Internal control and risk management
Internal control and risk management is an important part of Skeljungur’s business. The goal is to manage risk effectively, and to ensure transparency and awareness of risk management at all levels, from the board down to the employees. The company’s actions in the field of risk management aim to identify, assess, measure and manage risk in the company’s activities in accordance with its risk appetite.
It is the role of the Board, along with the CEO, to take the lead in formulating a strategy, setting goals and defining risk parameters for the company, both in the short and long term. Furthermore, to establish an efficient system of internal controls. This entails, among other things, the arrangement of internal controls being formal, documented and its effectiveness being verified regularly.
Under the board of directors of Skeljungur operates a special risk committee, whose task is to verify the effectiveness of risk management within the company. Among other responsibilities, the committee has to answer for the utility and effectiveness of risk management, consults and supervises on behalf of the board, monitors and evaluates periodically the success of the risk management committee and makes changes to the objectives and implementation that may be necessary, evaluates the major risk factors and the risk profile of the company, evaluates risk reports before they are submitted to the board and views emergency plans.
The risk that Skeljungur faces lies in potential events that can restrain the company from achieving its goals. The main activities of the Company are import, sale and distribution of oil in addition to lubricants, chemical products and fertilizer and various kinds of trade in other commodities, both in retail and whole sale. The risk management of the company considers all risks, such as relating to finance, operations, the environment and quality. Key financial riks includes the price of oil, currency risk, interest rate and funding risk and counterparty risk.
Oil price risk
Skeljungur is sensitive to fluctuations in the world market price of oil. For the Company the risk is mainly derived from potential differences in the purchase price versus the sales price of oil to customers, directly affecting the Company’s gross profit. Rising oil prices further brings risk of decreased demand, as customers are more likely to use less oil with rising prices.
The risk management policy Skeljungur has in place therefore aims at keeping inventory as low as acceptable. The Company is exposed to price risk for all inventory that is unsold from one price period to another In the B2B market the company to a large extent mitigates price risk by applying the same terms in its sales contracts as it does in purchasing. In Iceland the Company uses forward contracts to mitigate price risk for any inventory that is expected to be unsold from one period to another.
In 2017 oil prices were quite stable throughout the first half of the year but started to increase in the second half. Overall for the year Gasoline prices increased by 26% and AGO prices increased by 18% in USD. The graph below shows development of oil prices for the past two years
Skeljungur’s is exposed to currency risk in two forms, transaction risk and translation risk. Skeljungur’s operating currency is the Icelandic Krona (“ISK”) and the main transaction risk that Skeljungur faces is due to buying and selling of oil, which market price is denominated in United States Dollar (“USD”). The transaction risk is the exchange rate risk associated with the time delay between buying oil and until it is sold and settled with customers. Inventory is entered into accounts in ISK and is sold on a First in, First Out (“FIFO”) basis. An unfavourable exchange rate development could therefore affect the Company’s gross profit, results of operation and equity.
Translation exposure is the risk that a company's equities, assets, liabilities or income dominated in foreign currency will change in value as a result of exchange rate changes. This is a substantial risk for Skeljungur mainly since Magn prepares its financial statement in Danish Krona (“DKK”) and must be translated into ISK for the preparation of the consolidated group financial statements. Since exchange rates can dramatically fluctuate in a short period of time this creates substantial currency risk for Skeljungur.
The Company is exposed to currency risk on sales, purchases and borrowings that are denominated in currencies other than ISK. The currencies in which these transactions primarily are denominated are US Dollar (USD) and Euro (EUR). The major part of imports is purchase of oil, denominated in USD from foreign suppliers but the sales are in great part in ISK. Sales in ISK constitute 47.1% of total sales (2016: 51.6%), USD 52.1% (2016: 47.9%) and other currencies 0.8% (2016: 0.5%).
Magn is exposed to currency risk on sales and purchases that are denominated in a currency other than DKK. The currency in which these transactions are primarily denominated is US Dollar (USD). The major part of imports is purchase of oil, denominated in USD from foreign suppliers, but the sales are in great part in DKK. Sales in DKK constitute 66.0% of total sales (2016: 68.5%), USD 33.3% (2016: 30.5%) and other currencies 0.7% (2016: 1.0%).
The Company manages its currency risk with the aim of keeping a balance between assets and liabilities in foreign currency, albeit with some margin of tolerance. The Company has a access to USD denominated credit line which is drawn upon as necessary, both for funding purposes as well as for hedging.
The exchange rate for the Icelandic krona did not change significantly during 2017. At year end ISK was 7% stronger towards USD and 5% weaker towards DKK compared to beginning of the year.
Interest rate, liquidity and credit risk
Interest rate risk, liquidity risk and access to credit is the risk that the company will be negatively impacted by changes in interest rates or cannot meet its financial obligations as they fall due. Skeljung's interest-bearing assets are very limited and the company is therefore mainly exposed to the risk of rising interest rates.
The company’s loan portfolio consists of loans in ISK, USD and DKK. It has three long term loans on its books with variable interest rate plus a premium. The company has also access to credit lines in USD and ISK which are pledge against inventories and accounts receivables. Credit lines are also with variable interest rate plus a premium.
The company manages its liquidity risk through regular budgeting, financial modeling and ensuring access to credit at any given time as well as balancing the payment dates of financial assets and liabilities. It is the view of the management that the company is well funded and that the cash flow from the company's operations will suffice to meet all financial obligations.
Credit risk is the risk of financial loss to the company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the company’s receivables from customers. The credit risk is fairly distributed between number of both private and corporate customers.
The company is not faced with substantial credit risk due to private individuals. The Company establishes an allowance for impairment that represents an estimate of expected losses of trade and other receivables. The allowance includes both a specific allowance that relates to individually significant exposures, and a collective allowance. The collective loss allowance is determined based on historical data of payment statistics for similar receivables, age determination of receivables and general economic conditions.
The Company has set a credit policy which aims at minimising risk bearing in mind financial position, credit rating and operations of individual customers, in addition to the status of the largest customer's industry sectors. All of the Group's customers have credit limits to their accounts which they cannot exceed.
At year end 2017 receivables amount to ISK 3,5 billion.
Skeljungur owns four subsidiaries, although extensive operations are only one in of them, P / F Magn, situated in the Faroe Islands. The company has active internal control which is tested on a regular basis. The company, for example, is audited annually by authorized parties, and the company operates three safety committees which monitor the company's operations, distribution and retail. As such, Magn is subject to numerous internal and external audits and documentation demands based on strict international standards, reinforce the company’s commitment to conform to highest industry standards.
Magn is ISO 9001, 14001, and 18001 certified in all areas of operation and at all addresses. Audits are annual and are performed by an accredited international certification body DNV GL. In addition, Magn is an Achilles and F-Pal certified company6 which requires Magn to make certain commitments regarding risk management. Furthermore, all Magn’s oil terminals are certified by the Faroese Environmental Authorities.