Contents

• Annual Report
• Financial Statements
• Corporate Governance

Notes to the Consolidated Financial Statements – Contents

34. Financial Instruments and Financial Risk Management Policy

34.1. Financial instruments by category (carrying amounts)

Dec 31 2012

in PLN m

Classes of financial instruments	Categories of financial instruments
	Notes	Financial assets available for sale	Financial assets measured at fair value through profit or loss	Financial assets held to maturity	Loans and receivables	Financial liabilities measured at fair value through profit or loss	Financial liabilities at amortised cost	Hedge derivatives	Liabilities excluded from the scope of IAS 39	Total
Total financial assets		48	89	-	6 921	-	-	16	-	7 074
Listed shares	14, 22	-	-	-	-	-	-	-	-	-
Unlisted shares	14, 22	48	-	-	-	-	-	-	-	48
Debt securities	14, 22	-	-	-	-	-	-	-	-	-
Investment fund units	22	-	-	-	-	-	-	-	-	-
Trade and other receivables	19	-	-	-	4 849	-	-	-	-	4 849
Derivative financial instrument assets	35	-	89	-	-	-	-	16	-	105
Cash and cash equivalents	23	-	-	-	1 948	-	-	-	-	1 948
Other financial assets	14, 15, 22	-	-	-	124	-	-	-	-	124
Total financial liabilities		-	-	-	-	317	12 157	76	183	12 733
Borrowings	26	-	-	-	-	-	1 429	-	-	1 429
Debt securities	26	-	-	-	-	-	8 599	-	-	8 599
Finance lease	26	-	-	-	-	-	-	-	183	183
Trade payables	31, 32	-	-	-	-	-	2 129	-	-	2 129
Derivative financial instrument liabilities	35	-	-	-	-	317	-	76	-	393

Dec 31 2011

in PLN m

Classes of financial instruments	Categories of financial instruments
	Notes	Financial assets available for sale	Financial assets measured at fair value through profit or loss	Financial assets held to maturity	Loans and receivables	Financial liabilities measured at fair value through profit or loss	Financial liabilities at amortised cost	Hedge derivatives	Liabilities excluded from the scope of IAS 39	Total
Total financial assets		78	-	-	4 551	-	-	285	-	4 914
Listed shares	14, 22	-	-	-	-	-	-	-	-	-
Unlisted shares	14, 22	56	-	-	-	-	-	-	-	56
Debt securities	14, 22	-	-	-	-	-	-	-	-	-
Investment fund units	22	22	-	-	-	-	-	-	-	22
Trade and other receivables	19	-	-	-	3 036	-	-	-	-	3 036
Derivative financial instrument assets	35	-	-	-	-	-	-	285	-	285
Cash and cash equivalents	23	-	-	-	1 505	-	-	-	-	1 505
Other financial assets	14, 15, 22	-	-	-	10	-	-	-	-	10
Total financial liabilities		-	-	-	-	411	6 923	6	186	7 526
Borrowings	26	-	-	-	-	-	1 519	-	-	1 519
Debt securities	26	-	-	-	-	-	3 294	-	-	3 294
Finance lease	26	-	-	-	-	-	-	-	186	186
Trade payables	31, 32	-	-	-	-	-	2 110	-	-	2 110
Derivative financial instrument liabilities	35	-	-	-	-	411	-	6	-	417

34.2. Fair value of financial instruments

in PLN m

Classes of financial instruments	Dec 31 2012		Dec 31 2011
	Carrying amount	Fair value	Carrying amount	Fair value
Total financial assets	7,074	7,026	4,914	4,858
Unlisted shares	48	-	56	-
Investment fund units	-	-	22	22
Trade and other receivables	4,849	4,849	3,036	3,036
Derivative financial instrument assets	105	105	285	285
Cash and cash equivalents	1,948	1,948	1,505	1,505
Other financial assets	124	124	10	10
Total financial liabilities	12,733	12,733	7,526	7,526
Borrowings	1,429	1,429	1,519	1,519
Debt securities	8,599	8,599	3,294	3,294
Finance lease	183	183	186	186
Trade payables	2,129	2,129	2,110	2,110
Derivative financial instrument liabilities	393	393	417	417

34.3. Items of income, expenses, profit and loss related to financial assets and liabilities, presented in the consolidated statement of comprehensive income

in PLN m

	Jan 1–Dec 31 2012	Jan 1–Dec 31 2011
Total effect on net profit/(loss), including:	(206)	212
Financial assets available for sale	(4)	-
Impairment recognised in profit or loss for the reporting period	(4)	-
Financial assets and financial liabilities measured at fair value through profit or loss	87	(241)
Loans and receivables	86	194
Interest on deposits	63	48
Interest on receivables	43	80
Interest on loans advanced	3	5
Net income from short-term securities	-	1
Impairment losses on receivables	(21)	64
Impairment losses on loans	(1)	(5)
Foreign currency measurement of loans advanced in foreign currencies	(1)	1
Financial liabilities at amortised cost	(175)	(111)
Hedge derivatives	(195)	390
Liabilities excluded from the scope of IAS 39	(5)	(20)
Total effect on other comprehensive income, net, including:	(250)	82
Financial assets available for sale	-	(53)
Hedge derivatives	(250)	135
Total effect on comprehensive income	(456)	294

34.4. Fair value hierarchy

in PLN m

		Dec 31 2012		Dec 31 2011
Classes of financial instruments	Note	level 1	level 2	level 1	level 2
Investment fund units	34.2	-	-	22	-
Derivative financial instrument assets	34.2	-	105	-	285
Derivative financial instrument liabilities	34.2	-	393	-	417

34.5. Objectives and policies of financial risk management

In its business activity, the Group is exposed to financial risk, including in particular the following types of risk:

• credit risk,
• market risk, including:
  • interest rate risk,
  • foreign exchange risk,
  • commodity price risk,
• liquidity risk.

Credit risk

Credit risk is defined as the likelihood of failure by the Group's counterparty to meet its obligations on time or failure to meet such obligations at all. The credit risk resulting from a third party’s inability to perform its obligations under a contract concerning financial instruments is generally limited to the amounts, if any, by which the third party’s liabilities exceed the Group’s liabilities. As a rule, the Group concludes transactions in financial instruments with multiple entities with high creditworthiness. The key criteria applied by the Group in the selection of counterparties include their financial standing as confirmed by rating agencies, as well as their market shares and reputation.

The PGNiG Group is exposed to credit risk in connection with its:

• trade receivables,
• investment transactions,
• financial guarantees,
• hedging transactions.

The maximum exposures to credit risk for individual financial instrument categories are presented below.

Maximum exposure to credit risk

in PLN m

	Dec 31 2012	Dec 31 2011
Cash and cash equivalents	1,948	1,505
Trade and other receivables	4,849	3,036
Non-bank borrowings and other financial assets	124	10
Positive value of derivatives	105	285
Total	7,026	4,836

Exposure to credit risk under loans advanced arises exclusively in connection with loans advanced by the Parent to its subsidiaries which are not accounted for with the full method, or to its associates. Loans to those entities are advanced in line with the internal procedure “PGNiG SA’s Lending Policy with Respect to the Group Companies and Entities in which PGNiG SA Holds Equity Interests”. The policy stipulates detailed rules governing the conclusion and monitoring of loan agreements, thus minimising the Group’s exposure to credit risk under such agreements. Loans are advanced only if the borrower meets a number of conditions and provides appropriate security.

The highest credit risk, in value terms, is related to receivables. Most of the receivables are receivables under sales of gas fuel by PGNiG SA.

In order to minimise the risk of uncollectible receivables under gas fuel sales, uniform rules designed to secure trade receivables have been implemented, to be followed while concluding agreements for the sale of gas fuel.
Prior to the conclusion of a sale agreement with a significant value, the financial standing of a potential customer is reviewed and analysed based on generally available financial data on the counterparty (checking registers of debtors) in order to determine the counterparty’s creditworthiness. If a counterparty is found to be entered in a register of debtors, PGNiG SA requires special security for the agreement.
The Parent monitors on an ongoing basis customers' performance of their contractual obligations related to financial settlements. Under most of the agreements, the customer is obliged to make advance payments by the dates provided for in the agreement. At the end of the contractual settlement period, the customer is obliged to make payment for gas fuel actually received by the deadline provided for in the agreement. The standard payment deadline is 14 days from the invoice issue date, but other payment terms are also used.
PGNiG SA has implemented measures to monitor and assess the financial standing of customers receiving natural gas in excess of 1 million cubic metres a year based on corporate financial documents (once every three months and once a year). The measures are to help keep track of the financial standing of customers receiving over 1 million cubic metres of natural gas a year and determine the probability of the customers becoming insolvent.

PGNiG SA uses the following contract performance security instruments:

• mortgage (ordinary mortgage (hipoteka zwykła) and security (deposit) mortgage (hipoteka kaucyjna)),
• bank guarantee;
• security deposit;
• ordinary or registered pledge;
• insurance guarantee;
• Blank promissory note;
• Statement on voluntary submission to enforcement under Art. 777 of the Polish Code of Civil Procedure;
• Assignment of claims under long-term agreements;
• Cash deposit placed in an account indicated by PGNiG SA;
• rating;
• surety.

With respect to new agreements, the selection of a security instrument is agreed between PGNiG SA and the customer. As part of the mandatory harmonisation of concluded agreements with the requirements of the Polish Energy Law, the Company enters into negotiations with certain customers with a view to creating or strengthening contract performance security.
The balance of receivables from customers is monitored on an ongoing basis, in line with internal procedures applicable at the Parent. If a customer’s failure to make a payment when due has been identified, the Company takes appropriate measures to collect the debt.
The debt-collection measures are governed by “The Guidelines for Monitoring and Collection of Receivables from Customers Buying Gas/Crude Oil/Other Products” and “Interest Receivable Management Procedure”.During debt collection, legal tools are used and debt-collection measures are taken to assess the level and causes of associated risk. In this respect, standard steps of debt-collection are taken: a payment demand, a telephone call to the customer, notice and discontinuance of gas fuel supply with simultaneous termination of the agreement under Art. 6.3a of the Polish Energy Law. If these measures fail, a suit is filed with the court and an application is filed to enter the customer in the National Register of Debts maintained by Biuro Informacji Gospodarczej S.A. of Wrocław.
Statutory interest is charged on late payments.
In the event of temporary deterioration of a customer’s financial standing, at the customer’s request, an agreement is concluded for repayment of debt in instalments and simultaneously negotiations are undertaken to receive additional contract performance security.
As a rule, no arrangements providing for cancellation of principal and interest are offered or accepted.
A customer’s request to cancel interest (with a value exceeding the equivalent of EUR 5,000) is forwarded to the Supervisory Board for approval, in line with corporate procedures.
As at December 31st 2012, the value of unimpaired past due receivables, as disclosed in the Group's statement of financial position, was PLN 594m (December 31st 2011: PLN 467m).

Receivables past due but not impaired, as at the balance-sheet date – by length of delay

in PLN m

Delay	Dec 31 2012	Dec 31 2011
Up to 1 month	508	371
From 1 to 3 months	64	61
From 3 months to 1 year	16	33
from 1 to 5 years	6	2
Total net past due receivables	594	467

The Group identifies, measures and minimises its credit exposure to individual banks with which it executes investment transactions. The reduction of credit exposure was achieved through diversification of the portfolio of counterparties (mainly banks) with which the Group companies enter into investment transactions. The Parent has also concluded Framework Agreements with all banks with which the Group companies hold funds. These Framework Agreements stipulate detailed terms and conditions for execution and settlement of any financial transactions.
The Group measures the related credit risk by regularly reviewing the banks’ financial standing, as reflected in ratings assigned by rating agencies such as Fitch, Standards&Poor’s and Moody’s.
In 2012, the Group invested its long-term cash surplus of significant value in highly liquid, credit risk-free instruments, in particular treasury bills and bonds.

• The Group's credit risk exposure arising in connection with the provided guarantees is substantially limited to the risk of default by the banks which, acting on the Group's instructions, issued guarantees to other external entities. However, the banks on which the Group relies for provision of guarantees are reputable institutions with high ratings; therefore, both the probability of their default and the associated credit risk to the Group are insignificant.
• As in the case of the risk related to cash deposits, the credit risk arising in connection with provided guarantees is measured by regularly reviewing the financial standing of the banks issuing the guarantees.

The exposure to credit risk under financial derivatives is equal to the net carrying amount of the positive valuation of the derivative (at fair value). As in the case of investment transactions, transactions in financial derivatives are executed with most reputable banks with high credit ratings. The Group companies have also concluded either Framework Agreements or ISDA Agreements with each of their relationship banks, stipulating detailed terms of service and limits of maximum exposure arising from the fair value of derivatives.
The Group expects that all these measures protect it from any material losses related to credit risk.

Market risk

Market risk is defined as the probability that the Group’s financial performance or economic value will be adversely affected by changes in the financial and commodity markets.

The main objective of the market risk management is to identify, measure, monitor and mitigate key sources of risk, including:

• foreign exchange risk
• interest rate risk;
• commodity risk (e.g. gas and oil prices).

Currency risk

Currency risk is defined as the probability that the Group’s financial performance will be adversely affected by changes in the price of one currency against another.
Trade payables under long-term contracts for gas fuel deliveries are denominated in the US dollar and the euro. The Group has a considerable exposure to currency risk; for details, see “Sensitivity analysis”.
The hedging measures implemented by the Group are mainly intended to provide protection against the currency risk accompanying payments settled in foreign currencies (mainly payments for gas fuel supplies). To hedge its payables, the Company uses call options, option strategies and forward transactions.

Interest rate risk

Interest rate risk is defined as the probability that the Group's financial performance will be adversely affected by changes in interest rates.

The Group is exposed to interest rate risk primarily in connection with its financial liabilities. For detailed information on the Group's financial liabilities and the applicable interest rates, see Note 26.
The Parent measures its market risk (including the currency and interest rate risks) by monitoring the VaR (value at risk). VaR means that the maximum loss arising from a change in the market (fair) value will not exceed that value over the next n business days, given a specified probability level (e.g. 99%). VaR is estimated using the variance-covariance method.

Commodity risk

Commodity risk is defined as the probability that the Group’s financial performance will be adversely affected by changes in commodity prices.
The price risk to which the Group is exposed, mainly in connection with its contracts for gas fuel deliveries, is substantial. It stems from volatility of prices of oil products quoted on global markets. Under some of the contracts for gas fuel deliveries, the pricing formula relies on a weighted average of the prices from previous months, which mitigates the volatility risk.
In 2012, the Group closely monitored and hedged against the risk. To hedge against the price risk, the Group used Asian call options settled as European options, and risk reversal option strategies.
In addition, the Energy Law provides for the possibility of filing an application for tariff adjustment if, within a quarter, the purchase costs of gas rise by more than 5%.

Liquidity risk

The main objective of the liquidity risk management is to monitor and plan the Company's liquidity on a continuous basis. Liquidity is monitored through at least 12-month projections of future cash flows, which are updated once a month. PGNiG reviews the actual cash flows against projections at regular intervals – an exercise which comprises an analysis of unmet cash-flow targets, as well as the related causes and effects. The liquidity risk should not be equated exclusively with the risk of loss of liquidity by the Group. An equally serious threat is that of having excess structural liquidity, which could adversely affect the Group’s profitability.
The Group monitors and plans its liquidity levels on a continuous basis. As part of its strategy to hedge against liquidity risk, as at December 31st 2012 the Group had in place the following debt securities issuance programmes:

• Under the Note Issuance Programme Agreement executed by the Parent on June 10th 2010, the Parent may issue discount or coupon notes maturing in one to twelve months, for an aggregate amount of up to PLN 7,000m. The Agreement was originally concluded with six banks (Bank Pekao S.A., ING Bank Śląski S.A., PKOBP S.A., Bank Handlowy w Warszawie S.A., Societe Generale S.A. and BNP Paribas S.A., Polish Branch). Under an annex of November 25th 2011, by BRE Bank S.A., Bank Zachodni WBK S.A. and Nordea Bank Polska S.A. acceded to the Agreement. As at December 31st 2012, debt outstanding under the Agreement was PLN 2,293m.
• On August 25th 2011, the Parent and PGNiG Finance AB executed documentation for a Euro Medium Term Notes Programme with Societe Generale S.A., BNP Paribas S.A. and Unicredit Bank AG, pursuant to which PGNiG Finance AB may issue notes with maturities of up to ten years, up to the aggregate amount of EUR 1,200m. The first tranche of PGNiG Finance AB securities under the Programme, comprising PLN 500m 5-year eurobonds, was issued on February 10th 2012. As at the end of 2012, debt outstanding under the eurobonds was PLN 2,116m (translated at the mid-rate quoted by the NBP for December 31st 2012).
• On May 22nd 2012 the Parent executed an agreement for a PLN 4,500m notes programme with Bank Pekao S.A. and ING Bank Śląski S.A. Under the programme, on June 19th 2012 the Company issued Tranche 1, comprising PLN 2,500m notes maturing on June 19th 2017. On July 30th 2012, the notes were floated on the Catalyst market, a multilateral trading facility operated by BondSpot. On September 19th 2012, the Company issued Tranche 2, comprising PLN 510.5m short-term notes maturing on September 19th 2013, and on December 19th - Tranche 3, comprising PLN 728m notes maturing in up to twelve months. As at December 31st 2012, debt outstanding under the Programme was PLN 3,694.2m.
• On July 4th 2012, PGNiG Termika S.A. executed a Note Issuance Programme with the following banks: ING Bank Śląski S.A., PKO Bank Polski S.A., Nordea Bank Polska S.A. and Bank Zachodni WBK S.A. Under the Programme, PGNiG Termika S.A. may issue coupon or discount notes up to a total of PLN 1,500m. The Programme will expire on December 29th 2017. As at December 31st 2012, PGNiG Termika S.A.'s debt outstanding under the notes was PLN 537.7m. The notes were disclosed under current liabilities.

PGNiG Group companies were parties to credit facility agreements for an aggreate maximum limit of PLN 1,585m (December 31st 2011: PLN 1,822m). For more details, see Note 26.2.

Any excess cash is invested, mainly in high-yield treasury securities, or deposited with reputable banks.
The liquidity risk at the Parent is significantly mitigated through the application of the “PGNiG SA Liquidity Management Procedure”. This procedure has been implemented across the Company’s organisational units. It offers a systematised set of measures designed to ensure proper liquidity management through: settlement of payments, preparation of cash-flow projections, optimum management of free cash flows, securing and restructuring of financing of day-to-day operations and investment projects, protection against the risk of a temporary liquidity loss due to unforeseen disruptions, and appropriate servicing of credit agreements.
Measurement of the liquidity risk is based on an ongoing detailed monitoring of cash flows, which takes into account the probability that specific flows will materialise, as well as the planned net cash position.

The tables below present a breakdown of financial liabilities by maturity.

Financial liabilities at amortised cost, by maturity

in PLN m

Dec 31 2012	Liabilities under borrowings and notes	Finance lease liabilities	Trade payables	Total
up to 1 year	4,685	48	2,076	6,809
from 1 to 5 years	3,339	129	47	3,515
over 5 years	2,030	14	6	2,050
Total	10,054	191	2,129	12,374

Dec 31 2011	Liabilities under borrowings and notes	Finance lease liabilities	Trade payables	Total
up to 1 year	3,581	46	2,090	5,717
from 1 to 5 years	1,098	108	18	1,224
over 5 years	140	41	2	183
Total	4,819	195	2,110	7,124

The items in the above tables are presented at gross (undiscounted) amounts.
In the current and comparative periods, the Group met its liabilities under borrowings in a timely manner. Further, there were no defaults under any of its agreements that would trigger accelerated repayment.

Derivative instruments by maturity

in PLN m

	Net carrying amount as at Dec 31 2012*	Contractual cash flows, including:	up to 1 year	from 1 to 5 years	over 5 years
interest rate swaps (IRS) and forward contracts, used as risk hedging instruments	(232)	11 882	548	11 334	-
inflows	-	5 700	262	5 438	-
outflows	-	6 182	286	5 896	-
forward transactions	(76)	3 478	3 478	-	-
inflows	-	1 722	1 715	7	-
outflows	-	1 756	1 763	(7)	-
currency options**	5	1	1	-	-
inflows	-	1	1	-	-
outflows	-	-	-	-	-
commodity options**	15	-	-	-	-
inflows	-	-	-	-	-
outflows	-	-	-	-	-
Total	(288)	15 361	4 027	11 334	-

	Net carrying amount as at Dec 31 2011*	Contractual cash flows, including:	up to 1 year	from 1 to 5 years	over 5 years
interest rate swaps (IRS) and forward contracts, used as risk hedging instruments	(411)	(190)	12	(202)	-
inflows	-	2 642	118	2 524	-
outflows	-	(2 832)	(106)	(2 726)	-
forward transactions	59	65	65	-	-
inflows	-	1 999	1 999	-	-
outflows	-	(1 934)	(1 934)	-	-
currency options**	182	-	-	-	-
inflows	-	-	-	-	-
outflows	-	-	-	-	-
commodity options**	38	-	-	-	-
inflows	-	-	-	-	-
outflows	-	-	-	-	-
Total	(132)	(125)	77	(202)	-

Download Excel file

* Net carrying amount (positive valuation less negative valuation of assets) represents the fair value, i.e. payments under swap contracts are discounted, whereas cash flows are disclosed undiscounted amounts.
** The disclosed carrying amounts of currency and commodity options account for any option premiums paid; given that possible cash flows depend on the exchange rates or commodity prices prevailing on the market at the time when the option is exercised, no cash flows are shown.

The Group has not identified any other material risks inherent in its day-to-day operations.

Financial risk management policy

In order to manage financial risk effectively, since 2003 the Parent has operated the “Policy of Financial Risk Management at PGNiG SA” (Policy), defining the division of competencies and tasks among the Company’s organisational units in the process of financial risk management and control.
The bodies responsible for ensuring compliance with the “Policy of Financial Risk Management at PGNiG SA” and periodic updates of the Policy are:

• Risk Committee, which proposes risk management policies, assesses on an ongoing basis whether the policies are implemented and revises them accordingly;
• Management Board, which is responsible for formal approval of the Policy.

Sensitivity analysis

To determine a rational range of changes which may occur with respect to currency or interest rate risks, the Group assumed an (implied) market volatility level for semi-annual periods, i.e. an average change of 15% as at the end of December 2012 for the analysis of exchange rate sensitivity (unchanged relative to the end of December 2011), 100bp for the analysis of interest rate sensitivity (as at December 31st 2011, also 100bp) and 25% for energy commodity derivatives (December 31st 2011: 30%). The half-year period is the frequency with which the Group discloses results of financial instrument sensitivity analyses in its reports.
The results of the analysis of sensitivity to currency risk carried out as at December 31st 2011 indicate that the net profit would have been lower by PLN 423m, had the EUR/PLN, USD/PLN, NOK/PLN and other currencies’ exchange rates increased by 15%, ceteris paribus (net profit decrease of PLN 416m due to stronger NOK and of PLN 13m due to stronger USD vs. increase of PLN 5m on the back of stronger EUR and of PLN 1m due to strengthening of other currencies).
The most significant factor with a bearing on the outcome of the sensitivity analysis is higher negative valuation of CCIRS derivatives hedging the loan advanced to PGNiG Norway AS, which is eliminated from the consolidated financial statements.
If the loan was recognised in the statement of financial position (which is the case in the Parent's separate financial statements), the cash flows related to the loan and the cash flows from the hedging transactions would offset one another. As a result, the changes in positive (negative) valuation of the loan would be offset by negative (positive) changes in the valuation of CCIRS transactions. In aggregate, the items would be insensitive to the exchange rate and interest rate changes.
Lower profit would be mainly attributable to an increase in the negative portion of the fair value of financial derivatives (negative fair value of swap transactions in NOK).
The adverse effect on the result of NOK-denominated financial instruments would be substantially amplified by an increase in valuation the of the USD credit facility contracted by PGNiG Norway AS and reduced by an increase in the valuation of assets in this currency. Any increase in foreign exchange losses from valuation of the eurobonds in EUR would be compensated by an increase in the positive portion of the fair value of financial derivatives on EUR.
As at December 31st 2012, net profit would have been higher by PLN 421m, if the EUR, USD, NOK and other currencies depreciated against the złoty by 15%, ceteris paribus (profit higher by PLN 415m due to weaker NOK and by PLN 15m due to weaker USD, and lower by PLN 8m due to weaker EUR and by PLN 1m due to depreciation of other currencies). A positive result would be mainly attributable to an increase in the positive portion of the fair value of financial derivatives (positive fair value of swap transactions in NOK). Any increase in foreign exchange gains from valuation of the eurobonds in EUR would be offset by an increase in the negative portion of the fair value of financial derivatives for EUR. On the other hand, any decrease in the valuation of the USD-denominated loan contracted by PGNiG Norway AS would be offset by a decrease in assets (receivables) measured in the same currency.
Results of an analysis of sensitivity to currency risk carried out as at December 31st 2011 indicate that net profit would have been lower by PLN 412m, if the EUR, USD, NOK and other currencies apreciated against the złoty by 15%, ceteris paribus (profit lower by PLN 344m due to stronger NOK and by PLN 89m due to stronger USD, and higher by PLN 15m due to stronger EUR and PLN 6m due to the strengthening of other currencies).
The most significant factor with a bearing on the outcome of the sensitivity analysis is higher negative valuation of CCIRS derivatives hedging the loan advanced to PGNiG Norway AS, which is eliminated from the consolidated financial statements.
If the loan was recognised in the statement of financial position (which is the case in the Parent's separate financial statements), the cash flows related to the loan and the cash flows from the hedging transactions would offset one another. As a result, the changes in positive (negative) valuation of the loan would be offset by negative (positive) changes in the valuation of CCIRS transactions. In aggregate, the items would be insensitive to the exchange rate and interest rate changes.
Lower profit would be mainly attributable to an increase in the negative portion of the fair value of financial derivatives (negative fair value of swap transactions in NOK).
The adverse effect on the result on NOK-denominated financial instruments would be substantially amplified by an increase in valuation the of the USD credit facility contracted by PGNiG Norway AS and reduced by an increase in the positive portion of the fair value of financial derivatives on USD and EUR and the valuation of assets in those currencies
With the exchange rates higher by 15%, the positive portion of the fair value of financial derivatives executed on USD and EUR would grow and so would foreign exchange losses on trade payables related to EUR and USD.
As at December 31st 2011, net profit would have been higher by PLN 511m, if the EUR, USD, NOK and other currencies depreciated against the złoty by 15%, ceteris paribus (profit higher by PLN 344m due to weaker NOK, by PLN 168m due to weaker USD, and by PLN 5m due to weaker EUR, and lower by PLN 6m due to depreciation of other currencies). The positive financial result would be mainly attributable to an increase in the positive portion of the fair value of financial derivatives (positive fair value of swap transactions in NOK). The positive financial result would be augmented by a decrease in valuation of the USD credit facility contracted by a subsidiary, PGNiG Norway AS, and slightly reduced by a decrease in the positive portion of the fair value of financial derivatives executed on USD hedging the liabilities and expenses related to purchases of gas fuel.
Detailed results of the analysis of sensitivity of financial instruments held by the Group to exchange rate fluctuations for 2012 and 2011 are presented below.

Sensitivity of financial instruments denominated in foreign currencies to exchange rate fluctuations charged to profit or loss

in PLN m

		Currency risk
	Exchange rate change by:	15%				-15%
	Net carrying amount Dec 31 2012	for EUR	for USD	for NOK	for other currencies	for EUR	for USD	for NOK	for other currencies
Financial assets
Financial assets available for sale*	3	-	-	-	-	-	-	-	-
Other financial assets	1	-	-	-	-	-	-	-	-
Trade and other receivables	1 248	35	148	2	3	(35)	(148)	(2)	(3)
Financial assets held for trading	-	-	-	-	-	-	-	-	-
Derivative financial instrument assets**	90	357	5	-	-	-	-	507	-
Cash and cash equivalents	337	19	23	6	2	(19)	(23)	(6)	(2)
Effect on financial assets before tax		411	176	8	5	(54)	(171)	499	(5)
19% tax		(78)	(34)	(2)	(1)	10	33	(95)	1
Effect on financial assets after tax		333	142	6	4	(44)	(138)	404	(4)
Total currencies		485				218
Financial liabilities
Borrowings and debt securities (including finance lease)	3 406	324	186	-	1	(324)	(186)	-	(1)
Trade and other payables	677	81	5	14	2	(81)	(5)	(14)	(2)
Derivative financial instrument liabilities**	393	-	-	507	-	361	2	-	-
Effect on financial liabilities before tax		405	191	521	3	(44)	(189)	(14)	(3)
19% tax		(77)	(36)	(99)	-	8	36	3	-
Effect on financial liabilities after tax		328	155	422	3	(36)	(153)	(11)	(3)
Total currencies		908				(203)
Total increase/decrease		5	(13)	(416)	1	(8)	15	415	(1)
Total currencies		(423)				421
Exchange rates as at the balance-sheet date and their change:
EUR/PLN	4,0882	-	4,7014	4,7014	4,7014	-	3,475	3,475	3,475
USD/PLN	3,0996	3,5645	-	3,5645	3,5645	2,6347	-	2,6347	2,6347
NOK/PLN	0,5552	0,6385	0,6385	-	0,6385	0,4719	0,4719	-	0,4719

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* Includes shares disclosed at historical values, therefore the change in exchange rates will not affect the valuation of those assets and the profit/loss for the period.
** In the case of financial derivatives, the table presents only the effect of exchange rate fluctuations on profit or loss. In connection with the use of hedge accounting, part of the changes in the valuation of financial derivatives is charged to equity through other comprehensive income. The effect of fluctuations in exchange rates on this portion of financial derivatives is presented in a separate table below.

in PLN m

		Currency risk
	Exchange rate change by:	15%				-15%
	Net carrying amount Dec 31 2011	for EUR	for USD	for NOK	for other currencies	for EUR	for USD	for NOK	for other currencies
Financial assets
Financial assets available for sale*	6	-	-	-	-	-	-	-	-
Other financial assets	-	-	-	-	-	-	-	-	-
Trade and other receivables	494	47	14	4	10	(47)	(14)	(4)	(10)
Financial assets held for trading	-	-	-	-	-	-	-	-	-
Derivative financial instrument assets**	244	28	144	-	-	-	-	422	-
Cash and cash equivalents	294	6	11	22	5	(6)	(11)	(22)	(5)
Effect on financial assets before tax		81	169	26	15	(53)	(25)	396	(15)
19% tax		(15)	(32)	(5)	(3)	10	5	(75)	3
Effect on financial assets after tax		66	137	21	12	(43)	(20)	321	(12)
Total currencies		236				246
Financial liabilities
Borrowings and debt securities (including finance lease)	1 536	3	226	-	2	(3)	(226)	-	(2)
Trade and other payables	975	60	53	28	5	(60)	(53)	(28)	(5)
Derivative financial instrument liabilities**	414	-	-	422	-	4	47	-	-
Effect on financial liabilities before tax		63	279	450	7	(59)	(232)	(28)	(7)
19% tax		(12)	(53)	(85)	(1)	11	44	5	1
Effect on financial liabilities after tax		51	226	365	6	(48)	(188)	(23)	(6)
Total currencies		648				(265)
Total increase/decrease		15	(89)	(344)	6	5	168	344	(6)
Total currencies		(412)				511
Exchange rates as at the balance-sheet date and their change:
EUR/PLN	4,4168	-	5,0793	5,0793	5,0793	-	3,7543	3,7543	3,7543
USD/PLN	3,4174	3,93	-	3,93	3,93	2,9048	-	2,9048	2,9048
NOK/PLN	0,5676	0,6527	0,6527	-	0,6527	0,4825	0,4825	-	0,4825

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* Includes shares disclosed at historical values, therefore the change in exchange rates will not affect the valuation of those assets and the profit/loss for the period.
** In the case of financial derivatives, the table presents only the effect of exchange rate fluctuations on profit or loss. In connection with the use of hedge accounting, part of the changes in the valuation of financial derivatives is charged to equity through other comprehensive income. The effect of fluctuations in exchange rates on this portion of financial derivatives is presented in a separate table below.

Analysis of derivatives' sensitivity to fluctuations of exchange rates charged to equity

in PLN m

	Dec 31 2012
Exchange rate	for EUR	for USD	for EUR	for USD
Exchange rate change by:	15%		15%
Effect on equity, before tax	106	241	(38)	(196)
19% tax	(20)	(46)	7	37
Effect on financial assets/liabilities after tax	86	195	(31)	(159)
Total currencies	281		(190)

	Dec 31 2011
Exchange rate	for EUR	for USD	for EUR	for USD
Exchange rate change by:	15%		15%
Effect on equity, before tax	61	369	(51)	(265)
19% tax	(12)	(70)	10	50
Effect on financial assets/liabilities after tax	49	299	(41)	(215)
Total currencies	348		(256)

The analysis of derivative instruments' sensitivity to exchange rate fluctuations, charged to equity and presented in the table below, shows that a 15% increase in the PLN/USD and PLN/EUR exchange rates would cause an increase in equity through other comprehensive income. A 15% decline in the PLN/USD and PLN/EUR exchange rates would reduce equity. This is due to the fact that the Group uses derivative instruments whose valuation in the effective portion is charged to equity in order to hedge against an increase in USD- and EUR-denominated liabilities and expenses related to gas purchases.
The Group has analysed the sensitivity of energy commodity derivatives. For the sensitivity analysis for 2012, a 25% volatility was assumed for such instruments (December 31st 2011: 30%).

Sensitivity of derivatives to commodity price fluctuations charged to profit or loss

in PLN m

	Net carrying amount Dec 31 2012	Price risk
	Price change by:	25%		-25%
		Gasoil	Fueloil	Gasoil	Fueloil
Financial assets
Energy commodity derivative assets	15	15	2	-	-
Effect on financial assets before tax		15	2	-	-
19% tax		(3)	-	-	-
Effect on financial assets after tax		12	2	-	-
Total commodities		14		-
Financial liabilities
Energy commodity derivative liabilities	-	-	-	(3)	(2)
Effect on financial liabilities before tax		-	-	(3)	(2)
19% tax		-	-	1	-
Effect on financial liabilities after tax		-	-	(2)	(2)
Total commodities		-		(4)
Total increase/decrease		12	2	2	2
Total commodities		14		4

in PLN m

	Net carrying amount Dec 31 2011	Price risk
	Price change by:	30%		-30%
		Gasoil	Fueloil	Gasoil	Fueloil
Financial assets
Energy commodity derivative assets	41	86	72	-	-
Effect on financial assets before tax		86	72	-	-
19% tax		(16)	(14)	-	-
Effect on financial assets after tax		70	58	-	-
Total commodities		128		-
Financial liabilities
Energy commodity derivative liabilities	3	-	-	48	67
Effect on financial liabilities before tax		-	-	48	67
19% tax		-	-	(9)	(13)
Effect on financial liabilities after tax		-	-	39	54
Total commodities		-		93
Total increase/decrease		70	58	(39)	(54)
Total commodities		128		(93)

The above tables present only the effect of price fluctuations on profit or loss. Some changes in the value of energy commodity derivatives affect directly equity.

The table below presents the effect of changes in energy commodity derivatives charged to equity.

Analysis of derivatives' sensitivity to fluctuations of commodity prices charged to equity

in PLN m

	Dec 31 2012
Price change by:	25%		-25%
	Gasoil	Fueloil	Gasoil	Fueloil
Effect on equity, before tax	53	20	(16)	(3)
19% tax	(10)	(4)	3	1
Effect on financial assets/liabilities after tax	43	16	(13)	(2)

in PLN m

	Dec 31 2011
Price change by:	30%		-30%
	Gasoil	Fueloil	Gasoil	Fueloil
Effect on equity, before tax	42	54	(47)	(4)
19% tax	(8)	(10)	9	1
Effect on financial assets/liabilities after tax	34	44	(38)	(3)

The analysis of derivative instruments' sensitivity to changes in prices of energy commodity derivatives, charged to equity and presented in the table below, shows that a 25% increase (30% increase for 2011) in prices of energy commodity derivatives would increase equity through other comprehensive income. A 25% decline in the prices (2011: 30% decline) would reduce equity. This is due to the fact that the Group uses derivatives whose valuation in the effective portion is charged to equity in order to hedge against an increase in prices of energy commodities, which are the largest cost item in the Group's income statement.
The Group analysed the sensitivity of financial instruments under contracted borrowings, notes in issue and variable-rate lease liabilities to interest rate changes of +/-100 bp for 2012 (2011: +/-100 bp).
As at December 31st 2012, the sensitivity to interest rate changes of +/-100 bp of liabilities under borrowings, notes in issue, and variable-rate lease liabilities was +/- PLN 102m. At the same time, the sensitivity of loans advanced to interest rate changes of +/-100 basis points was PLN +/- 1m.
As at December 31st 2011, the sensitivity to interest rate changes of +/-100 bp of liabilities under borrowings, notes in issue, and variable-rate lease liabilities was +/- PLN 50m.

Sensitivity of financial instruments to interest rate changes

in PLN m

	Net carrying amount As at Dec 31 2012	Change by:
		+100 bp	-100 bp
Loans advanced	117	1	(1)
Borrowings and other debt instruments	1,429	14	(14)
Notes issued	8,599	86	(86)
Lease liabilities	183	2	(2)
Total liabilities	10,211	102	(102)

	Net carrying amount As at Dec 31 2011	Change by:
		+100 bp	-100 bp
Borrowings and other debt instruments	1,519	15	(15)
Notes issued	3,294	33	(33)
Lease liabilities	186	2	(2)
Total liabilities	4,999	50	(50)

Polish Oil & Gas Company (PGNiG SA) KRS 0000059492, NIP 525-000-80-28, share capital 5,900,000,000 PLN – fully paid Headquarters – 25 M. Kasprzaka Street, 01-224 Warsaw, Poland Phone: +48 22 589 45 55, Fax: +48 22 691 82 73