7.3.2.2 Currency risk
Currency risk is defined as the risk of the Group’s financial results being adversely affected by changes in the price of one currency against another.
As part of its risk management strategy, which consists in particular in managing the risk from a net open position in contracts to purchase or sell gas and petroleum products, the Group hedges the currency risk arising in connection with trading in gas and petroleum products payable by it under contracts settled in foreign currencies by entering into appropriate foreign exchange derivatives.
Currency risk largely arises on account of fluctuations in the EUR/PLN, USD/PLN and NOK/PLN exchange rates, And it mainly affects the Parent. The key sources of exposure include:
- Trade payables (mainly for natural gas purchased by the Group (Note 6.2.3.),
- CCIRS derivatives (Note 7.2.),
- Cash and cash equivalents (Note 5.4).
The main objective of the Group’s currency risk hedging activities is to mitigate volatility of net revenue from trading in gas and petroleum products (purchase, sale) arising from payments made in the euro, the US dollar and the Polish złoty, but resulting from economic indexation of commodity prices to the euro.
The Parent applies cash flow hedge accounting with respect to future, highly probable foreign-currency costs to purchase gas and petroleum products under contracts settled in the euro or the US dollar and economically indexed to the euro. The Group designates as a hedged item the risk component being the EUR/PLN exchange rate in those gas purchase and/or sale contracts for which the price is not determined in either of the currencies, but which give rise to the exposure to, inter alia, the EUR/PLN exchange rate. For details of the hedging transactions, see Note 7.2.
Analyses performed by the Group confirmed that currency exchange movements have a material impact on gas prices on PPX. As it is common knowledge that gas prices in Poland are strongly correlated with gas prices in Germany, and based on analyses, despite the fact that the foreign currency component is not expressly specified in the price of gas in Poland, the Group finds that such component can be separated and reliably measured.
Based on historical analyses performed for the last three years, the Group determined that in the past currency exchange movements accounted for approximately 8% of the volatility of the price of gas bought/sold at the intra-day price (i.e. other than under contracts to buy/sell gas at the price determined at the time of contract execution/amendment).
In 2021, the Group used derivative instruments to hedge against currency risk associated with trade payables/receivables denominated in foreign currencies (chiefly USD and EUR), including forwards and average rate forwards/currency swaps. For detailed information on derivative transactions executed by the Group (derivatives designated for hedge accounting and economic hedges not designated for hedge accounting), see Note 7.2.
The table below presents the Group’s exposure to currency risk arising from material items denominated in foreign currencies, and an analysis of the Group’s sensitivity to the risk of movements in foreign exchange rates that the Group considers to be reasonably possible as at the reporting date (December 31st 2021).
| 2021 | Note | Carrying amount | Value at risk | EUR/PLN | USD/PLN | NOK/PLN | |||||||||
| Exchange rate change: +10% | Exchange rate change: -10% | Exchange rate change: +10% | Exchange rate change: -10% | Exchange rate change: +10% | Exchange rate change: -10% | ||||||||||
| Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | ||||
| Financial assets | |||||||||||||||
| Trade receivables | Note 6.2.2. | 11,437 | 6,726 | 334 | – | (334) | – | 149 | – | (149) | – | 7 | – | (7) | – |
| Derivative financial instruments (assets) | Note 7.2. | 8,968 | 385 | 124 | – | – | 266 | – | 203 | – | – | – | – | 146 | – |
| Cash and cash equivalents | Note 5.4. | 11,410 | 3,766 | 103 | – | (103) | – | 135 | – | (135) | – | 24 | – | (24) | – |
| Financial liabilities | |||||||||||||||
| Financing liability | Note 5.2. | 14.638 | 2,054 | (91) | – | 91 | – | (74) | – | 74 | – | – | – | – | – |
| Trade payables | Note 6.2.3. | 4,575 | 4,479 | (188) | – | 188 | – | (156) | – | 156 | – | (17) | – | 17 | – |
| Derivative financial instruments (liabilities) | Note 7.2. | 15,031 | 277 | – | (266) | (124) | – | – | – | – | (203) | (146) | – | – | – |
| Effect of exchange rate movements | 282 | (266) | (282) | 266 | 54 | 203 | (54) | (203) | (132) | – | 132 | – | |||
| 2020 | Note | Carrying amount | Value at risk | EUR/PLN | USD/PLN | NOK/PLN | |||||||||
| Exchange rate change: +10% | Exchange rate change: -10% | Exchange rate change: +10% | Exchange rate change: -10% | Exchange rate change: +10% | Exchange rate change: -10% | ||||||||||
| Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | Profit/ (loss) | Other comprehensive income | ||||
| Financial assets | |||||||||||||||
| Trade receivables | Note 6.2.2. | 4,449 | 990 | 52 | – | (52) | – | 18 | – | (18) | – | 6 | – | (6) | – |
| Derivative financial instruments (assets) | Note 7.2. | 1,453 | 59 | – | – | 14 | 203 | – | 183 | 5 | – | – | – | 134 | – |
| Cash and cash equivalents | Note 5.4. | 7,098 | 3,544 | 25 | – | (25) | – | 260 | – | (260) | – | – | – | – | – |
| Financial liabilities | |||||||||||||||
| Financing liability | Note 5.2. | 4,184 | 1,881 | (85) | – | 85 | – | (67) | – | 67 | – | – | – | – | – |
| Trade payables | Note 6.2.3. | 1,199 | 681 | (28) | – | 28 | – | (23) | – | 23 | – | (3) | – | 3 | – |
| Derivative financial instruments (liabilities) | Note 7.2. | 1,398 | 276 | (14) | (203) | – | – | (5) | – | – | (183) | (134) | – | – | – |
| Effect of exchange rate movements | (50) | (203) | 50 | 203 | 183 | 183 | (183) | (183) | (131) | – | 131 | – | |||