26 Financial instruments

26.1 Capital management

The Group’s policy is to maintain a strong capital base, so as to maintain investor, creditor and market environment confidence and to sustain future development of the business. The Group monitors changes in the shareholders structure, return on capital and debt to equity ratios. 

The Group manages the capital in order to ensure the Group’s ability to continue as a going concern and maximise returns for shareholders through optimisation of the debt to equity ratio.

The capital structure of the Group consists of liabilities including credits and loans presented in Note 19, other financial liabilities presented in Note 24 and equity (including issued shares, reserves and retained earnings) presented in Note 18. 

The Parent Company, as a joint stock company, is subject to article 396 § 1 of the Commercial Companies Code, which requires to transfer to the reserves at least 8% of the profit for the period, until such reserves equal one third of the share capital.

26.2 Categories of financial instruments 

Classification of financial instruments 

Financial assets

Financial liabilities

Additionally we inform that:

• there were no financial assets presented in the statement of financial position as at 31 December 2014 and 31 December 2013 for which the terms and conditions were renegotiated,
• except for the impairment losses on receivables presented in Note 16, the Group did not recognise other impairment losses,
• no reclassifications of financial assets resulting from their maturities at the reporting dates occurred in 2014 and 2013,
• no instruments containing both a liability and an equity component as well as containing embedded derivatives were issued in 2014 and 2013,
• in 2014 and 2013 the Group did not seize any collaterals.

26.3 Financial risk management

The Group has exposure to the credit risk, liquidity risk and market risk (related mainly to the foreign exchange and interest rate risk). These risks arise in normal business activities of the Group. The objective of the Group’s financial risk management is to reduce the impact of market factors such as currency exchange rates and interest rates on the basic financial parameters (result for the period, cash flows) previously approved in the Gruop’s budgets by using natural hedging and derivatives.

26.3.1 Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. 

Credit risk arises principally from the trade receivables, bank deposits and cash-pooling.

The following table presents the maximum exposure of the Group to the credit risk:  

The structure of credit risk concerning trade receivables based on groups of products is presented in the following table: Trade receivables

Furthermore, over 14% (31 December 2013: 14%) of the Group’s trade receivables from third parties are secured by letters of credit and bank guarantees. Such receivables are excluded from the insurance.Over 59% of the Group’s trade receivables from third parties are insured under trade credit insurance policies (31 December 2013: 53%). It limits the credit risk exposure to the level of the Group’s own contribution (5-10% of the insured receivables value). The insurance policy provides the facility for current monitoring of customer’s current financial position and debt recovery when required. Additionally, upon customer's real or legal insolvency, the Group receives the compensation payment amounting to 90-95% of insured receivable value.

The Group established a unified credit risk management policy and performs ongoing credit assessment including customer monitoring. For these purposes, the Group reviews business intelligence reports, debtor registers and where appropriate require adequate collateral. 

The Group grants trade credits up to the market value of the collaterals received which mainly relates to domestic customers in Fertilisers-Agro Segment. 

Customers for which the Group does not have a positive history of cooperation or for which sales is made occasionally, and for which is not possible to receive the insured credit limit, perform the purchases on prepayment basis. The credit limit is granted to the customers primarily based on the decision issued by the insurer or additionally based on the positive history of cooperation and creditworthiness determined base on the business intelligence reports, financial statements and payment history.

Credit risk exposure is defined as the total of unpaid receivables and is monitored on an ongoing basis by the Group’s internal financial staff (individually for each customer) and in case of insured receivables additionally by the external credit risk analysts of the insurers. Taking into account the Group’s internal procedures and the diversified customers’ portfolio the concentration of credit risk not considered significant. 

Approximately 54% (31 December 2013: 59%) of the balance concerns the receivables from foreign customers and the remaining 46% (as at 31 December 2013: 41%) relates to domestic customers.

The Group’s revenue concentrates in three main segments reflecting the Group’s business profile. The most significant portion of the Group’s trade receivables relate to Fertilizers-Agro Segment – 35.6% (31 December 2013: 39.9%), then to Plastic Segment – 27.3% (31 December 2013: 23.7%), Chemicals Segment - 26.7% (31 December 2013: 21.5%). In Plastics and Chemicals Segments the foreign customers prevail, to which sales are made on deferred payment terms, mainly within the insured credit limits or based on the open letters of credit and guarantees. In the Fertilizers-Agro Segment domestic customers are dominant. Sales to these customers is made on prepaid basis and in case of customers with proven credit rating based on trade credit within the insured credit limits.

Not impaired overdue trade receivables

Changes in trade receivables impairment losses are presented in Note No. 16.

Cash and bank deposits

Cash and cash equivalents are held in the banks having high ratings and which maintain safe solvency ratios. The excess of domestic cash and cash equivalents is mostly held in the technical accounts linked to the overdraft balances of the Group’s other companies, in the virtual cash-pooling facility provided by PKO BP S.A.

26.3.2 Liquidity risk

Liquidity risk is the risk of a lack of the Group 's ability to repay its financial obligations as they fall due. Measures to reduce this risk include appropriate liquidity management, are performed by a correct assessment of the level of cash resources based on cash flow projections in different time horizons. The Parent Company optimises the management of cash surplus using cash-pooling, revolving loans and dividend policy within the Group.

The Group incurred loans and credits that contain loan covenants. A future breach of these covenants may require the Group to repay the loans and credits earlier than indicated in the table below. In 2014 and 2013, there were no defaults in payments of liabilities or other conditions relating to the liabilities that could result in early payment requests. The interest payments on variable interest rate loans and other financial instruments were estimated based on the interest rates at the reporting date and these amounts may change in the future.

The table below presents the contractual cash flows of financial liabilities at the reporting date.

31 December 2014

31 December 2013

26.3.3 Market risk

The activities aimed to reduce the interest rate risk include ongoing monitoring of the financial situation in the money market. The significant amount of the Group’s cash surpluses is included in the virtual cash-pooling facility, with the interest rate of 1M WIBOR, applicable after the offsetting of negative and positive cash balances of the Group’s companies which enables the application of a natural hedge.

The stabilisation of market interest rates WIBID and WIBOR was observed in the first half of 2014, followed by their decrease in the second half of 2014, resulting from the interest rate reductions announced by the Monetary Policy Council due to deflation and GDP growth stagnation. Decrease in the interest rates positively influenced the interest on the Group’s credits and loans in 2014, reducing the interest expense on the Group’s financial liabilities.

The Group has analysed the sensitivity of the variable interest-bearing financial instruments to the changes in the market interest rates. The following table presents the impact a change in the interest rates by 100 basis points would have on profit or loss and equity. This analysis assumes that all other variables, in particular foreign exchange rates, remain constant.

Sensitivity analysis: (+/-)

The Group is exposed to the currency risk on foreign currency transactions including more than the half of revenue and approximately one third of expenses. Exchange rate fluctuations affect the revenue and costs of raw materials. The appreciation of the domestic currency has a negative impact on the profitability of export and domestic sales denominated in foreign currencies. The depreciation of the domestic currency positively impacts the profitability. Changes in the value of export revenues and domestic revenues measured in foreign currencies resulting from the exchange rate fluctuations are partially offset by the changes in costs of imported raw materials which significantly reduces the Group’s exposure to the currency risk.

The Group considers the current and planned net currency exposure and reduces the existing currency risk resulting from the net currency exposure by using selected hedging instruments and activities. The Group used primarily in the reporting period the natural hedging, factoring of receivables denominated in foreign currencies and additionally currency forwards and currency corridor. In 2014, the Group had the net currency exposure in EUR, which represented 63% (2013: 63%) of the total currency exposure, and the remaining 37% exposure in USD (2013: 37%). The exposure was partially hedged (up to 80% of the expected net exposure). 

The following table presents the summary quantitative data about the Group’s exposure to currency risk, by classes of financial instruments and currencies:

The risk of changes in prices of raw materials, products and services

In order to reduce the risk, the Group undertakes activities to include such provisions in sales contracts which are symmetric to the provisions included in its supply contracts (e.g. references to ICIS-LOR quotations). 

26.4 Fair value of financial instruments 

Details of the fair value of financial instruments whose measurement is possible are presented below:

• cash and cash equivalents, short-term bank deposits and short-term bank loans. The carrying amount of such instruments approximates their fair value because of the short maturities of such instruments,
• trade receivables, other receivables, trade payables. The carrying amount of such instruments approximates their fair value because of their short maturities,
• long-term bank credits and loans. The carrying amount of such instruments approximates their fair value due to the variable interest,
• foreign exchange derivatives, interest rate. The carrying value of these instruments is equal to their fair value.
• available-for-sale financial assets. The carrying amount of such instruments is equal to their fair value.

There were no financial instruments recognised by the Group in 2014 and in 2013 for which the initial value resulting from the transaction would differ from their fair value as at the date of transaction, determined using the appropriate valuation technique.

The fair value of the Group's financial instruments measured at fair value by level of classification as follows: 

31 December 2014

31 December 2013

The fair value hierarchy presented in the table above is as follows:

Level 1 – price quoted in the active market for the same assets or liabilities,
Level 2 – the value determined based on inputs other than quoted prices included in level 1 that are directly or indirectly observable or ascertainable based on the market information,
Level 3 – the value determined on the basis of data inputs that are not based on observable market inputs.

The fair value of currency forwards and interest rate derivatives contracts presented in level II is determined based on a valuation carried out by banks with which the related contracts were concluded. Such valuations are reviewed by discounting the expected cash flows from the contracts using market interest rates prevailing at the reporting date.

The Group has investments of PLN 13 205 thousand (31 December 2013: PLN 13 224 thousand) in shares that were qualified to Level III because the shares are not quoted in an active market and there were no transactions performed on the shares. The fair value of the shares was estimated by an expert using valuation techniques containing significant unobservable inputs, i.e. the expected cash flows and discount rates.

26.5 Derivatives and hedge accounting

Currency derivatives

As at 31 December 2014, the nominal value of short positions in open currency derivatives (forward contracts) amounted to EUR 28 750 thousand (EUR 4 750 thousand with maturity in January 2015, in February and March 2015 EUR 5.5 million each, EUR 5 million with maturity in April 2015, EUR 3.5 million with maturity in May 2015, EUR 1.5 million with maturity in June 2015 and in July, August and September 2015 EUR 1.0 million each) and USD 6 755 thousand (USD 1 515 thousand with maturity in January 2015, USD 1 610 thousand with maturity in February 2015, USD 1 630 thousand with maturity in March 2015, in April and May 2015 USD 700 thousand each, USD 600  thousand with maturity in June 2015). As at 31 December 2014, the nominal value of open derivatives to sell currencies amounted to EUR 9 300 thousand and USD 5 100 thousand.

Transactions are entered only with reliable banks and are based on framework agreements. All derivative transactions reflect the real transactions affecting the currency cash flows. Currency derivatives are entered in accordance with the net currency exposure of the Group and are aimed to reduce the impact of exchange rate fluctuations on profit or loss.

Fair value of derivatives

As at 31 December 2014, the Group had open positions in futures for emission rights amounting to 769 thousand EUA units with maturities in March 2015 (200 thousand units), December 2015 (420 thousand units) and December 2016 (149 thousand units). As at 31 December 2013, the Group had open contracts for the purchase of emission rights for 395 thousand units.

Transactions are entered only with reliable banks and are based on framework agreements. All derivative transactions reflect the real transactions resulting from greenhouse gases emissions in 2014. Futures contracts are entered in accordance with the Group’s exposure resulting from shortage of emission rights (EUA) and are aimed to reduce the impact of emission rights prices fluctuations on profit or loss.

Hedge accounting

In 2014 and 2013, the Group did not use hedge accounting.