MANAGING COST

RISK

BY ØYVIND SÆTREN

CONTROLLER/BUSINESS DEVELOPER

AND MORTEN NILSEN

PORTFOLIO MANAGER - KINECT

Pelagia – who are we?

• Leading fish processor – 26 factories

• Norway, UK, Ireland, Denmark

• Ca 150 000 M3 freezing store capacity

• 765 000 tons raw material (2017 Auction)

• We need to produce in the fishing seasons

• High energy consumption, especially winter

and autumn when energy prices are high

Hedging – what do we mean?

Hedging is all the things we do

when we buy OR sell

AS LONG AS we stay within my

needed physical volume

Pelagia – our energy strategy

• We need predictability – but also flexibility to follow the

market when prices fall

• We now hedge up until 80% of our consumption, up from

60%

Pelagia – status active hedging

• We decided active hedging – buying and selling

• We benchmark against spot prices

• 2017 – low spot, our cost was close to spot

• 2018 – rising spot, our cost not rising

• 2018 so far: Our cost is ca 8,2 øre/kwh lower

than spot

1. The more volatile the market – the more need for hedge

2. A flat market – no need to hedge or ?

3. Hedge against increasing prices and decreasing prices

Do you need a hedging strategy

Why do we sell when we are buyer ??

• We expect that active hedging gives us lower cost

and more control

• Easier to take decision, when we know we can

change position

• Market is clearly trending: • We want to be protected in a rising trend

• We want to follow spot in a falling trend

• We change position to follow the trends

• We recommend to start with 20-30% of your cost

in active hedging, and increase when you have

experience

Why do we hedge?

1. To reduce ups and downs in

the electricity price

2. Know more about the cost in

the future

3. Reduce the cost

How do we hedge?

1. Buy when the price increase

2. Sell when the price is falling

= 90 % hedged

~10 years experience in managing electricity cost

IF THE CONTRACT

PRICE INCREASES OR

DECREASES FOR FIVE

WEEKS IN A ROW:

– WE DO SOMETHING!

Totally we have nearly 15% lower cost than the market cost

Electricity

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1 year forward&

PM Price day by day until delivery

PM Price 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006

In a falling trend we have

slightly higher cost than the

spot market

In a rising trend we have

significantly lower cost than

the market

Using the same hedge strategy as in Electricity - 21% saving against market

Gasoil – Yes a volatile market as well!

How we start with Gasoil hedging:

• We start carefully

• Basis: No hedge on 80% of the cost

• Challenge Strategy: 20% active hedging

• If the challenge strategy beat the basis

Increase from 20 to 40%

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22,00

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36,00

jan.11

feb.11

mar.11

apr.11

mai.11

jun.11

jul. 11 aug.11

sep.11

okt.11

nov.11

des.11

jan.12

feb.12

Y-2012 contract

Salmon – very trending market

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55,00

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Y-2016 contract

52,00

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62,00

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66,00

nov.17

des.17

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feb.18

mar.18

apr.18

mai.18

jun.18

jul.18

aug.18

sep.18

okt.18

nov.18

Y-2019 contract

Concluding remarks

• We started sceptical: • Spot was good, or is there a better strategy? • Why should we both buy and sell?

• We seeked advice and made a strategy • and got buy-in from management

• We started conservativewith only a part of our volume

• You know the market! • Teamwork • Defined rules • Patience, loyal to the strategy • Budget security

• We do not need to make many decisions

• 1-5 decisions a year is probably more than enough in salmon!

… remember the

glass of water!

This glass of water illustrates that buying and

selling are both two sides of the same strategy.

The glass is the boundry

• The filling level is a function of the market

Last, but not least…

THANK YOU!