Integrated report 2021

Interest rate risk is related to the possibility that financial results deteriorate as a result of changes in interest rates.

PGE Group’s exposure to interest rate risk arises mainly from the fact that Group companies finance their operating and investing activities by obtaining funding based on variable interest rates, mainly in the form of loans, borrowings and bonds issued in domestic and foreign currencies and from investments in financial assets bearing variable interest rates.

PGE Group controls interest rate risk through a system of limits relating to the maximum potential loss due to changes in interest rates in related to consolidated exposure to interest rate risk by PGE Group companies. The measure of interest rate risk is based on the size-at-risk methodology, understood as the product of the size of the net interest rate position and the value of a potential change in market interest rates.

Moreover, PGE Group determines the hedging strategy for the Group’s consolidated interest rate risk exposure through hedge ratios subject to the approval of PGE S.A.’s Risk Committee and Management Board. The hedging strategy and level of interest rate risk are subject to monitoring and are regularly reported to the Risk Committee.

PGE Group companies execute derivative transactions concerning instruments that are based on interest rates only in order to hedge identified risk exposures. Regulations applicable at PGE Group do not allow, with respect to interest rate derivative transactions, to conclude speculative transactions, i.e. transactions aimed at generating additional profits resulting from changes in the level of interest rates, at the same time exposing the Group to the risk of possible loss on this account.

Bonds issued in the amount of PLN 1.4 billion under the PLN 5 billion Bond Issuance Program are floating rate bonds in PLN. Payments on these bonds are secured by IRS contracts.

Bonds issued under the medium-term Eurobonds Issue Program, are interest bearing bonds at a fixed rate in EUR. Payments on these bonds are hedged by CCIRS hedging instruments.

Long-term credit facilities in the total amount of PLN 1.2 billion as at December 31, 2021 under the Credit Agreements entered into on December 17, 2014 and December 4, 2015 with Bank Gospodarstwa Krajowego, respectively, and a syndicated loan (term tranche) in the amount of PLN 2.9 billion as at December 31, 2021 under the Loan Agreement dated September 7, 2015, are floating interest rate instruments in PLN. Payments under these credit facilities are secured using Interest Rate Swaps.

The COVID-19 pandemic did not noticeably affect PGE Group’s interest rate risk. Long-term liabilities based on variable interest rates were 100% hedged by IRS and CIRS contracts.

PGE Group’s exposure to interest rate risk and concentration of this risk by currency:

Type of interest As at December 31, 2021 As at December 31, 2020
Derivatives – assets exposed to interest rate risk PLN Fixed 47 11
Variable 219 16
Other currencies Fixed
Variable 643 476
Deposits, cash, debt securities, leases PLN Fixed 6,044 3,708
Other currencies Fixed 964 739
Derivatives – liabilities, exposed to interest rate risk PLN Fixed (1) (4)
Variable (385)
Other currencies Fixed
Variable (82) (59)
Loans, borrowings, bonds and lease PLN Fixed (3,329) (3,103)
Variable (6,583) (7,294)
Other currencies Fixed (650) (644)
Variable (264) (368)
Net exposure PLN Fixed 2,761 612
Variable (6,364) (7,663)
Other currencies Fixed 314 95
Variable 297 49

Interest rates on variable interest rate financial instruments are updated in periods shorter than one year. Interest on fixed-rate financial instruments is fixed throughout the period to maturity of those instruments.

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