26.5 Hedge accounting

Hedge accounting

Changes in the fair value measurement of derivative financial instruments designated as CCIRS and IRS cash flow hedges are taken to the revaluation reserve for the portion that represents an effective hedge, while the ineffective portion of the hedge is taken to the income statement.

Amounts of cumulative remeasurement to fair value of a hedging instrument previously recognised in the revaluation reserve will be transferred to the statement of profit and loss in the period or periods during which the hedged item affects the statement of profit and loss. Alternatively, if the hedge of a planned transaction results in the recognition of non-financial assets or non-financial liabilities, the Group excludes the amount from equity and includes it in the initial cost or other carrying amount of a non-financial asset or liability.

In connection with loans received from PGE Sweden AB (publ), PGE S.A. concluded CCIRS transactions, hedging the exchange rate. In these transactions, banks – counterparties pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. pays interest based on a fixed rate in PLN. In the consolidated financial statements, a relevant part of the CCIRS transaction is treated as a hedge of bonds issued by PGE Sweden AB (publ).

PGE S.A. hedges the risk of changes in cash flows resulting from foreign exchange rates in connection with forward contracts for the purchase of carbon emission allowances, the price of which is expressed in EUR.

PGE S.A. also applies hedge accounting to IRS transactions, hedging the interest rate in connection with its financial commitments under credit agreements such as the Credit Agreement with a bank syndicate concluded on September 7, 2015 and Credit Agreement with Bank Gospodarstwa Krajowego concluded on December 17, 2014 and under the market bonds issued on May 9, 2019. In these transactions, banks – counterparties pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. pays interest based on a fixed rate in PLN.

To recognise the above transactions, PGE Group applies hedge accounting.

The source of ineffectiveness for the application of hedge accounting is exclusively the CCIRS transaction, which hedges the price of bonds issued by PGE Sweden AB.

Information on hedging instruments – maturity structure as at December 31, 2021. Payments received by the Group are shown with a 'minus’ sign and payments made by the Group are shown with a 'plus’ sign.

The Group estimates that the impact of the ineffective part of the hedge, resulting from the EUR exchange rate and the change in WIBOR and recognised in the income statement, will not have a material impact on future financial statements of PGE Group.

The impact of hedge accounting on the revaluation reserve is presented in note 20.3 to these financial statements.