Risk Management and Financial Risk Management


The operating activities of Repower are exposed to market, counterparty and transaction risks arising from the energy sector as well as liquidity risks. Risk management aims to limit the risks specified through operational and financial measures. Financial risks are managed by the Executive Board within the framework of the strategic parameters and risk targets determined by the Board of Directors. The guidelines issued by the Board of Directors on “Risk Management in the Energy Sector” set down the principles governing the Repower Group›s risk policy. They cover directives on the entry into, assessment, management and limitation of business risks in the energy sector and define the organisation and responsibilities. The aim is to ensure a reasonable balance between business risks entered into, earnings and risk-bearing equity. The Board of Directors and the Executive Board define risk limits in accordance with the company's risk capability. These limits are regularly reviewed for each risk category. Special measures are taken to manage risks related to personal safety, information technology and the energy business (transaction, market and counterparty risks). Risk management was further developed during the year under review but there were no changes in terms of content.

Market risks

Repower is exposed to various market risks within the scope of its business activities. The most important of these are energy price risk, interest rate risk and currency risk.

Energy price risks:

Energy transactions are conducted for the main purpose of covering physical delivery contracts, energy procurement, and selling and optimising the company's own generation volumes. Within this risk policy, purely financial transactions are used for trading. Energy price risks include risks arising from price volatility, changes in the price level, and changing correlations between markets and generation times. Compliance with trading limits and the risk situation of the portfolio are monitored by Risk Management and reported to the Risk Management Committee. Under the leadership of the Head of Finance, the Risk Management Committee assesses the risk situation in the energy sector at least once a month. The Board of Directors and the Executive Board are kept informed about the risk situation by reports submitted by the Risk Management Committee on a quarterly basis and in the case of extraordinary events

Interest rate risks:

Interest rate risks primarily concern changes in interest rates on non-current interest-bearing liabilities. In the event that the agreed interest rate is variable, changes in interest rates represent an interest rate risk. Due to the long investment horizon for capital-intensive power plants and grids, Repower primarily obtains long-term financial loans with phased terms to maturity. The interest situation and hedging options are continuously reviewed. Derivative financial instruments – in particular interest rate swaps – are used and under certain conditions recognised as hedging relationships (hedge accounting). Another interest rate risk exists with regard to variable-rate positions of current assets, in particular in the case of sight deposits. This risk is minimised by pursuing an active cash management policy.

Currency risks:

Energy goods and services are paid for and sold by Repower mainly in euros and partly in Swiss francs. The foreign Group companies conduct nearly all of their other transactions in their functional currency. These transactions are not subject to currency risks. There is, however, a risk of currency fluctuation on those positions denominated in euros for Repower AG and its Group companies with a functional currency other than the euro. Intragroup loans are particularly subject to currency risks. The currency risk is largely eliminated by netting receivables and liabilities in the foreign currency as agreed. Forward exchange transactions are conducted to reduce the currency risk. Net investments in foreign Group companies are also exposed to exchange rate fluctuations. However, these long-term commitments are not hedged since the differences in inflation rates and exchange rate fluctuations should offset each other over the long term.

Counterparty risks

Credit risks:

Credit risks arise if customers cannot meet their obligations as agreed, or the intrinsic value of financial assets is endangered in some other way. The credit risk is permanently monitored by checking outstanding payments by counterparties and by carrying out credit checks on contractual parties. Repower enters into significant business relationships only with counterparties who are creditworthy and whose solvency has been confirmed by a credit check.

The maximum credit risk exposure on the closing date is equal to the carrying amounts of the recognised financial assets. As the agreed offsetting of receivables and liabilities with the same counterparty has already been recognised, no other major agreements which would lessen the maximum default risk exist on the balance sheet date.

Supplier default risks:

Supplier default risks arise if suppliers cannot meet their supply obligations as agreed and a replacement can only be purchased at less favourable terms. Limits are set on purchase volumes to avoid risk concentration and to minimise supplier default risks. Observance of these limits is permanently monitored. Repower enters into significant business relationships only with counterparties who can guarantee supply readiness.

Transactions risks

During the course of business activities, operational risks arise. These transaction risks are mitigated by the skill and professionalism of the employees, and where necessary by providing them with training and further training. Other transaction risks arise as a result of political decisions and regulatiory changes. Repower pays close attention to these developments at all times.

Liquidity risks

Liquidity risks arise if Repower cannot meet its obligations as agreed or is unable to do so under economically feasible conditions. Repower permanently monitors the risk of liquidity shortfalls. Cash flow forecasts are used to anticipate future liquidity performance in order to respond in good time in the event of over- or under-liquidity, taking into account the maturity terms of financial liabilities as well as the financial assets. At the balance sheet date, financial liabilities exist with the following due dates (amounts represent the contractual, undiscounted cash flows):

CHF thousands 31.12.2009 31.12.2010
Up to 3 months 553,336 352,314
From 3 to 12 months 203,249 214,071
From 1 to 5 years 197,415 174,114
Over 5 years 331,162 520,369

These financial liabilities are expected to be offset by financial assets (carrying values of balance sheet items) which are expected to become available or which can be liquidated during the following periods:

CHF thousands 31.12.2009 31.12.2010
Up to 3 months 1,128,893 926,324
Over 3 months 70,848 63,400

Cash and cash equivalents are available for the purpose of liquidity. At the balance sheet date, Repower also has the following bank credit lines which have been secured but remain unused:

CHF thousands 31.12.2009 31.12.2010
Unused general credit lines 105,100 115,000
Additional unused credit lines for the purpose of issuing guarantees 37,157 13,844

Sensitivity analyses on market risks

On the balance sheet date, Repower performs a sensitivity analysis for each market risk category to determine the potential impact of various scenarios on net income and equity. During this analysis, the impact of individual factors is investigated, meaning that mutual interdependencies of individual risk variables are not taken into consideration. The same methods and assumptions as last year were applied to perform the analyses. The following scenarios were analysed for each of the individual market risk categories:

Energy price risks

When establishing energy price risks, a distinction is made in accordance with IAS 39 between positions held for own use and those held for trading. With regard to those positions held for own use, a potential price change on the balance sheet date will not have an impact on net income or equity since these positions are not measured at fair value. When considering positions held for trading, scenarios are assumed in which energy prices are 10 euros higher and lower per MWh.

CHF thousands 31.12.2009 31.12.2010
Impact on net income and equity at a higher energy rate -9,166 -4,636
Impact on net income and equity at a lower energy rate 9,166 4,636

Interest rate risks

In the sensitivity analysis of interest rate risks, an impact is only seen in positions for which the agreed interest rate is variable. All loans are recognised at amortised cost, i.e. for positions for which the agreed interest rate is fixed, changes in interest rates will have no impact on the balance sheet item. The analysis was performed in 2009 and 2010 for interest rates which were 150 bp higher and lower.

CHF thousands 31.12.2009 31.12.2010
Impact on net income and equity at a higher interest rate -222 -525
Impact on net income and equity at a lower interest rate 222 525

Hedging relationships (hedge accounting) were recognised for a portion of the interest rate risk. The corresponding effective hedge was recognised via equity and had no impact on the income statement. The impact of a shorter-term change in interest rates on the valuation of the long-term hedging instrument is insignificant and was not taken into consideration in the sensitivity calculation.

Currency risks

Currency risks exist mainly in connection with euro positions for receivables and trade accounts payable, cash and cash equivalents, intragroup loans, forward exchange transactions as well as non-current financial liabilities. The analysis was performed using euro exchange rates which were 10% higher and lower than the closing rate. The closing rate of the year under review was CHF/EUR 1.2500 (previous year: CHF/EUR 1.4863).

  31.12.2009 31.12.2010
Impact on net income and equity at a higher exchange rate 1.6349 24,851 1.3750 1,048
Impact on net income and equity at a lower exchange rate 1.3377 -24,851 1.1250 -1,048