6) Risk management and financial risk management

Principles

The Repower Group identifies and manages risks based on a Group-wide management approach. The instruments applied are the Enterprise Risk Management function, the concept of three lines of defence against risk, the integrated risk management process, and a culture of risk awareness. There are four main categories of risk to which Repower is exposed: business and strategic risks, market and credit risks, compliance risks, and financial reporting risks.

This report focuses on market and counterparty risks and liquidity risks as the main risks to which the operating activities of Repower are exposed. Activities aimed at managing compliance and regulatory risks, business and strategic risks and financial reporting risks are described at the end of this section. The task of risk management is to mitigate and actively control risks as well as to ensure an 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 capital. 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, including proprietary trading, are conducted for the purpose of procuring energy and fuels in order to cover physical delivery contracts, to sell Repower's own generation volumes and to optimise the overall portfolio. 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 (HfT). The units responsible for sales and generation conduct the transactions on the basis of the internal market model so as to ensure that a structure is in place 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 in 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

Energy deliveries and services are paid for and sold by the Repower Group 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 agreements for netting receivables and liabilities in the foreign currency. 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.

Counterparty risks

Counterparty risks consist of settlement risks and replacement risks:

Settlement risks

Settlement risks arise if customers are unable to meet their financial obligations as agreed. These risks are managed on the basis of ongoing credit checks on counterparties and collateral management.

Replacement risks

Replacement risks arise if, as a result of the counterparty defaulting, the position can only be procured or sold on the market at unfavourable conditions.

Settlement and replacement risks are taken into account in the limit system and when measuring the risk exposure.

Liquidity risks

Liquidity risks arise if the Repower Group cannot meet its obligations as agreed or is unable to do so under economically viable 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 a surplus or a shortfall. The standard requires liquidity risk to be based exclusively on financial liabilities. To indicate the effective liquidity risk related to derivative financial instruments, the next table in the section “Derivative financial liabilities” shows cash inflows and outflows from contracts with negative and positive fair values. At the balance sheet date, financial liabilities exist with the following due dates (amounts represent the contractual, undiscounted cash flows):

2013 financial year

2013 financial year

	Carrying amount	Cash flows	< 4 months	4-12 months	1-5 years	> 5 years
Derivative financial liabilities	-13,070	17,880	19,055	57,952	-55,654	-3,473
Forward foreign currency contracts	98
Cash inflow		3	3	-	-	-
Cash outflow		101	101	-	-	-
Energy trading transactions	-19,645
Cash inflow		2,949,482	708,318	1,744,426	496,738	-
Cash outflow		2,925,027	689,083	1,685,787	550,157	-
Interest rate swaps	6,477
Cash inflow		298	-	17	66	215
Cash outflow		6,775	82	704	2,301	3,688
Non derivative financial liabilities	976,535	976,535	411,517	43,177	357,349	164,492
Non-current financial liabilities	521,841	521,841	-	-	357,349	164,492
Current financial liabilities	31,996	31,996	1,372	30,624	-	-
Other current liabilities	422,698	422,698	410,145	12,553	-	-

2012 financial year

2012 financial year

	Carrying amount	Cash flows	< 4 months	4-12 months	1-5 years	> 5 years
Restated
Derivative financial liabilities	2,476	123,788	50,646	90,707	-9,254	-8,311
Forward foreign currency contracts	600
Cash inflow		-	-	-	-	-
Cash outflow		600	600	-	-	-
Energy trading transactions	-12,588
Cash inflow		3,741,350	869,642	2,288,577	582,658	473
Cash outflow		3,602,498	818,262	2,196,182	587,581	473
Interest rate swaps	14,464
Cash inflow		-	-	-	-	-
Cash outflow		14,464	134	1,688	4,331	8,311
Non derivative financial liabilities	1,022,840	1,022,840	434,395	43,213	356,746	188,486
Non-current financial liabilities	545,232	545,232	-	-	356,746	188,486
Current financial liabilities	28,479	28,479	2,277	26,202	-	-
Other current liabilities	449,129	449,129	432,118	17,011	-	-

Trade accounts receivable include the following overdue and non-impaired amounts:

	31.12.2013	31.12.2012
		Restated
Less than 30 days overdue	23,695	15,819
31-60 days overdue	1,549	9,104
61-90 days overdue	3,822	8,117
91-180 days overdue	9,762	17,039
181-360 days overdue	13,773	10,484
More than 360 days overdue	30,953	32,033

The total amount of receivables which are neither impaired nor overdue is TCHF 369,962 (previous year: TCHF 357,795). There are no indications that would necessitate an impairment loss being recognised for these receivables.Allowances for doubtful accounts amounted to:

	31.12.2013	31.12.2012
		Restated
At 1 January	27,211	21,468
Additions	8,476	24,467
Utilizations	-7,416	-18,458
Reversal	-194	-116
Translation differences	431	-150
Total	28,508	27,211

In the case of single significant items where receipt of payment is uncertain, individual impairments are determined based on internal and external credit rating information. In addition, lump-sum impairments are calculated based on historical accounts receivable losses and current information. Neither collateral nor any other enhancements are available for doubtful receivables.

At the balance sheet date, Repower also has the following bank credit lines which have been secured but remain unused:

	31.12.2013	31.12.2012
Unused general credit lines	160,000	160,000
Additional unused credit lines for the purpose of issuing guarantees	17,814	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 profit for the year and equity. During this analysis, the impact of individual factors is investigated, meaning that mutual dependencies 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

Own use positions use are not measured at fair value (IAS 39) and, accordingly, net profit for the year and equity are not affected. In the case of positions held for trading, the Value at Risk (VaR) for the open positions of the next 24 months is calculated with a confidence level of 99 per cent based on the changes in the trading price corresponding to the historical 180-day volatility. To improve the analysis of the liquid positions, the period under review was extended from 12 to 24 months. As a result of changes to the risk model, items that used to be accounted for individually are now considered in aggregate due to existing interdependencies, which leads to a change in the figures reported in the previous year.

	31.12.2013	31.12.2012
Energy, gas, CO2	8,863	19,203

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 along with the financial liabilities with variable interest rates. The analysis was performed in 2013 and 2012 for interest rates which were 50 bp higher and lower.

	31.12.2013	31.12.2012
Impact on net income and equity due to a higher interest rate	4,265	4,794
Impact on net income and equity due to a lower interest rate	-3,967	-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, intragroup loans, 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 is CHF/EUR 1.2276 (previous year: CHF/EUR 1.2080).

	31.12.2013		31.12.2012
	FX Rate EUR/CHF	Effect	FX Rate EUR/CHF	Effect
Impact on net income and equity due to a higher exchange rate	1.3504	35,920	1.3288	35,937
Impact on net income and equity due to a lower exchange rate	1.1048	-35,920	1.0872	-35,937

In 2013 the CHF to EUR exchange rate set by the Swiss National Bank remained fixed at a minimum of CHF 1.20.

Compliance risks

The business activities of the Repower Group and the constantly changing legal and regulatory environment give rise to numerous compliance risks. The Compliance function helps the Executive Board and employees to identify and deal with these risks. The compliance risks identified and evaluated as part of the annual risk and control evaluation process serve as a planning basis for the activities of the Compliance function. It also takes the changing legal and regulatory requirements into account. By means of communication activities, training, development of the Repower policy for reporting concerns and violations, direct advice, analysis and resolution of cases, it contributes to monitoring and reporting for the purpose of controlling compliance risks. It also makes a valuable contribution to fostering a culture of compliance and the Repower code of conduct.

The Compliance function comprises the Group and Country Compliance Officer for Switzerland, the Compliance Officer for Italy, who works full time for the Compliance function, and the Compliance Officers for Germany, the Czech Republic and Romania, who spend part of their time working for the Compliance function. The Group and Country Compliance Officer for Switzerland is part of the Enterprise Risk Management (ERM) function and heads up the Compliance function Group-wide in terms of strategic and technical aspects and can report directly to the CEO and/or the Chairman of the Board of Directors.

The Compliance function develops its activities on a solid foundation approved by the Board of Directors upon which it creates an effective compliance programme every year. It has up-to-date and adequate systems at its disposal.

Business and strategic risks

The Repower Group continuously evaluates the company risks for every area. The ERM and Controlling functions support this process by contributing their independent assessments. The controls for handling risks are identified, evaluated and enhanced in risk assessment or in separate processes.

The Repower Group relies here on an adequate and robust infrastructure as well as modern and tried-and-tested systems.

Financial reporting risks

The internal control system (ICS) is used for financial reporting risks. One of the goals of the ICS is to guarantee correct, complete and reliable reporting. The person responsible at Repower for the ICS regularly checks and updates the system.