Risk management

To succeed as a supplier of energy solutions and infrastructure of the future, it is important that Hafslund spearheads developments and adopts a proactive relationship to the risk patterns to which the Group and the various business units are exposed at any one time.

A combination of goal-oriented risk management, effective crisis contingency planning and efficient internal controls is essential if Hafslund is to achieve its overall goals. The aim of risk management at Hafslund is to identify risks and opportunities in order to manage these within the Group’s risk appetite and in line with adopted strategies. The company has continued to pursue its policy of allowing investors to participate in risk exposure in the market. Hafslund primarily pursues a strategy of being openly exposed to prevailing power prices in relation to cash flows from production activities with some degree of future price hedging in the forward market. Hafslund only engages in active positioning in the financial markets in connection with power price risks.

The Group contributes positively to the environment i.a. by generating electricity and heat from clean and renewable energy sources. Hafslund manages risk with the aim of minimising negative consequences, first and foremost for people and the environment, as well as for the Group’s reputation and finance. The risk of environmental accidents should be mapped at all facilities, and risk-reducing measures are implemented where necessary. Hafslund’s crisis management planning should be well dimensioned and our employees are trained to manage any environmental accidents. All activities at Hafslund should at all times be conducted within the bounds of prevailing legislation, and all employees should act in line with the Group’s core values and ethical guidelines. Hafslund has also established ethical guidelines concerning relationships with the Group’s suppliers. Should, however, any breaches of legislation or guidelines occur, Hafslund has established routines for notification, including an independent notification channel.

Responsibility, organisation and framework

The Board of Directors of Hafslund ASA establishes the basic rules for risk management within the Group by adopting guidelines and frameworks each year. The overarching guidelines cover prioritisations, strategies and basic principles relating to risk management as well as tolerance thresholds for important risk categories. For key financial risk factors such as power price, interest rate and currency risk, risk tolerance is established in the form of frameworks for maximum permitted exposure. The utilisation of risk frameworks is reported to management along with the development of the Group’s risk profile as part of the Group’s ongoing management reporting. At Hafslund the main principle is that risk responsibility should be placed as close as possible to the place where the risk occurs. Operational line management therefore assumes primary responsibility for identifying and following up risk as well as keeping within the appropriate limits for its activities. By involving the individual business units in risk management, Hafslund wishes to increase knowledge and awareness of risk and any need for improvement in the Group. To help with work identifying, measuring and compiling risk, Hafslund has developed and implemented a simple reporting model for operational risk. All units beyond a certain size report an updated risk picture each year. The Group’s crisis contingency planning frameworks are also revised, and are thus based on a live risk profile.

Financial risk factors such as power price risk, interest rate risk and currency exchange risk have great similarities throughout the various business areas. Consequently, management and exercising of risk mandates in connection with this type of risk is allocated to Hafslund’s key treasury and finance functions. The bundling of expertise concerning financial instruments and markets thereby secures efficient risk management.

Hafslund’s risk managers are responsible for establishing and developing a common framework and concept for risk management within the Group. The risk management function is also responsible for the overarching follow-up of financial risk, and for compiling and reporting an overall risk picture to Group management, the Audit Committee and the board. In addition scenario-based stress testing of the value chain is regularly carried out to highlight the degree of the Group’s robustness.

Risk factors

Financial market risk

Hafslund’s market risk is to a large extent connected to the development of power prices, interest rates and individual currency rates. With the exception of limited position-taking in the power markets, Hafslund does not engage in pure trading on the financial markets.

Many of the Group’s business units are exposed to electricity prices. Operating results for Production, Heat and Markets are affected by power prices. Price development is in particular important for power generation activities, as Hafslund has chosen to leave a large degree of the production volume openly exposed to power price developments. The Group is to a lesser extent exposed to risk in connection with other commodities such as oil and gas, and emission rates.

A significant share of Hafslund’s currency exposure relates to the Production business unit. The power generation business sells its production in EUR on Nord Pool Spot. Some of this currency exposure is covered through hedging. BioWood Norway is exposed to both cash inflows and outflows in various foreign currencies. Some other Group companies also make purchases in foreign currency.

The Group is exposed to interest rate risk as a result of changes in interest rates on its borrowings, and through the revenue frameworks governing network operations, which contain a significant interest rate element. Interest rate risk for the interest portfolio is managed from an overall perspective, where the aim is to keep the combination of floating and fixed rates within the limits approved by the Board of Directors. For a more detailed description and quantification of market risk and other financial risk factors, please refer to Note 3 to the annual financial statements.

Other input factors

Due to its focus on renewable energy, the Group is increasingly exposed to risk in connection with input factors of a similar financial nature. This applies in particular to Heat and the company BioWood Norway. Heat is exposed to the market for waste and waste-based fuel in various ways. There is no functioning marketplace (exchange) for managing this type of risk. For the foreseeable future this type of risk can therefore only be covered by entering into bilateral agreements, or collaboration agreements with suppliers.

The price of wood chippings and pellets will also become increasingly important for Hafslund in the future. Hafslund has established a cross-disciplinary discussion forum, where market developments and strategies for these types of factors in particular are subject to evaluation.

Liquidity and credit risk

At any one time Hafslund has considerable outstanding accounts receivable. The customer base mainly comprises small private customers, and historically bad debts have been very low. Hafslund has established guidelines for financial counterparties, which indicate lowest acceptable credit ratings, and as a supplementary measure assesses counterparties’ financial status on an ongoing basis. The Group also endeavours to spread transactions over several counterparties.

Liquidity risk arises to the extent that cash flows from activities do not correspond to financial obligations. Hafslund’s cash flows naturally vary in line with a number of factors including production volume and power prices. Consequently, a long-term committed drawdown facility has been established in order to secure adequate funding, including in periods where obtaining financing on the standard loan markets is difficult.

Regulatory risk

Hafslund’s business, in particular its power production, district heating and network operations, is to a large extent subject to public regulation. Changes in such regulations represent a risk for the Group. In the case of production activities, this applies in particular to specific taxation, fees and regulation of watercourses and other licence conditions. In the district heating business a certain risk is attached to the price picture in that prices are set based on the customer’s alternative cost for obtaining electrical heating. A particular feature of grid operations is that company revenues are largely determined by an officially established revenue framework.

The financial regulation imposed by the Norwegian Water Resources and Energy Directorate (NVE) makes it difficult to predict future revenue frameworks and thus future returns on network investments. Hafslund consequently regards the current regime as unsatisfactory. This a view shared throughout the industry. The authorities’ response to the industry’s objections has been to make adjustments to the current model. The NVE has indicated that relevant changes will be implemented from 2013. It is currently not known what form the specific changes will take or what these will mean for individual grid companies.

On March 2011 the Norwegian Water Resources and Energy Directorate (NVE) adopted the “Competence Regulation” relating to site and area licences. The regulation entered into force on 1 July 2011, and all companies must comply with the regulation by 1 July 2013. As Hafslund Nett already fulfils many of the requirements of the new regulation, its introduction will not impose any dramatic changes on the company: however, some changes will be required in the areas of contingency and operational control. Work will now be initiated to investigate the consequences of the new regulation on the Group’s business in more detail.

In the new regulation the NVE stipulates that all grid customers in Norway must have advanced metering systems (AMS), and has established deadlines for the obligatory introduction. By the end of 2015, AMS shall be installed for 80 percent of all grid customers, and by the end of 2016 AMS shall be in place at all customers. AMS covers the actual meters, associated equipment used for communication and management at customers’ premises, communication solutions between customers and the grid company and equipment and systems required to receive, store and process meter data in the AMS system. In 2011 Hafslund Nett established a project with the mandate of commencing implementation of AMS in Hafslund Nett’s distribution area.

Operating risk

Hafslund maps annual risk within all the Group’s key business and staff units. Risk is calculated as a combination of probability and consequence and is classified using a traditional risk matrix. A full risk mapping was last performed in spring/summer 2011, when 188 risk scenarios were reported. The status of measures and effects of risk are followed up every six months, and a number of effective risk-reducing measures have already been initiated or implemented.

Reported risk scenarios cover a range of ongoing issues of various sizes relating to business operation in the companies. Several key risk factors of an operational nature, including the following, are of significance for the Group’s businesses: Operational downtime will result in a significant financial risk for several of the Group’s companies. One example is damage to turbines in the company’s hydropower production plants, which could result in production activities being unable to fully utilise water resources. Operating downtime also involves costs for the company’s distribution activities within Heat and Networks. Operational downtime, faults or security breaches at key staff functions, for example ICT, could be critical for the Group’s operational activities. Hafslund therefore attaches importance to clarifying responsibility allocation and preventing downtime. As part of this process the Group implements a number of measures including a separate ICT security policy.

Operational risk may to a greater or lesser extent be covered by insurance. Hafslund’s insurances include cover for unforeseen events and the destruction of the company’s own production and network facilities caused by natural hazards or fire, liability insurance for damage caused to third parties and insurance that covers loss as a result of criminal acts.