38.5. Interest rate risk

Exposure to interest rate risk	Risk management
Interest rate risk is associated with a negative impact of changes in interest rates on ENEA Group’s financial situation. Exposure to interest rate risk is related to credit agreements and bond issue programme agreements. Given the Group’s financing arrangement model, interest rate risk is identified and managed (quantified, mitigated) by the Parent. Financing is arranged based on variable interest, which is calculated in correlation with market (interbank) rates. Interest rate hedging is performed on the basis of „ENEA Group’s currency risk and interest rate risk management policy.” In accordance with the aforementioned Policy – exposure to interest rate risk is identified solely on the basis of the liability side of planned cash flows, without taking into account the value of financial investments (which tend to have lower durations than financial liabilities) – although this only applies to non-current financial liabilities	In line with the interest rate risk hedging strategies adopted in 2019 pursuant to „ENEA Group’s currency risk and interest rate risk management policy,” the Group reduces interest rate risk by executing Interest Rate Swaps. The use of hedging instruments makes it possible to exchange a series of coupon payments in the same currency, calculated on an agreed nominal amount and for a specific period, although the Group pays interest based on fixed rates, while the second side of the transaction (bank) pays interest based on variable rates. In order to maximise the hedge effectiveness, the hedging instrument’s parameters are identical to the terms of the transaction being hedged (i.e. the underlying position). This eventually leads to an economic link forming between payments resulting from servicing external financing and the derivatives used to hedge them. With a close link between the hedged item and the hedging instrument, the main source of ineffectiveness of such links is improper performance of contracts by counterparties (based on which hedging transactions are executed) or earlier settlement of the hedged item.

Exposure to interest rate risk

Risk management

Interest rate risk is associated with a negative impact of changes in interest rates on ENEA Group’s financial situation. Exposure to interest rate risk is related to credit agreements and bond issue programme agreements.

Given the Group’s financing arrangement model, interest rate risk is identified and managed (quantified, mitigated) by the Parent. Financing is arranged based on variable interest, which is calculated in correlation with market (interbank) rates. Interest rate hedging is performed on the basis of „ENEA Group’s currency risk and interest rate risk management policy.”

In accordance with the aforementioned Policy – exposure to interest rate risk is identified solely on the basis of the liability side of planned cash flows, without taking into account the value of financial investments (which tend to have lower durations than financial liabilities) – although this only applies to non-current financial liabilities

In line with the interest rate risk hedging strategies adopted in 2019 pursuant to „ENEA Group’s currency risk and interest rate risk management policy,” the Group reduces interest rate risk by executing Interest Rate Swaps. The use of hedging instruments makes it possible to exchange a series of coupon payments in the same currency, calculated on an agreed nominal amount and for a specific period, although the Group pays interest based on fixed rates, while the second side of the transaction (bank) pays interest based on variable rates. In order to maximise the hedge effectiveness, the hedging instrument’s parameters are identical to the terms of the transaction being hedged (i.e. the underlying position). This eventually leads to an economic link forming between payments resulting from servicing external financing and the derivatives used to hedge them. With a close link between the hedged item and the hedging instrument, the main source of ineffectiveness of such links is improper performance of contracts by counterparties (based on which hedging transactions are executed) or earlier settlement of the hedged item.

As at 31 December 2020, the Group had credit and bond liabilities of PLN 7 831 817 thousand. The aforementioned debt has been hedged in 59.7% using IRSs.

The following table shows the Group’s sensitivity to changes in interest rates by presenting financial assets and liabilities by variable-rate and fixed-rate:

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	As at
	31 December 2020	31 December 2019
Fixed-rate instruments
Financial assets	3 318 473	4 891 004
Financial liabilities	(2 843 605)	(2 842 799)
Impact of IRS hedge	(4 672 992)	(5 201 117)
Total	(4 198 124)	(3 152 912)
Variable-rate instruments
Financial assets	737 229	950 877
Financial liabilities	(7 255 663)	(9 207 397)
Impact of IRS hedge	4 672 992	5 201 117
Total	(1 845 442)	(3 055 403)

The Group’s fixed-rate financial assets mainly include cash invested in bank deposits, trade receivables that are based on a fixed rate of penalty interest in case of overdue payment and assets arising from contracts with customers.

Interest rate swaps

In the 12-month period ending 31 December 2020 ENEA S.A. executed an Interest Rate Swap for an exposure amounting to PLN 1 000 000 thousand. The total bond and credit exposure hedged with IRSs as at 31 December 2020 amounted to PLN 4 672 992 thousand. Moreover, ENEA S.A. has fixed-rate credit agreements totalling PLN 584 014 thousand. These transactions have material impact on the predictability of expense flows and finance costs. The measurement of these instruments is presented in the item: Financial liabilities measured at fair value. Derivative instruments are treated as cash flow hedges, which is why they are recognised and accounted for using hedge accounting rules.

As at 31 December 2020, financial liabilities at fair value concerning IRSs amounted to PLN 139 673 thousand (31 December 2019: PLN 23 802 thousand). The considerable increase in liabilities resulting from the measurement of IRS transactions stems from two decisions taken by the Monetary Policy Council to lower interest rates in the first half of 2020. These decisions were directly intended to reduce the negative impact of the SARS-CoV-2 pandemic.

The following table presents the impact of interest rate changes on the Group’s financial result in reference to variable-rate instruments.

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	As at 31 December 2020			As at 31 December 2019
	Book value	Impact of interest rate risk on financial result (12-month period)		Book value	Impact of interest rate risk on financial result (12-month period)
		+ 1 p.p.	– 1 p.p.		+ 1 p.p.	– 1 p.p.
Financial assets
Cash	245 359	2 454	(2 454)	388 944	3 889	(3 889)
Funds in the Mine Decommissioning Fund	141 591	1 416	(1 416)	133 998	1 340	(1 340)
Trade and other receivables	350 279	3 503	(3 503)	427 935	4 279	(4 279)
Impact on result before tax		7 373	(7 373)		9 508	(9 508)
19% tax		(1 401)	1 401		(1 807)	1 807
Impact on result after tax		5 972	(5 972)		7 701	(7 701)
Financial liabilities
Credit facilities, loans and debt securities	(7 255 663)	(72 557)	72 557	(9 207 397)	(92 074)	92 074
Derivative instruments	(139 673)	−	−	(23 802)	−	−
Impact on result before tax		(72 557)	72 557		(92 074)	92 074
19% tax		13 786	(13 786)		17 494	(17 494)
Impact on result after tax		(58 771)	58 771		(74 580)	74 580
Total		(52 799)	52 799		(66 879)	66 879

38.4. Currency risk

39. Related-party transactions

38.5. Interest rate risk

Interest rate swaps

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