The ORLEN Group, when conducting commercial activity sells products and services to business entities with deferred payment dates. Consequently, a credit risk may arise to the ORLEN Group that its business partners will fail to pay for the products and services delivered.
To mitigate the credit risk and keep the working capital as low as possible, the ORLEN Group has a procedure to grant a trade credit limit to its business partners who acquire products and services with a deferred payment date. The procedure involves an individual assessment of the business partner in terms of the credit risk and determines how to secure the trade credit limit.
The level of trade receivables of business partners of the ORLEN Group is regularly monitored and if any overdue accounts receivable are identified in accordance with the applicable procedures, the sale is suspended and debt collection procedures are launched. Additionally, some accounts receivable are insured under 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 banks with a high credit rating. One of the major bank selection criteria is rating of no less than A.
Detailed information regarding credit risk are presented in note 33.7 of the Consolidated Financial Statements for 2011.
The ORLEN Group is exposed to a liquidity risk related to the ability to timely pay the amounts due.
In order to monitor its liquidity, the ORLEN Group applies the current liquidity ratio, calculated as a current assets to short-term liabilities ratio. As at 31 December 2011 the current liquidity ratio amounted to 1.5 as compared to 1.3 as at 31 December 2010.
In order to minimise the liquidity ratio, the ORLEN Group uses external sources of finance in the form of available credit lines. As at 31 December 2011 the maximum debt limit under executed loan facility agreements was PLN 20,899,193 thousand and PLN 7,562,831 thousand were still to be used.
An additional source of funds needed to secure the ORLEN Group’s financial liquidity is the Bond Issue Programme launched in 2007 which enables the Group to go beyond the traditional bank market and obtain funds from other financial institutions, corporate or natural persons. Bond Issue Programme is used to manage liquidity within the ORLEN Group entities on domestic and foreign market.
In order to support the liquidity management processes, the ORLEN Group set up cash pooling systems: a PLN cash pool system with 22 ORLEN Group companies (as at 31 December 2011) and an international EUR, USD and PLN cash pool system operated by a foreign bank for PKN ORLEN and foreign ORLEN Group companies (ORLEN Finance AB, AB ORLEN Lietuva, ORLEN Deutschland GmbH, Unipetrol Deutschland GmbH).
Detailed information regarding liquidity risk are presented in note 33.7 of the Consolidated Financial Statements for 2011.
The ORLEN Group, when running its business activity, is exposed to a number of market risks related to its macroeconomic environment.
The ORLEN Group manages the market risks under its adopted market risk management policy, which determines the rules for measuring individual exposures, parameters and time for securing the given risk and the hedging instruments. The implementation of procedures required under the market risk management policy set is the responsibility of designated organisational units supervised by the Financial Risk Committee, Management Board and Supervisory Board of PKN ORLEN.
The process of market risk management aims at mitigating undesirable effects of changes of market risk factors on cash flows and performance in short- and medium-term perspective.
The ORLEN Group implements the risk management objectives under derivative hedging strategies. The derivatives are solely used to limit the risk of changes in fair value and the risk of changes in cash flows. The ORLEN Group uses only these instruments that can be internally valued under standard valuation models set for specific instruments. When obtaining the market valuation of instruments, the ORLEN Group relies on information obtained from banks and brokerage companies or information services leading on a specific market. Transactions are concluded with reliable partners only, who are qualified for transactions under special procedures and upon signing the relevant documents.
Risk of changes in the prices of raw materials and oil derivative products
The operating activity of the ORLEN Group includes the following risks:
As at 31 December 2011 there were instruments hedging changes of raw materials and product prices resulting from cash flow hedges in connection with the sale/purchase of crude oil, gasoline and diesel fuel.
Detailed information regarding risk of changes in the prices of raw materials and oil derivative products are presented in note 33.7 of the Consolidated Financial Statements for 2011.
The ORLEN Group is exposed to the currency risk arising out of the current accounts receivable and current accounts payable, cash and cash equivalents, capital expenditures, foreign currency loans and borrowings denominated in foreign currencies, 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.
The USD/PLN exchange rate is partially hedged naturally to a certain extent, since the revenues from the sales of products which value depends 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 pet rochemical products are denominated. For this group the natural hedging applies to a limited extent (i.e., interest on the loans denominated in EUR, some investment purchases).
Detailed information regarding currency risk are presented in note 33.7 of the Consolidated Financial Statements for 2011.
Interest rate risk
The risk of cash flow fluctuations due to changes of interest rates results from extended loans, bank deposits held and fluctuating interest rate loans and borrowings. PKN ORLEN holds derivative transactions (interest rate swaps) which partially hedge the cash flow risk due to the interest rate payments for which the cash flow hedge accounting is applied. The ANWIL Group does not, however, apply the hedging accounting for the cross-currency interest rate swap (CCIRS).
The interest rate is hedged by identifying financial flows exposed to fluctuating interest rates as shown on the ORLEN Group’s current exposure map.
Detailed information regarding interest rate risk are presented in note 33.7 of the Consolidated Financial Statements for 2011.
Risk related to the procurement of raw materials
Raw materials are mostly supplied within the ORLEN Group via a pipeline system, by land and sea transport. The risk related to the procurement of raw materials arises due to the necessity to timely provide raw materials for production purposes.
Factors which significantly affect the procurement of raw materials for the ORLEN Group companies are mostly related to current political situation in the states exporting crude oil, efficiency of piping system and railways as well as weather conditions.
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. Additionally, the ORLEN Group implements investment projects to acquire its own gas and crude oil sources.
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 limits relating to the rights to CO2 emission and regulations on building up and storing mandatory reserves.
In accordance with the Council of Ministers’ Ordinance of 2007, as part of the adjustment to the community law regulation as regards the share of energy from renewable sources, improvement of power efficiency and reduction in greenhouse gas 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 bio-components 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.
From 1 May 2011 tax reliefs relating to the use of bio-components and biofuels were lifted, which resulted in an increase in the costs of implementation of the target NIT set.
NIT value 2008 – 2011 (%)
A significant risk of changes in legislation is also related to the limits on the number of the CO2 emission rights granted. 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, business entities are allocated rights which determine the maximum CO2 emission volume resulting from the type of business run. Once the limits set have been exceeded, a fine is imposed on the business entity.
Consequently, the ORLEN 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 every year. In 2011, the ORLEN Group sold its surpluses of CO2 emission rights and entered into forward transactions for the purchase of such rights. A major risk also arises in the context of the business operations in connection with the mandatory reserve system implemented in Poland. The mandatory reserves are regulated in the Act dated 16 February 2007 on mandatory reserves of crude oil, petroleum products and natural gas and how to proceed in case of national fuel emergency and disruptions on the oil market. It sets an obligation for all the companies operating on the fuel market to build up oil reserves of the ORLEN Group in proportion to their turnover. At the end of 2011, the value of mandatory reserves exceeded the level of PLN 8.2 billion, and may vary depending on changes in crude oil prices or sales volume.
Risk of changes in trends in fuel consumption and import
A change in the trends in the fuel consumption and import can materially affect the volume of sales and the level of prices of products of the ORLEN Group companies that are possible to be achieved and, consequently, on the ORLEN Group’s financial standing. The changes in diesel oil and gasoline consumption on the main markets of the ORLEN Group are presented below.
Based on the data of ARE, the total fuel consumption in Poland in 2011 decreased by (-) 35 thousand tons (i.e. (-) 1.4%) to the level of 2,442 thousand tons. Gasoline import increased by almost 28% and achieved the level of 530 thousand ton, that is 22% of total fuel import. The greatest observed gasoline import in 2011 was from Slovakia (app. 49%) and Germany (app. 47%). it is estimated that in 2011 about 1,905 thousand tons of diesel oil was imported to Poland, i.e. nearly by (-) 7% less than in 2010. The import of that fuel constituted app. 78% of the total volume of fuels imported to Poland. The greatest amount of diesel oil came from Germany (50%), Lithuania (26%) and Slovakia (15%).
Risk related to the global economic crisis, change in the economic growth and unemployment rates
In 2011 the ORLEN Group was operating under difficult market conditions as a result of the second wave of financial crisis. The negative impact of the crisis was mainly visible through the weak position of the Polish zloty against foreign currencies, decrease in the demand for fuels and margins for refinery and petrochemical products. This was directly reflected in the financial position of the ORLEN Group through the influence on revenue generated, profit from operations and net profit, as well as the balance of settlements and debt denominated in foreign currencies. The Gross domnestic product ratio (GDP) plays an important role as a tool for determining the level of economic growth, current trends and the business cycle of the economy. Unfavorable changes in the level of this index are a sign of an economic downturn and result in the decrease of consumption of goods including goods and services offered by the ORLEN Group.
An economic index that is important for the business operations of the ORLEN Group is also the unemployment rate. its increase may be tantamount to the demand for the products and services offered by the ORLEN Group being reduced due to a decreasing purchasing power of clients on the market.
Gasoline and diesel oil consumption in the countries served by ORLEN Group 2010–2011* (’000 tonnes)
* Na podstawie danych z kwietnia 2012 roku.
ORLEN Group's brands