7 Risk management and financial risk management
The Repower Group identifies and manages risks on the basis of a Group-wide risk management approach. A number of different components are used to put this approach into practice: the enterprise risk management (ERM) function, the concept of three lines of defence against risk, an integrated risk management process, and a specific risk culture fostered throughout the business. 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.
Repower assesses business risks for each division and the Repower Group on an ongoing basis. The ERM and controlling functions support this process by providing independent assessments. Controls for managing risks are identified, evaluated and improved as part of the risk assessment, or in separate processes.
Internal controls are applied to financial reporting risks. One of the aims of this system of internal controls is accurate, full and reliable reporting. Repower regularly reviews and updates the system.
The group compliance officer helps Repower manage compliance risks. This is the person responsible for propagating Repower’s code of conduct and developing additional measures in line with the requirements of the Board of Directors. The group compliance reports direct to the CEO and the chairman of the Board of Directors.
The market and credit risk manager monitors Repower’s trading activities in accordance with a dedicated market and credit risk management process. The risk manager analyses market and credit risks on an ongoing basis, reporting on and discussing these risks in meetings with the people responsible for energy trading and members of the risk management committee.
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 to the Executive Board and Board of Directors.
This report focuses on market and counterparty risks and liquidity risks as the main risks to which the operating activities of Repower are exposed.
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, a distinction is made between positions held for own use and those held for trading. The units responsible for sales and generation conduct transactions on the basis of the internal market model 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 and fixed-rate contracts are maturing, interest rates represent an interest rate risk. Owing 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.
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 its group companies with a functional currency other than the euro. Intragroup loans in particular are subject to currency risks. The currency risk is eliminated in part by agreements for netting receivables and liabilities in the foreign currency. Forward exchange transactions are conducted to reduce the currency risk. Selected refinancing is also done in euros. Net investments in foreign group companies are also exposed to exchange rate fluctuations. However, these long-term commitments are not hedged.
Counterparty risks consist of settlement risks and replacement 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 arise if, as a result of the counterparty defaulting, the position can only be procured or sold on the market at less favourable conditions.
Settlement and replacement risks are taken into account in the limit system and when measuring risk exposure.
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.
Liquidity risk is 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):
Forward exchange transactions and interest rate swaps are disclosed on the balance sheet under current financial liabilities and non-current financial liabilities.
The stated prior year cash flows from the interest rate swaps were corrected.
Trade accounts receivable include the following overdue and non-impaired amounts:
The total amount of receivables which are neither impaired nor overdue is TCHF 292,657 (previous year: TCHF 304,202). There are no indications that would necessitate an impairment loss being recognised for these receivables.
Allowances for doubtful accounts amounted to:
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.
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. In the course of 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 are not measured at fair value 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.
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 rate 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 2016 and 2015 for interest rates which were 50 bp higher and lower.
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, and 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 1.0739 (previous year: CHF/EUR 1.0835).