Page 24 - AGL Sustainability Report 2011

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Economic
AGL Energy Limited 22
Sustainable growth
Economic risk management
AGL effectively manages economic risks by integrating
risk assessment into decision-making and management
processes.
Wholesale energy risks – approach and performance
A number of commercial optimisation activities are utilised in AGL’s
electricity, gas and environmental products portfolio management
division, including:
>> reducing wholesale electricity costs through optimising load
diversity between customer classes and regions
>> optimising across the gas and electricity portfolios with arbitrage
opportunities provided by gas generation assets
>> accelerating or decelerating hedging programs based on AGL’s
view of future market prices
>> employing a variety of instruments including weather derivatives
to balance risk and return.
All of these commercial activities have independent risk
management oversight to maintain portfolio positions within
defined limits. Risk management performance is monitored through
a continuous review of hedging contracts, the physical portfolio
position and the possible economic outcomes from these positions.
A Risk Management Committee of senior business managers meets
regularly to review these performance measures.
During FY2011, portfolio projected positions and portfolio projected
economic risk measures remained within the required limits of the
Wholesale Energy Risk Management Policy. However, extreme
weather events were experienced across the Australian eastern
states in January and February 2011, including floods and cyclone
Yasi in Queensland, floods in Victoria and extreme temperatures
in Sydney, Melbourne and Adelaide. These weather events had a
significant financial impact upon AGL resulting in a profit downgrade
for the year. Reviews presented to the Risk Management Committee
and the AGL Board confirmed that these were extreme weather
events of an unforeseeable nature and prevailing risk management
limits for projected positions were still considered appropriate.
Price regulation risks – approach and performance
A key issue within the energy sector is the continued regulation
of household and small business electricity and gas prices by
state governments. In FY2009, Victoria became the first state in
Australia to discontinue regulation of retail prices and in 2010 it was
nominated as one of the most competitive retail electricity markets
in the world in the World Energy Retail Market Rankings Report by
Vaasa ETT. Some other states have also committed to remove price
regulation when competition is demonstrated to be effective. AGL
continues to be concerned about the financial risks that exist for
energy retailers where regulation of prices is continued, as there
will always be a risk that the regulated rate will not reflect current
energy costs.
AGL is an active participant in price review processes across
the National Electricity Market. During FY2011, the Essential
Services Commission of South Australia completed a review of
the methodology used to set regulated electricity prices in South
Australia. Reviews of regulated electricity prices were carried out in
New South Wales and Queensland under existing methodologies. In
May 2011, the Queensland Government directed the Queensland
Competition Authority to review the retail electricity pricing
methodology and tariff structures for regulated customers
commencing 1 July 2012. AGL will continue to work closely with the
Government, regulators and other stakeholders on these issues.
During the year, AGL has also been involved in regulated gas pricing
processes in New South Wales and South Australia. In New South
Wales, regulated gas prices were adjusted in line with the existing
price path determined by the regulator in 2010. In South Australia,
AGL participated in the review of regulated gas prices for the period
covering 2011 to 2014.
Treasury risks – approach and performance
AGL’s activities expose it to a variety of financial risks. These risks
include market risk (including foreign exchange risk, interest rate
risk and price risk), credit risk and liquidity risk. AGL’s overall risk
management program focuses on the unpredictability of markets
and seeks to manage the impact of these risks on AGL’s financial
performance, by utilising a range of derivative financial instruments
to hedge risk exposures.
During FY2011, hedging thresholds for interest rate, foreign
exchange and credit risk were consistent with the Treasury Policy.
AGL’s stated policy is to further diversify its funding sources and
lengthen the maturity profile.
AGL has a BBB stable credit assigned by Standard & Poors, and
AGL manages its balance sheet, financial ratios and risks with the
objective of retaining this rating.