Avner Oil - Annual Report 2011 - Delek Energy Systems

Part II: Market Risks – Exposure and ManagementReport on exposure to market risks and their management1. Head of market risk management for the CorporationThose responsible for risk management in the Partnership are the directors of the General Partner.The Partnership has no material exposure to changes in the dollar exchange rate – see linkage basesin Section 8 below.2. Description of the key market risks to which the Corporation is exposedA. Exchange rateMost of the Partnership's activities, assets and liabilities are in US dollars and the Partnership'sfunctional currency is US dollars.The Partnership is exposed to exchange rate risk due to the exposure to the shekel. Theexchange rate risk stems mainly from recognized liabilities that are denominated in a currencythat is not the Partnership's measuring currency.B. Interest rate1) The Partnership's liquid monetary assets are invested mainly in dollar deposits. Theseinvestments are affected by changes in the LIBOR interest rate.2) In the wake of the debenture issue, the Partnership is exposed to changes in 3-month LIBOR.The exposure in respect of fixed interest debentures is for fair value, and the exposure inrespect of variable interest debentures is for cash flow.3) Due to the bridge loan received to finance the Partnership's share of the development costs ofthe Tamar project, the Partnership has additional exposure to changes in 3-month LIBOR.C. Commodity prices – gas and fuelsThe prices that consumers currently pay for natural gas in the reservoirs in which the Partnership is apartner are set according to formulae comprising various parameters, such as the prices of substitutesfor natural gas. Fluctuations in the prices of the substitute fuels and in electricity tariffs could also affectthe prices that the Partnership will be able to commend from its customers for the natural gas it sellsand/or the viability of development and production from new reservoirs that the Partnership hasdiscovered or will discover in the future (if any). Fluctuations could also influence a decision onwhether to embark upon development activities or not.Since the natural gas market in Israel has not yet stabilized, the volatility of natural gas prices inthat market cannot yet be foreseen. In view of the fact that Israel's natural gas market has not yetstabilized, it is too early to anticipate future volatility in the price of natural gas in Israel.3. The Partnership's risk management policy for currencyA. The Partnership invests its liquid surpluses in an effort to attain a fair yield with the right mix in therisk-to-return ratio. Therefore, the General Partner, which manages the Limited Partnership,ensures that the Partnership's available funds are invested in low-risk dollar deposits and assets,consisting principally of bank deposits and highly rated debentures.B. When the Partnership is aware of payments to be made in foreign currency or shekels, it hedgesthe payments against changes in the exchange rate.C. There are no defined events for which the board of directors must pass a resolution on marketrisk matters.4. The Partnership's risk management policy for gas pricesThe Partnership made a hedging transaction on gas sales in accordance with the 2002 IEC contract.Regarding the other contracts for the sale of natural gas – in most cases, the price formula is themaximum contractual price, excluding with respect to the Letter of Intent signed with IEC and whichB-10