In order to identify potential risks that may threaten Zorlu Enerji’s existence, development and continuity, and to implement and manage the necessary measures against such risks, Zorlu Holding established an Enterprise Risk Management Department which started up operations in first quarter 2012 as a support function for the Company. Risk management activities carried out by this Department include the assessment of financial risks as well as non-financial risks, such as operational, environmental, technology related risks, among others.
Pursuant to the Board of Directors’ resolution dated February 19, 2013, Zorlu Enerji established an Early Detection of Risk Committee.
An outline of critical risk types identified during the analysis of current and potential risks, which may hinder the Company from achieving its targets, and the actions taken against these risks, are as follows:
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risk type definition
Liquidity Risk Liquidity risk is the inability to provide sufficient cash or securities to maintain business continuity, or obtain sufficient financing to balance cash flow, or a weakened ability to close open positions. The Company carries out periodic analyses in order to manage the liquidity risks it may be exposed to. Financing Risk Zorlu Enerji makes long-term investments as per the nature
of its activities. The Company finances these investments by liquid assets. Financing risk occurs when the Company cannot obtain funding on agreeable terms to finance its projects, or when there is a maturity mismatch between existing debt and assets, or when there is not an optimum balance between assets and resources. Such risks are closely monitored by the Company.
Currency/Interest Rate Risks Zorlu Enerji mostly uses foreign currencies for financing its investments. Therefore, the Company is exposed to currency risk emerging from the exchange of its debts or receivables which are mainly denominated in US dollars. As a method of protection against this risk, the Company implements certain protection policies such as using various derivative products. Additionally, Zorlu Enerji also has exposure to interest rate risk due to fluctuating interest rates in domestic and international markets because it obtains funds for its investments from various financial resources. As the Company’s investments are mainly financed by non-capital resources, an increase in interest rates becomes a critical risk factor. In order to minimize this risk, the Company uses interest rate swaps. Customer Credit Risk In order to eliminate potential risks in the collection of trade
receivables, customer credit risks are closely monitored by drawing on the past experience of the Company’s management. The Company manages credit risk through credit control procedures, credit rating systems, and internal control policies.
Market Risk Market risks, defined as fluctuations in electricity prices, changes in electricity demand, instable raw material
(resources) prices, and the government’s ongoing intervention in the electricity market, have been increasing in recent years, are considered important, and are closely monitored. Economic Risks Economic risks include economic instability (stagnation, crisis,
recession, devaluation and the like), fluctuations in currency and interest rates; these risks are considered important especially during investment and operation stages.
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risk type definition
Investment Risk Zorlu Enerji has combined-cycle natural gas and wind power plants in its portfolio, and therefore places great importance on feasibility studies, as the Company’s main objective is to grow with profitable investments. Accordingly, the potential effects of all internal and external risk factors on planned investments are identified and relevant scenarios are analyzed. Project Risk Zorlu Enerji conducts technical feasibility studies at the
most optimum level possible, in all stages of its projects, for which the investment decision has been made. These feasibility studies cover construction works, procurement of electromagnetic equipment, transmission lines, engineering, operation, and the like.
The Company also takes into consideration financial feasibility, including macroeconomic growth, inflation rate, currency rates, sales volume, market impact, prices, and monitors these factors periodically. The profitability of a project is determined by calculating the internal productivity ratio, profitability index, and capital cost.
During the project development stage, the Company closely monitors progress through the use project management tools. Operational Risks Operational risks are defined as operational defaults
resulting from system malfunctioning in energy production and distribution lines due to environmental factors (natural disasters, terrorism, and the like) or operator/user errors, mechanical malfunctions, or theft. The Company minimizes such risks by tackling operational problems in a timely manner. Additionally, the effects of such damages are kept at a minimum thanks to comprehensive insurance coverage. Competition Risk Through privatizations and a new regulatory framework,
a more liberal and competitive market is being formed to replace the public monopoly in the energy sector, leading to increased competition. Therefore, Zorlu Enerji manages competitive risk by implementing innovative sales and marketing strategies. As a result, portfolio diversification will continue to be on the Company’s agenda in the coming period as well.
Human Resources Risks Zorlu Enerji values its workforce as one of the Company’s most important assets in achieving corporate targets. Therefore, the Company monitors the performance of its employees regularly, carries out personnel satisfaction surveys, takes the necessary actions to improve performance, and motivates staff members to participate in management.
In order to prevent large-scale strikes and employee demonstrations, especially at production facilities, the Company regularly organizes training programs and interactive informational sessions.
Legal/Political Risks Legal and political risks, defined as changes in regulations, delays in obtaining project permits, licenses or expropriation permits from public authorities, compliance with tender contract conditions, and political relations, are considered natural risks in the energy sector. The Company keeps such risks under control through close monitoring and timely actions.
Country Risks Legal, political and similar risks related to the Company’s investments in foreign countries are assessed by using consultancy services before and after the investment is made, and country-specific management approaches are adopted. Technology Risks As technological developments, newer and more efficient
energy production systems, at the same or lower cost, continue to emerge every day, Zorlu Enerji may potentially experience weakening competitive power in terms of profitability. Therefore, the Company makes short-term upgrades to integrate these new technologies.
Environment/Health/Safety Related Risks At its production facilities, Zorlu Enerji implements strict policy and procedural guidelines to ensure compliance with legal standards related to environmental protection, stakeholder safety and health; the Company also tries to take the necessary measures against adverse geographic and climatic conditions. In addition, risks related to natural disasters or terrorism are managed via insurance coverage.