INTEGRATED ESG
REPORT 2020

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PL

7.2 Derivative financial instruments

Accounting policies

Derivative financial instruments not designated for hedge accounting

Derivative financial instruments used to hedge the Group’s risk which are not hedging instruments designated for hedge accounting are classified as financial assets/liabilities at fair value through profit or loss. Such instruments are economic hedges. The Group also permits speculative transactions to be executed, but they are strictly controlled and limited by risk limits.

Derivative instruments at fair value include also derivatives with hedging relationship terminated.

Derivative instruments are initially recognised at fair value, and as at each reporting date they are measured at fair value with gains or losses from the measurement recognised in statement of profit or loss under net finance costs (e.g. measurement of instruments hedging financing activity, such as debt liabilities) and other income and expenses (e.g. hedging transactions not designated for hedge accounting, e.g. forward contracts).

Hedge accounting

The Group applies hedge accounting to appropriately account for the risk of movements in gas prices and exchange rates (EUR/PLN and USD/PLN) for future transactions to buy/sell gas. The gas price risk is related to the highly probable future gas purchase transactions. The Group applies cash flow hedge accounting to these transactions.

Derivatives are designated as hedging instruments.

The portion of gains or losses arising from change in the fair value of a cash flow hedge which is determined to be an effective hedge is recognised as a separate item of equity (hedging reserve). The ineffective portion is charged to profit or loss. The effective hedge taken to equity over its lifetime is reclassified upon being exercised to initial cost of inventories or affects profit or loss on gas sales.

The Group ceases to classify an instrument as a hedge if the derivative expires or is sold, terminated or exercised, the hedge no longer meets the criteria of hedge accounting, or if the hedged transaction is no longer expected to be executed.

The Group enters into transactions involving the following derivative instruments:

Derivative instruments designated for hedge accounting

Description and purpose of instrument

XLS

Currency forwards A currency forward is a contract for the purchase or sale of a currency for a specified exercise price, with delivery date falling no earlier than after two business days from the date when the forward terms have been agreed. The Group uses currency forwards to hedge against currency risk of USD and EUR exchange rates in future transaction to buy/sell commodities. Average rate forwards/currency swaps are settled in cash based on the difference between the exercise price and the average monthly price.
Commodity swap A commodity swap is a contract where two parties agree to exchange payments on a specified date. The payments are calculated based on agreed amounts of a specified commodity and its price. In the transaction, one party agrees to pay a fixed price, and the other party pays a floating price. However, no physical exchange of the underlying commodities takes place. The Group companies use the instrument to hedge against price movements in transactions to buy/sell gas.

Derivative instruments not designated for hedge accounting

Description and purpose of instrument

XLS

CCIRS A cross currency interest rate swap is an instrument which exchanges cash flows associated with an interest rate and a currency in respect of an agreed base amount at a fixed pre-agreed exchange rate. The Group uses CCIRS to exchange variable rate interest payments denominated in NOK into variable rate interest payments denominated in PLN or fixed rate interest payments denominated in EUR into variable rate interest payments denominated in PLN.
Currency forwards For instrument description see the previous table.
Electricity and gas futures contracts1 A futures contract (futures) is a standard contract enabling the sale or purchase of a commodity in a regulated market for a set exercise price, with a delivery date falling no earlier than after two business days from the date when the terms of the futures contract have been agreed. The Group uses this instrument as economic hedge against price changes in future purchases of electricity and gas.
CO2 futures contracts A futures contract is standard contract enabling the sale or purchase of CO2 emission allowances in a regulated market for a set exercise price, with a delivery date falling no earlier than after two business days from the date when the terms of the futures contract have been agreed. The Group uses this instrument as economic hedge against price changes in future purchases of CO2 emission allowances.
Electricity and gas forward contracts A commodity forward is a contract for the purchase or sale of a commodity for a set exercise price, with delivery date falling no earlier than after two business days from the date when the forward terms have been agreed. The Group uses this instrument as economic hedge against price changes in future purchases of electricity and gas 2.
1 EE – Phelix power futures contracts traded at the EEX.
2 Electricity and gas forward contracts traded at the Polish Power Exchange.
XLS

Note 2020 2019
Assets Liabilities Assets Liabilities
Derivative instruments covered by hedge accounting Note 7.2. 449 618 1,088 306
Derivative instruments not covered by hedge accounting Note 7.2. 1,004 780 1,539 991
Total 1,453 1,398 2,627 1,297

Derivative instruments designated for hedge accounting

XLS

2020 2019
Type of derivative instrument Notional amount (million Period when cash flow will occur and affect the financial result Exercise price (exercise price range) Weighted average exercise price Fair value of instruments for which cash flow hedge accounting is applied Notional amount (million Period when cash flow will occur and affect the financial result Fair value of instruments for which cash flow hedge accounting is applied
Derivative instruments used to hedge currency risk in gas purchase and sale contracts
Forward
USD 263 USD up to 3 years 3,6629-3,7583 3.71 11 371 USD up to 3 years 54
USD 340 USD up to 3 years 3,7935-3,9960 3.87 (38) 601 USD up to 3 years (39)
EUR/USD 32 EUR up to 3 years 1,2463-1,2575 1.25 – 970 EUR up to 3 years 120
EUR/USD 229 EUR up to 4 years 1,1170-1,2391 1.2 (41) 42 EUR up to 3 years 2
Currency swap
EUR 38 EUR up to 3 years 4,6535-4,6630 4.66 – – – –
EUR 528 EUR up to 3 years 4,4421-4,6342 4.51 (73) – – –
(141) 137
Derivative instruments used to hedge gas purchase and selling prices
TTF swap DA 24 MWh up to 3 years 12,70-19,75 16.52 286 41 MWh up to 3 years 807
TTF swap MA 5 MWh 1 – 3 m-cy 15,06-19,10 17.45 11 2 MWh 1-3 months (1)
TTF swap DA 29 MWh up to 4 years 11,26-19,12 14.58 (446) 12 MWh up to 12 months (254)
BRENT Swap 4 Bbl up to 3 years 39,05-43,87 42.03 117 – – –
– – – – – 4 MWh up to 3 years 105
HH NYMEX 31 MMBTU up to 4 years 2,2450-2,6080 2.43 24 – – –
HH NYMEX 33 MMBTU up to 4 years 2,4050-2,6080 2.52 (20) 15.41 MMBTU up to 3 years (12)
(28) 645
Total (169) Total 782
Including: Assets 449 Including: Assets 1,088
Liabilities 618 Liabilities 306
XLS

2020 Notional amount Carrying amount Name of item in statement of financial position which includes hedging instrument Change in fair value of hedging instrument used as basis for recognising hedge ineffectiveness in a given period Hedging gains or losses for reporting period, recognised in other comprehensive income Hedge ineffectiveness amount taken to profit or loss Statement of comprehensive income (statement of profit or loss) item in which ineffectiveness amount is included Amount reclassified from cash flow hedging reserve to profit or loss as reclassification adjustment Item of statement of comprehensive income (statement of profit or loss) in which reclassification adjustment is included
Type of hedging instrument Assets Liabilities
CASH FLOW HEDGES
CURRENCY RISK
Forward contracts for currency purchase (USD/PLN) 2,267 11 38 Derivative financial instruments 75 60 – Operating income / expenses – Not applicable
Forward contracts to purchase USD for EUR (EUR/USD) 1,183 – 41 Derivative financial instruments (38) (39) – Operating income / expenses 2 Revenue from sales of gas
Average rate forwards (EUR/PLN) 2,611 – 73 Derivative financial instruments (41) (172) – Operating income / expenses (51) Revenue from sales of gas
COMMODITY PRICE RISK
Basis swap contracts for gas price indices 403 11 37 Derivative financial instruments (100) (99) – Operating income / expenses 38 Revenue from sales of gas
Swap contracts for gas price indices 4,274 286 409 Derivative financial instruments 889 (48) 32 Operating income / expenses (1 051) Revenue from sales of gas
Swap contracts for HH price indices 610 24 20 Derivative financial instruments (19) (7) – Operating income / expenses – Not applicable
Swap contracts for petroleum product price indices 699 117 – Derivative financial instruments 151 151 – Operating income / expenses – Not applicable
Total 12,047 449 618 917 (154) 32 (1,062)
XLS

2019 Notional amount Carrying amount Name of item in statement of financial position which includes hedging instrument Change in fair value of hedging instrument used as basis for recognising hedge ineffectiveness in a given period Hedging gains or losses for reporting period, recognised in other comprehensive income Hedge ineffectiveness amount taken to profit or loss Statement of comprehensive income (statement of profit or loss) item in which ineffectiveness amount is included Amount reclassified from cash flow hedging reserve to profit or loss as reclassification adjustment Item of statement of comprehensive income (statement of profit or loss) in which reclassification adjustment is included
Type of hedging instrument Assets Liabilities
CASH FLOW HEDGES
CURRENCY RISK
Forward contracts for currency purchase (USD/PLN) 3,688 54 39 Derivative financial instruments 287 72 – Operating income / expenses – Not applicable
Forward contracts for currency purchase – USD for EUR (EUR/USD) 186 2 – Derivative financial instruments 2 2 – Operating income / expenses – Revenue from sales of gas
Average rate forwards (EUR/PLN) 4,133 120 – Derivative financial instruments 444 129 288 Operating income / expenses (25) Revenue from sales of gas
COMMODITY PRICE RISK
Basis swap contracts for gas price indices 88 1 1 Derivative financial instruments 396 286 85 Operating income / expenses (276) Revenue from sales of gas
Swap contracts for gas price indices 2,899 911 254 Derivative financial instruments 1 547 1 013 713 Operating income / expenses (269) Revenue from sales of gas
Swap contracts for petroleum product price indices 128 – 12 Derivative financial instruments (18) (11) (6) Operating income / expenses – Not applicable
Total 11,122 1,088 306 2,658 1,491 1,080 (570)

The impact of cash flow hedges is presented in the table below.

XLS

2020 2019
Hedged items Change in value of hedged item used as basis for recognising hedge ineffectiveness in given period Balance of cash flow hedging reserve for continuing hedges Balance remaining incash flow hedging reserve in respect of all hedging relationships for which hedge accounting is no longer applied Change in value of hedged item used as basis for recognising hedge ineffectiveness in given period Balance of cash flow hedging reserve for continuing hedges Balance remaining incash flow hedging reserve in respect of all hedging relationships for which hedge accounting is no longer applied
CURRENCY RISK
Natural gas (USD) (75) (26) – (287) 16 –
Natural gas (EUR/USD) 38 (41) – (2) 2 –
Natural gas (EUR) 41 (69) (24) (156) 93 38
COMMODITY PRICE RISK
Gas contracts indexed to monthly gas price indices (807) (176) 195 (310) 33 1
Gas contracts indexed to daily gas price indices 24 3 – (846) 606 133
Gas contracts indexed to monthly petroleum product indices (151) 117 – 15 (12) –
Total (930) (192) 171 (1,586) 738 172

Changes in the cash flow hedging reserve are presented in the table below.

XLS

2020 2019
At beginning of the period 910 88
CURRENCY RISK
Hedging gains or losses recognised in other comprehensive income during reporting period (152) 202
Amount reclassified from cash flow hedging reserve to statement of profit or loss as reclassification adjustment (49) (25)
Amount transferred from cash flow hedging reserve and recognised as adjustment to carrying amount of inventories (107) (271)
COMMODITY PRICE RISK
Hedging gains or losses recognised in other comprehensive income during reporting period (4) 1 287
Amount reclassified from cash flow hedging reserve to statement of profit or loss as reclassification adjustment (1,012) (545)
Amount transferred from cash flow hedging reserve and recognised as adjustment to carrying amount of inventories 393 174
At end of the period (21) 910

Derivative instruments not designated for hedge accounting

XLS

2020 2019
Type of derivative instrument Notional amount (million) Fair value of instruments not designated for hedge accounting Notional amount (million) Fair value of instruments not designated for hedge accounting
Derivative instruments hedging interest rate risk and currency risk
CCIRS
NOK 3818 NOK (45) 2318 NOK 90
Forward
EUR 44 EUR 5 608 EUR 89
EUR 33 EUR 5 1 EUR –
EUR – – 610 EUR (49)
EUR 2 EUR – 24 EUR (1)
USD 16 USD 5 – –
Currency swap
EUR 558 EUR 78 – –
EUR 534 EUR (78) – –
(30) 129
Derivative instruments used as economic hedges of electricity purchase prices
Forward
electricity – PPX 2 MWh 44 12 MWh 18
electricity – PPX 15 MWh 5 1 MWh (5)
electricity – OTC 1 MWh 14 1 MWh 34
electricity – OTC 1 MWh (23) 1 MWh (22)
Futures
electricity – EEX AG 1 MWh 26 2 MWh 69
electricity – EEX AG 1 MWh (17) 3 MWh (81)
Electricity EPEX SPOT – – – –
Electricity EPEX SPOT – – – –
49 13
Derivative instruments used to hedge gas purchase and selling prices
Forward
Gas 0,04 MWh (1) – –
gas – OTC 20 MWh 204 16 MWh 393
gas – OTC 19 MWh (239) 13 MWh (310)
Futures
gas – PPX 3 MWh 50 – –
gas – PPX – – 2 MWh (54)
gas – ICE ENDEX B.V. 3 MWh 59 4 MWh 91
gas – ICE ENDEX B.V. 3 MWh (61) 4 MWh (92)
gas – POWERNEXT SA 1 MWh 12 2 MWh 40
gas – POWERNEXT SA 2 MWh (19) 3 MWh (72)
Swap
GASPOOL DA 1 MWh 17 9 MWh 235
GASPOOL DA 1 MWh (5) 7 MWh (99)
BRENT 0,31 Bbl (2) – –
TTF swap DA 28 MWh 431 21 MWh 473
TTF swap DA 19 MWh (248) 9 MWh (159)
TTF swap MA 3 MWh (4) 9 MWh (44)
194 402
Derivative instruments used to hedge purchase prices of CO2 emission allowances
Forward 1 t (43) – –
Futures 2 t 38 3 t (1)
(5) (1)
Derivative instruments used to hedge share purchase prices
Options 7 million shares 16 9 million shares 5
Total 224 Total 548
Including: Including:
Assets 1,004 Assets 1,539
Liabilities 780 Liabilities 991

Measurement of derivative financial assets and derivative financial liabilities is classified as Level 1 and Level 2 in the fair value hierarchy. In Level 1, market quotations of instruments are used for measurement, while Level 2 measurements are made using observable inputs other than quoted prices.

XLS

Instrument Measurement method Key inputs
Stock options Black-Scholes-Merton model Market data on: interest rates, exchange rates, basis of commodity spreads and commodity volatility (volatility)
Forwards, currency swaps, commodity swaps, CCIRS and IRS Discount method
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7.3 Financial risk management policies

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