2011 Annual Report - OTCIQ.com

52 Risk Report
Commodity Price Risks
The E.ON Group’s business operations are exposed to commodity
price risks. In order to limit our exposure to these risks,
we conduct systematic risk management. The key elements
of our risk management are, in addition to binding Group-wide
guidelines and a Group-wide reporting system, the use of
quantitative key figures, the limitation of risks, and the strict
separation of functions between departments. To limit commodity
price risks, we utilize derivative financial instruments
that are commonly used in the marketplace. These instruments
are transacted with financial institutions, brokers, power
exchanges, and third parties whose creditworthiness we
monitor on an ongoing basis. The Trading unit aggregates and
consistently manages the price risks we face on Europe’s liquid
commodity markets.
We mainly use electricity, gas, coal, carbon allowance, and oil
price hedging transactions to limit our exposure to risks
resulting from price fluctuations, to optimize systems and load
balancing, and to lock in margins. We also engage in proprietary
commodity trading in accordance with detailed guidelines
and within narrowly defined limits.
Financial Risks
The international nature of E.ON’s business operations exposes
E.ON to risks from currency fluctuation. One form of this risk
is transaction risk, which occurs when payments are made in
a currency other than E.ON’s functional currency. Another form
of risk is translation risk, which occurs when currency fluctuations
lead to accounting effects when assets/liabilities and
income/expenses of E.ON companies outside the euro zone are
translated into euros and entered into our Consolidated Financial
Statements. We limit currency risk by conducting systematic
currency management involving derivative and underlying
financial instruments. Currency-translation risk results mainly
from transactions denominated in U.S. dollars, pounds sterling,
Swedish kroner, Norwegian kroner, and Hungarian forints.
E.ON faces earnings risks from financial liabilities, accounts
payable, short-term financing with variable interest rates, and
interest derivatives that are based on variable interest rates.
We also use systematic risk management to manage our
interest-rate and currency risks. Here, E.ON AG plays a central
role by aggregating risk positions through intragroup transactions
and hedging these risks on the market. Due to its intermediary
role, E.ON AG’s risk position is largely closed.
E.ON’s operating activities and use of derivative financial instruments
expose E.ON to credit-default risks. We use a Groupwide
credit risk management system to systematically monitor
the creditworthiness of our business partners on the
basis of Group-wide minimum standards. We manage our creditdefault
risk by taking appropriate measures, which include
obtaining collateral and setting limits. The E.ON Group’s Risk
Committee is regularly informed about all material creditdefault
risks.
E.ON could face liquidity risks due to margin calls resulting
from adverse price developments of derivative financial
instruments.
In addition, E.ON also faces risks from price changes and
losses on the current and non-current investments it makes
to cover its non-current obligations, particularly pension and
asset-retirement obligations. The foundation of our risk management
in this area is a conservative investment strategy
and a broadly diversified portfolio.