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Interest rate risk is related to the possibility that financial results deteriorate as a result of changes in interest rates.
PGE Group is exposed to interest rate risk as a result of financing the Group companies’ operating and investing activities with indebtedness bearing interest at variable interest rates, mainly in the form of credit facilities, loans and bonds issued in domestic or foreign currency and through investments in variable-rate financial assets.
PGE Group controls interest rate risk through a system of limits relating to the maximum potential loss due to changes in interest rates with respect to the consolidated interest rate risk exposure of Group companies. The interest rate risk measure is based on the value-at-risk, understood as a product of the amount of the net interest rate position and the value of a potential change in market interest rates.
Moreover, PGE Group sets out hedging strategies with respect to the consolidated interest rate risk exposure of Group companies using hedging ratios subject to approval by the PGE S.A.’s Risk Committee and Management Board. The hedging strategy and level of interest rate risk are subject to monitoring and are reported to the Risk Committee on a regular basis.
PGE Group companies enter into derivative transactions concerning instruments that are based on interest rate only in order to hedge identified risk exposures. Regulations in force at the PGE Group do not allow, with regard to derivative transactions based on interest rates, to enter into speculative transactions, i.e. transactions which would be aimed at generating additional gains resulting from changes in the level of interest rates, while exposing the Company to the risk of incurring a potential loss on this account.
Bonds issued in the amount of PLN 1 billion under the Bonds issue program of PLN 5 billion bear interest at a variable rate in PLN. Payments relating to those bonds are hedged by IRS contracts.
Bonds issued under the Medium term Eurobonds Issue Programme bear interest at a fixed rate in EUR. Payments relating to those bonds are hedged by CCIRS hedges.
Long-term credit facilities of PLN 1.5 billion under Facilities Agreement signed on December 17, 2014 and December 4, 2015 with Bank Gospodarstwa Krajowego, as well a syndicated facility (term facility tranche) of PLN 3.63 billion under Facility Agreement signed on September 7, 2015 bear interest at variable rates in PLN. Payments on account of these credit facilities are hedged by IRS contracts. PGE Group’s exposure to interest rate risk and concentration of this risk by currency:
| Type of interest | As at December 31, 2019 | As at December 31, 2018 | ||
|---|---|---|---|---|
| Derivatives – assets exposed to interest rate risk | PLN | Fixed | 121 | 6 |
| Variable | 5 | 16 | ||
| Other currencies | Fixed | – | – | |
| Variable | 226 | 143 | ||
| Deposits, cash and debt securities | PLN | Fixed | 983 | 1,070 |
| Variable | – | 4 | ||
| Other currencies | Fixed | 511 | 375 | |
| Variable | – | – | ||
| Derivatives – liabilities exposed to interest rate risk | PLN | Fixed | 8 | – |
| Variable | (106) | (24) | ||
| Other currencies | Fixed | – | – | |
| Variable | (365) | (112) | ||
| Credit facilities, loans, bonds issued, leases | PLN | Fixed | (3,158) | (290) |
| Variable | (8,179) | (7,083) | ||
| Other currencies | Fixed | (595) | (2,769) | |
| Variable | (376) | (566) | ||
| Net exposure | PLN | Fixed | (2,062) | 786 |
| Variable | (8,280) | (7,087) | ||
| Other currencies | Fixed | (84) | (2,394) | |
| Variable | (515) | (535) | ||
Interest on variable-rate financial instruments is updated in periods of less than one year. Interest on fixed-rate financial instruments remains unchanged until maturity.
