Risk management

TAURON Polska Energia manages the business risks in the TAURON Group’s overall operations. The objective of the business risk management process is to help achieve the TAURON Group’s planned business goals while not exceeding the acceptable risk level approved by the Management Board.

The process of developing the risk management system in the Group’s key subsidiaries in line with TAURON Group’s Corporate Risk Management Policy was continued in 2014.

The nature of risk is defined by determining its significance level and probability of materializing. For this purpose the system engages and organizes the Group’s resources, creating the corporate risk management infrastructure (strategy, processes, authorizations, reporting, methodologies and IT tools). The risk management system covers all elements of the TAURON Group’s value chain, and all of its employees are involved in the process.

The company is actively managing all risks, seeking to reduce or eliminate their potential negative impact, in particular on the Group’s earnings.

 

schemat

 

The TAURON Group’s most important risks include the following:

  1. Price risk – the volatility of prices of electricity, property rights and CO2 emission allowances. Electricity price fluctuations may have a significant impact on the TAURON Group’s earnings leading to higher costs and lower margins and revenues.
  2. Volume risk – the volatility of volume of electricity traded over time that may have a negative impact on the TAURON Group’s operations because of reduced margin or financial loss incurred as a result of a change to the volume of a purchase, sale of electricity and related products.
  3. Risk associated with the obligation to redeem certificates of origin or pay the substitution fee – the lack of an obligation to redeem certificates of origin or pay the substitution fee as a result of limited availability of certificates of origin on the market, a change to the support policy for electricity generated from renewable energy sources and in co-generation or redeeming the wrong number of certificates of origin, possibly leading to higher costs of fulfilling this statutory obligation, penalties imposed by the President of URE and higher costs of generating electricity sold.
  4. Risk of weather conditions and climatic changes in the Heat segment fluctuations of air temperature significantly affecting the demand for heat and electricity, causing a corresponding significant increase or decrease in long-term demand, leading to a failure to realize the production plan in a given period or reduced capabilities to satisfy the demand due to hydraulic constraints in the connection network, fittings and increased number of failures related to the supply process.
  1. Political risk – State Treasury as a majority shareholder may make changes to the company’s corporate bodies in case Poland’s ruling political coalition changes, which may lead to a change of the company’s strategy, deterioration of results due to the modification of its plans and strategic business goals, a slower expansion pace, a change of the dividend paid to shareholders.
  2. Risk associated with the TAURON Group’s organization and corporate managementinefficient cooperation between the Group’s subsidiaries in management processes, reporting and information management. This may have a negative impact on operations due to a failure to accomplish strategic goals in full, an extended process of accomplishing such goals, delays in decision taking or taking wrong decisions.
  3. Risk of unstable legal system and EU regulations related to the functioning of the power sector, including environment protection adverse changes of law, Polish and EU regulations and uncertainty in the legislative environment.
  4. Risk of non-compliance with URE requirements /UOKiK requirements/ Distribution Grid Code the above offices’ ability to question the correctness of the operations conducted with respect to independence and equal treatment of entities operating on the market, compliance with antitrust regulations and abuse of market power.
  5. Risk due to the obligation to redeem CO2 emission allowances – discharging CO2 into the atmosphere and the need to redeem the applicable number of CO2 emission allowances. This may result in a penalty being imposed for each unit of unredeemed allowance (carbon credit) or a reduction of the budgeted electricity sales profitability.
  6. Risk associated with obtaining financing and servicing the financing inability to obtain financing for operational and investment needs or the high cost of obtaining such financing due to the tightening of banks’ credit policy, adverse market conditions, unstable macroeconomic environment.
  7. Risk associated with purchasing thermal fuelssignificant and/or unexpected price changes for hard coal and other fuels, as well as a shortage of hard coal, including coal of appropriate quality. This may lead to higher costs to meet the need of complying with the requirements of the production process and the legal requirements to maintain appropriate an fuel inventory or a penalty being imposed in case the requirements are not satisfied.
  8. Risk associated with fixed asset management inability to use fixed assets as a result of inefficient management leading to their poor technical condition, inadequate costs of insuring fixed assets if assets are undervalued or overvalued, as well as costs of maintaining redundant assets.
  9. Environmental risk, including risk related to weather conditions – possibility of incurring losses due to non-compliance with legal regulations (including regulations related to the way European law is implemented in national law, administrative decisions), as well as the possibility of environmental damage or major industrial failure occurring. This may lead to incurring substantial costs to comply with the requirements and pay damages or pose a threat to the performance of production tasks.
  10. Risk associated with unregulated legal status of real estate used – possibility of land owners filing financial claims on a large scale due to the unregulated legal status of structures erected on third party land and disputing legal status, as well as third party claims to some assets.
  11. Risk associated with the process of conducting strategic investment projects – inefficient process of conducting strategic investment projects including planning, implementing, monitoring and closing, due to the wrong selection of investment projects included in the investment project portfolio, lack of sufficient diversification of investment projects, making wrong assumptions, underestimating outlays, inability to provide financing from the company’s own sources, more difficult access to external financing.
  1. Risk of having tariffs approved by the President of URE – the President of URE’s failure to approve submitted tariffs for the products offered and services provided, limited ability to introduce changes to previously approved tariffs and the lack of approval for capital expenditures envisaged in the expansion plan or approval of expenditures below the amount required to their actual costs.
  2. Risk of asset failures – major and/or permanent failures and damage to the plant used.
  3. Risk associated with the variable cost of generation – any errors in the dispatch of units and load sharing in the process of scheduling specific units (merit order). Dispatch of units is based on the Transmission System Operator’s (TSO) data and decisions, operational information from power plants, schedules for units, variable costs and data published by the TSO.
  4. Risk of the occurrence of natural threats (disasters) or adverse geological and mining conditions – threat to the performance of production tasks, threats to safety of the coal mine’s operations and safety of personnel as a result of natural disasters arising from the expansion of mining works, difficulties associated with bottom of the layer conditions that hinder the mining process, as well as natural threats occurring in coal mines (hydrological conditions, fires, rock bursts).
  5. Risk associated with planning – incorrect assumptions as a result of uncertain or incomplete planning data or a change to the market environment due to, in particular, a change of the inflation rate, GDP fluctuations, change of demand or economic downturn.
  6. Risk of losing Tax Group status possibility of losing this status due to non-compliance with statutory requirements. Varying interests of individual participants, human error, incomplete information, lack of regulations may lead to risk materialization depriving the Group of the ability to employ tax optimization processes.
  7. Risk associated with the process of awarding orders /purchasing supplies/services –possibility of a significant increase in the prices of supplies/services provided by contractors or their diminished availability.
  8. Risk associated with performing customers’ electricity supply contracts, including combined (distribution and supply) contracts – unfavorable provisions of electricity supply contracts, including combined (distribution and supply) contracts for customers, inefficient handling of electricity supply contracts, including combined (distribution and supply) contracts. Failure to meet quality standards in customer service and electricity delivery quality parameters may lead to higher discounts awarded and penalties imposed, more complaints, proceedings conducted by URE or UOKiK and tarnishing of the Company’s corporate image (reputation impairment).
  9. Risk associated with measurements and billing data – erroneous or delayed settlement of electricity distribution services by the Distribution System Operator (DSO) leading to erroneously issued invoices and sales values, inability to issue invoices, deviation from budgeted revenue and cost levels, problems with the correct accounting for taxes and customer complaints.
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