35.1. Risks and opportunities
The risks and opportunities of Energie AG have not changed significantly from the previous year: The general conditions with regard to the government's energy policy, the regulatory framework as well as intense competitive pressure continue to present great challenges for Energie AG. While the company is exposed to certain commercial risks on the one side, opportunities in the form of new markets, business models and technologies also avail themselves to the company. This is where the pro-active management of risks and opportunities plays an important role.
35.2. Risk management process
The objective of the risk management system employed by Energie AG is to collect information about future developments as early as possible, identify the resultant risks and opportunities and actively control them. As an integral part of the management and control system, risk assessments form an integral part of the strategic and operational decision-making process and support our management team.
The responsible business units follow a structured quarterly process to identify and evaluate risks, opportunities and measures 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 on a quarterly basis and ad hoc as required. 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 submitted to the audit committee with respect to the efficiency and validity of the processes.
Proper documentation and verifiability are also guaranteed by historicisation of the data as at the measurement dates.
35.3. Strategic risks
Making the right strategic decisions is essential for the success of any company. Climate change, the changes in the energy policy and general conditions for the energy industry as well as technological developments and changes in the market environment entail strategic risks and opportunities for Energie AG. An intensive observation of markets, competitors and technologies forms the basis for the continuous evaluation and strategic adjustment of the Groups strategic direction.
Investment projects in energy generation and distribution companies with higher and more long-term capital investments 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. A 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.
35.4. Sustainability risks
As part of its NaDiVeG reporting (reporting under the Austrian Act on Improving Sustainability and Diversity), Energie AG analyses the relevant opportunities and risks for the environment, social affairs, workforce, compliance and anti-corruption and safeguarding human rights, as well as the measures associated with them.
This includes the identification of risks and opportunities related to climate change (e.g. water shortages, heat periods) and initiatives for mitigating the effects of climate change (e.g. CO2 taxes, emission regulations), which are given consideration in the context of the respectively relevant operational risks and opportunities.
35.5. Risks from the operating business activities
Risks from the operating business activities
The profitability and value of the assets, procurement rights and investments of the Energie AG Group are exposed to significant 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.
Electricity production from thermal power plants has increased significantly over the previous year. This is attributable to the increased utilisation of the CCGT power plant in Timelkam, which was over the entire 2018/2019 fiscal year used for grid reserve and congestion management aimed at stabilising the electricity grid and which was, due to the increased electricity prices accompanied by relatively stable gas prices, in certain months also used on the electricity market.
Another important parameter affecting the business development of Energie AG are the developments relating to weather and climate. These developments affect the electricity generation volumes from hydroelectric power – due to hydrological conditions that are outside of human control – and also the space heat-driven sales volumes of electricity, gas and heat. The electricity procurement experienced a moderate positive effect in the reporting period due to water levels above the long-term average.
The competitive situation on the end customer markets – the electricity, gas, heat and telecommunication markets – continue to pose major challenge for Energie AG and affect the customer base, sales volumes and price levels. According to E-Control, the number of customers switching their electricity and gas providers reached a peak level in the first half of 2019.
Numerous measures – such as the bundling of the sales organisations, price guarantees, service and financial assistance offers, focus on digitalisation in product development and positioning as an energy service provider – are aimed at keeping the number of switching customers at lowest possible and at winning over new customers at the same time.
Concerning the economic environment in the Waste Management segment, the trend towards easing of the markets is continuing. However, the positive price trend for thermally recyclable waste 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 addressed by conducting marketing activities that focus on long-term supply contracts with fixed volumes and prices, as well as an intensified cooperation with the public sector. The activities also focus on the further development of the digitalisation projects.
The Czech Republic segment reports a steady development in sales revenues and earnings for water/waste water. Due to the higher than average temperatures and resulting lower sales volumes in the 2018/2019 fiscal year, the income generated by the heat-related business in the Czech Republic was slightly lower than in the previous year. The restructuring of the Czech Republic segment included the start of a synergy project. This project and the ongoing participation in (concession) tenders for water/waste water are the most important measures aimed at securing and increasing our 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. Energie AG continues to successfully expand coverage of fibre to the home (FTTH). The proportion of smart metres, which is higher than the industry average, reached a coverage of 96% in the 2018/2019 fiscal year. These expansions to the business model also offer new opportunities and risks, particularly in terms of IT protection regulations for end customers.
In the business units of Energie AG, systems are exposed to risks from technical failures or other damage events (natural disasters, sabotage, etc.) that 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. In our electricity grid, we proactively continue the strategic programme to replace overhead low-voltage lines and overhead medium-voltage lines that are particularly susceptible to disruption with underground cable as planned. Energie AG operates an adequate incident management system to handle any damages incurred despite these measures and also 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 that depend on secure and reliable information technology. Energie AG addresses the risks for information security, cyber security and data protection by employing comprehensive management systems for information security and data protection.
35.6. Political, regulatory and legal risks
Energy supply is a business model that requires a long-term perspective, which in turn renders it highly dependent on the prevailing political, regulatory and legal framework conditions.
Climate-related EU requirements and their implementation in Austria – depending on the composition of the future federal government – as well as the legal framework for project development and implementation for infrastructure companies are of essential significance for infrastructure companies such as Energie AG. Efforts to counter these risks take the form of an intensive and constructive dialogue with government agencies and policymakers.
For the most part, the general regulatory conditions are expected to remain unchanged. It must be assumed that the regulatory parameters for the fourth regulatory period, which commenced on 1 January 2019, will remain stable until 2023 for the electricity segment. The Austrian Federal Chamber of Commerce and the Federal Chamber of Labour objected against the fundamental commercial conditions for natural gas that will come into effect on 1 January 2018. A decision on how to respond to these objections is still outstanding. The objective continues to be the safeguarding of a stable economic environment for grid operators.
35.7. Risks from investments
Risks from investments are present in the fluctuations of revenues from investments, in the payment of dividends and the distribution of profits, and in changes in the value of participating interests. These risks are primarily optimised by the ongoing monitoring of existing investments.
35.8. Financial risks
The financial risks are centrally managed by the Group Treasury unit on holding level. The management and monitoring of financial risks focuses on the liquidity risk, the interest rate risk, the currency risk, and the fair value risk from financial investments.
As of the end of the 2018/2019 fiscal year, the interest rate risk continues to be assessed as very low due to the continued high proportion of Energie AG Group's financial liabilities bearing fixed interest.
A potential change in the discount rate for provisions is generally accompanied by an opportunity or a risk, because the present value of the provisions declines with an increasing discount rate and increases with a lower discount interest rate. The expected future development of interest rates has increased the current risk level.
The currency risk within Energie AG Group predominantly results from the transaction and translation risks of the Group companies in the Czech Republic and is monitored continuously. This risk is minimised by currency hedging if required.
An anticipatory liquidity planning provides the basis for managing and monitoring the liquidity risk. Sufficient liquidity reserves and available, partially drawn lines of credit assure the solvency of Energie AG and its Group companies at all times.
The risks associated with changes in the prices of financial investments of Energie AG Group (securities, investment funds) – which result from fluctuations on the capital markets – is limited by pursuing a conservative investment policy. A stringent monitoring and continual quantification of exchange rate risks assures that the Group's strategic liquidity reserves are invested in a risk-optimised way.
The Group uses credit ratings, credit limit systems, hedging instruments and a targeted strategy of diversifying its business partners to address any counterparty risks it may be exposed to.
In February 2019, the excellent creditworthiness of Energie AG was again confirmed, with international rating agency Standard & Poor's awarding Energie AG an A (stable outlook) credit rating. The management of Energie AG aims at safeguarding the Group's single-A rating over the long term.