2021 INTEGRATED MANAGEMENT REPORT

145

FINANCIAL RISKS

Arising from the variability of basic raw material prices and other financial variables, from hedging and trading, and from econo- mic, financial and tax management.

RISKS DESCRIPTION AND CONTROL MEASURES

Raw material price risk

Cepsa is an integrated company engaged in all energy value chain activities and is exposed to fluctuations in the price of raw materials: oil, gas, CO2, electricity and derivative products. Though business is diversified, fluctuations in commodity markets, possible interventions or supply constraints may lead to unexpected departures from planning assumptions. Price fluctuations, volatilities or liquidity in these markets are constantly recorded and managed using hedging strategies. Projects are also undertaken to improve efficiency and flexibility, and to reduce exposure to energy markets.

Foreign exchange risk

From an operational viewpoint, the US dollar is the currency in which many of the company's commercial transactions are denominated, such as crude oil supplies and a part of its refined product sales. Cepsa manages foreign exchange risk in these transactions centrally and has recourse to the foreign exchange market to hedge the Group companies overall net cash flow position in dollars. Net asset value risk affecting investments in foreign subsidiaries is mitigated by holding debt in the currency in which each investment is denominated and using net investment hedges. Finally, certain Group companies obtain cash flows in currencies other than their functional currency. In such situations, the company minimises exposure to foreign exchange risk by obtaining financing in the same currency in which the cash flows are denominated, thus generating a natural hedge between the currency of the cash flows and the currency in which the debt is denominated.

Interest rate risk

Cepsa is exposed to interest rate fluctuations in relation to the possible impact on the income statement, the effect on interest income and expense on floating rate loans and credit lines, the effect on certain balance sheet items of changes in the discount rates applied to assets and liabilities, and the possible impact on investment returns due to the effect on discounted cash flows. In order to manage and mitigate this risk, the company holds a certain percentage of financing at fixed rates, or contracts interest rate hedges in the form of financial derivatives where deemed fit.