ANNUAL REPORT 2011 - DONG Energy

Market and credit risks
The Group’s net exposure to market risks is illustrated below.
In the long term, the Group’s market risks are determined
by its strategic choices and associated asset mix.
DONG Energy mitigates its structural risks through, among
other things, its technical and geographical diversification
and the transition to greener electricity and heat generation,
as described in the chapter Wind and biomass
growth. Coupled with balancing of the oil and gas portfolio,
this provides a diversified portfolio of assets with different
risk profiles.
To further reduce the fluctuations in the Group’s cash
flows in the short and medium terms, price hedging contracts
are entered into within the risk management time
frame (up to five years). At the short end of the time frame,
we want a high level of hedging to achieve a high degree of
certainty with regard to cash flows, while the hedging level is
lower in subsequent years. This approach is chosen partly
because the underlying longer-term exposure is subject to
greater uncertainty, and partly because the financial and
physical markets are less liquid in the longer term.
Overall, the diversification of the structural risk and management
of the Group’s cash flows in the short and medium
terms has a positive effect on DONG Energy’s capital structure
target, as the fluctuations in earnings from the different
activities are largely independent of each other and can therefore
be assumed to balance each other out to some extent.
Hedging strategy
High
Hedging percentage
Low
Commercial activities
Purchase and production
• Oil and gas production
• Long-term wholesale
gas contracts
• Thermal electricity
generation
• Renewable generation
Sale
• Retail customers
(gas and electricity)
• Wholesale customers
(gas and electricity)
Up to 5 years
Risk management principle
Transfer of exposure
Asset backed
optimisation
Time
• Managing contract
volumes and optimising
contracts
• Optimising physical
and financial exposures
DONG Energy’s principle for managing market risks is
shown below. Where possible, all of the Group’s exposures
from production and purchase and sales contracts within
the management time frame are combined in the activity
Asset-backed optimisation, where they are consolidated
and optimised together. The consolidated exposure is then
hedged via DONG Energy’s trading function (Market trading),
which trades exposures in the market within given
risk parameters.
Market risks can be divided into energy price risks and
financial risks. Financial risks comprise currency risks, interest
rate risks and liquidity and financing risks. Energy
price risks are affected by fluctuations in the prices of oil,
gas, electricity, coal, CO and, to a lesser extent, other com-
2
modities. Part of the exposure depends on one specific
price (direct price risks), while other parts depend on the
difference between two or more prices (spread risks). Market
price risk on direct price risks is higher than for spreadbased
exposures as the prices of individual commodities
are typically more volatile than the levels of wholly or partly
correlated energy prices. The figure shows the exposure
values for 2012 before and after hedging.
Exposure to energy prices in 2012, DKK billion
6
5
4
3
2
1
0
Commercial exposure Net exposure
Hedging of exposure
Oil and gas
Market
trading
Renewable generation
• Efficient execution in
the market within given
risk limits
Execution in the market
Thermal electricity
generation
Market
counterparties
DONG ENERGY DONG ENERGY GROUP ANNUAL REPORT 2011 – manaGEmEnt’s rEviEw 45
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