7.1.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 established part of the management and controlling system, the risk management plays a role in strategic management, investment/project management and the operational activities.

Based on the operational risk management in the decentral business units, the operational and strategic risk management are controlled by the central risk management unit. Risks, opportunities and measures are updated on a quarterly basis and recorded in a group-wide implemented software tool. The identified opportunities and risks are analysed on group level and aggregated to form the total risk position.

Reporting to the Group's Management Board is done on a quarterly basis and ad hoc if required. The risk management report is an integral part of the reporting to the Supervisory Board and, as required under the Austrian Company Law Amendment Act (URÄG), is also reported to the audit committee with respect to the efficiency and validity of the risk management process.

Proper documentation and verifiability are also guaranteed by historicisation of the data as at the measurement dates.

7.2 Strategic risks

Making the right strategic decisions is quintessential for the success of any company. Climate change, changing framework conditions in energy politics and the energy industry sector, technological development and a changing market environment entail strategic risks and opportunities for Energie AG. Based on an intensive surveillance of markets, competitors and technologies, the strategic direction is continually being reviewed and adapted to new circumstances.

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.

7.3. Risks from operational activities

The profitability and value of the assets, procurement rights and participating interests of the Energie AG Group are exposed to significant market price risks (prices for electricity, gas, biomass, emissions allowance pricing etc.). Because the majority of the generated volume has already been contracted, the lower electricity prices are not expected to have any major effect on the result for the 2019/2020 fiscal year. To enable the utilisation of synergies within the Group as well as risk strategies that are geared to the market environment, the know-how concerning the management of commodity price risks has been bundled in Energie AG Oberösterreich Trading GmbH.

The electricity production from thermal capacities in the Energy Segment has declined from the previous fiscal year. The continued high electricity prices and relatively stable gas prices in the winter half year allowed for the utilisation of the CCGT (combined-cycle gas turbine) power plant in Timelkam, which is kept as a reserve for grid reserve and congestion management.

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 in the reporting period benefitted of water levels that were higher than the long-term average, but slightly lower than in the previous fiscal year. All temperature-exposed units experienced the effects of the – in relation to the long-term average – mild winter temperatures.

The COVID-19 pandemic, the ensuing subdued economic development and demanding energy policy framework conditions presented great challenges for the end customer market for electricity, gas, heat and telecommunication services. According to internal assessments, the COVID-19 pandemic will result in significantly lower revenues in the electricity and gas sectors. In the area of private customers, the continued curfew measures are expected to result in slightly higher sales volumes. The risks associated with the current situation are analysed and assessed frequently, suitable measures are taken as required. According to E-Control Austria, the year 2019 saw the greatest number of customers switching their electricity and gas provider since the liberalisation of the markets. Numerous measures are implemented to keep provider switches for Energie AG at the lowest possible level and to win over new customers – 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.

In the Waste Management Segment, the traditional waste management services benefitted of favourable economic conditions in the half-year under review and continued the positive trend from the previous fiscal year. As a result of the permanent high volumes of waste requiring thermal treatment, waste incineration plants throughout Europe continued to operate at high capacity utilisation rates. The negative trend from the previous year continued for the recycling materials paper/cardboard and metals where prices are expected to recover after bottoming out at the end of the first year.

Stable sales revenues and results will be assured by intensifying the cooperation with the public sector, a stringent strategic cost management, and ongoing implementation of optimisation projects.

The Austrian waste management companies were expressly excluded from the COVID-19 lockdown that started in mid-March 2020. To warrant a reliable disposal of waste, the operating business operated from the second half of March onward under aggravated framework conditions and in compliance with the safety and personal hygiene requirements.

In the Czech Republic Segment, the favourable macroeconomic data were – up to the onset of the COVID-19 pandemic – reflected in a positive sales development and in increasing order volumes in the service business. Due to weather conditions, sales in heating were slightly impaired by the mild winter. It is difficult to estimate the implications of the COVID-19 pandemic, and particularly so with respect to upcoming concessionaires. The operating business is likely to experience a contraction in the producing sector, which will to some degree be compensated by higher demand from households. 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.

Because of the rapidly advancing digitalisation, the expansion of Fibre To The Home (FTTH) and the fitting of smart meters is gaining in importance. The COVID-19 pandemic clearly highlighted the great importance of lightspeed broadband internet for Upper Austria as a business location. Energie AG is continuing the installation of FFTH, but the COVID-19 pandemic is expected to affect the acquisition and construction activity. As of 31 March 2020, smart meters accounted for 98.25% of metering installations, a high value by industry standards that fully satisfies the statutory requirements. 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 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.

The storm fronts at the beginning of the year created a challenging situation due to the difficulties caused in electricity grid operations. In this situation, the 110 kV high-voltage grid once again proved to be the strong and reliable supply backbone of the electricity supply in Upper Austrian. The strategic programmes to replace overhead low-voltage lines and overhead medium-voltage lines that are particularly susceptible to disruption with underground cable and the systematic expansion of grid automation are continued as planned. This further reduces the effects of windstorm events on the power supply and increases the availability of the grid.

As an operator of critical infrastructure, Energie AG has installed a suitable crisis and emergency management that enables the Group to respond appropriately to a crisis like the current COVID-19 pandemic, and assure the availability of its systems.

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 risks for information security, cyber security and data protection by employing comprehensive management systems for information security and data protection.

7.4.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 as well as the statutory environment for project development and implementation for infrastructure companies are of essential significance for infrastructure companies such as Energie AG. Efforts are made to counter these risks by engaging in an intensive and constructive dialogue with government agencies and political stakeholders.

The general regulatory conditions for grid operators continue to be viewed as stable. The parameters for the current electricity regulation period are fixed for five years. In terms of the general economic conditions for natural gas, it can be assumed that the parameters will be fixed in the vein of the proceedings already completed for the industry and will be applied throughout the third regulatory period. The objective continues to be the safeguarding of a stable economic environment for grid operators.

7.5. Risks from investments in other companies

Risks from participating interests in other companies 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 participating interests.

7.6.Financial risks

The management of financial risks has never been more important than in the current turbulent environment on the financial and capital markets. Financial risks, such as the interest rate risk, currency and liquidity risks as well as the market price risk from financial investments, are managed and monitored centrally by Energie AG Oberösterreich. The credit risk is managed in close consultation with the individual business units and mitigated by carrying out regular credit analyses for major counterparties.

The provisions carry a potential opportunity or risk, because the present value of the provisions declines with an increasing discount rate and increases with a lower discount interest rate.