25.6 Hedge accounting

SIGNIFICANT ACCOUNTING PRINCIPLES

Hedge accounting

Changes in the fair value measurement of derivative financial instruments designated as CCIRS and IRS cash flow hedges are recognised in the revaluation reserve for the portion that constitutes an effective hedge, while the ineffective portion of the hedge is recognised in profit or loss. The amounts of the cumulative change in the measurement of the fair value of a hedging instrument previously recognised in the revaluation reserve are transferred to profit or loss in the period or periods during which the hedged item affects profit or loss. Alternatively, where a hedge of a forecast transaction results in the recognition of a non-financial asset or non-financial liability, the Group excludes such an amount from equity and includes it in the initial cost or another book value of an non-financial asset or non-financial liability.

In connection with loans received from PGE Sweden AB (publ), PGE S.A. concluded CCIRS transactions hedging the exchange rate. In these transactions, banks-counterparties pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. pays interest based on a fixed rate in PLN. In the consolidated financial statements, a relevant part of CCIRS transactions is treated as a hedge of bonds issued by PGE Sweden AB (publ).

PGE S.A. hedges the risk of changes in cash flows resulting from foreign exchange rates in connection with forward contracts for the purchase of carbon emission allowances whose price is expressed in EUR.

The Group also applies hedge accounting to IRS transactions hedging the interest rate in connection with its financial commitments under agreements such as the Credit Agreement with Bank Gospodarstwa Krajowego concluded on 17 December 2014 and 4 December 2015, the Credit Agreement with the European Bank for Reconstruction and Development concluded on 7 June 2017 and under the market bonds issued on 9 May 2019. Under these IRS transactions, banks-counterparties pay PGE S.A. interest based on a variable rate in PLN and PGE S.A. pays interest based on a fixed rate in PLN.

To recognise these IRS transactions, the PGE Capital Group uses hedge accounting. The source of ineffectiveness for hedge accounting is solely the CCIRS transaction hedging the interest rate on bonds issued by PGE Sweden AB.

Information on hedging instruments – maturity structure as at 31 December 2023. Payments received by the Group are presented with a “minus” sign and payments made by the Group are presented with a “plus” sign.

The Group assesses that the ineffective part of the hedge resulting from the EUR exchange rate and the change in WIBOR and recognised in profit or loss will not have a material impact on future financial statements of the PGE Capital Group.

The IBOR reform may also have an impact on variable rate derivatives. The implementation date of the reform has been postponed until the end of 2027. As at 31 December 2023, the par value of IRS derivatives exposed to the interest rate risk amounted to PLN 2,525 million (these instruments are based on WIBOR). Before the reform comes into effect, the PGE Group will have to settle the instruments hedging the credit agreement with Bank Gospodarstwa Krajowego, whose par value as at 31 December 2023 was PLN 500 million and whose maturity date falls in December 2027, as well as a bond hedging instrument, whose par value as at the reporting date was PLN 400 million and whose maturity date falls in May 2026.

The impact of hedge accounting on the revaluation reserve is presented in note 19.3 to these financial statements.