26. Objectives and principles of financial risk management

The primary objective of financial risk management in the PGE Capital Group is to support the process of creating the Group’s value for shareholders and the implementation of the Group’s business strategy by reducing and maintaining financial risk at the level acceptable to the Group’s management.

Responsibility for managing financial risk in the PGE Capital Group lies with the Management Board of PGE S.A. The Management Board specifies appetite for risk, which is understood as an acceptable level of deterioration of the PGE Group’s financial results, taking into consideration its current and planned economic and financial position. The Management Board also decides on the allocation of risk appetite to specific business areas.

The organisation of the financial risk management function in the PGE Capital Group is based on the principle of organisational independence of an entity responsible for risk measurement and control (the Risk and Insurance Department in PGE Polska Grupa Energetyczna S.A.) of business units being risk owners. Risk reports are submitted directly to the Risk Committee and Audit Committee of the Supervisory Board of PGE S.A., as well as the Management Board of PGE S.A.

The PGE Capital Group has a Risk Committee that exercises supervision of the financial and corporate risk management process in the PGE Capital Group. The Risk Committee monitors exposure levels of the PGE Capital Group, sets limits for significant financial risks, accepts methodologies in financial risk resulting from commercial and financial activities, permits expansions of activities into new business areas and makes key decisions regarding risk management.

From the perspective of the whole PGE Capital Group, financial risk is measured in an integrated manner. The process is conducted or supervised within the framework of the Corporate Centre of the PGE Capital Group, which is a centre of competencies in this area. Exposures to risk faced by the particular business areas are examined on a comprehensive basis, taking into account interdependencies among exposures, the possibility of using natural hedging effects and their overall impact on the PGE Capital Group’s risk profile and financial position.

The financial risk management model includes the following elements:

• collecting and analysing market and risk exposure data broken down by individual financial risk categories;
• measuring financial risk, for example by means of Value-at-Risk (VaR) and Profit-at-Risk (PaR), for individual risk factors and jointly for all material risk factors;
• managing the consolidated exposure of the PGE Capital Group in relation to the capital at risk and the risk limits established on its basis (among others, by defining and implementing hedging strategies).

In the key areas where financial risks occur, the PGE Capital Group implemented internal regulations setting out the principles for the management of such risks.

The PGE Capital Group is exposed to various types of financial risks:

• market risk (commodity risk, interest rate risk, foreign exchange risk);
• liquidity risk;
• credit risk.

The exposure of the PGE Capital Group to individual financial risks depends on the extent of its activities in the commodity and financial markets.