NNPCL Finance and Accounts_Forex.pdf

NNPC Limited Finance and Accounts Process and Procedures 13.0 Foreign Exchange Management 13.1 Objectives The objective of this policy is to provide a framework for the management of foreign exchange exposure in NNPC Limited and its Subsidiaries. This policy is designed to:  Maintain enough forei...

NNPC Limited Finance and Accounts Process and Procedures 13.0 Foreign Exchange Management 13.1 Objectives The objective of this policy is to provide a framework for the management of foreign exchange exposure in NNPC Limited and its Subsidiaries. This policy is designed to:  Maintain enough foreign exchange liquidity to meet the operational needs of NNPC Limited and its Subsidiaries.  Minimize value erosion resulting from domestic and global fluctuations in exchange rates.  Ensure compliance with all relevant laws and regulations relating to foreign exchange transactions. 13.2 Scope/Applicability This policy covers the following:  Sources of foreign exchange  Uses of foreign exchange  Foreign exchange exposure management This policy is applicable to NNPC Limited and its wholly owned Subsidiaries and shall align with the overall risk management strategy. 13.3 Sources of Foreign Exchange NNPC Limited obtains foreign exchange from the following main sources:  Revenue from the sale of crude oil and gas  Dividends received in US Dollars from wholly owned Subsidiaries  Dividend from investment in other companies  Dollar revenue from the sale of power and other products 116 NNPC Limited Finance and Accounts Process and Procedures  Drawdown from shareholders (equity or debt) and third-party lenders  Other income in US Dollars (including common cost chargeback) 13.4 Foreign Exchange Exposure Management Policy Statement 13.4.1 Foreign Currency Sale NNPC Limited and its Subsidiaries shall buy and sell Currency Pairs on spot basis through competitive bidding. Where the implementation of this Policy is constrained by law or a regulation of the Central Bank of Nigeria, the provisions of such law or regulation shall subsist. 13.4.2 Loan Repayment NNPC Limited and its Subsidiaries shall settle all loan obligations (principal and accrued interest) in the loan currency. Where a loan is denominated in one of the revenue currencies, repayment shall be made in that same currency without conversion. Where a loan principal and interest thereon are in a currency not held by NNPC Limited or the relevant Subsidiary, repayment shall be made from a USD bank account via conversion by a dollar House Bank to the borrowing currency at the exchange rate subsisting as at the date of loan repayment. 13.4.3 Payment of Suppliers NNPC Limited and its Subsidiaries shall pay suppliers and other creditors within standard payment terms, as may be set by Management from time to time, or within defined regulatory timelines. Naira payments to third parties shall be made from Naira bank accounts while foreign currency payments shall be made in the transaction currency from dollar bank accounts. 13.4.4 Intercompany and Affiliates Sales NNPC Limited and its Subsidiaries shall conduct intercompany and affiliate sales at arm’s length, in line with the Company’s Transfer Pricing Policy. Therefore, all trading arrangements between NNPC Limited and 117 NNPC Limited Finance and Accounts Process and Procedures its Subsidiaries, or between Subsidiaries, shall be consummated and settled in a manner that would not have been different if transaction was with an unrelated party. 13.4.5 Contract Currency Denomination NNPC Limited and its Subsidiaries shall denominate all contracts and procurement agreements in the originating transaction source currency or currencies where applicable. 13.4.6 Intercompany Currency Conversion NNPC Limited and its Subsidiaries shall meet operational currency requirements through Intercompany currency conversion at a rate that demonstrates the arms-length principle; and make payments on behalf of each other, as part of shared services, and be promptly reimbursed in the base transaction currency or USD. 13.4.7 Third-party Currency Conversion NNPC Limited and its Subsidiaries shall hold enough cash to meet capital and other forecast operational expenditure over the next thirty (30) days. Where there is a shortfall in Nigerian Naira required to meet payment obligations, the US Dollar amount to be sold at any point in time to fund such forecast shortfall, shall not exceed known obligations for a 30-day forecast period. This excludes surplus cash invested in permitted instruments of tenure exceeding 30 days. Currency conversion transactions shall not be undertaken with any entity not wholly owned by NNPC Limited or licensed by the Central Bank of Nigeria. In all currency conversion proposals, priority shall be given to the requirements of NNPC Limited and its Subsidiaries before consideration of financial institutions licensed by the Central Bank of Nigeria to undertake currency conversion transactions in their normal course of business. Currency conversion transactions shall be implemented upon the recommendation of the Treasurer, and approval of the CFO. Any third currency cash surplus, i.e., non-Nigerian Naira and US Dollar denominated funds, shall be converted to US Dollars within 3 days of receipt of such inflows, after deducting forecast obligations falling due in such currency before expected date of receipt of another inflow in such currency. 118 NNPC Limited Finance and Accounts Process and Procedures 13.4.8 Determination of Exchange Rate for FX Sale/Conversion The exchange rate applicable for all foreign exchange sales by NNPC Limited and its Subsidiaries shall be determined by the Central Bank of Nigeria regulation in force as at the date of transaction. 13.4.9 Foreign Exchange Hedging The use of foreign exchange hedging options shall only be considered upon a thorough evaluation of the risks and potential impact within a broader portfolio strategy. The primary purpose shall not be to speculate or increase leverage in the short term. Implementation shall be upon the recommendation of the Treasurer, endorsement of the CFO, and approval of the CEO. 13.5 Procedural Guidelines 13.5.1 Guidelines on the Use of Foreign Exchange The following guidelines shall apply in the use of foreign exchange earnings by NNPC Limited and its subsidiaries:  Company shall as a matter of priority fully meet all foreign currency loan obligations in any financing agreement, including but not limited to covenants, representations, and warranties.  Ensure that adequate foreign currency is available to meet suppliers and other creditor obligations for budgeted capital expenditure and other working capital requirements.  The net cash flow from operations shall then be applied as follows:  Distribution to shareholders in the form of dividend.  Investment with House Banks or in approved financial instruments.  Where necessary, surplus funds may be applied to the early prepayment of loans not yet fallen due, subject to the support of the appropriate Board Committee and approval of the Board of Directors. 119 NNPC Limited Finance and Accounts Process and Procedures  NNPC Limited and its Subsidiaries shall agree vendor contract tenors for foreign currency payments consistent with the company’s risk attitude. 13.5.2 Guidelines on Foreign Exchange Exposure Management NNPC Limited transacts business in major non-Nigerian Naira denominated currencies, such as US Dollars. Such currencies may move against the Nigerian Naira in a direction which may be financially detrimental to the Company. Foreign Exchange Exposures can be categorized into three (3):  Transaction Risk  Translation Risk  Economic Risk Transaction and Translation Risk Instability in the movement of spot and cross rates, especially between the Nigerian Naira and other major world currencies, gives rise to transaction and translation risk in the company's financial dealings. The Head of Treasury shall be responsible for developing and maintaining market contacts to stay aware of market conditions affecting corporate exposures. On a quarterly basis, the Treasury Division shall carry out a review of the inherent currency risk (including exposure in contracts and product basket, where feasible) and present to the Chief Financial Officer (CFO). Where necessary, a hedging strategy shall be recommended. Some analyses that may be carried out by Treasury Division to help understand its foreign exchange exposures include, but not limited to:  Cashflow at Risk (CFaR) analysis  Earnings at Risk (EaR) analysis  Sensitivity analysis Examples of foreign exchange hedge instruments that NNPC Limited and its Subsidiaries may consider include but not limited to:  Foreign currency swaps 120 NNPC Limited Finance and Accounts Process and Procedures  Forward contracts  Currency options  Currency futures On an annual basis, the status of foreign exchange exposure shall be reported as notes to the Financial Statement. Economic Risk NNPC Limited and its Subsidiaries shall take steps, on a defensive basis, to minimize possible loss arising from foreign exchange exposure in its international trading activities and financial transactions by regularly analyzing the net transaction exposure arising from firm commitments for which the size of the foreign currency exposure is certain. On exceptional basis, a report on findings and recommendations shall be issued for Executive Management consideration. The aim is to reduce the volatility of its reported profits and cash flows. 13.5.3 Guidelines on Contract Currency Split Alignment with Content Source NNPC Limited and its Subsidiaries shall not adopt an arbitrary currency split in contracts and procurement agreements. In determining the currency split in contracts, only verified offshore procurements and contracts content shall be priced in US Dollars or other foreign currencies, while locally sourced procurement and contracts content shall be priced in Nigerian Naira. The functional value of contracts shall be determined using the internally published exchange rate for ledger maintenance. 13.5.4 Guidelines on Intercompany Currency Conversion The following guidelines shall apply in Intercompany currency conversion transactions:  The request for currency conversion shall be made by the entity that requires another currency available within NNPC Limited or any of its wholly owned Subsidiaries, providing a clear business justification. 121 NNPC Limited Finance and Accounts Process and Procedures  Requests from Subsidiaries shall be initiated by the Head of Finance, approved by the Managing Director of the Subsidiary, and forwarded to the Treasurer for review and sourcing of the required currency.  The Treasurer shall identify an entity that holds the currency required by the requesting Subsidiary, assess their cash flows for headroom to accommodate the transaction, test for compliance with transfer pricing requirements, and if satisfied recommend conversion to the CFO for approval.  Intercompany currency conversions shall be completed in compliance with the transfer pricing arms-length principle. Hence the transaction exchange rate shall be the same as the rate applicable for dollar sale to third parties as at the transaction date.  Currency conversion transactions shall be recognized by the selling and buying entities in their books of accounts. 13.5.5 Guidelines on Foreign Currency Sale The following guidelines shall govern the sale of foreign currency by NNPC Limited and its wholly owned Subsidiaries: Foreign Currency Sale by NNPC Limited:  Proposal for foreign currency sale by NNPC Limited shall originate from the Treasury Department, duly backed by a cash forecast and a clear business justification.  The Treasurer shall review the proposal and if satisfied, shall recommend to the CFO for consideration and approval. The recommendation shall include buyer options (intercompany, CBN, or third-party).  If approved by the CFO, transaction shall be executed and closed out with necessary bookkeeping subsequently. Foreign Currency Sale by Subsidiaries: 122 NNPC Limited Finance and Accounts Process and Procedures  Proposal for foreign currency sale by Subsidiaries shall be raised by the Head of Finance of each Subsidiary, backed by a cash forecast and clear business justification, and forwarded to the Treasurer for review and support.  Proposals supported by the Treasurer shall be recommended to the CFO for endorsement, and to the MD of the Subsidiary for approval.  If approved by the MD, transaction shall be executed and closed out with necessary bookkeeping subsequently.  The Treasury Division of NNPC Limited shall be centrally responsible for arranging all the sale of foreign exchange by NNPC Limited and its Subsidiaries. Subsidiaries shall not engage in independent sale of foreign exchange. 13.5.6 Guidelines on the Determination of Exchange Rate for FX Sale/Conversion The Treasury Division of NNPC Limited shall be the custodian of exchange rates advisory for NNPC Limited and its Subsidiaries. To ensure compliance with the arms-length principle of transfer pricing, the exchange rate applicable for foreign exchange conversion between NNPC entities shall be the same with the rates applicable for the sale of foreign exchange to third parties. 13.5.7 Guidelines on Foreign Exchange Hedging Foreign exchange hedging instruments shall be authorized as a risk mitigation instrument within the following parameters:  Hedge instrument shall not to be used for speculative purposes  Hedge instrument shall not be used on a levered basis (the change in the value of the derivative should not be designed to outweigh the change in value of the underlying asset or obligation)  Hedge instrument shall be used as a hedge or offset to an underlying asset or obligation only 123 NNPC Limited Finance and Accounts Process and Procedures  Derivatives shall not create new risk exposures  Derivatives shall not exceed the amount of the underlying asset or obligation (except to adjust for differences in tax treatment of the derivative transaction versus that of the underlying asset or obligation). 13.6 Compliance NNPC Limited and its Subsidiaries shall comply fully with any subsisting policies and regulations of the Central Bank of Nigeria in all foreign exchange dealings and reporting. In the event of a breach of established regulatory requirements, the Treasurer of NNPC Limited/Head of Finance of the Subsidiary shall:  Prepare a comprehensive report to the CFO/CEO/MD stating the breach, the financial implications, and the proposed remedial action(s) to minimize the impact of the breach.  Where necessary, such incident shall be reported to the Board of Directors. Governance, Risk and Compliance (GRC) shall perform a biennial review of the execution of this Policy for compliance and report any infringement to the Board of Directors. Where the need arises, the GCEO is authorized to grant exceptions to the application of this policy, and thereafter seek ratification from the NNPC Limited Board. 13.7 Disclosure Requirements All entities shall also comply with the provisions of International Financial Reporting Standards (IFRS) with regards to the effects of changes in foreign exchange rates and other reporting requirements, including but not limited to: 124 NNPC Limited Finance and Accounts Process and Procedures  IAS 1 - Presentation of Financial Statements which requires a disclosure of the Group’s financial risk management objectives and policies.  IFRS 7 - Financial Instruments: Disclosures which also requires the disclosure of the nature and extent of risks arising from financial instruments.  IFRS 9 - Financial Instruments which establish principles for reporting on financial instruments that will present information for their assessment of the amounts, timing, and uncertainty of an NNPC Limited’s future cash flow. 13.8 References This Procedural Guide shall be implemented in compliance with the Central Bank of Nigeria’s foreign exchange policies in place at the date of each transaction occurrence, any other relevant regulatory requirement, or requirements of the International Financial Reporting Standards (IFRS). Other references include:  Enterprise Risk Management (ERM) policy  Foreign exchange management procedural document  Dividend policy 125