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AGL Energy Limited 22
Sustainable growth
Economic risk management
AGL effectively manages economic risks by integrating
risk assessment into decision-making and management
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; and
>> 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 FY2012, portfolio projected positions and portfolio projected
economic risk measures remained within the required limits of the
Wholesale Energy Risk Management Policy. The acquisition of Loy
Yang will further manage wholesale energy risk though reducing
the net short position within AGL’s electricity portfolio.
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 since 2010 it has been
one of the most competitive retail electricity markets in the world,
as reported 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 FY2012, a key consideration in
these reviews was the adjustment of regulated prices to account
for the introduction of a carbon price under the
Clean Energy
Act 2011
(Cth). In South Australia, the adjustment of electricity
prices for carbon was based on the intensity of existing generation
assets within the state, while in New South Wales and Queensland,
the impact of the carbon price reflected the intensity of existing
generation assets in the NEM. In Queensland, regulated prices
for FY2013 were also significantly affected by the Queensland
Competition Authority’s change in approach to a market based
methodology and new tariff structures, as well as a Government
mandated price for the main residential tariff. In New South Wales,
the review of wholesale energy costs was within expectations while
South Australia regulated prices were limited by the cap under the
Relative Price Movement methodology. In regulated gas pricing in
New South Wales, a carbon component was approved by IPART and
prices were adjusted according to the Voluntary Transitional Pricing
Arrangement which expires in June 2013.
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, commodity
price risk and interest rate 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 FY2012, hedging thresholds for interest rate, foreign
exchange and credit risk were consistent with the Treasury Policy
except where approved by the board. AGL’s stated policy is to
further diversify its funding sources and lengthen the maturity
profile. AGL maintained the appropriate liquidity buffer in accordance
with Board approved levels throughout the year.
AGL has a BBB/stable credit rating assigned by Standard & Poors,
and AGL manages its balance sheet, financial ratios and risks with
the objective of retaining this rating.