25.1.3 Loans, borrowings, bonds and leases

The Group is continuously monitoring works related to the IBOR reform, which may have an impact on financial instruments based on a variable interest rate. At December 31, 2022 the value of credit facilities, loans and bonds exposed to interest rate risk was PLN 4,999 million (PLN 4,959 million is based on WIBOR and PLN 40 million is based on LIBOR). To hedge the interest rate in respect of incurred financial liabilities, PGE S.A. uses IRS instruments and hedging accounting. As at December, 2022, PLN 4,274 million of the above loans, borrowings and bonds is covered by hedging instruments.

As at December 31, 2022, the value of the available overdrafts at significant PGE Group companies was PLN 3,817 million. The repayment dates for the available overdraft facilities of PGE Group’s key companies are in 2023-2024. The amount of overdraft limits remaining available was reduced by PLN 59 million (USD 13.5 million), i.e. by the amount of a letter of credit granted as security for the repayment of trade liabilities.

In 2022 and after the reporting period no failures to make payment or other breaches of credit agreement terms were recorded.

The lessee recognises the lease liability at the inception date.

At the inception date, the lessee measures the lease liability at the present value of the lease payments outstanding at that date. Lease payments are discounted using the interest rate implicit in the lease if that rate is readily determinable. Otherwise, the lessee applies the lessee’s marginal interest rate.

At the inception date, lease payments included in the measurement of the lease liability include the following payments for the right to use the underlying asset during the lease term, which remain payable at that date:

• fixed lease payments (including substantially fixed lease payments) less any lease incentives payable;
• variable lease payments that depend on an index or a rate, measured initially using that index or rate according to their value at the inception date,
• amounts expected to be paid by the lessee under the guaranteed residual value,
• the strike price of the call option if it can be assumed with reasonable certainty that the lessee will exercise the option, and
• financial penalties for terminating a lease if the lease terms provide that the lessee may exercise the option to terminate the lease.

The lessee measures, after the commencement date, the lease liability by:

• increase in carrying amount to reflect interest on the lease liability, which at each date during the lease term is an amount that earns a fixed periodic rate of interest on the outstanding balance of the lease liability,
• a reduction in the carrying amount to take account of lease payments made, and
• revise the measurement of the carrying amount to reflect any reassessment or modification of the lease or to reflect updated substantially fixed lease payments.

PGE Group is a party to a number of lease, tenancy, easement and rental agreements. The subjects of the agreements are land, technical infrastructure areas, office and commercial space, equipment, installations, technical premises, as well as IT infrastructure. Contracts are concluded for a fixed or indefinite period with a specified notice period. The Group also holds the right to use land in perpetual usufruct. The Group estimates the lease term on a case-by-case basis, taking into account relevant facts and circumstances that may affect the extension or reduction of the term of the contracts.

Some contracts have variable fees based on the inflation rate as announced by Statistics Poland for the previous year. The valorisation element accounts for their variable nature – these payments are taken into account in the valuation of the lease liability as they are based on an index. In certain cases, the annual rent is increased by other charges of a variable nature, other than variable charges depending on a rate or index. These are, for example, payments for property tax or building tax. These charges are not included in the measurement of lease liabilities. In land lease contracts for the construction and operation of wind farms, in addition to the lease rent, there are compensation payments for the exclusion of the property from agricultural cultivation for the construction period. These charges are not included in the calculation of the lease liability as no rights to use the assets are transferred to the lessee nor are any services provided to the lessee as a result of incurring these charges. Similarly, charges relating to compensation for losses for entering the site to carry out operation, maintenance and other works related to the operation of the wind power park are also treated.

Decisions on the perpetual usufruct of land are usually granted for a fixed period of 99 years. The fee for perpetual usufruct of land is set as a percentage of the land value. The amount of the annual fee for perpetual usufruct of land is subject to update no more frequently than once every 3 years, if the value of the property changes, thus it will be a variable fee depending on the index or the rate, which is taken into account in the valuation of the lease liability.

The Group leases small office equipment (printing equipment, photocopiers, computers, etc.), which it treats as leases of low-value assets. The Group has elected to apply the exemption and not to recognise rights of use and lease liabilities in respect of these contracts in the statement of financial position.

The Group also applied a practical exemption for short-term leases. This primarily applies to decisions on occupation of road or railway lanes if the decision is issued for a period of less than 12 months.

The Group also benefits from an expedient for short-term leases in the case of property leases with an indefinite term with a notice period of less than 12 months, where the leased space has not been subject to special adjustments, there are no significant exit barriers (e.g. early termination penalties) and both parties have the practical ability to lease such space on the market.