Risk has been divided into four categories: market-related, financial, operational and miscellaneous. Operational risk is generally dealt with by means of contingency plans and procedures, while financial and market-related risks are managed through authorisations and a continual evaluation of risk exposure.

Market-related risk
Risk is defined in relation to volume and price uncertainty. Statkraft’s core business is the generation and trading of electricity. However, uncertainties with respect to fluctuations in both price and volume are reduced to some extent because prices will generally be lower when production volumes can be kept high. Prices also tend to rise when the available production volume sinks. If the company were to sell electricity only on the spot market its revenues
would fluctuate greatly. To reduce such revenue fluctuations Statkraft also trades in the futures market. Before a new contract is signed, it is assessed in light of the company’s other contracts. The contract portfolio is continuously adjusted in relation to the general view of future price trends and the company’s own generating capacity.

The trading portfolio is followed up on a daily basis by reporting Value-at-Risk (VaR) figures. This business is governed by a narrowly defined set of trading rules. The origination portfolio is based largely on the buying and selling of customised contracts. These are hedged with standard contracts such that the balance between expected profits and risk profile complies with the authorisation regulations for trading.

Financial risk
Foreign exchange: Foreign exchange risk consists largely of uncertainties relating to electricity sales in foreign currencies. The hedging strategy is included in the company’s overall finance strategy.

Interest rates: The group has a high level of debt and is vulnerable to changes in interest rates. Interest rate swaps are used to achieve the desired interest rate structure on the company’s borrowing portfolio. In addition, future rate agreements (FRA) are used to manage the rate fixing risk.

Liquidity and credit: Statkraft assumes a liquidity risk when the term of its financial commitments is different from the cash flow generated by its assets. With respect to credit risk, the terms granted shall be determined on the basis of a formal credit rating of the individual debtor or an analysis of their key financial figures. Credit risk relating to physical and financial electricity contracts is calculated and monitored on a weekly basis.

Operational risk
Production facilities: Operational risk is mainly linked to the company’s production facilities. Statkraft has extensive experience of managing operational risk through procedures and contingency plans.

IT: IT risk is included in the overall contingency plan. Important elements in this area are the availability of IT tools and security in relation to the misuse of information from the company’s databases and analytical tools.

HSE: Risk relating to health, safety and the environment (HSE) is managed by means of detailed procedures covering the activities of all operative units. The company maintains a constant focus on HSE matters affecting both its own employees and the general public.

External environment: All operative units carry out an annual audit of their environmental impact in accordance with the requirements of ISO 14001:1996 certification. Incidents are recorded and followed up on an ongoing basis, which provides statistical data and highlights the company’s risk management performance both for internal purposes and as documentation for the regulatory authorities, such as the Norwegian Water Resources and Energy Directorate (NVE). Licensing conditions and river management regulations are entered into the process systems and any non-conformances are recorded and can be used as the basis for remedial measures and changes in risk assessments.

Miscellaneous risk
Political: The business framework within which Statkraft operates is influenced by political decisions, ie tax regulations (including environmental taxes), the reversion scheme, changes in the minimum water flow regulations and instructions from the NVE, as well as the general conditions for Norwegian industry. Statkraft is also exposed to
political risk in terms of the size of the dividend which its owner requires from the company.

Reputation: To a large extent Statkraft’s business conditions are determined by the political and regulatory authorities. Statkraft’s corporate reputation influences the confidence which these authorities have in the company. For this reason Statkraft strives hard to communicate with important stakeholders who may influence the company’s reputation.