26.1.2 Interest rate risk

Interest rate risk is related to the possibility of deterioration in the financial result due to changes in interest rates.

The exposure of the PGE Capital Group to the interest rate risk arises mainly from the fact that the Group companies finance their operating and investing activities by obtaining funds based on a variable interest rate, primarily in the form of credits, loans and bonds issued in domestic and foreign currencies, as well as from investments in financial assets bearing variable interest rates.

The PGE Capital Group controls the interest rate risk through a system of limits relating to the maximum potential loss from changes in interest rates in relation to the consolidated interest rate risk exposure of the Group companies. A 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, the PGE Capital Group establishes hedging strategies with respect to its exposure to the interest rate risk in the form of hedging ratios subject to approval of the Risk Committee and the PGE Management Board. The implementation of hedging strategies and the level of interest rate risk are subject to monitoring and are reported regularly to the Risk Committee.

The PGE Capital Group companies enter into interest rate derivative transactions only for the purpose of hedging identified risk exposures. The regulations in force in the PGE Capital Group do not allow, with regard to interest rate derivative transactions, entering into speculative transactions, i.e. transactions which would be aimed at generating additional profits resulting from changes in the level of interest foreign currency exchange rates, while exposing the Group to the risk of incurring a potential loss on this account.

Bonds issued in the amount of PLN 1.4 billion under the PLN 5 billion bonds issue programme bear interest at a variable rate in PLN. Payments relating to these 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 these bonds are hedged by CCIRS instruments.

The Group also has long-term credits in the combined amount of PLN 1.5 billion under the Credit Agreements entered into on December 17, 2014 and December 4, 2015 with Bank Gospodarstwa Krajowego, as well a syndicated loan (a term tranche) of PLN 3.63 billion under the Credit Agreement of September 7, 2015. These credits bear interest at variable rates in PLN. Payments under these credits are secured by IRS contracts.

The outbreak of the COVID-19 pandemic entailed a significant reduction in the dynamics of economic development, although the uncertainty about the development of the economic situation did not noticeably affect the interest rate risk occurring in the PGE Capital Group.  Long-term debt liabilities based on a variable interest rate were 100% hedged by IRS and CIRS contracts.

The exposure of the PGE Capital Group to the interest rate risk and the concentration of this risk by currency:

Variable interest rates of financial instruments are reviewed in periods shorter than one year. Interest on financial instruments with fixed rates is constant during the whole period until their maturity.