7.2. DERIVATIVE FINANCIAL INSTRUMENTS
Accounting policies
Derivative financial instruments not designated for hedge accounting Derivative financial instruments entered into 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 (hedging transactions not designated for hedge accounting, e.g. 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 reclassified to initial cost of inventories or affects 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
|
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 or fixed rate interest payments denominated in EUR into variable rate interest payments denominated in PLN.
|
|
Currency forwards
|
For instrument description see the previous table.
|
|
Electricity futures contracts1
|
A futures contract (futures) is a standard contract enabling the sale or purchase of a commodity in a regulated market for a set exercise price, with a delivery date falling no earlier than after two business days from the date when the terms of the futures contract have been agreed. The Group uses this instrument as economic hedge against price changes in future purchases of electricity and gas.
|
|
CO2 futures contracts
|
A futures contract is standard contract enabling the sale or purchase of CO2 emission allowances in a regulated market for a set exercise price, with a delivery date falling no earlier than after two business days from the date when the terms of the futures contract have been agreed. The Group uses this instrument as economic hedge against price changes in future purchases of CO2 emission allowances.
|
|
Electricity and gas forward contracts
|
A commodity forward is a contract for the purchase or sale of a commodity for a set 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 this instrument as economic hedge against price changes in future purchases of electricity and gas.2
|
| 1. EE – Phelix power futures contracts traded at the EEX 2. Electricity and gas forward contracts traded at the Polish Power Exchange |
|
|
2019
|
2018
|
||||
|
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|
Derivative instruments covered by hedge accounting
|
1,088
|
306
|
390
|
358
|
|
|
Derivative instruments not covered by hedge accounting
|
1,539
|
991
|
928
|
802
|
|
|
Total
|
2,627
|
1,297
|
1,318
|
1,160
|
|
Derivative instruments designated for hedge accounting |
||||||||
|
2019
|
2018
|
||||||
|
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
|
Fair value
of instruments for which cash flow hedge accounting
is applied
|
Notional amount (million)
|
Period when cash flow will occur and affect the financial result
|
Fair value
of instruments for which cash flow hedge accounting
is applied
|
Derivative instruments used to hedge currency risk in gas purchase and sale contracts
|
||||||||
|
Forwards
|
|
|
|
|
|
|
|
|
|
USD
|
371
|
up to 3 years
|
3,34-3,76
|
3.65
|
54
|
901
|
up to 3 years
|
216
|
|
USD
|
601
|
up to 3 years
|
3,80-3,99
|
3.86
|
(39)
|
77
|
1–3 months
|
(1)
|
|
EUR
|
970
|
up to 3 years
|
4,40-4,57
|
4.46
|
120
|
1,354
|
up to 3 years
|
50
|
|
EUR
|
-
|
-
|
-
|
-
|
-
|
438
|
up to 3 years
|
(18)
|
|
EUR/USD
|
42
|
up to 3 years
|
1,14-1,18
|
1.16
|
2
|
-
|
-
|
-
|
|
|
|
|
|
|
137
|
|
|
247
|
Derivative instruments used to hedge gas purchase and selling prices |
||||||||
|
TTF swap DA
|
41 MWh
|
up to 3 years
|
12,18-21,71
|
18.55
|
807
|
9 MWh
|
up to 3 years
|
67
|
|
TTF swap MA
|
2 MWh
|
1–3 months
|
12.2
|
12.20
|
(1)
|
2 MWh
|
1–3 months
|
(9)
|
|
TTF swap DA
|
12 MWh
|
Up to 12 months
|
13,03-19,51
|
16.74
|
(254)
|
3 MWh
|
up to 3 years
|
(54)
|
|
GASPOOL swap DA
|
4 MWh
|
up to 3 years
|
15,97-21,98
|
19.00
|
105
|
6 MWh
|
up to 3 years
|
57
|
|
GASPOOL swap DA
|
-
|
-
|
-
|
-
|
-
|
16 MWh
|
up to 3 years
|
(276)
|
|
HH NYMEX
|
15 MMBTU
|
up to 3 years
|
2,35-2,66
|
2.48
|
(12)
|
-
|
-
|
-
|
|
|
|
|
|
|
645
|
|
|
(215)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
782
|
Total
|
32
|
||
|
|
Including: |
Assets
|
1,088
|
Including: |
Assets
|
390
|
|
|
|
|
Liabilities
|
306
|
Liabilities
|
358
|
||
2019 |
||||||||||
|
Type of hedging instrument
|
Notional amount
|
Carrying amount
|
Name of item in statement of financial position which includes 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)
|
3,688
|
54
|
39
|
Derivative financial instruments
|
287
|
72
|
-
|
Operating income / expenses
|
-
|
Not applicable
|
|
Average rate forwards (EUR)
|
186
|
2
|
-
|
Derivative financial instruments
|
2
|
2
|
-
|
Operating income / expenses
|
-
|
Revenue from sale of gas
|
|
Average rate forwards (EUR)
|
4,133
|
120
|
-
|
Derivative financial instruments
|
444
|
129
|
288
|
Operating income / expenses
|
(25)
|
Revenue from sale of gas
|
|
COMMODITY PRICE RISK
|
|
|
|
|
|
|
|
|
|
|
|
Basis swap contracts for gas price indices
|
88
|
1
|
1
|
Derivative financial instruments
|
396
|
286
|
85
|
Operating income / expenses
|
(276)
|
Revenue from sale of gas
|
|
Swap contracts for gas price indices
|
2,899
|
911
|
254
|
Derivative financial instruments
|
1,547
|
1,013
|
713
|
Operating income / expenses
|
(269)
|
Revenue from sale of gas
|
|
Swap contracts for petroleum product price indices
|
128
|
-
|
12
|
Derivative financial instruments
|
(18)
|
(11)
|
(6)
|
Operating income / expenses
|
-
|
Not applicable
|
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
11,122
|
1,088
|
306
|
-
|
2,658
|
1,491
|
1,080
|
-
|
(570)
|
-
|
2018 |
||||||||||
|
Type of hedging instrument
|
Notional amount
|
Carrying amount
|
Name of item in statement of financial position which includes 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)
|
3,678
|
216
|
1
|
Derivative financial instruments
|
215
|
418
|
-
|
Operating income / expenses
|
-
|
-
|
|
Average rate forwards (EUR)
|
7,707
|
50
|
18
|
Derivative financial instruments
|
27
|
30
|
-
|
Operating income / expenses
|
(3)
|
Revenue from sale of gas
|
|
COMMODITY PRICE RISK
|
|
|
|
|
|
|
|
|
|
|
|
Basis swap contracts for gas price indices
|
208
|
34
|
9
|
Derivative financial instruments
|
25
|
(193)
|
-
|
Operating income / expenses
|
217
|
Revenue from sale of gas
|
|
Swap contracts for gas price indices
|
3,081
|
90
|
330
|
Derivative financial instruments
|
(189)
|
(359)
|
(10)
|
Operating income / expenses
|
164
|
Revenue from sale of gas
|
|
Swap contracts for petroleum product price indices
|
-
|
-
|
-
|
Derivative financial instruments
|
-
|
28
|
-
|
Operating income / expenses
|
-
|
-
|
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
14,674
|
390
|
358
|
-
|
78
|
(76)
|
(10)
|
-
|
378
|
-
|
The impact of cash flow hedges is presented in the table below.
|
2019
|
2018
|
|||||
|
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)
|
(287)
|
16
|
-
|
215
|
215
|
-
|
|
Natural gas (EUR/USD)
|
(2)
|
2
|
-
|
-
|
-
|
-
|
|
Natural gas (EUR)
|
(156)
|
93
|
38
|
(27)
|
32
|
(5)
|
|
COMMODITY PRICE RISK
|
|
|
|
|
|
|
|
Gas contracts indexed to monthly gas price indices
|
(310)
|
33
|
1
|
(25)
|
25
|
1
|
|
Gas contracts indexed to daily gas price indices
|
(846)
|
606
|
133
|
179
|
(182)
|
2
|
|
Gas contracts indexed to monthly petroleum product indices
|
15
|
(12)
|
-
|
-
|
-
|
-
|
|
Total
|
(1,586)
|
738
|
172
|
342
|
90
|
(2)
|
Changes in the cash flow hedging reserve are presented in the table below.
|
2019
|
2018
|
|
At beginning of the period
|
88
|
8
|
|
CURRENCY RISK
|
|
|
|
Hedging gains or losses recognised in other comprehensive income during reporting period
|
202
|
448
|
|
Amount reclassified from cash flow hedging reserve to statement of profit or loss as reclassification adjustment
|
(25)
|
(3)
|
|
Amount transferred from cash flow hedging reserve and recognised as adjustment to carrying amount of inventories
|
(271)
|
(194)
|
|
COMMODITY PRICE RISK
|
|
|
|
Hedging gains or losses recognised in other comprehensive income during reporting period
|
1,287
|
(524)
|
|
Part of loss taken to statement of profit or loss as hedged item was not expected to occur
|
-
|
(1)
|
|
Amount reclassified from cash flow hedging reserve to statement of profit or loss as reclassification adjustment
|
(545)
|
381
|
|
Amount transferred from cash flow hedging reserve and recognised as adjustment to carrying amount of inventories
|
174
|
(11)
|
|
Amount reclassified from cash flow hedging reserve to statement of profit or loss as reclassification adjustment for those hedging relationships to which hedge accounting is no longer applied
|
-
|
(16)
|
|
At end of the period
|
910
|
88
|
Derivative instruments not designated for hedge accounting |
||||
|
2019
|
2018
|
||
|
Type of derivative instrument
|
Notional amount (million)
|
Fair value of instruments not designated for hedge accounting
|
Notional amount (million)
|
Fair value of instruments not designated for hedge accounting
|
Derivative instruments hedging interest rate risk and currency risk |
|
|
||
|
CCIRS
|
|
|
|
|
|
NOK
|
2,318
|
90
|
2,318
|
94
|
|
Forwards
|
|
|
|
|
|
EUR
|
608
|
89
|
573
|
16
|
|
EUR
|
1
|
-
|
97
|
(8)
|
|
EUR
|
610
|
(49)
|
336
|
(15)
|
|
130
|
|
87
|
|
Derivative instruments used as economic hedges of electricity purchase prices |
|
|
||
|
Forwards
|
|
|
|
|
|
electricity – PPX
|
12 MWh
|
18
|
0.25 MWh
|
12
|
|
electricity – PPX
|
1 MWh
|
(5)
|
8 MWh
|
(7)
|
|
electricity – OTC
|
1 MWh
|
34
|
1 MWh
|
75
|
|
electricity – OTC
|
1 MWh
|
(22)
|
2 MWh
|
(97)
|
|
Futures
|
|
|
|
|
|
electricity – EEX AG
|
2 MWh
|
69
|
5 MWh
|
203
|
|
electricity – EEX AG
|
3 MWh
|
(81)
|
5 MWh
|
(180)
|
|
13
|
|
6
|
|
Derivative instruments used to hedge gas purchase and selling prices |
|
|
||
|
Forwards
|
|
|
|
|
|
gas – OTC
|
16 MWh
|
393
|
30 MWh
|
305
|
|
gas – OTC
|
13 MWh
|
(310)
|
33 MWh
|
(342)
|
|
Futures
|
|
|
|
|
|
gas - PPX
|
2 MWh
|
(54)
|
-
|
-
|
|
gas – ICE ENDEX B.V.
|
4 MWh
|
91
|
7 MWh
|
85
|
|
gas – ICE ENDEX B.V.
|
4 MWh
|
(92)
|
5 MWh
|
(63)
|
|
gas – POWERNEXT SA
|
2 MWh
|
40
|
6 MWh
|
74
|
|
gas – POWERNEXT SA
|
3 MWh
|
(72)
|
6 MWh
|
(59)
|
|
Swap
|
|
|
|
|
|
GASPOOL DA
|
9 MWh
|
235
|
-
|
-
|
|
GASPOOL DA
|
7 MWh
|
(99)
|
-
|
-
|
|
TTF swap MA
|
-
|
-
|
1 MWh
|
2
|
|
TTF swap DA
|
21 MWh
|
473
|
5 MWh
|
37
|
|
TTF swap MA
|
9 MWh
|
(44)
|
1 MWh
|
(11)
|
|
TTF swap DA
|
9 MWh
|
(159)
|
2 MWh
|
(7)
|
|
402
|
|
21
|
|
Derivative instruments used to hedge oil prices |
|
|
||
|
Futures
|
|
|
|
|
|
Crude oil – ICE Futures Europe
|
-
|
-
|
-
|
11
|
|
Crude oil – ICE Futures Europe
|
-
|
-
|
-
|
(11)
|
|
|
- |
|
- |
Derivative instruments used to hedge purchase prices of CO2 emission allowances |
|
|
||
|
Forwards
|
EUR 24
|
(1)
|
EUR 2
|
-
|
|
Forwards
|
-
|
-
|
EUR 16
|
-
|
|
Futures
|
3 t
|
(1)
|
1 t
|
-
|
|
|
(2)
|
|
-
|
Derivative instruments used to hedge share purchase prices |
|
|
||
|
Options
|
9 million shares
|
5
|
9 million shares
|
12
|
|
|
|
|
|
|
Total
|
548
|
Total
|
126
|
|
Including: |
|
Including: |
||
|
Assets
|
1,539
|
Assets
|
928
|
|
|
Liabilities
|
991
|
Liabilities
|
802
|
|
Measurement of derivative financial assets and derivative financial liabilities is classified as Level 1 and Level 2 in the fair value hierarchy. In Level 1, market quotations of instruments are used for measurement, while Level 2 measurements are made using observable inputs other than quoted prices.
|
Instrument
|
Valuation method
|
Key inputs
|
|
Currency call options
|
Garman Kohlhagen model
|
Market data such as interest rates, foreign-exchange rates, basis spreads, commodity prices and volatility of commodity prices
|
|
Asian commodity call and put options
|
Espen Levy model
|
|
|
Forwards, average rate forwards, commodity swaps, CCIRS and IRS
|
Discount method
|