The Company is actively managing all risks, seeking to eliminate or to the maximum degree reduce their potential negative impact, in particular on TAURON Capital Group’s financial results.
TRADING RISK MANAGEMENT
In accordance with TAURON Group’s Trading Risk Management Policy in place trading risk is understood as the possibility of incurring a loss or making a gain due to price fluctuations on the commodity and related products markets. The trading risk, due to the specifics of the operations conducted, constitutes one of TAURON Capital Group’s key risks. TAURON Capital Group is made up of subsidiaries operating both in the Mining and the Generation Lines of Business, including also the RES Line of Business, as well as in the Supply Line of Business. Due to the opposing positions in the above Lines of Business the risk is, to a certain degree, naturally diversified, however, since the above-mentioned Lines of Business do not fully offset each other, and due to the diverse nature of the exposures, TAURON Capital Group is displaying sensitivity to the volatility of the prices of electricity, gas and related products.
In order to efficiently manage that group of risks the trading risk management system was established, tied with respect to the organizational structure and information flow, to the trading position hedging strategy in place at TAURON Capital Group’s level. In particular, TAURON Group’s Trading Risk Management Policy introduces an early warning system and a system used to limit the risk exposure in the individual trading areas based on the Risk Tolerance approved by the Management Board.
The basic operating measure of TAURON Capital Group’s market risk is Value at Risk (VaR), defining the maximum admissible change of the position’s value over the given time horizon and at a specific probability level. Value at Risk (VaR) represents a dynamic risk measure which, in contrast to static measures, allows for determining potential negative effects before their factual occurrence. However, being aware of certain limitations of the statistical measures of this type, the Risk Area also uses a number of supplementary risk measures aimed at enabling a safe operation of the trading areas.
The strategic measurement of market risk is conducted based on the mechanism of Hedge Curves, which are to ensure the maximum level of security by optimizing open trading positions exposed to the volatility of price factors in the individual areas of TAURON Capital Group’s operations.
The organizational structure of the trading risk management system envisages a strict division of competences, where the risk supervision (steering) and control are performed centrally at TAURON level. In particular, an element of the organizational structure of the trading risk management system is the split of TAURON Capital Group’s trading operations into: Front Office, Middle Office and Back Office. The goal of such a split of tasks is to guarantee the independence of the operating functions carried out by the Front Office from the risk control function carried out by the Risk Area, and it ensures an appropriate level of operational flexibility. For the needs of the risk management process such a placement of responsibility is assumed in order to ensure an optimal approach to the given type of threat, in particular taking advantage of the economy of scale and the synergy effect. Such an approach ensures efficiency of the trading processes conducted and adequate supervision over one of the main business processes conducted by TAURON Capital Group.
Breakdown of TAURON Capital Group’s trading operations
FINANCIAL RISK MANAGEMENT
As part of the financial risk management, TAURON Capital Group is managing the FX risk and the interest rate risk, based on the developed and adopted for use TAURON Group’s Financial Risk Management Policy and the Risk Tolerance approved by the Management Board, the Global Financial Risk Limit including the decomposition thereof into individual financial risk types. The main goal of managing such risks is to minimize the sensitivity of TAURON Capital Group’s cash flows to the financial risk factors and to minimize the financial costs and the hedging costs as part of transactions with the use of the derivative instruments. In cases when it is possible and economically justified, TAURON uses the derivative instruments the characteristics of which allow for applying the hedging accounting.
With respect to the financial risks TAURON Capital Group also identifies and actively manages the liquidity risk understood as a potential loss or limitation of the ability to pay the current expenses, due to an inadequate value or structure of liquid assets in relation to the short-term obligations or an insufficient level of the actual net inflows from the operating activities.
As part of the identified financial risks TAURON is also managing the risk of financing understood as a lack of the possibility to acquire the new funding, an increase of the cost of funding and the risk of the termination of the existing financing agreements. As part of efforts aimed at minimizing the financing risk, TAURON conducts a policy of acquiring the funding for TAURON Capital Group with an appropriate advance notice in relation to the planned date of its use, i.e. up to 24 months in advance of the planned funding requirement. This means that TAURON Capital Group should hold signed programs of guaranteed financing or hedging for such financing by accumulating the funds on TAURON Capital Group’s accounts. Such a policy is first and foremost aimed at ensuring a flexible choice of the financing sources and taking advantage of favorable market conditions as well as reducing the risk of the need to take on new liabilities under unfavorable market conditions. TAURON’s policy also covers the standardizing of the covenants and the provisions of the financing agreements in the key elements of the documentation.
CREDIT RISK MANAGEMENT
In accordance with TAURON Group’s Credit Risk Management Policy in place credit risk is understood as the possibility of incurring a loss or making a gain due to trading partners (counterparties) failing to fulfill their contractual obligations (default) as well as the occurrence of credit exposures at risk of impairment due to the deterioration of their financial position. TAURON Capital Group has a decentralized credit risk management system in place, however the control, limiting and reporting of this risk category is carried out centrally, on the parent Company level. TAURON Group’s Credit Risk Management Policy put in place defines credit risk management principles on TAURON Capital Group’s level, aimed at effectively minimizing the impact of that risk on achieving TAURON Capital Group’s goals.
Credit risk management is carried out by controlling the credit exposure generated upon the conclusion of contracts by TAURON Capital Group’s subsidiaries. The general rule is that prior to concluding a material contract every entity is subjected to an examination of its financial standing and receives a credit limit which caps the maximum exposure due to the given trade. Credit exposure is, in this context, understood as an amount that can be lost if a counterparty (business partner, contractor) fails to fulfill its obligations (defaults) within a certain time (taking into account the value of the collaterals submitted thereby). Credit exposure is calculated as of the current day and is split into exposure due to payment (payment exposure) and substitution exposure.
Based on the exposure value and the synthetic measure of evaluation of the financial standing of specific customers, the global credit value at risk that TAURON Capital Group is exposed to is calculated using the statistical methods according to which the exposure value is calculated based on the total loss probability distribution CVaR. This measure is the basic operational limit of credit risk, which represents the allocation of the Risk Tolerance approved by Management Board.
OPERATIONAL RISK MANAGEMENT
Operational risk, in accordance with TAURON Group’s Operational Risk Management Policy put in place, is understood as the possibility of incurring a loss or making a gain due to inappropriate or fallible internal procedures, human and system errors or as a consequence of external events. It also includes reputational risk and non-compliance risk. Operational risk, due to the specific nature of the threats and the ability to manage them, constitutes a separate group of risks affecting TAURON Capital Group’s operations. The said risk is a complex issue, occurs in every process and type of operations, it is multi-dimensional and applies to various types of activities and operations. In particular, the exposure to the operational risk factors is related to the size and complexity of the organizational structure, the number and complexity of the IT systems and to the number of business processes conducted. Operational risk is characterized by the lack of the ability to totally eliminate its sources, and the analysis of its factors and parameters (among others, frequency and severity), and also the evaluation thereof requires the use of complex measurement and analysis methods.
In order to effectively manage the operational risk, TAURON Capital Group is using appropriate tools that, in particular, include: the global operational risk limit, the operational risk profile the early warning system functioning on a broad scale, operational events database, and the related operational limits system. In particular, based on the approved Risk Tolerance, operational limits are determined for the individual operational risks (or their groups) aimed at the pre-emptive control of TAURON Capital Group’s vulnerability to the individual operational risk factors and the implementation of advance mitigation actions.
- Global operational risk limit is the basic tool for the operational risk control and represents the allocation of Risk Tolerance adopted by TAURON Capital Group. The global operational risk limit can be subsequently allocated to TAURON Capital Group’s individual lines of business, the operational risk sub-categories as well as to the specific operational risks.
- Operational risk profile is aimed at identifying areas, processes or activities with an excessive exposure to threats stemming from specific operational risk factors. It is expressed in particular in the structural dimension that includes types of operational events, TAURON Capital Group’s organizational structure and processes, and in the scale dimension that includes estimated potential losses, taking into account in particular the historical values of actual losses, as well as the tools used to mitigate the threats. For the needs of measuring the operational risk and defining the Operational Risk Profile the individual types of the operational risk are broken down (due to the nature of the occurrence thereof) into continuous and one-off risks.
- Early Warning System is defined in order to monitor the operational risk level for each identified threat. Early Warning Indicators (EWI) are selected from the Key Risk Indicators (KRI) set, as the ones that are subject to continuous control with respect to the cautionary thresholds set for them, i.e. acceptance, mitigation and escalation thresholds.
- Operational events database is created for the needs of identifying new risk factors, and in parallel in order to define the risk profile for TAURON Capital Group. It allows for keeping the records of cases that are characterized by a potential or actual loss for the organization. The goal of maintaining the operational events database is to determine the frequency and severity of the individual operational risk factors, as well as the areas and processes they occur in.
- Risk identification questionnaire is a document in the form of a tabular form that constitutes a tool supporting the performance of the risk management process with respect to risk identification, specifying the detailed information that should be collected in this process.
REGULATORY RISK MANAGEMENT REGULACYJNYM
Regulatory risk, in accordance with TAURON Group’s Regulatory Risk Management Policy put in place, is understood as the possibility of incurring a loss or making a gain due to the planned or unplanned changes to the existing or the introduction of the new regulations that may affect the operations of TAURON Capital Group. Regulatory risk, due to the specific nature of threats and limited options to manage them, is a separate category of the enterprise risk to which TAURON Capital Group is exposed as part of its operations. Regulatory risk management is based on the Regulatory Risk Management Process and is a refinement of the Risk Management Process specified in the ERM Strategy.
The main causes of the regulatory risk include:
- instability of the legal environment,
- change in regulatory policy at national and European levels,
- progressing integration of the European energy market,
- uncertain political situation,
- a significant increase in the requirements with respect to a specific regulation.
The main goal of the regulatory risk management at TAURON Capital Group is to minimize losses and maximize gains from the planned or unplanned changes to the existing regulations or the introduction of the new regulations that may affect the operations of the organization. As a result, it allows for reducing the potential threats to a level that would be possibly favorable for achieving TAURON Capital Group’s strategic goals. The regulatory risk management is also aimed at building culture and awareness among the employees of TAURON Capital Group regarding the risk taken, as well as at the continuous improvement of the process of managing such risk.
Regulatory risk occurs when there are indications of regulatory changes, for example an entry into force of the EU directive, which will be implemented into the Polish legal regime or the positions of the legislators declaring the regulatory changes. The regulatory risk management does not cease when a specific regulation which is frequently expected to provide executive regulations that specify its implementation method comes into force but from the moment the regulatory requirements take effect (the period from the entry of a legal act into force until the beginning of the regulatory requirements becoming effective is a transition period). At that time the regulatory risk management turns into the risk of non-compliance monitored as part of the non-compliance risk.
In accordance with the classification of the regulatory risk, as part of TAURON Group’s Regulatory Risk Management Policy, 13 areas of regulatory risk have been identified at TAURON Capital Group. The classification is based on the identification of homogeneous groups of regulations, based on their impact on the operations of TAURON Capital Group, taking into account the possibility of undertaking an effective response to the given risk. The regulatory risk areas are divided into 2 basic categories:
- Sector regulatory risks – regulatory risks that may affect the operations of TAURON Capital Group related to the generation and supply of electricity and heat. Within this category, independently, there are also risks related to the distribution of electricity and the extraction of raw materials.
- Non-sector regulatory risks – regulatory risks that may affect the operations of TAURON Capital Group related to, among others, the public procurement law, information security or compliance area, personal data protection, labor law, accounting and tax law, occupational health and safety, environment protection and climate change as well as corporate management.
PROJECT RISK MANAGEMENT
TAURON Capital Group is conducting a number of investment projects in many lines of its business operations. These projects, due to their scale and often very complicated nature of implementation, represent a source of threats (risk) that may have an impact on the schedule, budget or quality of the final products. Systematic application of the provisions of TAURON Group’s Project Risk Management Policy is aimed at mitigating these risks, supporting at the same time the accomplishment of the organization’s strategic goals. That regulation, in particular, defines the basic principles of project risk management, ensuring consistency, comprehensive approach and unequivocal understanding in that area. The goal of the actions taken is to achieve the required probability of the project’s completion, while complying with the defined schedule, budget and quality of the products obtained. The overall objective is to obtain the expected benefits from the project’s completion and to achieve TAURON Capital Group’s strategic goals.
Project risk management is also applicable to managing the risk stemming from the projects and having an impact on the organization. The process of managing the risk stemming from the projects includes identification, valuation of such risks, defining and monitoring the early warning indicators as well as planning and implementing actions related to managing such risks. In case of the risks that have an impact on the organization, the risk valuation is made as the absolute value of the impact, including indicating the impact period broken down into the individual accounting periods, in reference to the assumed EBITDA or the assumptions made in the organization for the long-term projections. In case of the most important risks that have an impact on the organization, Plans of Responses to the Risk and Back-up (Contingency) Plans are developed. The evaluation of the project risks and the risks stemming from the projects for the organization is taken into account when making the key decisions related to launching and implementing such projects.
Project risk management model
