Currency risk is related to the possibility of deterioration in the financial result due to changes in currency exchange rates.

The main sources of the exposure of the PGE Capital Group to the currency risk are set out below:

  • capital expenditures denominated in or indexed to foreign currencies;
  • debt denominated in foreign currencies;
  • purchase and sales of electricity denominated in foreign currencies;
  • fees denominated in or indexed to foreign currency exchange rates on account of purchase of transmission capacities;
  • sales and purchase of CO2 emission allowances and gas as well as purchase of hard coal and other fuels denominated in or indexed to foreign currencies;
  • expenditures related to current operation of generation assets denominated in or indexed to foreign currencies;
  • investment financial assets denominated in foreign currencies;
  • other operating cash flows denominated in or indexed to foreign currencies.

The PGE Capital Group controls the currency risk through a system of limits relating to the maximum potential loss due to changes in exchange rates with respect to the consolidated currency risk exposure of the Group companies. The currency risk measure is based on the value-at-risk methodology understood as a product of the amount of the absolute currency position and the value of a potential change in exchange rates.

Moreover, the PGE Capital Group establishes hedging strategies with respect to its exposure to the currency risk in the form of hedging ratios subject to approval of the Risk Committee and the Management Board. The implementation of hedging strategies and the level of currency risk are subject to monitoring and are reported regularly to the Risk Committee.

The PGE Capital Group companies enter into currency exchange 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 currency exchange 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 foreign currency exchange rates, while exposing the Group to the risk of incurring a potential loss on this account.

The outbreak of the COVID-19 pandemic entailed a significant reduction in the dynamics of economic development, and uncertainty as to its possible severity and scope weakened the PLN exchange rate and increased the dynamics of its fluctuations. In the case of the PGE Capital Group, the increase in currency exchange rate risk  translated mainly into an increase in the average cost of hedging currency exposure resulting from the current operating activities conducted in 2020. In connection with the adopted currency risk management strategy based on minimising and hedging exposure to risk, the cost of servicing liabilities in foreign currencies, in the medium and long term, did not change significantly due to the hedging measures taken before the outbreak of the pandemic.

The Group's exposure to currency risk by class of financial instruments

Total amount in statements, in PLN CURRENCY POSITION AS AT
DECEMBER 31, 2020
EUR USD
Currency PLN Currency PLN
Trade receivables and other financial receivables 5,003 156 720 1 4
Cash and cash equivalents 4,189 158 729 1 4
Derivatives, including: 555 2,924 13,493 90 356
Measured at fair value through profit or loss 58 90 356
Hedging instruments 445 2,924 13,493
FINANCIAL ASSETS 9,747 3,238 14,942 92 364
Credits, loans, bonds and leases 11,409 187 863 40 149
Trade and other payables measured at amortised cost 3,952 196 902 10 37
Derivatives, including: 448 120 554 70 262
Measured at fair value through profit or loss 40 66 247
Hedging instruments 408 120 554 4 15
FINANCIAL LIABILITIES 15,809 503 2,319 120 448
The book value of derivative instruments is the result of valuation to fair value. The value of exposure to currency risk for forwards represents their nominal amount in a given currency. The value of exposure to currency risk for CCIRSs represents the value of discounted cash flows of the currency leg in a given currency.

Total amount in statements, in PLN CURRENCY POSITION AS AT
DECEMBER 31, 2019
EUR USD
Currency PLN Currency PLN
Trade receivables and other financial receivables 4,995 148 629
Cash and cash equivalents 1,313 117 498 2 8
Derivatives, including: 420 1,108 4,718 62 237
Measured at fair value through profit or loss 368 490 2,087 62 237
Hedging instruments 52 618 2,631
FINANCIAL ASSETS 6,728 1,373 5,845 64 245
Credits, loans, bonds and leases 12,308 209 888 22 83
Trade and other payables measured at amortised cost 5,040 18 73 39 147
Derivatives, including: 479 3,120 13,287 53 203
Measured at fair value through profit or loss 40 234 997 41 157
Hedging instruments 439 2,886 12,290 12 46
FINANCIAL LIABILITIES 17,827 3,347 14,248 114 433
The book value of derivative instruments is the result of valuation to fair value. The value of exposure to currency risk for forwards represents their nominal amount in a given currency. The value of exposure to currency risk for CCIRSs represents the value of discounted cash flows of the currency leg in a given currency.

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