annual-and-sustainability-report-2014

Risks and risk managementRisks and risk managementVattenfall applies conscious and balanced risk-takingin which business transactions are reviewed from bothprofitability and risk perspectives. In accordance with theSwedish Corporate Governance Code and the Board ofDirectors’ Rules of Procedure, Vattenfall’s risk managementframework ensures thorough identification of Vattenfall’srisks and acceptable risk exposure. Risks and risk managementare part of the financial statements in accordancewith IFRS, which can be found on pages 73–142.Enterprise Risk ManagementEnterprise Risk Management (ERM) at Vattenfall is a systematic andstructured process of identifying, analysing and, above all, managingrisks at an early stage that could have a negative impact onVattenfall’s business operations. The aim of ERM is to improve thebusiness operations and optimise risk management. Vattenfall basesits ERM on the risk management standards of the Committee ofSponsoring Organizations of the Treadway Commission (COSO) andcoordinates the process with the company’s financial reporting.Vattenfall’s risk management process quantifies and compares riskswith respect to both financial and non-financial consequences (suchas reputation, environment, health and safety). After aggregating therisks, a composite overview is made of Vattenfall’s risk situation andthe potential financial impact is coupled to relevant financial key datainformation that is used for the financial governance of the company.Vattenfall is exposed to three main categories of risk:Strategic risk – such as a change in political control and changes inlegislation and rules and regulations governing the energy industry.Operational risk – such as risks associated with operation andmaintenance of electricity and heat production plants, high processsafety, supplier cooperation, and competence succession and planning.Financial risk – such as currency risk, interest rate risk, electricityprice risk, fuel price risk, and credit and liquidity risks.Selected examples of risks that Vattenfall is exposed to and how thecompany manages these are provided on the following pages.Enterprise Risk ManagementStrategic risk Operational risk Financial riskFinancialrisk (short- tomedium-term)Risks in operational assets andinfrastructure, and personnel andorganisational risks (short- to long-term)Risk for changes in political control, changes in publicopinion, changes in rules and regulations, and risk inchoice of technology (medium- to long-term)Examples of risksElectricity price riskFuel price riskVolume riskCredit riskOperational asset riskSecurity riskPersonnel riskLegal riskTax riskPolitical riskInvestment riskLiquidity riskInterest rate riskCurrency riskPrice risk in equitiesExamples of risk mitigationHedging of electricity and fuel pricesEffective management of debt portfolioAnalysis and selection of counterpartiesRisk mandateMaintenance and renewalsOptimisation of asset managementInsuranceHigh process safetyInternal governance and controlSuccession and competence planningActive business intelligence activitiesDiversified and sustainable production portfolioScenario analyses in the strategic processThis illustration above shows Vattenfall’s general risk structure and indicates a relative net exposure/impact on the value of Vattenfall’s productionand distribution portfolio after suitable risk mitigation actions have been taken.66 Vattenfall Annual and sustainability report 2014