria Nafty GLIMAR S.A. of Gorlice bankrupt. Upon consideration on March 11th 2008 of the petition for discontinuation of the bankruptcy proceedings, submitted by bankruptcy administrator Capricorn Sp. z o.o. of Nowy Sącz, the District Court of Nowy Sącz, Commercial Court Division V, decided to discontinue the bankruptcy proceedings pursuant to Art. 361.2 of the Bankruptcy and Recovery Law.

The decision issued by the District Court of Nowy Sącz, Commercial Court Division V, was appealed against to the Regional Court of Kraków, Appellate Commercial Division XII. On July 25th 2008, the Regional Court of Kraków, Appellate Commercial Division XII, issued a decision (court docket No. XII Gz 242/08) dismissing the appeals. Accordingly, the decision of the District Court of Nowy Sącz, Commercial Court Division V on discontinuation of the bankruptcy proceedings became final.

On December 1st 2008, Grupa LOTOS S.A. concluded an agreement with Podkarpacki Holding Budowy Dróg Drogbud Sp. z o.o. of Strzyżów concerning disposal of its shares in Rafineria Nafty GLIMAR S.A.

Under the agreement, Grupa LOTOS S.A. sold 9,520,000 shares in Rafineria Nafty GLIMAR S.A. with a par value of PLN 10 per share, representing 91.54% of the company’s share capital. The agreed transaction value was PLN 1,000 thousand. As at the agreement execution date, the carrying value of the shares in Grupa LOTOS S.A.’s accounting books was PLN 0.

2. On November 12th 2001 an agreement was concluded under which Petrobaltic S.A. granted a loan to Energobaltic Sp. z o.o. Petrobaltic S.A.’s receivables under the loan (including accrued interest) amounted to USD 7,764 thousand as at December 31st 2008 (USD 7,381 thousand as at December 31st 2007), which represented the equivalent of PLN 22,994 thousand (PLN 17,974 thousand as at December 31st 2007). On the basis of an analysis of the economic and financial standing of Energobaltic Sp. z o.o., performed based on the 2007 financial statements, and considering the projections for the following years and the related risk of a loss of liquidity in the event of failure of the measures taken by the Management Board of Energobaltic Sp. z o.o. to restructure the company’s indebtedness, i.e. to postpone the repayment of bank loans and shareholder loans, an impairment charge was made for the full value of the loan. An impairment charge was also made for the value of shares held in Energobaltic Sp. z o.o.

Financial Liabilities Valued at Amortised Cost

Financial liabilities valued 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 2008 and December 31st 2007:

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

21.1. Carrying Value of Financial Instruments

Dec 31 2008 (audited)	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:		-	-	11,041	-	-	11,041
- non-current	19	-	-	9,917	-	-	9,917
- current		-	-	1,124	-	-	1,124
Prepayments for shares	20	-	25,332	-	-	-	25,332
Decommissioning fund	19	-	16,599	-	-	-	16,599
Loans:	30	-	-	-	-	-	-
- non-current		-	-	-	-	-	-
- current		-	-	-	-	-	-
Derivative financial instruments	20	302,304	-	-	-	-	302,304
Trade and other receivables:		-	1,260,660	-	-	-	1,260,660
- non-current		-	9,152	-	-	-	9,152
- current		-	1,251,508	-	-	-	1,251,508
Cash and cash equivalents	24	-	712,801	-	-	-	712,801
Trade and other payables:	33	-	-	-	-	(1,260,855)	(1,260,855)
- non-current		-	-	-	-	(4,916)	(4,916)
- current		-	-	-	-	(1,255,939)	(1,255,939)
Loans and borrowings:	30	-	-	-	-	(3,919,605)	(3,919,605)
- non-current		-	-	-	-	(3,412,245)	(3,412,245)
- current		-	-	-	-	(507,360)	(507,360)
Financial liabilities:	32	-	-	-	(218,526)	(1,415)	(219,941)
Lease liabilities:	32	-	-	-	-	(1,415)	(1,415)
- non-current		-	-	-		(854)	(854)
- current		-	-	-	-	(561)	(561)
Derivative financial instruments	32	-	-	-	(218,526)	-	(218,526)
Total		302,304	2,015,392	11,041	(218,526)	(5,181,875)	(3,071,664)

As at December 31st 2008, the Group held no financial assets whose terms would be renegotiated due to the possibility of default or impairment.

As at December 31st 2008, the Group did not hold any financial assets or liabilities measured at fair value through profit or loss whose components were initially recognised at fair value through profit or loss (fair value option).

As at December 31st 2008, the Group did not have any financial assets held to maturity.

As at December 31st 2008, the carrying value of the above classes of financial instruments corresponded to their fair value.

As at December 31st 2008, the carrying value of cash and cash equivalents, current trade receivables and payables and financial liabilities at amortised cost approximated their fair value. Long-term bank loans bear interest at floating rates, with interest payable in a short term.

As at December 31st 2008, the financial assets available for sale measured at fair value comprised mainly shares for which there was no active market.

Dec 31 2007 (audited) 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:		-	-	8,178	-	-	8,178
- non-current	19	-	-	8,093	-	-	8,093
- current		-	-	85	-	-	85
Prepayments for shares	20	-	23,117	-	-	-	23,117
Decommissioning fund	19	-	13,443	-	-	-	13,443
Loans:	30	-	58	-	-	-	58
- non-current		-	17	-	-	-	17
- current		-	41	-	-	-	41
Derivative financial instruments	20	96,099	-	-	-	-	96,099
Trade and other receivables:		-	1,461,080	-	-	-	1,461,080
- non-current		-	12,668	-	-	-	12,668
- current		-	1,448,412	-	-	-	1,448,412
Cash and cash equivalents	24	-	924,995	-	-	-	924,995
Trade and other payables:	33	-	-	-	-	(1,222,473)	(1,222,473)
- non-current		-	-	-	-	(3,774)	(3,774)
- current		-	-	-	-	(1,218,699)	(1,218,699)
Loans and borrowings:	30	-	-	-	-	(1,360,136)	(1,360,136)
- non-current		-	-	-	-	(842,943)	(842,943)
- current		-	-	-	-	(517,193)	(517,193)
Financial liabilities:	32	-	-	-	(3,906)	(1,628)	(5,534)
Lease liabilities:	32	-	-	-	-	(1,628)	(1,628)
- non-current		-	-	-	-	(629)	(629)
- current		-	-	-	-	(999)	(999)
Derivative financial instruments	32	-	-	-	(3,906)	-	(3,906)
Total		96,099	2,422,693	8,178	(3,906)	(2,584,237)	(61,173)

As at December 31st 2007, the Group held no financial assets whose terms would be renegotiated due to the possibility of default or impairment.

As at December 31st 2007, the Group did not hold any financial assets or liabilities measured at fair value through profit or loss whose components were initially recognised at fair value through profit or loss (fair value option).

As at December 31st 2007, the Group did not have any financial assets held to maturity. As at
December 31st 2007, the carrying value of the above classes of financial instruments corresponded to their fair value.

As at December 31st 2007, the carrying value of cash and cash equivalents, current trade receivables and payables and financial liabilities at amortised cost approximated their fair value. Long-term bank loans bear interest at floating rates, with interest payable in a short term.

As at December 31st 2007, the 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 the financial instruments held by the Group are described in Note 10 and Note 21.

21.2. Items of Income, Expenses, Gains and Losses Disclose
in the Income Statement by Categories of Financial Instruments

Year ended Dec 31 2008 (audited) PLN ‘000	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)	-	50,486	-	(48,565)	1,921
Foreign exchange gains/(losses)	-	(76,897)	-	(591,642)	(668,539)
(Recognition)/reversal of impairment charges	-	(27,931)	-	-	(27,931)
Gains/(losses) on fair value measurement and realisation	(247,237)	-	-	-	(247,237)
Gains/(losses) on disposal	-	-	1,027	-	1,027
Total	(247,237)	(54,342)	1,027	(640,207)	(940,759)

 

Year ended Dec 31 2008 (audited) PLN ‘000	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)	-	41,205	-	(28,182)	13,023
Foreign exchange gains/(losses)	-	(71,414)	-	11,239	(60,175)
(Recognition)/reversal of impairment charges	-	5,976	-	-	5,976
Gains/(losses) on fair value measurement and realisation	122,473	-	-	-	122,473
Gains/(losses) on disposal	2,188	-	2,710	-	4,898
Total	124,661	(24,233)	2,710	(16,943)	86,195

21.3. Financial Risk Management

The Company is exposed to financial risk, including chiefly:

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

The Financial Risk Management Committee (“FRMC”) operating within the Parent Undertaking is responsible for the supervision and coordination of the financial risk management process at Grupa LOTOS S.A. In order to ensure the efficiency and operational security of this process, the following areas have been distinguished: financial transaction area (front-office), risk analysis and control area (middle-office), and transaction documentation and settlement area (back-office).

The key objectives sought to be achieved through financial risk management are as follows:

• maximising the result on market risk management at the assumed risk level,
• stabilising cash flows,
• ensuring short-term financial liquidity,
• supporting the activities related to the arrangement of financing for investment activities.

In order to achieve these objectives, documents have been prepared and approved at appropriate decision-making levels at the Parent Undertaking. These documents specify the necessary framework for effective and secure functioning of the financial risk management process, including principally:

• methodology for quantifying exposures to particular risks (risk mapping),
• acceptable financial instruments,
• method of assessing financial risk management,
• limits within risk management,
• reporting method,
• credit limits for counterparties in financial transactions.

The Parent Undertaking monitors all managed market risks on an ongoing basis. Opening a position with respect to risks which do not arise as part of Grupa LOTOS S.A.’s core activity is prohibited. The Company uses liquid derivatives which it is able to value by applying commonly applied valuation models. The valuation of the underlying position and derivatives is performed based on market data received from reliable providers.

The Group does not apply hedging accounting; accordingly, any change in the fair value of derivatives is charged to the income statement.

Risk Related to Prices of Raw Materials and Petroleum Products

The concept for the management of risk related to prices of raw materials and petroleum products covers the period until the end of 2010, by which time also the 10+ Programme is to have been completed. The main objective of the management concept is to increase the probability of generating cash flows guaranteeing safe financing of investment projects under the 10+ Programme.
The risk management concept provides for maximum hedge ratios for the underlying position, decreasing each year relative to a current budget year. Within the framework of accepted limits and guidelines, the Financial Risk Management Committee adopts decisions defining the limits and volumes of hedging transactions.

The basic risk map is created by converting the map of price indices used in trade contracts into the map of indices for which there exist liquid markets of derivatives. Such conversion takes into account relevant statistical relations between base indices and market indices. The converted map serves a basis for defining the model of the refining margin. The margin is defined as the difference between the value of indices representing products sold, weighted by the share of particular indices in a barrel, and the index representing raw materials purchased.

As at December 31st 2008, the estimated underlying refining margin position stood at (in barrels):

Period	Underlying position
Q1 2009	9,930,140
Q2 2009	6,720,316
Q3 2009	9,894,993
Q4 2009	9,452,383
Q1 2010	11,805,410
Q2 2010	15,699,834
Q3 2010	15,569,563
Q4 2010	14,712,155

As at December 31st 2007, the estimated underlying refining margin position stood at (in barrels):

Period	Underlying position
Q1 2008	9,935,622
Q2 2008	9,475,025
Q3 2008	9,543,912
Q4 2008	9,658,366
Q1 2009	9,939,825
Q2 2009	6,629,920
Q3 2009	9,611,546
Q4 2009	10,395,482
Q1 2010	15,164,964
Q2 2010	15,869,788
Q3 2010	16,000,117
Q4 2010	16,698,049

In connection with concerns about the impact of the deepening economic slowdown on the refining margins market, in 2008 Grupa LOTOS S.A. continued to execute transactions to hedge its refining margins.

In addition, in order to minimise the basis risk related to the difference between the barrel structure in the executed hedging transactions and the barrel structure resulting from the updated production plans, the Company executed transactions aimed at adjusting the structure in the executed transactions to the currently planned structure.

Open refining margin transactions as at December 31st 2008:

Company	Type of transaction	Transaction execution date	Beginning of the valuation period	End of the valuation period	Number of barrels	Price (USD/barrel)	Fair value as at Dec 31 2008 (PLN ‘000)(1)
Grupa LOTOS S.A.	Commodity swap	Mar 4 2008	Jan 1 2009	Mar 31 2009	(500,001)	8	1,773
Grupa LOTOS S.A.	Commodity swap	Mar 7 2008	Jan 1 2009	Mar 31 2009	(999,999)	8	4,110
Grupa LOTOS S.A.	Commodity swap	May 30 2008	Apr 1 2009	Jun 30 2009	(501,000)	12	7,881
Grupa LOTOS S.A.	Commodity swap	May 30 2008	Jan 1 2009	Mar 31 2009	(999,999)	10	11,366
Grupa LOTOS S.A.	Commodity swap	Jun 2 2008	Jan 1 2009	Mar 31 2009	(501,000)	10	5,472
Grupa LOTOS S.A.	Commodity swap	Jun 2 2008	Jul 1 2009	Sep 30 2009	(501,000)	14	9,601
Grupa LOTOS S.A.	Commodity swap	Jun 6 2008	Jul 1 2009	Sep 30 2009	(999,999)	14	17,504
Grupa LOTOS S.A.	Commodity swap	Jun 17 2008	Apr 1 2009	Jun 30 2009	(500,001)	10	5,570
Grupa LOTOS S.A.	Commodity swap	Jun 19 2008	Jul 1 2009	Sep 30 2009	(500,001)	13	7,716
Grupa LOTOS S.A.	Commodity swap	Jun 20 2008	Jul 1 2009	Sep 30 2009	(499,998)	13	7,715
Grupa LOTOS S.A.	Commodity swap	Sep 25 2008	Jul 1 2009	Sep 30 2009	(500,001)	12	8,338
Grupa LOTOS S.A.	Commodity swap	Oct 2 2008	Apr 1 2009	Jun 30 2009	(500,001)	11	7,687
Grupa LOTOS S.A.	Commodity swap	Oct 10 2008	Apr 1 2009	Jun 30 2009	(500,001)	10	6,206
Grupa LOTOS S.A.	Commodity swap	Oct 7 2008	Apr 1 2009	Jun 30 2009	(500,001)	10	6,354
					(8,503,002)	TOTAL, including:	107,293
						positive	107,293
						negative	-

Open transactions adjusting the structure, as at December 31st 2008:

Company	Type of transaction	Transaction execution date	Beginning of the valuation period	End of the valuation period	Number of barrels	Price (USD/barrel)	Fair value  as at Dec 31 2008 (PLN ‘000)(1)
Grupa LOTOS S.A.	Commodity swap	Oct 8 2008	Jan 1 2009	Mar 31 2009	230,001	(2)	(275)
Grupa LOTOS S.A.	Commodity swap	Oct 9 2008	Jan 1 2009	Mar 31 2009	90,000	(2)	(107)
Grupa LOTOS S.A.	Commodity swap	Oct 13 2008	Jan 1 2009	Mar 31 2009	(120,000)	(18)	(1,040)
Grupa LOTOS S.A.	Commodity swap	Oct 29 2008	Jan 1 2009	Mar 31 2009	70,023	93	(6,488)
Grupa LOTOS S.A.	Commodity swap	Oct 29 2008	Jan 1 2009	Mar 31 2009	(70,023)	91	6,041
					200,001	TOTAL, including:	(1,869)
						positive	6,041
						negative	(7,910)

As at Dec 31 2008, positive fair value of commodity swaps was PLN 113,334 thousand.

As at Dec 31 2008, negative fair value of commodity swaps was PLN (7,910) thousand.

Open refining margin transactions as at December 31st 2007:

Type of transaction	Type of transaction	Transaction execution date	Beginning of the valuation period	End of the valuation period	Number of barrels	Price (USD/barrel)	Fair value  as at Dec 31 2007 (PLN ‘000) (1)
Grupa LOTOS S.A.	Commodity swap	Nov 9 2007	Jan 1 2008	Mar 31 2008	(1,040,000)	9	1,638
Grupa LOTOS S.A.	Commodity swap	Nov 9 2007	Apr 1 2008	Jun 30 2008	(750,000)	9	347
Grupa LOTOS S.A.	Commodity swap	Nov 12 2007	Jan 1 2008	Mar 31 2008	(990,000)	9	1,776
Grupa LOTOS S.A.	Commodity swap	Nov 12 2007	Jan 1 2008	Mar 31 2008	(999,999)	9	1,526
Grupa LOTOS S.A.	Commodity swap	Nov 13 2007	Apr 1 2008	Jun 30 2008	(490,000)	9	429
Grupa LOTOS S.A.	Commodity swap	Nov 13 2007	Apr 1 2008	Jun 30 2008	(799,998)	9	273
Grupa LOTOS S.A.	Commodity swap	Nov 13 2007	Apr 1 2008	Jun 30 2008	(129,999)	9	92
Grupa LOTOS S.A.	Commodity swap	Nov 14 2007	Apr 1 2008	Jun 30 2008	(620,000)	9	362
Grupa LOTOS S.A.	Commodity swap	Nov 14 2007	Apr 1 2008	Jun 30 2008	(90,000)	9	53
Grupa LOTOS S.A.	Commodity swap	Nov 20 2007	Apr 1 2008	Jun 30 2008	(510,000)	9	295
Grupa LOTOS S.A.	Commodity swap	Nov 21 2007	Apr 1 2008	Jun 30 2008	(609,999)	9	356
Grupa LOTOS S.A.	Commodity swap	Nov 21 2007	Jul 1 2008	Sep 30 2008	(500,001)	9	(63)
Grupa LOTOS S.A.	Commodity swap	Nov 22 2007	Jul 1 2008	Sep 30 2008	(246,000)	9	29
Grupa LOTOS S.A.	Commodity swap	Nov 27 2007	Apr 1 2008	Jun 30 2008	(700,002)	10	835
Grupa LOTOS S.A.	Commodity swap	Dec 13 2007	Jul 1 2008	Sep 30 2008	(500,001)	9	(307)
Grupa LOTOS S.A.	Commodity swap	Dec 20 2007	Jul 1 2008	Sep 30 2008	(999,999)	9	(370)
					(9,975,998)	TOTAL, including:	7,271
						positive	8,011
						negative	(740)

1) Fair value of commodity swaps is established by reference to future cash flows connected with the executed transactions, calculated on the basis of the difference between the average market price and the transaction price.

Total refining margin position as at December 31st 2008:

Period	Underlying position	Transaction position	Total position	Hedge ratio
Q1 2009	9,930,140	(3,000,999)	6,929,141	30%
Q2 2009	6,720,316	(2,501,004)	4,219,312	37%
Q3 2009	9,894,993	(3,000,999)	6,893,994	30%
Q4 2009	9,452,383	-	9,452,383	0%
Q1 2010	11,805,410	-	11,805,410	0%
Q2 2010	15,699,834	-	15,699,834	0%
Q3 2010	15,569,563	-	15,569,563	0%
Q4 2010	14,712,155	-	14,712,155	0%
2009	35,997,832	(8,503,002)	27,494,830	24%
2010	57,786,962	-	57,786,962	0%

Total refining margin position as at December 31st 2007:

Period	Underlying position	Transaction position	Total position	Hedge ratio
Q1 2008	9,935,622	(3,029,999)	6,905,623	30%
Q2 2008	9,475,025	(4,699,998)	4,775,027	50%
Q3 2008	9,543,912	(2,246,001)	7,297,911	24%
Q4 kw 2008	9,658,366	-	9,658,366	-
Q1 2009	9,939,825	-	9,939,825	-
Q2 2009	6,629,920	-	6,629,920	-
Q3 2009	9,611,546	-	9,611,546	-
Q4 kw 2009	10,395,482	-	10,395,482	-
Q1 2010	15,164,964	-	15,164,964	-
Q2 2010	15,869,788	-	15,869,788	-
Q3 2010	16,000,117	-	16,000,117	-
Q4 2010	16,698,049	-	16,698,049	-
2008	38,612,925	(9,975,998)	28,636,927	26%
2009	36,576,773	-	36,576,773	-
2010	63,732,918	-	63,732,918	-

Risk Related to Prices of Carbon Dioxide (CO2) Emmission Allowances

The risk related to prices of CO2 allowances is managed in line with the assumptions set forth in The Strategy for Managing the Risk Related to Prices of CO2 Allowances by Grupa LOTOS S.A. The period covered by the management is determined by the individual phases of the Kyoto protocol; currently, it is the period until the end of 2012.

A position limit is defined based on the number of allowances granted for a given phase. The position in a given phase comprises the aggregate of positions for individual years within the phase. The maximum loss limit is defined based on the Group’s equity.

Depending on the market situation and allowances granted, the Grupa LOTOS S.A. maintains an appropriate position in carbon allowances by entering into financial transactions or changing the underlying position.

The basic risk map includes the allowances granted and the CO2 emissions planned for a given phase, which can be reliably determined both with respect to the existing installations and the installations which are planned to be constructed.

Underlying CO2 allowances position as at December 31st 2008 stood at:

Period	EUA	CER	TOTAL
Phase II (2008-2012)	40,238	114,000	154,238

Underlying CO2 allowances position as at December 31st 2007 stood at:

Period	EUA	CER	TOTAL
Phase I (2005-2007)	11,645	-	11,645
Phase II (2008-2012)	-	-	-

In connection with concerns that the prices of  CO2 emission allowances might increase and due to uncertainty as to the number of allowances to be granted for the installations constructed under the 10+ Programme, the Company maintained a long position in CO2 allowances.

Open CO2 allowances transactions as at December 31st 2008:

Company	Type of transaction	Transaction execution date	Transaction settlement date	No, of CO2 allowances	Price (EUR/tonne)	Fair value as at Dec 31 2008 (PLN ‘000) (2)
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	(0)
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	3,000	16	(1)
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	1
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	1
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	4,000	16	2
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	-
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	-
Grupa LOTOS S.A.	Futures EUA	Dec 3 2008	Dec 17 2009	20,000	16	5
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	-
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	2,000	16	-
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	-
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	5,000	16	1
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	30,000	16	4
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	10,000	16	1
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	1,000	16	-
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	2,000	16	-
Grupa LOTOS S.A.	EUA Futures	Dec 3 2008	Dec 17 2009	4,000	16	-
				88,000	TOTAL, including:	14
					positive	15
					negative	(1)

Open CO2 allowances transactions as at December 31st 2007:

Company	Type of transaction	Transaction execution date	Transaction settlement date	No, of CO2 allowances	Price (EUR/tonne)	Fair value as at Dec 31 2007 (PLN ‘000) (2)
Grupa LOTOS S.A.	EUA Futures	May 31 2007	Dec 17 2009	10,000	23	(16)
Grupa LOTOS S.A.	EUA Futures	May 31 2007	Dec 17 2009	10,000	23	(16)
Grupa LOTOS S.A.	EUA Futures	May 31 2007	Dec 17 2009	10,000	23	(16)
Grupa LOTOS S.A.	EUA Futures	Jun 13 2007	Dec 18 2008	5,000	23	(16)
Grupa LOTOS S.A.	EUA Futures	Jun 13 2007	Dec 18 2008	5,000	23	(16)
Grupa LOTOS S.A.	EUA Futures	Jun 13 2007	Dec 18 2008	5,000	23	(16)
Grupa LOTOS S.A.	EUA Futures	Jun 14 2007	Dec 18 2008	25,000	24	(130)
Grupa LOTOS S.A.	EUA Futures	Jun 14 2007	Dec 18 2008	5,000	24	(25)
Grupa LOTOS S.A.	EUA Futures	Jun 19 2007	Dec 18 2008	10,000	22	33
Grupa LOTOS S.A.	EUA Futures	Jun 19 2007	Dec 18 2008	10,000	21	35
Grupa LOTOS S.A.	EUA Futures	Jun 19 2007	Dec 18 2008	10,000	21	36
Grupa LOTOS S.A.	EUA Futures	Jun 19 2007	Dec 18 2008	10,000	21	36
Grupa LOTOS S.A.	EUA Futures	Jun 19 2007	Dec 18 2008	10,000	21	40
Grupa LOTOS S.A.	EUA Futures	Oct 23 2007	Dec 18 2008	10,000	22	10
Grupa LOTOS S.A.	EUA Futures	Oct 23 2007	Dec 18 2008	10,000	22	11
Grupa LOTOS S.A.	EUA Futures	Oct 31 2007	Dec 18 2008	5,000	22	16
Grupa LOTOS S.A.	EUA Futures	Oct 31 2007	Dec 18 2008	10,000	22	27
Grupa LOTOS S.A.	EUA Futures	Oct 31 2007	Dec 18 2008	10,000	22	29
Grupa LOTOS S.A.	EUA Futures	Oct 31 2007	Dec 18 2008	10,000	22	33
Grupa LOTOS S.A.	EUA Futures	Oct 31 2007	Dec 18 2008	10,000	21	36
Grupa LOTOS S.A.	EUA Futures	Oct 31 2007	Dec 18 2008	15,000	22	46
				205,000	TOTAL, including:	137
					positive	388
					negative	(251)

2) Fair value of futures contracts for 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.

Total CO2 allowances position as at December 31st 2008 stood at:

	EUA position			CER position
Period	Underlying	Transaction	Total	Underlying	Transaction	Total
Phase II (2008-2012)	40,238	88,000	128,238	114,000	-	114,000

Total CO2 allowances position as at December 31st 2007 stood at:

	EUA position			CER position
Period	Underlying	Transaction	Total	Underlying	Transaction	Total
Phase I (2005-2007)	11,645	-	11,645	-	-	-
Phase II (2008-2012)	-	205,000	205,000	-	-	-

Currency Risk

Currency risk is managed in line with the assumptions stipulated in The Strategy of Currency Risk Management at Grupa LOTOS S.A. The period covered by currency risk management is determined according to individual budget years.

Limits are established for aggregate positions, such as the total and global gross positions, which are determined by reference to net positions in the particular currencies. Position and maximum loss limits are expressed as percentages of Grupa LOTOS S.A.’s equity.

The base map of net currency positions takes into account principally the volumes and price formulae for purchases of raw materials and sales of products, investments, loans denominated in foreign currencies, as well as valuation of derivatives. The map is then presented in a single currency to enable management of aggregate positions.

The basic currency of Grupa LOTOS S.A.’s operating market is USD. This currency is used in market price quotations for crude oil and petroleum products. Consequently, Grupa LOTOS S.A. has a structurally long position in USD on its operating activity. For this reason it has been decided that USD is the most appropriate currency for contracting and repaying long-term loans to finance the 10+ Programme, as such an approach contributes to reducing the structurally long position, and consequently to reducing the strategic currency risk.

Under the agreement on the financing of the 10+ Programme, Grupa LOTOS S.A. has the obligation to maintain a specified level of the hedge ratio for the currency risk (EUR/USD and USD/PLN) which arises in connection with the fact that the currency in which the investment projects are financed is different from the currencies in which project execution contracts are denominated. The obligation to maintain a specified level of the hedge ratio is connected with the necessity to guarantee that the loan amounts disbursed, denominated in USD, will be sufficient to finance the investment expenditure irrespective of the situation on the currency markets. This obligation remains binding only with respect to payments under the 10+ Programme projects execution contracts to be made by mid-2011.

At the end of 2008, the revised underlying position which could be subject to risk management was determined on the basis of the planned drawdowns under the loan to finance the 10+ Programme and the project execution contracts, and thus related exclusively to the hedging required under loan agreements.

The estimated underlying currency position as at December 31st 2008 stood at:

Period	USD	EUR
2009	596,635,901	(368,983,750)

The estimated currency position as at December 31st 2007 stood at:

Period	USD	EUR
2008	1,412,625,827	(416,912,999)

In connection with its obligation to meet by a specific deadline the hedge ratio prescribed in the loan agreement and due to the significant risk of depreciation of the euro against the dollar, the Parent Undertaking decided to purchase EUR/USD call options. Once the scenario of depreciation of the euro against the dollar became reality in Q4 2008, Grupa LOTOS S.A. decided to hedge its EUR/USD exchange rate risk by means of buying forward contracts and closing the options. As a result, the Company achieved a much economic effect than it would have achieved if it had hedged the risk by entering into forward contracts by the contractual deadlines.

Open currency transactions as at December 31st 2008:

Company	Type of transaction	Transaction execution date	Transaction settlement date	Currency pair	Amount in base currency	Rate	Amount in quote currency	Fair value as at Dec 31 2008 (PLN ‘000)(3)
Grupa LOTOS S.A.	Currency forward	Oct 1 2008	Feb 10 2009	EUR/USD	(18,800,000)	1.4	26,647,120	623
Grupa LOTOS S.A.	Currency forward	Oct 1 2008	Mar 5 2009	EUR/USD	(8,000,000	1.4	11,335,200	254
Grupa LOTOS S.A.	Currency forward	Oct 3 2008	Mar 5 2009	EUR/USD	7,000,000	1.4	(9,708,300)	397
Grupa LOTOS S.A.	Currency forward	Oct 6 2008	Mar 5 2009	EUR/USD	3,500,000	1.4	(4,755,170)	491
Grupa LOTOS S.A.	Currency forward	Oct 7 2008	Mar 5 2009	EUR/USD	10,000,000	1.4	(13,580,000	1,421
Grupa LOTOS S.A.	Currency forward	Oct 8 2008	Feb 13 2009	EUR/USD	(7,000,000)	1.4	9,608,200	(694)
Grupa LOTOS S.A.	Currency forward	Oct 9 2008	Feb 13 2009	EUR/USD	(3,000,000)	1.4	4,134,000	(249)
Grupa LOTOS S.A.	Currency forward	Oct 14 2008	Feb 2 2009	EUR/USD	7,000,000	1.4	(9,637,600)	617
Grupa LOTOS S.A.	Currency forward	Oct 15 2008	Feb 2 2009	USD/PLN	(10,000,000)	2.6	25,735,500	(3,973)
Grupa LOTOS S.A.	Currency forward	Oct 20 2008	Feb 11 2009	USD/PLN	(4,000,000)	2.7	10,620,000	(1,275)
Grupa LOTOS S.A.	Currency forward	Oct 27 2008	Feb 13 2009	EUR/USD	450,000	1.2	(560,835)	213
Grupa LOTOS S.A.	Currency forward	Oct 29 2008	Apr 30 2009	USD/PLN	(22,000,000)	2.9	62,733,000	(3,155)
Grupa LOTOS S.A.	Currency forward	Oct 30 2008	Feb 11 2009	EUR/PLN	3,000,000	3.5	(10,513,800)	2,026
Grupa LOTOS S.A.	Currency forward	Oct 30 2008	Apr 30 2009	USD/PLN	10,000,000	2.7	(26,800,000)	3,118
Grupa LOTOS S.A.	Currency forward	Oct 30 2008	Apr 30 2009	USD/PLN	5,000,000	2.7	(13,402,500)	1,556
Grupa LOTOS S.A.	Currency forward	Nov 3 2008	Feb 4 2009	USD/PLN	(1,300,000)	2.8	3,612,635	(252)
Grupa LOTOS S.A.	Currency forward	Nov 3 2008	Jan 16 2009	EUR/USD	25,000,000	1.3	(31,455,250)	11,081
Grupa LOTOS S.A.	Currency forward	Nov 3 2008	Feb 4 2009	EUR/PLN	1,100,000	3.6	(3,928,705)	668
Grupa LOTOS S.A.	Currency forward	Nov 4 2008	Jan 14 2009	EUR/USD	25,000,000	1.3	(31,456,250)	11,089
Grupa LOTOS S.A.	Currency forward	Nov 4 2008	Feb 12 2009	EUR/USD	20,000,000	1.3	(25,526,000)	7,679
Grupa LOTOS S.A.	Currency forward	Nov 4 2008	Feb 12 2009	EUR/USD	6,000,000	1.3	(7,657,800)	2,304
Grupa LOTOS S.A.	Currency forward	Nov 4 2008	Mar 16 2009	EUR/USD	25,000,000	1.3	(31,409,250)	11,009
Grupa LOTOS S.A.	Currency forward	Nov 4 2008	Mar 17 2009	EUR/USD	25,000,000	1.3	(31,408,000)	11,009
Grupa LOTOS S.A.	Currency forward	Nov 12 2008	Apr 15 2009	EUR/USD	30,000,000	1.2	(37,425,000)	13,857
Grupa LOTOS S.A.	Currency forward	Nov 12 2008	Apr 20 2009	USD/PLN	(20,000,000)	3	60,524,000	623
Grupa LOTOS S.A.	Currency forward	Nov 12 2008	May 15 2009	EUR/USD	30,000,000	1.2	(37,416,300)	13,759
Grupa LOTOS S.A.	Currency forward	Nov 12 2008	May 20 2009	USD/PLN	(15,000,000)	3	45,474,000	411
Grupa LOTOS S.A.	Currency forward	Nov 12 2008	Jun 15 2009	EUR/USD	30,000,000	1.3	(37,789,500)	12,544
Grupa LOTOS S.A.	Currency forward	Nov 12 2008	Jun 19 2009	USD/PLN	(15,000,000)	3	45,480,000	284
Grupa LOTOS S.A.	Currency forward	Nov 19 2008	Feb 11 2009	USD/PLN	(17,000,000)	3.1	52,450,100	1,853
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Jul 16 2009	EUR/USD	5,000,000	1.2	(6,246,250)	2,226
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Jul 16 2009	EUR/USD	10,000,000	1.2	(12,492,500)	4,453
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Jul 17 2009	USD/PLN	(15,000,000)	3.1	46,605,000	1,260
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Aug 12 2009	USD/PLN	(15,000,000)	3.1	46,627,500	1,181
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Aug 13 2009	EUR/USD	25,000,000)	1.2	(31,238,750)	11,058
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Sep 11 2009	USD/PLN	(5,000,000)	3.1	15,550,000	364
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Sep 16 2009	EUR/USD	20,000,000	1.2	(24,997,000)	8,791
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Oct 9 2009	USD/PLN	(5,000,000)	3.1	15,557,500	339
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Oct 16 2009	EUR/USD	15,000,000	1.3	(18,772,500)	6,490
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Nov 16 2009	EUR/USD	10,000,000	1.3	(12,516,500)	4,285
Grupa LOTOS S.A.	Currency forward	Nov 20 2008	Dec 16 2009	EUR/USD	25,000,000	1.3	(31,292,500)	10,618
Grupa LOTOS S.A.	Currency forward	Dec 9 2008	Dec 11 2009	USD/PLN	23,500,000	3.1	(72,885,250)	(966)
Grupa LOTOS S.A.	Currency forward	Dec 9 2008	Dec 11 2009	EUR/USD	(2,500,000)	1.3	3,195,000	(873)
Grupa LOTOS S.A.	Currency forward	Dec 18 2008	Jan 7 2009	USD/PLN	(35,000,000)	2.8	99,455,300	(4,230)
Grupa LOTOS S.A.	Currency forward	Dec 18 2008	Jan 8 2009	USD/PLN	(30,000,000)	2.8	85,244,400	(3,640)
Grupa LOTOS S.A.	Currency forward	Dec 18 2008	Jan 9 2009	USD/PLN	(25,000,000)	2.8	71,092,000	(2,988)
Grupa LOTOS S.A.	Currency forward	Dec 29 2008	Jan 15 2009	EUR/USD	50,000,000	1.4	(71,345,150)	(2,789)
Grupa LOTOS S.A.	Currency spot	Dec 31 2008	Jan 5 2009	USD/PLN	2,000,000	3	(5,942,720)	(19)
Grupa LOTOS S.A.	Currency spot	Dec 31 2008	Jan 5 2009	EUR/USD	(1,000,000)	1.4	1,403,780	(15)
Grupa LOTOS S.A.	Currency forward	Dec 31 2008	Jan 14 2009	USD/PLN	11,100,000	3	(33,029,160)	(114)
Grupa LOTOS S.A.	Currency forward	Dec 31 2008	Jan 14 2009	EUR/PLN	3,800,000	4.2	(15,903,000)	(36)
Grupa LOTOS S.A.	Currency forward	Dec 31 2008	Jan 15 2009	USD/PLN	22,000,000	3	(65,250,900)	(6)
Grupa LOTOS S.A.	Currency forward	Dec 31 2008	Jan 15 2009	USD/PLN	7,000,000	3	(20,778,100)	(19)
Grupa LOTOS S.A.	Currency forward	Dec 31 2008	Mar 16 2009	USD/PLN	21,400,000	3	(63,868,300)	(20)
Grupa LOTOS S.A.	Currency spot	Dec 31 2008	Jan 2 2009	USD/PLN	(2,000,000)	3	5,940,000	19
Grupa LOTOS S.A.	Currency spot	Dec 31 2008	Jan 2 2009	EUR/USD	1,000,000	1.4	(1,404,000)	15
							TOTAL, including:	134,672
							positive	159,985
							negative	(25,313)

 

Company	Type of transaction	Transaction execution date	Transaction settlement date	Currency pair	Amount in base currency	Rate	Amount in quote currency	Premium settlement date	Premium (PLN ‘000)	Fair value as at Dec 31 2008 (PLN ‘000)(4)
Grupa LOTOS S.A.	Call option	Aug 8 2008	Feb 12 2009	EUR/USD	50,000,000	1.6	(79,500,000)	12,08,2008	(1,563)	384
Grupa LOTOS S.A.	Call option	Aug 11 2008	Feb 13 2009	EUR/USD	100,000,000	1.6	(159,000,000)	13,08,2008	(2,900)	815
Grupa LOTOS S.A.	Call option	Aug 11 2008	Mar 5 2009	EUR/USD	60,000,000	1.6	(95,400,000)	09,09,2008	(666)	1,192
Grupa LOTOS S.A.	Call option	Oct 20 2008	Mar 9 2009	EUR/USD	(60,000,000)	1.6	95,400,000	22,10,2008	438	(1,192)
Grupa LOTOS S.A.	Call option	Oct 27 2008	Feb 13 2009	EUR/USD	(15,000,000)	1.6	23,850,000	29,10,2008	85	(122)
Grupa LOTOS S.A.	Call option	Nov 4 2008	Feb 12 2009	EUR/USD	(50,000,000)	1.6	79,500,000	07,11,2008	329	(385)
Grupa LOTOS S.A.	Call option	Nov 4 2008	Feb 13 2009	EUR/USD	(85,000,000)	1.6	135,150,000	07,11,2008	600	(692)
								TOTAL, including:	(3,677)(5)	-
								positive	1,452	2,391
								negative	(5,129)	(2,391)

(5) As at December 31st 2008, the option premium was presented in net value under derivative financial instruments (see Note 20).

Total currency position of the Parent Undertaking as at December 31st 2008 stood at:

Period	USD/PLN position			EUR/PLN position
	Underlying	Transaction	Total	Underlying	Transaction	Total
2009	596.635.901	(598.067.105)	(1.431.204)	(368.983.750)	372.550.000	3.566.250

Open currency transactions as at December 31st 2007:

Company	Type of transaction	Transaction execution date	Transaction settlement date	Currency pair	Amount in base currencyj	Rate	Amount in quote currency	Fair value as at Dec 31 2007 (PLN ‘000)(3)
Grupa LOTOS S.A.	Currency forward	Dec 6 2007	Jan 7 2008	EUR/USD	20,000,000	1.5	(29,218,000)	496
Grupa LOTOS S.A.	Currency forward	Dec 6 2007	Jan 10 2008	EUR/USD	10,000,000	1.5	(14,559,220)	370
Grupa LOTOS S.A.	Currency forward	Dec 7 2007	Jan 11 2008	EUR/PLN	8,500,000	3.6	(30,449,040)	5
Grupa LOTOS S.A.	Currency forward	Dec 10 2007	Jan 14 2008	EUR/USD	20,000,000	1.5	(29,390,200)	83
Grupa LOTOS S.A.	Currency forward	Dec 10 2007	Jan 14 2008	EUR/USD	20,000,000	1.5	(29,388,200)	88
Grupa LOTOS S.A.	Currency forward	Dec 10 2007	Jan 17 2008	EUR/USD	40,000,000	1.5	(58,766,120)	208
Grupa LOTOS S.A.	Currency forward	Dec 14 2007	Jan 11 2008	EUR/PLN	(8,500,000)	3.6	30,654,400	200
Grupa LOTOS S.A.	Currency forward	Dec 14 2007	Jan 18 2008	USD/PLN	(30,000,000)	2.5	74,577,000	1,501
Grupa LOTOS S.A.	Currency forward	Dec 14 2007	Jan 22 2008	USD/PLN	(30,000,000)	2.5	74,580,000	1,498
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 4 2008	USD/PLN	(30,000,000)	2.5	75,483,000	2,375
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 4 2008	USD/PLN	(18,000,000)	2.5	45,199,800	1,336
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 6 2008	USD/PLN	(50,000,000)	2.5	125,740,000	3,887
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 27 2008	USD/PLN	(40,000,000)	2.5	100,600,000	3,055
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 27 2008	USD/PLN	(20,000,000)	2.5	50,320,000	1,547
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 15 2008	EUR/PLN	(25,000,000)	3.6	90,527,500	856
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 29 2008	EUR/PLN	(50,000,000)	3.6	181,092,500	1,694
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 29 2008	USD/PLN	(48,000,000)	2.5	120,816,000	3,754
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Jan 16 2008	EUR/USD	50,000,000	1.4	(72,035,000)	3,714
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Jan 16 2008	EUR/USD	50,000,000	1.4	(72,006,000)	3,784
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Jan 9 2008	EUR/USD	50,000,000	1.4	(72,034,,250)	3,701
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Jan 25 2008	EUR/USD	50,000,000	1.4	(71,989,000)	3,846
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 11 2008	EUR/USD	50,000,000	1.4	(72,044,750)	3,724
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 19 2008	EUR/USD	40,000,000	1.4	(57,596,000)	3,066
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 20 2008	EUR/USD	50,000,000	1.4	(72,030,000)	3,747
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 28 2008	EUR/USD	40,000,000	1.4	(57,606,000)	3,032
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Jan 23 2008	EUR/USD	40,000,000	1.4	(57,570,000)	3,125
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 29 2008	EUR/PLN	25,000,000	3.6	(90,562,500)	(863)
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Feb 29 2008	USD/PLN	24,000,000	2.5	(60,434,400)	(1,903)
Grupa LOTOS S.A.	Currency forward	Dec 19 2007	Jan 29 2008	EUR/USD	20,000,000	1.4	(28,794,600)	1,545
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Feb 22 2008	USD/PLN	(50,000,000)	2.5	126,620,000	4,700
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Jan 8 2008	USD/PLN	(30,000,000)	2.5	75,762,000	2,701
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Feb 28 2008	EUR/PLN	(45,000,000)	3.6	162,851,850	1,398
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Feb 8 2008	USD/PLN	(32,000,000)	2.5	80,849,600	2,857
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Feb 8 2008	USD/PLN	(25,000,000)	2.5	63,057,500	2,126
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Feb 14 2008	EUR/PLN	(7,000,000)	3.6	25,328,800	221
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Feb 14 2008	USD/PLN	(20,000,000)	2.5	50,452,000	1,698
Grupa LOTOS S.A.	Currency forward	Dec 20 2007	Feb 29 2008	EUR/USD	20,000,000	1.4	(28,745,400)	1,654
Grupa LOTOS S.A.	Currency forward	Dec 21 2007	Jan 28 2008	EUR/PLN	(50,000,000)	3.6	180,997,500	1,742
Grupa LOTOS S.A.	Currency forward	Dec 21 2007	Feb 21 2008	EUR/PLN	(20,000,000)	3.6	72,480,000	733
Grupa LOTOS S.A.	Currency forward	Dec 21 2007	Jan 31 2008	EUR/USD	50,000,000	1.4	(71,930,000)	4,003
Grupa LOTOS S.A.	Currency forward	Dec 21 2007	Feb 25 2008	USD/PLN	(50,000,000)	2.5	124,073,300	2,163
Grupa LOTOS S.A.	Currency forward	Dec 27 2007	Feb 26 2008	USD/PLN	(50,000,000)	2.5	124,075,500	2,162
Grupa LOTOS S.A.	Currency forward	Dec 27 2007	Jan 7 2008	EUR/PLN	(10,000,000)	3.6	36,096,000	271
Grupa LOTOS S.A.	Currency forward	Dec 27 2007	Feb 13 2008	EUR/USD	50,000,000	1.4	(72,452,250)	2,735
Grupa LOTOS S.A.	Currency forward	Dec 28 2007	Jan 9 2008	EUR/PLN	(10,000 000)	3.6	36,055,890	229
Grupa LOTOS S.A.	Currency spot	Dec 28 2007	Jan 2 2008	EUR/PLN	(3,500,000)	3.6	12,607,000	70
							TOTAL, including:	84,934
							positive	87,700
							negative	(2,766)

3) Fair value of 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 implied interest rate curve based on fx swaps (for 2007, the zero-coupon interest rate curve was used).

4) 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.

Total currency position of the Parent Undertaking as at December 31st 2007 stood at:

Period	USD/PLN position			EUR/PLN position
	Underlying	Transaction	Total	Underlying	Transaction	Total
2008	1,412,625,827	(1,467,154,990)	(54,529,163)	(416,912,999)	474,500,000	57,587,001

Companies from the LOTOS Group entered into transactions with a view to hedging their revenue from export sales, generated in the euro.

Open currency transactions as at December 31st 2008 stood at:

Company	Type of transaction	Transaction execution date	Transaction settlement date	Currency pair	Amount in base currency	Rate	Amount in quote currency	Fair value as at Dec 31 2008 (PLN ‘000)
LOTOS Asfalt Sp. z o.o.	Currency forward	Jul 8 2008	Jul 10 2009	EUR/PLN	(3,000,000)	3.3	9,984,000	(2,623)
LOTOS Asfalt Sp. z o.o.	Currency forward	Dec 1 2008	Jan 2 2009	EUR/PLN	(155,000)	3.8	595,510	(51)
LOTOS Asfalt Sp. z o.o.	Currency forward	Dec 3 2008	Jan 5 2009	EUR/PLN	(388,000)	3.8	1,491,860	(128)
LOTOS Asfalt Sp. z o.o.	Currency forward	Dec 8 2008	Jan 9 2009	EUR/PLN	(305,000)	3.9	1,182,333	(91)
LOTOS Asfalt Sp. z o.o.	Currency forward	Dec 10 2008	Jan 12 2009	EUR/PLN	(168,000)	4	665,112	(36)
LOTOS Asfalt Sp. z o.o.	Currency forward	Dec 11 2008	Jan 13 2009	EUR/PLN	(250,000)	4	992,750	(52)
LOTOS Asfalt Sp. z o.o.	Currency forward	Dec 22 2008	Jan 23 2009	EUR/PLN	(469,000)	4.1	1,925,949	(35)
							TOTAL, including:	(3,016)
							positive	-
							negative	(3,016)

 

Company	Type of transaction	Transaction execution date	Transaction settlement date	Currency pair	Amount in base currency	Rate	Amount in quote currency	Fair value as at Dec 31 2008 (PLN ‘000)
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Jan 28 2009	EUR/PLN	300,000	3.6	1,080,000	1
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Feb 25 2009	EUR/PLN	300,000	3.6	1,078,500	4
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Mar 27 2009	EUR/PLN	300,000	3.6	1,077,000	8
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Apr 28 2009	EUR/PLN	300,000	3.6	1,074,000	11
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	May 27 2009	EUR/PLN	300,000	3.6	1,072,500	14
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Jun 18 2009	EUR/PLN	300,000	3.6	1,071,000	16
LOTOS Parafiny Sp. z o.o.	Call option	Oct 16 2008	Jan 28 2009	EUR/PLN	(600,000)	3.6	2,160,000	(402)
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Jan 28 2009	EUR/PLN	(300,000)	3.6	1,068,000	(1)
LOTOS Parafiny Sp. z o.o.	Call option	Oct 16 2008	Feb 25 2009	EUR/PLN	(600,000)	3.6	2,157,000	(412)
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Feb 25 2009	EUR/PLN	(300,000)	3.6	1,068,000	(4)
LOTOS Parafiny Sp. z o.o.	Call option	Oct 16 2008	Mar 27 2009	EUR/PLN	(600,000)	3.6	2,154,000	(423)
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Mar 27 2009	EUR/PLN	(300,000)	3.6	1,068,000	(7)
LOTOS Parafiny Sp. z o.o.	Call option	Oct 16 2008	Apr 28 2009	EUR/PLN	(600,000)	3.6	2,148,000	(437)
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Apr 28 2009	EUR/PLN	(300,000)	3.6	1,068,000	(10)
LOTOS Parafiny Sp. z o.o.	Call option	Oct 16 2008	2009,05,27	EUR/PLN	(600,000)	3.6	2,145,000	(448)
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	May 27 2009	EUR/PLN	(300,000)	3.6	1,068,000	(13)
LOTOS Parafiny Sp. z o.o.	Call option	Oct 16 2008	Jun 18 2009	EUR/PLN	(600,000)	3.6	2,142,000	(457)
LOTOS Parafiny Sp. z o.o.	Put option	Oct 16 2008	Jun 18 2009	EUR/PLN	(300,000)	3.6	1,068,000	(15)
							TOTAL, including:	(2,575)
							positive	54
							negative	(2,629)

Open currency transactions as at December 31st 2008 stood at:

Company	Type of transaction	Transaction execution date	Transaction settlement date	Currency pair	Amount in base currency	Rate	Amount in quote currency	Fair value as at Dec 31 2007 (PLN ‘000)
LOTOS Gaz S.A.	Currency forward	Dec 3 2007	Jan 4 2008	USD/PLN	(100,000)	2.8	282,720	(39)
LOTOS Gaz S.A.	Currency forward	Dec 7 2007	Jan 7 2008	USD/PLN	(100,000)	2.8	278,500	(35)
LOTOS Gaz S.A.	Currency forward	Dec 21 2007	Feb 21 2008	USD/PLN	(100,000)	2.8	283,080	(40)
LOTOS Gaz S.A.	Currency forward	Dec 21 2007	Jan 21 2008	USD/PLN	(100,000)	2.8	278,410	(35)
							TOTAL, including:	(149)
							positive	-
							negative	(149)

Interest Rate Risk

The base map of interest rate positions reflects the planned schedule of drawdowns and repayments under the loan extended to finance inventory and the implementation of the 10+ Programme. The interest rate risk is connected with the interest calculated on the basis of a floating rate (LIBOR USD). The structure of limits is based on the underlying’s nominal value hedge ratio. In a long-term perspective, a partial risk mitigation effect was achieved through the choice of a fixed interest rate for the SACE sub-tranche under the investment loan granted to finance the 10+ Programme.

The agreement on the financing of the 10+ Programme provides for the obligation to maintain a specified hedge ratio for the interest rate risk, i.e. the risk connected with the LIBOR USD floating interest rate on the loan to finance the 10+ Programme in the period until mid-2011. The obligation to maintain a specified level of the hedge ratio is connected with the necessity to guarantee that the loan amounts disbursed will be sufficient to finance the investment expenditure, including the costs of financing throughout the time of execution of the investment projects, irrespective of  any changes in the interest rates prevailing on the market.

As at December 31st 2008, the estimated underlying interest rate position stood at (in USD):

Period	Underlying position
2009	(1,465,046,833)
2010	(1,733,870,372)
2011	(1,752,351,666)
2012	(1,323,175,000)
2013	(1,240,750,000)
2014	(1,144,955,000)
2015	(1,032,745,000)
2016	(914,130,000)
2017	(791,805,000)
2018	(658,210,000)
2019	(508,060,000)
2020	(356,965,000)

The underlying interest rate position as at December 31st 2007 was not identified, due to the fact that there was no management of the interest rate risk.

In connection with its obligation to maintain the hedge ratio prescribed in the loan agreement and given its intention to partly mitigate the interest rate risk which is not covered by mandatory hedges, Grupa LOTOS S.A. executed hedging transactions. However, due to the collapse of the financial markets in Q4 2008 and the anticipated further decline of the yield curve in the USD, the Company decided not to enter into further hedging transactions in order to benefit from a drop of interest rates on the unhedged portion of the risk.

Open interest rate transactions as at December 31st 2008:

Company	Type of transaction	Transaction execution date	Beginning of period	End of period	Nominal value (USD)	Company pays	Company receives	Fair value as at Dec 31 2008 (PLN ‘000)(6)
Grupa LOTOS S.A.	Interest rate swap (IRS)	May 9 2008	Oct 15 2008	Jun 30 2011	50,000,000	3.40%	LIBOR 6M	(5,912)
Grupa LOTOS S.A.	Interest rate swap (IRS)	May 13 2008	Oct 15 2008	Jun 30 2011	50,000,000	3.60%	LIBOR 6M	(6,515)
Grupa LOTOS S.A.	Interest rate swap (IRS)	May 16 2008	Oct 15 2008	Jun 30 2011	100,000,000	3.70%	LIBOR 6M	(13,494)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Jun 4 2008	Jul 15 2009	Jun 30 2011	122,000,000	4.10%	LIBOR 6M	(16,271)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Jun 4 2008	Oct 15 2008	Jun 30 2011	208,000,000	3.80%	LIBOR 6M	(30,172)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Jun 26 2008	Jan 15 2009	Jun 30 2011	100,000,000	4.30%	LIBOR 6M	(18,803)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Jun 27 2008	Jul 15 2009	Jun 30 2011	150,000,000	4.30%	LIBOR 6M	(22,190)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Sep 5 2008	Oct 15 2008	Jan 15 2013	100,000,000	3.80%	LIBOR 6M	(20,121)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Sep 16 2008	Jan 15 2009	Jan 15 2013	100,000,000	3.50%	LIBOR 6M	(17,678)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Sep 19 2008	Jan 15 2009	Jan 15 2013	(100,000,000)	4.00%	LIBOR 6M	22 848
Grupa LOTOS S.A.	Interest rate swap (IRS)	Oct 7 2008	Jan 15 2009	Jan 15 2013	100,000,000	3.50%	LIBOR 6M	(17,333)
Grupa LOTOS S.A.	Interest rate swap (IRS)	Oct 8 2008	Jul 15 2011	1Jan 15 2013	100,000,000	4.20%	LIBOR 6M	(7,044)
							TOTAL, including:	(152,685)
							positive	22,848
							negative	(175,533)

 

Company	Type of transaction	Transaction execution date	Beginning of period	End of period	Nominal value (USD)	Company pays	Company receives	Fair value as at Dec 31 2008 (PLN ‘000)(6)
Grupa LOTOS S.A.	Forward rate agreement (FRA)	07.10.2008	15.01.2009	15.07.2009	100,000,000	2.50%	LIBOR 6M	(1,733)
							TOTAL	(1,733)

5) 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 on the basis of the zero-coupon interest rate curve.

Total interest rate position as at December 31st 2008 stood at:

Period	Underlying position	Fixed interest rate loans	Transaction position	Total position	Hedge ratio
2009	(1,465,046,833)	307,798,312	894,000,000	(263,248,521)	82%
2010	(1,733,870,372)	401,860,932	980,000,000	(352,009,440)	80%
2011	(1,752,351,666)	420,654 375	640,000,000	(691,697,291)	61%
2012	(1,323,175,000)	401,678,125	300,000,000	(621,496,875)	53%
2013	(1,240,750,000)	376,656,250	-	(864,093,750)	30%
2014	(1,144,955,000)	347,575,625	-	(797,379,375)	30%
2015	(1,032,745,000)	313,511,875	-	(719,233,125)	30%
2016	(914,130,000)	277,503,750	-	(636,626,250)	30%
2017	(791,805,000)	240,369,375	-	(551,435,625)	30%
2018	(658,210,000)	199,813,750	-	(458,396,250)	30%
2019	(508,060,000)	154,232,500	-	(353,827,500)	30%
2020	(356,965,000)	108,364,375	-	(248,600,625)	30%

To optimise the interest balance, the cashpooling service for the LOTOS Group members is used. The service consists in the application of favourable interest rates for debit and credit balances, which are subject to offsetting as at the end of each business day.

Liquidity Risk

The liquidity risk management process at the Group consists in monitoring the forecast cash flows, matching maturities of assets and liabilities, analysing working capital and maintaining access to various financing sources.

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

In the area of financial risk, in addition to an active management of market risk, the Parent Undertaking follows the following rules with respect to liquidity management:

• employs no margins with respect to trade in derivatives on the over-the-counter market,
• limits the possibility of an early termination of financial transactions,
• establishes limits for spot financial instruments of low liquidity,
• establishes credit limits for counterparties in financial transactions.

Note 24 presents additional free cash remaining at the Group’s disposal. Note 30 contains information on the contractual maturities of financial liabilities as at December 31st 2008 and December 31st 2007.

Credit Risk

Management of credit risk relating to counterparties in financial transactions consists in ongoing monitoring of credit exposure in relation to the limits granted. The counterparties must have an appropriate credit rating assigned by leading rating agencies or hold guarantees granted by institutions meeting the minimum rating requirement. The Group enters into financial transactions with well-established firms with good credit standing.

As at December 31st 2008, the concentration of credit risk with respect to a single counterparty in financial transactions did not exceed 3% of the Parent Undertaking’s balance-sheet total.

As regards management of credit risk relating to counterparties in trade transactions, all customers requesting trade credit undergo verification of their financial reliability, whose results determine the level of credit limits to be granted. Furthermore, due to the fact that the Group’s receivables are monitored on an ongoing basis, the risk of it holding uncollectible receivables is low.

Carrying values of financial assets represent the maximum credit exposure. The maximum credit risk exposure as at the balance-sheet date stood at:

PLN ‘000	Dec 31 2008	Dec 31 2007
	(audited)	(audited)
Shares:	11,041	8,178
- non-current	9,917	8,093
- current	1,124	85
Prepayments for shares	25,332	23,117
Derivative financial instruments	302,304	96,099
Decommissioning fund	16,599	13,443
Loans:	-	58
- non-current	-	17
- current	-	41
Trade and other receivables:	1,260,660	1,461,080
- non-current	9,152	12,668
- current	1,251,508	1,448,412
Cash and cash equivalents	712,801	924,995
Total	2,328,737	2,526,970

The aged analysis of past due financial assets as at December 31st 2008 and as at December 31st 2007 is shown in Note 23.

21.4. Sensitivity Analysis with Respect to Market Risk Related
to Fluctuations in FX Rates, Interest Rates, Prices of Carbon (CO2)
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 2008, 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 2008 (audited) PLN ‘000	Note	Carrying value in a foreign currency, translated into PLN as at the balance-sheet day	4% increase in exchange rate, effect on year’s result		4% decrease in exchange rate, effect on year’s result
			USD	EUR	USD	EUR
Trade and other receivables	23	102,989	2,565	1,555	(2,565)	(1,555)
Financial assets – derivative financial instruments	20	302,304	(53,808)	54,808	53,808	(54,808)
Cash and cash equivalents	24	107,347	3,269	1,025	(3,269)	(1,025)
Trade and other payables	33	(230,745)	(2,613)	(6,616)	2,613	6,616
Loans	30	(3,198,294)	(126,508)	(1,012)	126,508	1,012
Financial liabilities – derivative financial instruments	32	(218,526)	(18,506)	6,507	18,506	(6,507)
Total		(3,134,925)	(195,601)	56,267	195,601	(56,267)

As at December 31st 2008, the Parent Undertaking held futures for the purchase of CO2 EU emission allowances (EUA), measured at fair value as at the balance-sheet date.

As at December 31st 2008, the financial assets related to positive valuation of the futures for the purchase of CO2 emission allowances amounted to PLN 15 thousand.

As at December 31st 2008, the financial liabilities related to negative valuation of those futures were PLN 1 thousand.

A change in the price of the CO2 emission allowances up by 10% or down (by 10%) could potentially lead to a change in the valuation of the fair value of financial assets and liabilities related to the futures for the purchase of CO2 emission allowances of PLN 584 (584) thousand.

As at December 31st 2008, the Parent Undertaking held OTC full barrel swaps, measured at fair value as at the balance-sheet date.

As at December 31st 2008, the financial assets related to positive valuation of the full barrel swap amounted to PLN 113,334 thousand

As at December 31st 2008, the financial liabilities related to negative valuation of the full barrel swap were PLN 7,910 thousand.

A change in the values of the indices included in the full barrel swap up by 10% or down (by 10%) could potentially lead to a change in the valuation of the fair value of financial assets and liabilities related to the full barrel swap recognised in the income statement of PLN (16,655) 16,655 thousand.

Below is presented an analysis of the Group’s sensitivity to currency risk as at December 31st 2007, along with the effect of such a risk on the financial performance, assuming a 1% increase or decrease in the USD/PLN and EUR/PLN currency exchange rates and constant levels of all other variables:

Dec 31 2007 (audited) PLN ‘000	Note	Carrying value in a foreign currency, translated into PLN as at the balance-sheet day	1% increase in exchange rate, effect on year’s result		1% decrease in exchange rate, effect on year’s result
			USD	EUR	USD	EUR
Trade and other receivables	23	186,284	1,629	234	(1,629)	(234)
Financial assets – derivative financial instruments	20	96,099	(36,225)	16,058	36,225	(16,058)
Cash and cash equivalents	24	161,871	1,290	329	(1,290)	(329)
Trade and other payables	33	(715,476)	(6,794)	(361)	6,794	361
Loans	30	(596,491)	(5,665)	(300)	5,665	300
Financial liabilities – derivative financial instruments	32	(3,906)	583	892	(583)	(892)
Total		(871,619)	(45,182)	16,852	45,182	(16,852)

As at December 31st 2007, the Parent Undertaking held futures for the purchase of CO2 EU emission allowances (EUA), measured at fair value as at the balance-sheet date.
As at December 31st 2007, the financial assets related to positive valuation of the futures for the purchase of CO2 emission allowances amounted to PLN 388 thousand.
As at December 31st 2007, the financial liabilities related to negative valuation of those futures were PLN 251 thousand.
A change in the price of the CO2 emission allowances up by 1% or down (by 1%) could potentially lead to a change in the valuation of the fair value of financial assets and liabilities related to the futures for the purchase of CO2 emission allowances of PLN 165 (165) thousand.

As at December 31st 2007, the Parent Undertaking held OTC full barrel swaps, measured at fair value as at the balance-sheet date.

As at December 31st 2007, the financial assets related to positive valuation of the full barrel swap amounted to PLN 8,011 thousand.

As at December 31st 2007, the financial liabilities related to negative valuation of the full barrel swap were PLN 740 thousand.

A change in the value of the indices included in the full barrel swap up 1% or down (by 1%) could potentially lead to a change in the valuation of the fair value of financial assets and liabilities related to the full barrel swap recognised in the income statement of PLN 2,148 (2,148) thousand.

Below is presented an analysis of the Group’s sensitivity to interest rate risk as at December 31st 2008, assuming a 0.2% increase or decrease in the interest rate:

Dec 31 2008 (audited) PLN ‘000	Note	Carrying value	Change
			0.20%	-0.20%
Borrowings	19, 20	-	-	-
Decommissioning fund	19	16,599	33	(33)
Cash and cash equivalents	24	712,801	1,426	(1,426)
Loans and borrowings	30	(3,919,605)	(7,839)	7,839
Lease liabilities	32	(1,415)	(3)	3
Financial liabilities – derivative financial instruments (1)	32	(154,418)	16,387	(16,387)
Total		(3,346,038)	10,004	(10,004)

(1) Including interest rate swaps (IRS) and forward rate agreements (FRA).

As at December 31st 2008, the carrying value of financial assets and liabilities (borrowings, cash, financial liabilities under bank loans) which are sensitive to interest rate risk amounted to PLN (3,346,038) thousand net.

A change in interest rates up by 0.2% or down (by 0.2%) could potentially lead to a net change in the value of financial assets and liabilities as at December 31st 2008 of PLN 10,004 (10,004) thousand.

Below is presented an analysis of the Group’s sensitivity to interest rate risk as at December 31st 2007, assuming a 1% increase or decrease in the interest rate:

As at December 31st 2007, the net carrying value of financial assets and liabilities (borrowings, cash, financial liabilities under bank loans) which are sensitive to interest rate risk amounted to PLN (423,268) thousand.

A change in interest rates up by 1% or down (by 1%) could potentially lead to a net change in the value of financial assets and liabilities as at December 31st 2007 of PLN (4,232), 4,232 thousand net.

Dec 31 2008 (audited) PLN ‘000	Note	Carrying value	Change
			1% increase	1% decrease
Borrowings	19,20	58	1	(1)
Decommissioning fund	19	13,443	134	(134)
Cash and cash equivalents	24	924,995	9,250	(9,250)
Loans and borrowings	30	(1,360,136)	(13,601)	13,601
Lease liabilities	32	(1,628)	(16)	16
Financial liabilities – derivative financial instruments	32	-	-	-
Total		(423,268)	(4,232)	4,232

As at December 31st 2007, the net carrying value of financial assets and liabilities (borrowings, cash, financial liabilities under bank loans) which are sensitive to interest rate risk amounted to PLN (423,268) thousand.

A change in interest rates up by 1% or down (by 1%) could potentially lead to a net change in the value of financial assets and liabilities as at December 31st 2007 of PLN (4,232), 4,232 thousand net.