7.2. Derivative financial instruments

Derivative financial instruments not designated for hedge accounting

Derivative financial instruments which are not hedging instruments in hedge accounting are classified as financial assets/liabilities at fair value through profit or loss. The instruments are economic hedges.

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 hedge against the risk of movements in gas prices and exchange rates (EUR/PLN and USD/PLN) for future gas purchases. 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 on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income. The ineffective portion is charged to net finance costs in the statement of profit or loss. Amounts previously recognised in other comprehensive income are reclassified to profit or loss (line item ‚raw materials and consumables used’) in the period when the hedged item affects profit or loss.

The Group ceases to classify an instrument as a hedge if the derivative expires or is sold, terminated or exercised, if the Group revokes its designation as a hedge, the hedge no longer meets the criteria of hedge accounting, or if the hedged transaction is no longer expected to be executed.

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, NOK, and EUR exchange rates in future gas purchase contracts.

A currency call option gives the holder the right to purchase a set amount of a currency at a specified price (exercise price). The right may be exercised at the option expiration date (European option). For the right represented by the option the seller receives option premium. The Group buys call options to hedge against adverse movements in USD and EUR exchange rates in future gas purchase contracts.

A call option gives the holder the right to receive specified payment. The payment amount depends on the arithmetic mean of the value of the underlying instrument computed for the period when the instrument is valid. For the right represented by the option the seller receives option premium. The Group purchases call options to hedge against movements in prices of TTF gas ^[A], GO ^[B] and FO ^[C].

The Group uses put options exclusively under zero-cost collar strategies. The instrument gives the right to receive a specified amount upon exercise. The amount depends on the arithmetic mean of the value of the underlying instrument computed for the period when the instrument is valid. For the right represented by the option the seller receives option premium. The Group sells put options to hedge against movements in prices of TTF gas ^[A], GO ^[B] and FO ^[C].

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 uses the instrument to hedge against movements in prices of TTF gas ^[A], GO ^[B] and FO ^[C].

An interest rate swap is an instrument exchanging fixed rate interest payments denominated in PLN for variable rate interest payments on a specified principal amount.

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.

For instrument description see the previous table.

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.

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.

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. ^[E]