16.5. RISK IDENTIFICATION
Riskidentification
Risk management is mainly focused on the unpredictability of markets and aims to reduce the impact of volatility on the Group's financial results.
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Type of risk |
Exposure |
Measurement of exposure |
Management/Hedging |
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MARKET RISK |
Commodity |
- risk of changes in refining and petrochemical margins on sale of products and Brent differential fluctuations; |
Based on planned cash flows. |
Market risk management policy and hedging strategies, which define principles of measurement of individual exposure, parameters and the time horizon of risk hedging and hedging instruments. By setting the market valuation of instruments, the Group uses its own recording systems and valuation of derivatives as well as relies on information obtained from market-leading banks and brokerage companies or information services. Transactions are concluded only with reliable partners, allowed to participate in transactions as a result of the application of appropriate procedures and signing of appropriate documentation. |
|
Exchange rates changes |
- economic currency exposure resulting from inflows decrease by expenses indexed to or denominated in other than the functional currency; |
Based on planned cash flows. |
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Interest rates changes |
-exposure resulting from owned assets and liabilities for which interest gains or losses are dependent on floating interest rates, including surplus cash investments and debt obligations. |
Based on total gross debt to positions for which interest costs are dependent on floating interest rate. |
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-impact in interest rates changes on the change in the WACC reported by the President of the ERO used to calculate the return on WRA included in the tariff of Energa Operator S.A. |
Based on analyses of the rate of return on the WRA. |
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Liquidity |
Risk of unforeseen shortage of cash or lack of access to financing sources, both in the horizon of short and long-term, leading to temporary or permanent loss of ability to pay liabilities resulting in the need to obtain financing on less favourable terms or the loss of potential benefits arising from excess liquidity. |
Based on planned cash flows from operating, investing and financing activities in short and long-term horizon. |
Liquidity risk management policy, which defines rules of reporting and consolidation of liquidity of PKN ORLEN and ORLEN Group entities. Group carries out a policy of its financing sources diversification and uses range of tools for effective liquidity management. The Group also monitors on an ongoing basis the level of credit covenants and their estimated level in long-term periods. |
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Losing cash and deposits |
Risk of bankruptcy of domestic or foreign banks, in which accounts cash is kept or in which cash is invested according to the on-balance-sheet exposure of the financial assets held: cash and cash equivalents. |
Regular review of credit rating of banks and setting limits on concentration of funds. |
Management based on principles of surplus cash management, which determine possibility of granting quotas for individual banks made on the basis of, among others, ratings and reporting data. Cooperation mainly with crediting banks. |
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Credit |
Risk of unsettled receivables for delivered products and services by customers with whom trade transactions are concluded with deferred payment. |
Analysis of creditability and solvency of customers. |
Management based on procedures and policies adopted for management of trade credit and debt recovery including the determination of limits and hedging. |
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Hedging strategies within hedge accounting as at 31.12.2020 |
Component |
Type of relationship |
|
Bitumen sales at fixed price |
Brent / Fuel Oil and Gas Oil risk component, which is a part of an unconditional and binding commercial commitment from concluded sale transaction at a fixed price |
fair value hedge |
|
Aviation fuel sales at fixed price |
Jet Fuel risk component, which is a part of an unconditional and binding commercial commitment from concluded sale transaction at a fixed price |
fair value hedge |
|
Oversize inventories |
Brent DTd risk component, which is part of future crude oil purchase; an item identified based on crude oil deliveries from the month of execution/delivery of hedging transaction in the order in which they were received |
cash flow hedge |
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EBOB/ULSD/JET/3,5PCT risk component, which is a part of petrol / diesel / aviation fuel / heating oil sales; an item identified based on sales invoices issued in the month of execution/delivery of hedging transaction in the order in which they were issued |
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Refining margin |
Brent DTd risk component, which is part of future crude oil purchase; an item identified based on crude oil deliveries from the month of execution/delivery of hedging transaction in the order in which they were received |
cash flow hedge |
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EBOB/ULSD/3,5PCT risk component, which is a part of petrol / diesel / heating oil sales; an item identified based on sales invoices issued in the month of execution/delivery of hedging transaction in the order in which they were issued |
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Sales of goods denominated in foreign currencies/indexed to foreign currencies |
Invoices for sales denominated in foreign currency or indexed to exchange rate of foreign currency issued on the day of Forward transaction and subsequent days in the order in which they were issued; nominal value in foreign currency up to the nominal value of hedging instrument in foreign currency |
cash flow hedge |
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Deliveries for purchases denominated in foreign currencies or indexed to a foreign currency |
Deliveries for sales denominated in foreign currency or indexed to exchange rate of foreign currency received on the day of Forward transaction and subsequent days in the order in which they were delivered; nominal value in foreign currency up to the nominal value of hedging instrument in foreign currency |
cash flow hedge |
The ORLEN Group applies a consistent financial risk hedging policy based on market risk management policy and strategies supported and supervised by the Financial Risk Committee, the Management Board and the Supervisory Board of PKN ORLEN.
Standard hedge against currency economic exposure is done in a rolling and recurring basis, covering a period of the next 12 months.
Hedge against currency economic exposure in EUR (due to its stability and predictability) for periods of over 60 months is allowed.
A dedicated hedging strategy determines the optimal heeding levels for the standard period and acceptable deviations.
Exposure to balance sheet currency risk is hedged up to 100% of the amount exposed to this currency risk.
In case of commodity risk, the hedged level for particular exposures is in line with the recommendations for individual companies approved by the Financial Risk Committee.
Exposure to commodity price risk related to time mismatches on non-normative operating inventories is hedged for 100% of the volume of inventories exposed to the risk concerned.
Exposure to commodity price risk related to probable liabilities or receivables in PKN ORLEN is 100% hedged on the volume exposed to this risk (offering customers the price formulas based on a fixed price over time).
Exposure to commodity price risk related to time mismatch on crude oil purchases is hedged on the volume corresponding to 90% of sold products made from the purchased crude oil, exposed to this risk.
Exposure due to the refining margin is hedged opportunistically. In line with the strategies adopted in this respect, the refining margin is hedged in the horizon of up to 12 months in advance on the volume of planned production not exceeding 30% in PKN ORLEN, and 50% in Unipetrol and in ORLEN Lietuva.
All transactions hedging the commodity and currency exposure in Unipetrol and ORLEN Lietuva are performed on the PKN ORLEN balance sheet and then transferred to the companies on the basis of intercompany transactions.
