Management of the TAURON Group’s key risks – detailed rules

The Company actively manages all risks, seeking to eliminate or to a maximum degree reduce their potential negative impact, in particular on the TAURON Group’s financial result.

Trading risk management

In accordance with the 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. Trading risk, due to the specifics of the operations conducted, constitutes one of the TAURON Group’s key risks. The TAURON Group is made up of subsidiaries operating both in the Mining and Generation Lines of Business and 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, the TAURON Group is displaying sensitivity to the volatility of the prices of electricity, gas and related products.

In order to efficiently manage this group of risks the trading risk management system was established, tied with respect to organization and information, to the trading position hedging strategy in place at the TAURON Group level. In particular, the 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. The basic operating measure of the TAURON Group’s market risk is Value at Risk, defining the maximum admissible change of the position’s value over the anticipated time horizon and at a specific probability level. Value at Risk 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 organizational structure of the trading risk management system envisages a strict split of competences as part of which risk management is decentralized, where the supervision and risk control are performed centrally at the TAURON Polska Energia level. In particular, an element of the organizational structure of the trading risk management system is the breakdown of the TAURON 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 appropriate supervision over one of the main business processes conducted by the TAURON Group.

The figure below presents a breakdown of the TAURON Group’s trading operations.

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Financial risk management

As part of the financial risk management, the TAURON Group is managing the FX risk and the interest rate risk, based on the developed and adopted for use the TAURON Group’s Financial Risk Management Policy. The main goal of managing these risks is to minimize the sensitivity of the TAURON 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 financial risks, the TAURON 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. The TAURON Group’s liquidity is monitored on an ongoing basis for any potential deviations from the assumed plans and the availability of the external sources of financing the amount of which substantially exceeds the expected short term demand, mitigates the risk of losing liquidity. The TAURON Group’s financial liquidity management policy put in place defines the rules of determining the liquidity position, both of individual subsidiaries and the whole TAURON Group, which allows for securing funds to cover a potential liquidity gap, both by allocating the funds among the subsidiaries (cash pool mechanism) and with the use of external financing, including overdrafts.

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. In order to minimize the financing risk, TAURON conducts a policy of acquiring the funding for the TAURON 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. It means that the TAURON Group should hold signed programs of guaranteed financing or hedging this financing by collecting the funds on the TAURON 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 need to take on new liabilities under unfavorable market conditions. TAURON”s policy also covers standardizing of the covenants and the provisions of the financing agreements in the key elements of the documentation.

Credit risk management

In accordance with the 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 trade 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. The TAURON Group has a decentralized credit risk management system in place, however the control, limiting and reporting of this risk category is carried out centrally, at the Parent Company level. The TAURON Group’s Credit Risk Management Policy defines credit risk management principles at the TAURON Group level, aimed at effectively minimizing the impact of this risk on achieving the Group’s goals.

In accordance with the 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 trade 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. The TAURON Group has a decentralized credit risk management system in place, however the control, limiting and reporting of this risk category is carried out centrally, at the Parent Company level. The TAURON Group’s Credit Risk Management Policy defines credit risk management principles at the TAURON Group level, aimed at effectively minimizing the impact of this risk on achieving the Group’s goals.

The figure below presents credit exposure components.

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Based on the exposure value and the evaluation of the financial standing of specific customers, the credit value at risk that the TAURON 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.

Operational risk management

Operational risk, in accordance with the TAURON Group’s Operational Risk Management Policy 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 the TAURON Group’s operations. The said risk is a complex issue, occurs in every process and type of operations, 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, the TAURON Group uses appropriate tools that, in particular, include the global operational risk limit, operational events database, the early warning system functioning on a broad scale and the related system of operational limits.

The figure below presents the risk management system tools.

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Global operational risk limit is the basic tool for the operational risk control and represents the allocation of risk tolerance adopted by the TAURON Group. The global operational risk limit can be subsequently allocated to the Group’s individual lines of business, the operational risk sub-categories as well as to the specific operational risks.

The operational risk profile is aimed at identifying areas, processes or activities with an excessive exposure to threats stemming from specific operational risk factors. The operational risk profile is expressed, in particular, in the structural dimension that includes types of operational events, the TAURON Group’s organizational structure and processes, and in the scale dimension that includes estimated potential losses, taking into account especially 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 caution thresholds set for them, i.e. acceptance, mitigation and escalation thresholds.

is created for the needs of identifying new risk factors, and in parallel in order to define the risk profile for the TAURON 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.

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

Regulatory risk, in accordance with the 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 the TAURON 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 the TAURON 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 regulatory risk include:

  1. instability of the legal environment,
  2. change in regulatory policy at national and European levels,
  3. progressing integration of the European energy market,
  4. uncertain political situation,
  5. a significant increase in the requirements for specific regulation.

The main goal of the regulatory risk management at TAURON is to minimize losses and maximize gains from the planned or unplanned changes to existing regulations or the introduction of new regulations that may affect the operations of the organization. As a result, it allows for reducing the potential threats, to a level as neutral as possible, to achieving the TAURON Group’s strategic goals. The regulatory risk management is also aimed at building culture and awareness among the employees of the 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 an EU directive which will be implemented into the Polish legal system or the stance of the legislature declaring regulatory changes constitute grounds for regulatory changes. Regulatory risk management does not cease when a specific regulation enters into force. Following the entry of such regulation into force, it is frequently expected that executive regulations will be issued to define its implementation method. The period from the entry of a legal act into force until the beginning of the regulatory requirements becoming effective is the transition period. From the moment the regulatory requirements take effect, the regulatory risk management turns into compliance risk, which is monitored within the framework of measures applied to that specific risk.

The figure below presents the regulatory risk life cycle.

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In accordance with the classification of the regulatory risk, as part of the TAURON Group’s Regulatory Risk Management Policy, 12 areas of regulatory risk have been identified. The classification is based on the identification of homogeneous groups of regulations, based on their impact on the operations of the TAURON 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:

regulatory risks that may affect the operations of the 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.

regulatory risks that may affect the operations of the TAURON Group related to, among others, the public procurement law, information security or compliance area, personal data protection, labor law, accounting and tax law, occupational safety and health and corporate management.

Project risk management

The TAURON Group is conducting a number of investment projects in many areas of its business. These projects, due to their scale and often very complicated nature of implementation, represent a source of threats that may have an impact on the schedule, budget or quality of the final products. Systematic use of the provisions of the 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. In particular, this regulation defines the basic principles of project risk management, ensuring consistency, comprehensive approach and unequivocal interpretation in this 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 received. The overall objective is to obtain the expected benefits from the project’s completion and to achieve the TAURON 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. This process 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. As regards the risks having 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 long-term projections. In case of the most important risks having an impact on the organization, the plans of responses to the risk and back-up 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.

The figure below presents the project risk management model.

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