Risk management and financial risk management

Basis

The main risks to which the operating activities of Repower are exposed are market and counterparty risks, liquidity risks, transaction risks, compliance risks and regulatory risks. The task of risk management is to mitigate and actively control risks as well as ensure an effective early-warning system for the various management levels. The parameters set by the Board of Directors and the Executive Board are implemented in the form of guidelines, directives and risk limit systems. The aim is to ensure a reasonable balance between business risks entered into, earnings, investments and risk-bearing equity. Compliance with the parameters set for each risk category is regularly reviewed and reported.

Market risks

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

Energy price risks:

Energy transactions are conducted primarily for the purpose of procuring energy and fuels in order to cover physical delivery contracts, and to sell and optimise the company's own generation volumes. The units responsible for sales and generation conduct the transactions on the basis of the internal market model so as to mitigate trading risks. Energy price risks arising from price volatility, changes in the price level and pricing structures and from changing market correlations, are subject to defined limits and monitored by risk management on trading days. Each month the Risk Management Committee (RMC) assesses the risk situation for the energy business. The Board of Directors and the Executive Board are kept informed about the risk situation through reports submitted by the RMC on a quarterly basis and ad hoc reports 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:

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 their 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

Payment default / settlement risks:

These arise if customers are unable to meet their financial obligations as agreed. Our business relations are based on ongoing credit checks and collateral management.

Supplier default / replacement risks:

These risks arise if, as a result of the counterparty defaulting, the existing position can only be liquidated on the market at unfavourable conditions.

Both types of risk are taken into account in the limit system and when measuring the risk exposure.

Transaction risks

Operational risks arise in the course of business activities. Repower is also exposed to regulatory risks as a result of the changing energy landscape. Repower pays close attention to these developments through its involvement in various bodies and committees (VSE, EFET and others). The further training programme is designed to address this situation.

Liquidity risks

Liquidity risks arise if Repower cannot meet its obligations as agreed or is unable to do so under economically feasible conditions. Repower continuously 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 financial assets. At the balance sheet date, financial liabilities exist with the following due dates (amounts represent the contractual, undiscounted cash flows):

CHF thousands	31.12.2011	31.12.2012
Up to 3 months	507,064	481,158
From 3 to 12 months	231,878	206,953
From 1 to 5 years	364,422	360,597
Over 5 years	288,962	270,516

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	31.12.2011	31.12.2012
Up to 3 months	1,055,296	935,789
Over 3 months	67,055	66,289

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	31.12.2011	31.12.2012
Unused general credit lines	155,000	160,000
Additional unused credit lines for the purpose of issuing guarantees	4,134	13,956

Sensitivity analyses of 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 following scenarios were analysed for each of the individual market risk categories:

Energy price risks

When establishing energy price risks in accordance with IAS 39, a distinction is made between positions held for own use and those held for trading. In the case of 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. In the case of positions held for trading, the change – observed in the first approximation – is indicated by a change in trading price corresponding to the historic 180-day volatility. The energy price risk presented here relates to the open positions over the next twelve months and is shown as an amount. Changes in the trading price can have a positive or negative impact on net income and equity.

CHF thousands	31.12.2011	31.12.2012
Energy	3,967	15,418
Gas	1,971	2,833
CO2	549	952

Interest rate risks

Valuation effects may occur in the case of financial instruments for which an interest rate has been agreed and which are measured at fair value. The impact of the interest swaps held to which the valuation principle of hedge accounting does not apply is shown. The analysis was performed in 2011 and 2012 for interest rates which were 50 bp higher and lower.

CHF thousands	31.12.2011	31.12.2012
Impact on net income and equity at a higher interest rate	4,779	4,794
Impact on net income and equity at a lower interest rate	-5,260	-5,010

Currency risks

Currency risks exist mainly in connection with euro positions for trade accounts receivable and payable, derivative receivables and payables from forward exchange transactions, cash and cash equivalents, internal loans granted within the Group, open financial instruments from energy trading transactions as well as non-current financial liabilities. The analysis was performed using euro exchange rates which were 10 per cent higher and lower than the closing rate. The closing rate for the year under review was CHF/EUR 1.2080 (previous year: CHF/EUR 1.2156).

	31.12.2011		31.12.2012
	CHF/EUR	TCHF	CHF/EUR	TCHF
Impact on net income and equity at a higher exchange rate	1.3372	48,795	1.3288	35,937
Impact on net income and equity at a lower exchange rate	1.0940	-48,795	1.0872	-35,937

In 2012 the CHF to EUR exchange rate set by the Swiss National Bank remained fixed at a minimum of CHF 1.20.