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