7.2 Derivative financial instruments
Table of contents
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, including 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, once realised, reclassified to initial cost of gas inventory or is taken to 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 | |
| Currency forwards/average rate forwards/currency swaps | 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 | |
| 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. |
| Currency forwards/average rate forwards/currency swaps | For instrument description see the previous table. |
| Futures1 for electricity, natural gas, CO2 emission allowances, crude oil | Futures to wystandaryzowana transakcja, umożliwiająca sprzedaż bądź zakup towaru na rynku regulowanym za cenę wykonania określoną z góry, z datą realizacji większą niż dwa dni robocze od daty, w której ustalane są warunki transakcji futures. Spółki z Grupy wykorzystują instrument w celu ekonomicznego zabezpieczenia przed zmianami cen przyszłych zakupów/sprzedaży poszczególnych aktywów. |
| Forward contracts for electricity, gas2 2 and CO2 emission allowances | Forward to transakcja umożliwiająca sprzedaż bądź zakup towaru za z góry określoną cenę wykonania z datą realizacji większą niż dwa dni robocze od daty, w której ustalane są warunki transakcji forward. Spółki z Grupy wykorzystują instrument w celu ekonomicznego zabezpieczenia przed zmianami cen przyszłych zakupów/sprzedaży poszczególnych aktywów. |
| Commodity swap | For instrument description see the previous table. |
1. EE – Phelix power futures contracts traded at the EEX
2. Electricity and gas forward contracts traded at the Polish Power Exchange
2. Electricity and gas forward contracts traded at the Polish Power Exchange
| Derivative instruments designated for hedge accounting | 2021 | 2020 | |||||||
| 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 | Maturity of fair value | Notional amount (million) | Period when cash flow will occur and affect the financial result | Fair value | |
| up to 1 year | over 1 year | ||||||||
| Derivative instruments used to hedge currency risk in gas purchase and sale contracts | |||||||||
| Forwards | |||||||||
| USD | 478 USD | Up to 12 months | 3.6600-4.0595 | 3.7870 | 149 | – | 263 USD | up to 3 years | 11 |
| USD | 140 USD | up to 3 years | 4.0675-4.0779 | 4.0724 | (1) | – | 340 USD | up to 3 years | (38) |
| EUR/USD | 735 EUR | up to 3 years | 1.1671-1.2575 | 1.2167 | 9 | 172 | 32 EUR | up to 3 years | – |
| EUR/USD | 13 EUR | up to 12 months | 1.1258 | 1.1258 | (1) | – | 229 EUR | up to 4 years | (41) |
| Currency swap | |||||||||
| EUR | 45 EUR | up to 3 years | 4.6060-4.9385 | 4.6882 | 1 | 1 | 38 EUR | up to 3 years | – |
| EUR | 718 EUR | up to 3 years | 4.4746-4.9069 | 4.6299 | (24) | (66) | 528 EUR | up to 3 years | (73) |
| 133 | 107 | (141) | |||||||
| Derivative instruments used to hedge gas purchase and selling prices | |||||||||
| TTF Swap DA | 3 MWh | up to 3 years | 22.75-176.00 | 113.64 | 763 | – | 24 MWh | up to 3 years | 286 |
| TTF Swap MA | 2 MWh | 1–3 months | 60.85-98.10 | 91.98 | 105 | – | 5 MWh | 1–3 months | 11 |
| TTF Swap DA | 52 MWh | up to 4 years | 12.52-89.20 | 20.33 | (824) | (3,691) | 29 MWh | up to 4 years | (446) |
| TTF Swap MA | 6 MWh | up to 3 years | 64.30-167.50 | 104.19 | (1 026) | – | – | – | – |
| BRENT Swap | 2 bbl | up to 12 months | 43.58-43.87 | 43.67 | 207 | – | 4 bbl | up to 3 years | 117 |
| HH NYMEX | 171 mmBtu | up to 3 years | 2.24-3.70 | 2.67 | 60 | 424 | 31 mmBtu | up to 4 years | 24 |
| HH NYMEX | 29 mmBtu | up to 3 years | 2.86-3.70 | 3.36 | – | (36) | 33 mmBtu | up to 4 years | (20) |
| (715) | (3,303) | (28) | |||||||
| Total | (582) | (3,196) | Total | (169) | |||||
| Including: | Assets | 1,294 | 597 | Including: | Assets | 449 | |||
| Liabilities | 1,876 | 3,793 | Liabilities | 618 | |||||
| 2021 | ||||||||||
| Type of hedging instrument | Notional amount | Carrying amount | Item in statement of financial position containing 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 | |
| Assets | Liabilities | |||||||||
| CASH FLOW HEDGES | ||||||||||
| CURRENCY RISK | ||||||||||
| Forward contracts for currency purchase (USD/PLN) | 2,507 | 149 | 2 | Derivative financial instruments | 221 | 247 | – | Operating income / expenses | – | Not applicable |
| Forward contracts to purchase USD for EUR (EUR/USD) | 3,690 | 181 | 1 | Derivative financial instruments | 174 | 216 | – | Operating income / expenses | (1) | Revenue from sales of gas |
| Average rate forwards (EUR/PLN) | 3,507 | 2 | 89 | Derivative financial instruments | (133) | (41) | – | Operating income / expenses | 36 | Revenue from sales of gas |
| COMMODITY PRICE RISK | ||||||||||
| Basis swap contracts for gas price indices | 445 | 327 | – | Derivative financial instruments | (258) | (231) | – | Operating income / expenses | 584 | Revenue from sales of gas |
| Swap contracts for gas price indices | 21,497 | 541 | 5,541 | Derivative financial instruments | (5,070) | (5,116) | 1 | Operating income / expenses | 78 | Revenue from sales of gas |
| Swap contracts for HH price indices | 3,035 | 484 | 36 | Derivative financial instruments | 465 | 460 | 2 | Operating income / expenses | – | Not applicable |
| Swap contracts for petroleum product price indices | 507 | 207 | – | Derivative financial instruments | 421 | 304 | – | Operating income / expenses | – | Not applicable |
| Total | 35,188 | 1,891 | 5,669 | (4,180) | (4,161) | 3 | 697 | |||
| 2020 | ||||||||||
| Type of hedging instrument | Notional amount | Carrying amount | Item in statement of financial position containing 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 | |
| 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) | |||
The impact of cash flow hedges is presented in the table below.
| 2021 | 2020 | |||||
| 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 in cash 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 in cash flow hedging reserve in respect of all hedging relationships for which hedge accounting is no longer applied |
| CURRENCY RISK | ||||||
| Natural gas (USD) | (221) | 147 | – | (75) | (26) | – |
| Natural gas (EUR/USD) | (174) | 180 | – | 38 | (41) | – |
| Natural gas (EUR) | 133 | (75) | (22) | 41 | (69) | (24) |
| COMMODITY PRICE RISK | ||||||
| Gas contracts indexed to European gas price indices (daily or monthly) | 5,330 | (4,644) | (1,916) | (807) | (176) | 195 |
| Gas contracts indexed to monthly Henry Hub price indices | (462) | 448 | (1) | 24 | 3 | – |
| Gas contracts indexed to monthly petroleum product indices | (421) | 207 | – | (151) | 117 | – |
| Total | 4,185 | (3,737) | (1,939) | (930) | (192) | 171 |
| Derivative instruments not designated for hedge accounting | 2021 | 2020 | |||
| Type of derivative instrument | Notional amount (million) | Maturity of fair value | Notional amount (million) | Fair value | |
| up to 1 year | over 1 year | ||||
| Derivative instruments hedging interest rate risk and currency risk | |||||
| CCIRS | |||||
| NOK | 3,818 NOK | – | (141) | 3,818 NOK | (45) |
| Forwards | |||||
| EUR | 206 EUR | 15 | – | 77 EUR | 10 |
| EUR | 142 EUR | (4) | – | 2 EUR | – |
| EUR/USD | 204 | 3 | – | – | – |
| EUR/USD | 15 | (1) | (3) | – | – |
| USD | – | – | – | 16 USD | 5 |
| Currency swap | |||||
| EUR | 503 EUR | 35 | – | 558 EUR | 78 |
| EUR | 338 EUR | (36) | – | 534 EUR | (78) |
| 12 | (144) | (30) | |||
| Derivative instruments used as economic hedges of electricity purchase prices | |||||
| Forwards | |||||
| electricity – POLPX | 1 MWh | 442 | – | 2 MWh | 44 |
| electricity – POLPX | 6 MWh | (308) | (2) | 15 MWh | 5 |
| electricity – OTC | 0,15 MWh | 79 | 13 | 1 MWh | 14 |
| electricity – OTC | 0,42 MWh | (256) | (31) | 1 MWh | (23) |
| Futures | |||||
| electricity – EEX AG | 0,38 MWh | 230 | 32 | 1 MWh | 26 |
| electricity – EEX AG | 0,11 MWh | (55) | (12) | 1 MWh | (17) |
| 132 | – | 49 | |||
| Derivative instruments used to hedge gas purchase and selling prices | |||||
| Forwards | |||||
| Gas | – | – | – | 0,04 MWh | (1) |
| gas – OTC | 78 MWh | 1 652 | 482 | 20 MWh | 204 |
| gas – OTC | 16 MWh | (2 179) | (599) | 19 MWh | (239) |
| Futures | |||||
| gas – PPX | 2 MWh | 352 | 68 | 3 MWh | 50 |
| gas – PPX | – | (15) | – | – | – |
| gas – ICE ENDEX B.V. | 1 MWh | 157 | 15 | 3 MWh | 59 |
| gas – ICE ENDEX B.V. | – | (40) | (5) | 3 MWh | (61) |
| gas – POWERNEXT SA | 2 MWh | 317 | 84 | 1 MWh | 12 |
| gas – POWERNEXT SA | 2 MWh | (238) | (45) | 2 MWh | (19) |
| Swap | |||||
| HH NYMEX | 3 mmBtu | 7 | 1 | – | – |
| HH NYMEX | 6 mmBtu | (5) | (7) | – | – |
| GASPOOL DA | – | – | – | 1 MWh | 17 |
| GASPOOL DA | – | – | – | 1 MWh | (5) |
| BRENT | 0,29 bbl | (31) | – | 0,31 bbl | (2) |
| TTF swap DA | 14 MWh | 2 463 | 90 | 28 MWh | 431 |
| TTF swap DA | 28 MWh | (4 991) | (230) | 19 MWh | (248) |
| TTF swap MA | 4 MWh | 436 | – | – | – |
| TTF swap MA | 1 MWh | (34) | – | 3 MWh | (4) |
| (2 149) | (146) | 194 | |||
| Derivative instruments used to hedge oil prices | |||||
| Futures | |||||
| Crude oil – ICE Futures Europe | 0,01 bbl | 1 | – | – | – |
| Crude oil – ICE Futures Europe | 0,01 bbl | (1) | – | – | – |
| – | – | – | |||
| Derivative instruments used to hedge purchase prices of CO2 emission allowances | |||||
| Forwards | 1 t | (93) | – | 1 t | (43) |
| Futures | 1 t | 87 | – | 2 t | 38 |
| (6) | – | (5) | |||
| Derivative instruments used to hedge share purchase prices | |||||
| Options | 7 million shares | 1 | 15 | 7 million shares | 16 |
| Total | (2,010) | (275) | Total | 224 | |
| Including: | Including: | ||||
| Assets | 6,278 | 799 | Assets | 1,004 | |
| Liabilities | 8,288 | 1,074 | Liabilities | 780 | |
The impact of cash flow hedges on equity is presented in the table below.
| 2021 | 2020 | |
| At beginning of the period | (21) | 910 |
| CURRENCY RISK | ||
| Hedging gains or losses recognised in other comprehensive income during reporting period | 422 | (152) |
| Amount reclassified from cash flow hedging reserve to statement of profit or loss as reclassification adjustment | 34 | (49) |
| Amount transferred from cash flow hedging reserve and recognised as adjustment to carrying amount of inventories | (66) | (107) |
| COMMODITY PRICE RISK | ||
| Hedging gains or losses recognised in other comprehensive income during reporting period | (4,584) | (4) |
| Amount reclassified from cash flow hedging reserve to statement of profit or loss as reclassification adjustment | 662 | (1,012) |
| Amount transferred from cash flow hedging reserve and recognised as adjustment to carrying amount of inventories | (2,123) | 393 |
| At end of the period | (5,676) | (21) |