25.1.2 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’s 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’s companies. A measure of interest rate risk is based on the size-at-risk methodology understood as the product 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 profit resulting from changes in the level of foreign currency exchange interest 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 committed financing in the form of a long-term credit in the amount of PLN 875 million under the Credit Agreements entered into on 17 December 2014 and 4 December 2015 with Bank Gospodarstwa Krajowego and the Credit Agreement with the European Bank for Reconstruction and Development entered into on 7 June 2017; the credits described above are variable interest rate instruments in PLN. Payments under these credits are secured by IRS contracts.
The exposure of the PGE Capital Group to the interest rate risk and the concentration of this risk by currency:
| Type of interest rate | As at 31 December 2023 | As at 31 December 2022 | ||
| Derivatives – assets exposed to interest rate risk | PLN | Fixed | – | 5 |
|---|---|---|---|---|
| Variable | 206 | 477 | ||
| Other currencies | Fixed | – | – | |
| Variable | 157 | 1.025 | ||
| Deposits, cash, debt securities, leases | PLN | Fixed | 4.980 | 10.180 |
| Variable | 5 | – | ||
| Other currencies | Fixed | 1,292 | 1,926 | |
| Variable | – | – | ||
| Derivatives – liabilities exposed to interest rate riskprocentowej | PLN | Fixed | – | (1) |
| Variable | (410) | (397) | ||
| Other currencies | Fixed | – | – | |
| Variable | (1,623) | (1,536) | ||
| Credits, loans, issued bonds and leases | PLN | Fixed | (5,886) | (3,276) |
| Variable | (8,252) | (4,959) | ||
| Other currencies | Fixed | (608) | (661) | |
| Variable | (151) | (40) | ||
| Net exposure | PLN | Fixed | (906) | 6,908 |
| Variable | (8,451) | (4,879) | ||
| Other currencies | Fixed | 684 | 1,265 | |
| Variable | (1,617) | (551) |
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.