11.2.4 Interest rate risk

The Group is exposed to the risk of changes in cash flows caused by interest rate movements, as interest income and expense related to certain assets and liabilities accrues based on floating interest rates. This is driven primarily by the expected facility repayment schedules, as well as the amount of interest computed by reference to the floating USD LIBOR rate. The Group manages the interest rate risk within the set limits using interest rate swaps.

As at December 31st 2021, the Group had no open derivative interest rate contracts.

Open interest rate contracts as at December 31st 2020:

 

In the table above, IRS contracts are aggregated according to the currency of the notional amount and the reference rate. The ‘Period’ column shows the earliest start date and the latest end date of the period for contracts classified in a given group.

Reform of interest rate benchmarks (IBOR Reform)

Issued by the European Parliament and the Council (EU) in 2016, the so-called BMR Regulation introduced new rules on the setting and use of reference rates, as well as on the operation and supervision of entities that prepare indices and make them available to other market participants. Alignment with the principles of the Regulation is expected to increase the safety of market participants by improving the reliability of indices and the transparency of their calculation methodology. Since January 2018, when the BMR Regulation came into force, EU member states have been working on the benchmark reform.

As a result of the reform, the method of calculation some interest rate benchmarks (e.g. WIBOR, EURIBOR) was adjusted to the requirements of the BMR Regulation. Therefore, they will continue to be prepared and provided, and there was no need to replace them with other indices. However, for some indices (e.g., LIBOR) the effect of the reform will be to phase out their calculation and publication, and thus there has been or will be a need to replace them with alternative indices.

The following table provides information on when selected benchmarks will cease to be provided and on proposed alternative benchmarks.

 

The Group companies actively monitored the progress of the reform to the extent applicable to them, including with respect to the hedge accounting requirements, and took all decisions and actions necessary to implement the reform-related changes.

As at December 31st 2021, the Group did not have any financial instruments for which it would be necessary to adopt alternative reference rates as of January 1st 2022 following the cessation of the existing reference rates.

As a rule, the Group’s financial instruments are based either on benchmarks that meet the requirements of the BMR Regulation and therefore there is no risk of transition to alternative benchmarks, or on USD LIBOR rates which will continue to be provided until June 30th 2023. The Group also holds cash deposited in bank accounts, including accounts of the Extraction Facilities Decommissioning Fund and the account used for the purposes of transactions on the ICE exchange, as well as loans advanced by the Provincial Fund for Environmental Protection and Water Management and lease contracts, which are not exposed to the risks arising from the benchmark reform due to the applied mechanisms of determining interest rates.

Below is presented information on the Company’s financial instruments exposed to interest rate risk which are based on benchmarks that are compliant with the BMR Regulation and therefore will continue to be provided and do not require transition to alternative benchmarks.

 

The table below presents financial instruments held by the Company as at December 31st 2021 that are based on the USD LIBOR benchmark whose provision is to be discontinued on June 30th 2023.

 

In respect of the credit facility agreements and note issue agreements entered into by the Group, where interest rates are based on USD LIBOR benchmarks, an analysis was made of the provisions stipulating the rules to be followed in the event of the cessation of the benchmarks. The relevant clauses were included either in the original wording of the agreements with financing providers or were incorporated in the agreements as amendments.

In principle, the relevant clauses stipulate that if the provision of USD LIBOR is discontinued, the benchmark will be replaced by an alternative index indicated by the regulator or by an index agreed by the parties. The note issue agreements also contain appropriate clauses in the event that the USD LIBOR index is no longer published, which specify how an alternative index will be determined.

As the publication period of the USD LIBOR index has been extended until 30 June 2023, such alternative indices have not yet been determined. In this regard, the Company remains in contact with its financial partners, and discussions regarding the choice of alternative benchmarks will continue in the following year.

The Parent may continue to use the interest rate benchmarks previously applied in its hedge accounting calculations until the uncertainty arising from the interest rate benchmark reform no longer exists (pursuant to Annex ‘Interest Rate Benchmark Reform’ to Commission Regulation (EU) 2020/34 of January 15th 2020, describing temporary exceptions from applying specific hedge accounting requirements), and it intends to transition to new benchmarks as soon as the conditions set out in the Regulation are met. As the publication of USD LIBOR rates will not be discontinued until June 30th 2023, the Parent has not yet made the transition to new benchmarks.