Risks and Opportunities
The general conditions with regard to the government's energy policy and the regulatory framework as well as intense competitive pressure present great challenges for Energie AG. While the company is exposed to certain business risks, new markets, business models and technologies also offer opportunities for the company. This is where the pro-active management of risks and opportunities plays an important role.
The objective of the Group-wide risk management is to ascertain, evaluate and control risks early in the process, and to identify and exploit opportunities presented to the company. Risk assessments are an integral part of the management and control system and an integral part of the strategic and operational decision making process and provide support for management.
The responsible business units follow a structured process to identify and evaluate risks, opportunities and measures each quarter and record them in a central software tool. The data collected is then analysed on Group-level and incorporated into the Group's overall risk position. Reporting to the Group's management board is done quarterly and ad hoc as needed. The risk management report is an integral part of reporting to the Supervisory Board and is, in accordance with the requirements of the Austrian Company Law Amendment Act (URÄG), also reported to the audit committee regarding the efficiency and validity of the process. Proper documentation and verifiability are also guaranteed by historicization of the data as at the measurement dates.
Risk Profile and Development Trends
Risks from Operating Activities
The efficiency and intrinsic value of the assets, procurement rights and investments of the Energie AG Group are significantly influenced by market price risks (prices for electricity, gas, biomass, allowance pricing etc.). The expertise in the management of commodity price risks bundled in Energie AG Oberösterreich Trading GmbH makes it possible to utilise intra-Group synergies by employing risk strategies geared to the market environment.
In light of increasingly volatile markets, the stabilisation of the electricity grid is becoming an increasingly dominant challenge for transmission system operators. Energie AG's production capacities from Group-owned thermal power plants continue to be highly significant for the supply of grid reserves. The CCGT power plants of Energie AG will continue to be available to the transmission system operators for grid support in the 2017/2018 fiscal year.
Weather conditions are another important parameter affecting the development of the Group's business. Varying water levels of rivers result in fluctuating electricity generation from hydroelectric power plants, while temperatures have a significant effect on the demand for district heating, natural gas and electricity during the heating season. The electricity procurement experienced a moderate negative effect in the reporting period due to water levels falling below the long-term average. The higher than average temperatures during the 2017/2018 winter months have resulted in significantly lower sales due to the reduced heating of buildings.
The competitive situation on the electricity and end-customer market is having an impact on the number of active customers, sales quantities and price levels. The private customer segment is strongly in the focus of competition and saw, contrary to the overall development of the industry, electricity sales of Energie AG to its customers experiencing a slight inverse trend in the 2017/2018 financial year with declining switching rates. The measures taken in this customer segment to improve customer loyalty, service and subsidies/incentive programmes, as well as the focus on digitalisation in product development resulted in a positive effect.
Concerning the general economic conditions on the waste management markets, the trend towards easing of the markets is continuing in the Waste Management Segment. However, the positive price trend on the waste management market led to increased competition with operators of pre-treatment plants and industrial co-incinerators, and to stronger remunicipalisation efforts by communal waste management associations. These developments are being addressed by targeted market activities and more intensive cooperation with the public sector. Strategically anchored cost management is also being consistently pursued, and the implementation of ongoing optimisation projects is continuing.
The Water Segment reports a steady development in sales revenues and earnings. Ongoing optimisation campaigns in all business areas as well as the participation in (concession) tenders are the most prominent measures for securing and growing the Group's market share.
Thanks to rapidly advancing digitalisation, the expansion of Fibre To The Home (FTTH) and the fitting of smart meters is gaining in importance. The dynamic nature of FTTH expansion has been able to be significantly increased thanks to high customer requirements and the allocation of considerable funds from the subsidy programmes in the scope of “Breitband Austria 2020” (Broadband Austria 2020), as well as follow-up support for small and medium-sized enterprises (SMEs) and compulsory schools on the part of the Province of Upper Austria.
The Group's comparably high proportion of smart meters allows the grid operator the use of various smart grid functions. These expansions to the business model also offer new opportunities and threats, particularly in terms of IT protection regulations for end customers.
Systems involving highly complex technologies are used at times within the various business units of Energie AG. These systems are exposed to risks from technical failures or other damage events (natural disasters, sabotage, etc.), which may also affect their availability. Energie AG responds to these asset risks by carrying out maintenance and quality inspections, as well as implementing an optimised maintenance strategy. Energie AG operates an adequate incident management system to handle any damages incurred despite these measures and insures these risks to the extent commercially viable at economically acceptable insurance excesses.
The business processes of Energie AG are supported by information and communication systems, which depend on a secure and reliable information technology. Energie AG addresses the increasing risks associated with information security as well as risks in cyber space by employing a comprehensive information security management system at Group level.
Political, Regulatory and Legal Risks
Energy supply is a business model requiring a long-term perspective, which renders it highly dependent on the prevailing political, regulatory and legal framework conditions. Efforts are made to counter these risks with an intensive and constructive dialogue with government agencies and policymakers.
The regulatory environment for the current fiscal year can be judged in principle to be stable. General Conditions of IV. The regulatory periods for electricity (from 01/01/2019) have, to the largest extent, been clarified. Despite pending appeals against decisions in the field of natural gas, a stable regulatory system in Austria is still expected.
The EU General Data Protection Regulation (GDPR) entered into force on 25 May 2018. Precisely defined work packages resulted in the implementation of all relevant GDPR requirements in a timely manner throughout the Energie AG Group.
Risks from Investments
Investment risks lie in the fluctuations of revenues from investments, in the payment of dividends and the distribution of profits, and in changes in the impairment of investments. Risk optimisation primarily takes place through ongoing monitoring of existing investments.
Investment Project Risks
Projects in energy generation and distribution companies with higher and more long-term capital purchases entail a higher complexity and interdependencies between numerous input parameters. For this reason, deviations from project planning (also with ensuing delays and cost increases) cannot be completely ruled out. The crucial decision-making criterion is the expected return on the invested capital, taking into account risks and opportunities over the entire project term. Whether or not projects are implemented depends on market expectations and on whether the (energy) political environment can offer an adequate level of investment security. Risk management methods are integrated in the entire project cycle to evaluate any potential financial deviations as early as possible and prepare adequate counter-measures.
Financial Risks
Financial risks, such as the interest rate, currency and liquidity risks as well as the market price risk from financial investments, are managed and monitored centrally by the Group Treasury unit of Energie AG Oberösterreich.
Energie AG Group's exposure to interest rate risk can continue to be classified as very low due to the unchanged high fixed interest rate share of close to 94% of outstanding interest-bearing financial liabilities.
The currency risk was mainly limited to investments denominated in Czech koruna. The Group monitors currency risks continuously and mitigates these risks by taking adequate hedging measures.
An anticipatory financial planning provides the basis for managing and monitoring the liquidity risk. Thanks to sufficient liquidity reserves and available, partially drawn lines of credit, the solvency of Energie AG Oberösterreich and its Group companies is ensured at all times. The liquidity risk has not changed and is assessed as very low.
Energie AG Group employs a conservative investment policy to mitigate any fluctuation risk its financial assets (securities, investment funds). A stringent monitoring and continual quantification of exchange risks ensures the Group's strategic liquidity reserves are invested in a risk-optimised way.
Counterparty Risks
The Group uses credit rating methods, credit limit systems, hedging instruments and a targeted strategy of diversifying its business partners to address any counterparty risks it may be exposed to.
Rating
In March 2018, the excellent creditworthiness of Energie AG was again confirmed with the credit rating of “A/stable outlook” awarded by the international rating agency Standard & Poor's. This makes Energie AG once again one of Europe´s best rated utilities with the highest creditworthiness. The annual planning process includes the continuous evaluation of significant investment projects on the basis of rating-relevant key figures with the objective of ensuring that the target credit rating remains within the single-A area.