The companies belonging to the PGE Group are exposed to interest rate risk as a result of financing their operating and investment activities with interest bearing indebtedness at variable interest rates or through investments in financial assets at variable or fixed interest rates. On the other hand, financing business activity with indebtedness at a fixed interest rate is related to the opportunity cost risk in case of interest rates’ decline.
The PGE Group is exposed to interest rate risk related to investment in debt instruments, liabilities from loans granted, and changes in fair value of derivatives swaps resulting from changes in interest rates.
Bonds issued in amount PLN 1 billion under the Bond Issue Program in amound of PLN 5 billion are interest bearing bonds at a variable rate in PLN. Payments relating to those bonds are hedged by IRS transactions. Bonds issued under the medium term Eurobonds Issue Program, are interest bearing bonds at a fixed rate in EUR. Payments relating to these bonds are hedged by CCIRS transactions. Bonds issuance programs are described in note 25.1.4 and hedging instruments are described in note 25.1.2 of these financial statements.
Incured financing in the form of long-term bank credit of PLN 1 billion under the terms of Credit Agreement signed on December 17, 2014 with Bank Gospodarstwa Krajowego and syndicated loan (term loan facility tranche) of PLN 3.63 billion under the terms of Credit Agreement signed on September 7, 2015, constitute financial instruments at a variable interest rate in PLN. Payments related to bank credits are hedged with IRS hedge instruments, described in note 25.1.2.
The PGE Group entities enter into interest-rate based derivative transactions exclusively in the purpose to hedge identified exposure to risk. Thus, the PGE Group entities are not permitted, as regards interest-rate based derivative transactions, to enter into speculative transactions, i.e. those that increase the interest rate risk exposure in comparison with the level resulting from the identified sources of exposure and that aim to obtain additional gains from risk factor changes.
The PGE Group’s exposure to interest rate risk and risk concentration, by currencies:
|Type of interest rate||As at December 31, 2016||As at December 31, 2015|
|Derivatives – assets, exposed to interest rate risk||PLN||Fixed||-||-|
|Deposits, cash and debt securities||PLN||Fixed||5,046||2,948|
|Derivatives – liabilities, exposed to interest rate risk||PLN||Fixed||-||-|
|Loans, borrowings, bonds and lease||PLN||Fixed||(121)||(156)|
Interest rates on variable interest rate financial instruments are updated in periods shorter than one year. Interest rates on fixed interest rate financial instruments are fixed throughout the whole period until maturity of these instruments.