Foran Energy Group Co.Ltd(002911)
Feasibility analysis report on carrying out hedging business
1、 Purpose and necessity of hedging
Foran Energy Group Co.Ltd(002911) (hereinafter referred to as “the company”) carries out hedging business to hedge the transaction prices of long-term purchase and sale of international imported natural gas and natural gas trade, so as to avoid the adverse impact of international energy price fluctuation and other factors on the company’s business operation and reduce the risk of price fluctuation through price risk management.
2、 Hedging business
(I) operation subject: the company and / or its subsidiaries;
(II) trading varieties: mainly including Brent crude oil, JCC crude oil, JKM natural gas, Henry hub natural gas, TTF natural gas and other price indexes or derivatives hedging trading varieties related thereto;
(III) investment amount: the maximum amount of deposit invested within the validity period of the authorization shall not exceed RMB 1.5 billion (that is, it shall not exceed RMB 1.5 billion at any time point within the term, which can be recycled);
(IV) source of funds: the source of funds for the hedging business of the company is its own funds, which does not involve raised funds or bank credit funds.
3、 Risk analysis of hedging business
The company’s hedging business follows the principle of reducing the risk of natural gas price fluctuation and stabilizing natural gas price. It does not aim at arbitrage and speculation, but there will be certain risks at the same time, as follows:
(I) market risk: when the market fluctuates sharply, the operator may not be able to lock the price according to the plan.
(II) capital risk: it may be necessary to provide trading margin to the counterparty. If the investment amount is too large, it may bring corresponding capital risk.
(III) internal control risk: hedging transactions are highly professional and complex, and there may be operational risk of loss due to imperfect internal processes, employees, systems and external events.
(IV) technical risk: the abnormal operation of the trading system caused by uncontrollable and unpredictable system failure, network failure, communication failure, etc., resulting in the delay, interruption or data error of trading instructions, resulting in technical risk.
(V) policy risk: major changes in laws and regulations on natural gas trade and derivatives trading may lead to market fluctuations or failure to trade.
(VI) credit risk: when the price index linked to the natural gas trade contract fluctuates unfavourably, the counterparty may violate the relevant provisions of the contract and cause losses.
4、 Risk control measures taken by the company
(I) the company will adopt quantitative and qualitative methods to timely identify market risk, capital risk, internal control risk and credit risk according to the actual situation and needs of the company’s production and operation, clarify the disposal authority and procedures for different types and degrees of risk matters, match with the company’s production and operation, and hedge the risk of gas source price fluctuation to the greatest extent.
(II) the company will pay full attention to the selection of counterparties, capital risk, market risk and other key links, properly do a good job in position stop loss, legal dispute case handling, public opinion response and other work, establish a regular reporting system to prevent the expansion and spread of risks, and make risk management cover all links of pre prevention, in-process monitoring and post-processing.
(III) the company has formulated the management system of natural gas trading hedging business in accordance with relevant regulations and in combination with the actual situation of the company, which clearly stipulates the working principle, organization, approval authority, internal operation process, risk management, emergency handling procedures, information report management, confidentiality management and file management of hedging business. The company will control all links in strict accordance with relevant laws and regulations and the company’s system. (IV) the company has established a computer system and related facilities that meet the requirements to ensure the normal operation of transactions. In case of failure, corresponding treatment measures shall be taken in time to reduce losses.
(V) in the early stage, the company will conduct detailed review on the company situation, relevant personnel and qualification documents of the counterparty. Pay close attention to and carefully control the risk of counterparty default in accordance with the terms of the above transaction documents and market operation practices.
5、 Feasibility of hedging
(I) the company’s hedging business follows the principle of reducing the risk of natural gas price fluctuation and stabilizing natural gas price, and does not aim at arbitrage and speculation. In the actual operation process, natural gas price fluctuation has a great impact on the company’s operating performance. In order to avoid the impact of natural gas price fluctuation on the company’s production and operation as far as possible, the company plans to carry out hedging business of commodities related to its main business, which is conducive to reducing the impact of gas source price fluctuation on the company’s normal operation.
(II) the company has formulated the natural gas hedging business management system as its internal control and risk management system for hedging business, which clearly stipulates the principles, organization, approval authority, information disclosure, internal operation, information isolation, risk management, reporting system, emergency response plan, file management and other aspects of hedging business, A more comprehensive and perfect internal control system for hedging business has been established.
(III) the company has set up a reasonable hedging business organization, defined the responsibilities and authorities, approval authorities and authorization scope of relevant departments and posts, avoided ultra vires disposal, and ensured the independence of personnel in each post and the effectiveness of internal supervision and management mechanism to the greatest extent.
(IV) the company uses its own funds to carry out hedging business, and does not use the raised funds to carry out hedging business directly or indirectly. The margin scale invested in the planned hedging business matches its own funds, operating conditions and actual needs, and will not affect the normal operation of the company.
6、 Impact of hedging business on the company
The company’s hedging business is mainly to lock in the cost of gas source, effectively prevent and resolve the market risk caused by the change of gas source price, and reduce the impact of gas source price fluctuation on the normal operation of the company. The proposed business scale matches the current business situation and actual needs of the company and will not affect the normal business activities of the company. The company will conduct accounting treatment in accordance with the relevant provisions of the Ministry of finance, such as accounting standards for Business Enterprises No. 14 – revenue, accounting standards for Business Enterprises No. 22 – recognition and measurement of financial instruments, accounting standards for Business Enterprises No. 24 – hedge accounting, accounting standards for Business Enterprises No. 37 – presentation of financial instruments, etc.
7、 Conclusion of feasibility analysis
The relevant approval procedures for the company to carry out hedging business comply with relevant laws, regulations and the articles of association. Under the premise of strictly controlling the hedging business of the company, the establishment of the hedging business group is not conducive to the normal operation of the company, which will reduce the risk of the company’s normal operation and reduce the risk of the company’s normal operation.
To sum up, the targeted risk control measures taken by the company are feasible, and the company’s hedging business is feasible, which is conducive to the company’s avoidance of business risks to a certain extent.
Foran Energy Group Co.Ltd(002911) board of directors February 10, 2022
