5.2. FINANCING LIABILITIES

Accounting policies

Borrowings and debt securities

On initial recognition, borrowings and debt securities are measured at fair value less transaction costs. As at the reporting date, the liabilities are measured at amortised cost with the use of the effective interest rate method.

 

Lease liabilities

 

Accounting policy applied as of January 1st 2019

Leases are recognised as right-of-use assets and liabilities to pay for those rights as at the date when the leased assets are available for use by the Group. Right-of-use assets are presented in Note 6.

At the lease commencement date, lease liabilities are measured at amounts equal to the present value of the following lease payments for the right to use of the underlying asset during the lease term:

  • fixed lease payments (including substantially fixed payments), less any lease incentives payable;
  • variable lease payments based on an index or a rate;
  • amounts expected to be payable by the lessee under residual value guarantees;
  • the exercise price of a purchase option if exercise of that option by the lessee is reasonably certain;
  • lease termination fees if the lessee is entitled to exercise the option to terminate the lease.

 

Lease payments are discounted at the lease interest rate, if that rate is readily determinable, or at the lessee’s incremental borrowing rate.

Each lease is allocated between the liability and the finance cost. After initial recognition, lease liabilities are measured using the effective interest rate method. Carrying amounts of the liabilities are updated to reflect changes in the estimate of the lease term, purchase options, changes in lease payments, guaranteed residual value, and modifications to the lease contract.

The lease term is an irrevocable lease term. Periods covered by lease extension or termination options are included in the lease term if there is reasonable certainty that the lease will be extended or the contract will not be terminated earlier.

 

Accounting policy applied until December 31st 2018

Leases where substantially all the risks and rewards incidental to the ownership were not transferred to the Group as a lessee were classified as operating leases. Lease payments under operating leases (after taking into account all lease benefits received from the lessor) were recognised as costs in profit or loss on a straight-line basis over the lease term.

Material estimates

Lease term

When determining the lease term, the Management Board takes into account all the facts and circumstances that give the economic incentive to exercise the option to extend the contract or not to exercise the option to terminate the contract. Periods covered by extension or termination options are included when determining the lease term if there is reasonable certainty that the contract will be renewed (extension option) or will not be terminated (termination option). Reassessment of whether there is reasonable assurance that the Group will exercise the extension option or will not exercise the termination option is made if a significant event or a significant change in circumstances occurs that affects such assessment and the Group can control the change or the circumstances.

 

Discount rates applied in the valuation of lease liabilities.

For the purpose of measuring lease liabilities and right-of-use assets, the Group estimated the incremental interest rates applied in discounting future cash flows. The incremental interest rates are defined as the sum of:

  • the risk-free rate, determined based on IRS (Interest Rate Swap) at the time of maturity of the discount rate and the relevant base rate for a given currency, and
  • the credit risk premium of the Group based on the credit margin.

 

The Group applied marginal interest rates ranging from 0.9% to 5.5%.

 

The process of determining a current incremental interest rate consists of the following steps:

  • analysis of the lessee’s current financing structure (e.g. the debt instruments held by the lessee and their terms);
  • determination of the appropriate reference rate – for a given currency, economic conditions and the lease term;
  • analysis of the other material lease terms, including the nature of the underlying assets.

 

As at December 31st 2019, the Group’s future payments for short-term leases was PLN 16m.

In the reporting period, the Group did not enter into any sale and leaseback transactions.

The value of payments not included in the valuation of the lease liability is PLN 3.6m and relates to lease contracts not yet commenced but which the lessee is obliged to enter into.

The lease contracts outstanding as at December 31st 2019 do not impose any covenants on the Group.

In 2019 and 2018, the Group’s financing liabilities were not secured with its property, plant and equipment.

In the reporting period and as at the date of authorisation of these financial statements for issue, there were no defaults under material terms of any debt securities that could trigger accelerated repayment, including with respect to the covenants under either of the programmes.

The Group’s debt gives rise to liquidity risk. For detailed description of those risks and sensitivity analysis, see Note 7.3.

 

2019
In functional currency – PLN
In foreign currency
EUR
USD
Other
 Bank borrowings
 3,218
 688
 987
 -
 Lease liabilities
 1,774
 -
 59
 7
 Other
 20
 -
 -
 -
Total, including:
 5,012
 688
 1,046
 7
 floating-rate
 3,357
 688
 1,046
 6
 fixed-rate
 1,655
 -
 -
 1
         
2018
In functional currency – PLN
In foreign currency
 
EUR
USD
 
 Bank borrowings
 214
 356
 815
 
 Debt securities
 2,298
 -
 -
 
 Lease liabilities
 16
 -
 3
 
Total, including:
 2,528
 356
 818
 
 floating-rate
 219
 356
 818
 
 fixed-rate
 2,309
 -
 -
 

Interest on floating-rate debt denominated in the Polish złoty is calculated based on 1M WIBOR, 3M WIBOR or 6M WIBOR rates; USD-denominated debt: 1M LIBOR and 3M LIBOR rates; EUR-denominated debt: EONIA, 1M EURIBOR and 3M EURIBOR rates. Fixed interest rate is applicable only to PLN-denominated debt securities.

The Group’s debt is subject to interest rate risk, currency risk and liquidity risk. For detailed information on these risks, see Note 7.3.

In the reporting period, the Group operated the following debt security programmes:

 
 
 
 
 
Utilisation (%) as at
Outstanding debt (PLNbn) as at
Start date
End date
Issuance Programme
Participating banks as at the reporting date
Limit
Dec 31 2019
Dec 31 2019
Dec 31 2018

Authorised issuer: PGNiG S.A.

June 10th
2010
July 31st 2020
early termination in as per agreement of June 24th 2019
Programme for short-term discount notes and coupon-bearing notes with maturitiesfrom one to twelve months
Bank Pekao S.A.
ING Bank Śląski S.A.
PKO BP S.A.
Bank Handlowy  w Warszawie S.A.
Societe Generale S.A., BNP Paribas S.A. Oddział w Polsce
mBank S.A.
Bank Zachodni WBK S.A.
PLN 7bn
-
-
2.3
October 2nd 2014
September 30th 2024
early termination in as per agreement of June 24th 2019
Note programme for notes with maturities of at least 12 months
Bank Gospodarstwa Krajowego
PLN 1bn
-
-
-
December 21st  2017
December 21st
 2022
Note programme
Bank Pekao S.A.
ING Bank Śląski S.A.
Bank Handlowy  w Warszawie S.A.
BGŻ BNP Paribas S.A.
PLN 5bn
-
-
-

On June 24th 2019, PGNiG S.A. entered into an agreement terminating the PLN 7bn and PLN 1bn note programmes, replacing them with a PLN 10bn syndicated loan agreement with a five-year availability period. The agreement was concluded with a syndicate of nine banks. The facility will replace the funding in the form of the two note programmes with a PLN 8bn underwriting commitment. The funds made available under the loan are intended to be used by the Company to e.g. finance the day-to-day operations and capital expenditure of PGNiG and the PGNiG Group companies.

 
 
 
 
 
Utilisation (%) as at
Outstanding debt (PLNbn) as at
Start date
End date
Issuance Programme
Syndicate banks
Facility limit
Dec 31 2019
Dec 31 2019
Dec 31 2018
June 24th 2019
June 24th
2024
Credit facility
Bank Gospodarstwa Krajowego Bank Pekao S.A. ING Bank Śląski S.A.  PKO BP S.A. Caixa Bank S.A. Oddział w Polsce BNP Paribas Bank Polska S.A. Societe Generale S.A. Santander Bank Polska S.A. Intesa Sanpaolo S.P.A
PLN 10bn
30
3.0
-

In the current and comparative periods, the Group repaid its financing liabilities in a timely manner. In the reporting period and as at the date of authorisation of these financial statements for issue, there were no instances of default under material provisions of any credit facility, loan, or debt securities issue agreement that could trigger accelerated repayment.