The PGE Group is exposed to different kinds of financial risks. Types and significance of those risks depend on the range of activities on the commodity and financial markets. In particular these are:

• liquidity risk
• market risk, including: interest rate risk, currency risk, price risk;
• credit risk.

The supreme goal of financial risk management in the PGE Group is to support the process of creating value for shareholders and to implement business strategies of the Group through maintaining the financial risk at the level acceptable for the Group management. This goal is attained through reducing the effect of risk factors changes on the range of cash flows and financial result fluctuations arising out of the PGE Group’s exposure to financial risk. The financial risk management activities are integrated from the perspective of the PGE Group as a whole. This means that the process of risk management takes into account the sources of exposure to the risk generated by individual areas of business, co-relationships between them and their aggregate influence on the risk profile and the financial situation of the PGE Group.

Financial risk management model includes:

• collection and consolidation of data on exposure to particular categories of financial risk,
• calculation and analysis of the aggregate measures of financial risk and global risk measurement,
• management of the PGE Group’s consolidated exposure in relation to capital at risk and risk limits established on its basis (including the identification and implementation of hedging strategies).

Management Board of PGE S.A. bears the responsibility for the infrastructure of financial risk management. The Management Board of PGE S.A. determines the risk appetite which is an acceptable level of worsening of the financial result of the PGE Group, taking into account its current and projected economic and financial situation. The Management Board decides also on the allocation of the risk appetite to particular areas of business activity. In the PGE Group, there is the Risk Committee that supervises the process of risk management as well as the scope and level of the Group’s exposure to significant risks (including financial risks) in the relation to applicable limits and risk appetite. The Risk Committee makes key decisions in the area of risk management concerning, among others, setting risk limits as part of the risk appetite, as well as the approval of applied methods and instruments in the area of commercial and hedging operations.

The organization of a function of financial risk management is based on the principle of independence of an entity responsible for measurement and control of risk vs business entities (risk owners) responsible for taking and managing the risk on an ongoing basis. The independence of the risk control function from business entities assuming the risk is guaranteed by way of locating the risk unit in a separate division of the PGE Group’s Corporate Center and independent reporting lines to the Risk Committee and the Management Board of PGE S.A.

In the key areas for financial risks, the PGE Group has implemented internal rules for managing these risks.

The rules for financial risk management support a business decision making process and attainment of assumed strategic goals with the concurrent risk optimization.

The risk owners execute transactions exclusively in the scope of agreed area of operations and approved products, markets and types of instruments/transactions. Each decision regarding the extension of operations into a new area is preceded with an independent assessment of, among others, a risk unit, in respect of the generated risk profile, impact on risk exposure of the PGE Group and requirements to be met to ensure risk control and must be approved by the Risk Committee.

Interest rate and foreign currency risks management in the PGE Group assumes that the transfer of market risk generated by the companies from the PGE Group is transferred to the parent entity, i.e. PGE S.A., by way of intergroup transactions. Financial risk management process involves natural hedge mechanisms and hedging instruments, including derivatives which are concluded in the scope determined by the PGE Group’s internal regulations.