Market risk
PKN ORLEN manages the market risk on the basis of its adopted policy, which determines the rules for measuring individual exposures, parameters and time for securing the given risk and the security instruments. The market risk is managed by the designated organisational units supervised by the Financial Risk Committee, Management Board and Supervisory Board of PKN ORLEN.
Management and Supervisory Boards of particular companies are responsible for the risk management and compliance with the adopted policy relating to the above in the companies of the ORLEN Group. PKN ORLEN, which received relevant powers of attorney under respective agreements, is responsible for the implementation of hedging transactions on behalf of individual companies of the ORLEN Group covered by the coherent hedging policy. Effectiveness and performance of hedging transactions are monitored by individual companies of the ORLEN Group and presented to the PKN ORLEN Financial Risk Committee and the Management Board of PKN ORLEN.
The Group is exposed to market risks relating to the exchange rates, interest rates, goods and CO2 emission rights prices.
The process of market risk management aims at mitigating the undesirable effects of changes of market and financial risk factors on the cash flows and performance in shortand medium-term perspective.
Risk of changes in the exchange rates
The ORLEN Group is exposed to the currency risk arising out of the current accounts receivable and current accounts payable, cash, capital expenditures and loan liabilities as well as own bonds denominated in foreign currencies and future planned cash flows relating to sale and purchase of goods and refinery and petrochemical products. The currency risk exposure is hedged with such instruments as forwards or swaps.
For the USD/PLN exchange is secured (hedged) naturally to a certain extent, since the revenues from the sales of products, whose value is dependent on the USD exchange rate, are balanced with the costs of crude oil purchases in the same currency.
In the case of EUR/PLN exchange rate, in this currency the revenues from the sale of petrochemical products are denominated. For this group the natural hedging applies to a limited extent (i.e., interest on the loans denominated in EUR, part of investment purchases).
Risk of changes in the interest rates
The risk of cash flow fluctuations due to changes of interest rates results from the extended loans, bank deposits held and fluctuating interest rate loans. The Capital Group holds derivative transactions which hedge the cash flow risk due to the interest rate payments relating to the issuance of bonds in PLN and the cash flows relating to the interest rate payments as regards the external financing in EUR and USD, using the IRS (interest rate swaps), for which the cash flow hedging accounting is applied.
Risk relating to the procurement of raw materials
The risk relating to the procurement of raw materials is due to the necessity of securing continuous and punctual supply of raw materials needed for the production. In PKN ORLEN the procurement is performed mainly via a pipeline system, by land and sea transport. The strategy adopted by PKN ORLEN is aimed at preventing any disturbances in the raw materials procurement, mainly due to the diversification of sources and adaptation of the production installation to process various types of raw materials.
Risk of changes in the prices of crude oil, refinery and petrochemical products
The operating result reported by the Capital Group is exposed to the risk of changes in the prices of crude oil and refinery and petrochemical products. Changes of margin quotations (crack) on refinery and petrochemical products directly influence the level of revenues and operating result. The fluctuations of crude oil quotations are directly reflected in the level of sales revenues, while the production cost is calculated using weighted average cost for stock valuation, which may result in disproportional effects at cost side. Sensitivity of reported result to price fluctuations is mainly due to the requirement to keep mandatory reserves.
The Capital Group carries out the transactions hedging the risk of changes in prices of crude oil to which it applies the hedge accounting.
Risk of changes in legislation
The risk arising out of changes in legislation concerns mainly the implementation of the National Indicative Target (NIT) and the quantity limit relating to the rights to CO2 emission.
In accordance with the Council of Ministers’ Ordinance of 2007, as part of the adjustment to the community law regulation involving the achievement of ambitious goals as regards the share of energy from the renewable sources, improvement of power efficiency and the reduction in greenhouse gases emission – the so called 3x20 package, since 2008 the obligation to satisfy the National Indicative Target (NIT) has been imposed on fuel producers. NIT determines the minimum share of biocomponents and other renewable fuels calculated at the heating value in the general quantity of liquid fuels and biofuels used up in transport during the calendar year. The value of the index is updated annually and in 2010 it amounted to 5.75% in comparison to 4.60% in 2009 and 3.45% in 2008. The increasing value of NIT and no regulations on the sale of E10 fuels (gasoline with 10% of bioethanol) and B7 fuels (diesel oil with 7% of bioethanol) compels PKN ORLEN to enter B100 fuel into trading. Moreover, in the half of 2011 it is planned to lift the tax reliefs relating to the use of biocomponents and biofuels, which may result in the increase in the costs of economic activity and difficulties in the implementation of NIT goals in the future.
Under the applicable legal regulations arising out of the Kyoto Protocol to the United Nations Framework Convention on Climate Change adopted by the European Union, companies of the ORLEN Group were allocated with the CO2 emission rights.
Annually, the Capital Group verifies the number of such rights and determines the way of systematic balancing of the discovered deficits/surpluses as intra-group or futures and spot transactions. In 2010, the ORLEN Group sold its surpluses of CO2 emission rights and entered into forward transactions for the purchase of such rights.
Risk of changes in the trends in fuels consumption and import
Change in the trends in the fuels consumption and import may exert a material influence on the volume of sales and the level of prices of products of the ORLEN Group companies that are possible to be achieved and, therefore, on the ORLEN Group’s financial standing.
Credit risk
The ORLEN Group is exposed to the credit risk related mainly to trade accounts receivable. The Capital Group, when conducting commercial activity sells products and services to business entities with deferred payment date, therefore the risk may emerge of non-payment for the products and services delivered.
To mitigate the credit risk and to keep working capital at the lowest feasible level, the ORLEN Group applies the procedure of trade credit limit allocated to its business partners and determines the way in which it is secured.
A business partner with the deferred payment term is assessed individually in terms of the credit risk. Trade receivables of the business partners are monitored on a regular basis by the financial departments. Should the overdue accounts receivable arise, the sale is suspended and the debt collection procedures are launched, in accordance with the applicable procedures. Additionally, part of the accounts receivable is insured under the organised programmes of trade credit insurance.
The credit risk associated with assets resulting from the positive valuation of derivative instruments is assessed by the ORLEN Group as low due to the fact that all transactions are concluded with the banks having high credit rating. One of the significant factors for the bank choice is rating on the level not lower than A.
Liquidity risk
As at 31 December 2010, the current assets to trade accounts payable ratio (current liquidity ratio) amounted to 1.3. As at 31 December 2010 the ORLEN Group held more than EUR 1 billion of free funds under available credit lines.
In order to ensure an additional source of funds needed to secure its financial liquidity, the ORLEN Group signed the Bond Issue Programme with the debt limit of up to PLN 2 billion. As at 31 December 2010, the ORLEN Group used PLN 1,155,289 thousand of that limit.
ORLEN Group's brands
