Internal risk management and audit systems
Our company’s activities are subject to a variety of risks. These result from changes both within the company and outside it. We are committed to managing these risks appropriately, and risk management therefore forms an integral part of all our company’s processes and activities.
To help us manage our risks, we use a transparent internal risk management and audit system. This is designed to provide a reasonable degree of certainty that we are monitoring our performance in meeting our operating targets, that the risks attached to our company processes and business activities are being properly managed, that our financial accounting is reliable, and that we are fully compliant with applicable laws and regulations. As a reference framework for planning and evaluating our internal risk management and audit system, we use the Enterprise Risk Management model of COSO (Committee of Sponsoring Organizations of the Treadway Commission).
The measures we take to manage risks are combined in our Risk Management Framework. This framework is designed so that risks can be managed both top-down and bottom-up. This is done at unit level by means of strategic risk analyses, while at operational level and in the case of projects, operational risk analyses and project risk analyses are used. The framework is based on the Three Lines of Defence model. Management forms the first line of defence, being responsible for controlling its own processes and operational risks, supported by business control. The second line of defence is formed by corporate staff departments, who support and monitor the internal risk management and control system based on an integrated approach. Finally, the third line of defence is the internal audit.
All universally applicable standards are defined in a document entitled Minimum Requirements for Management Control. This is a standardised framework for all Gasunie business units. Within the framework of the risk management and audit system, managers of departments and subsidiaries are responsible for organising and implementing the system within their own part of the organisation. Each year, in a Document of Representation, managers give account to the Executive Board of how the internal risk management and audit system is working within their unit.
All Gasunie staff are subject to our Code of Conduct. All key processes are covered by process descriptions, including the necessary instructions and guidelines. These are regularly updated. In the context of the annual accounts, external auditors periodically evaluate the main elements of the organisation, including the working of the administrative system and internal audit measures. They report their findings to the Executive Board and the Supervisory Board. Once a year, the Executive Board discusses the organisation and operation of the entire risk management and audit system with the Audit Committee.
RISKS SPECIFIC TO GASUNIE
Strategic risk analysis
A strategic risk analysis is performed annually. The Executive Board discusses the risks that could prevent us from attaining our strategic goals. Both the strategic goals and the risks are discussed by the Audit Committee and the Supervisory Board, and are incorporated into the business plans of the various business units. Based on the policy plans, audits are then carried out, and adjustments are made where necessary. This cycle is part of the risk management and audit system. Identified risks are reduced to acceptable limits, in line with Gasunie’s risk profile.
Risks are classified as strategic, operational or commercial. In the case of each risk, we establish its impact, ascertain what measures can be taken to avoid it, assess how likely it is that the risk will become reality, and finally determine the current status of each risk. The main risks faced by Gasunie specifically are described below.
Our business operations are significantly affected by the liberalisation of the European gas market, and the resulting EU directives and changes to national legislation. EU regulations are directly applicable in the member states, and their governments have appointed regulators (specifically, NMa in the Netherlands and BNetzA in Germany) to monitor compliance with relevant laws and regulations. This applies to all regulated sections of the gas market, including gas transport.
Gasunie faces substantial risks in relation to the tariffs that can be charged for gas transport and related services. Both in the Netherlands and in Germany, there is a risk that, if tariffs are set too low, ROI will become unacceptably low, putting pressure on our results and leading to a less attractive investment climate. This could be disadvantageous not only for the shareholder, but also for all other players in the gas market, including, eventually, consumers. This could also mean that we would not be able to implement our strategy effectively. Investing in gas infrastructure is an activity for the long term, and it is therefore vital for Gasunie that it can operate within a transparent regulatory framework and in a stable investment climate. For this reason, the Executive Board places a high priority on reducing this risk, and it explains why we systematically make every effort to remain in close contact and dialogue with the regulators and decision-makers in this regard.
European regulation is continually changing. Recent examples of this are the introduction of the Third Energy Package and the collaborative groups ENTSOG (European Network of Transmission System Operators for Gas) and ACER (Agency for the Cooperation of Energy Regulators). It is essential that we follow these developments very closely, so that we can at all times react appropriately. We do this by, amongst other things, participating intensively in relevant networks, and by actively taking part in ENTSOG activities. Significantly, the managing director of GTS, Annie Krist, was appointed to the Management Board of ENTSOG on 13 December 2012.
Strategy and market developments
The gas and gas infrastructure markets are in a great state of flux. A number of prominent international players are currently trying to strengthen their position in gas transport in mainland Europe, and we are competing with them. The risk here for Gasunie is that it may find itself unable to react rapidly and effectively enough to the accelerating market integration in major EU member states, or to a possible consolidation of gas network companies. The formation of a few, very large TSOs may hinder our international expansion, as a result of which we may find ourselves unable to strengthen our position as a leading cross-border gas infrastructure company in Europe. We try to protect our competitive position by differentiating ourselves by offering superior service and innovative products, including in the field of sustainability. In addition, we are looking for opportunities to work together and join forces with other parties. To ensure that our strategy and the principles and assumptions underlying it are at all times in line with developments relating to sustainability, regulation, financing and market developments, we periodically evaluate them and where necessary update them.
Personal and external safety, health and environment are key aspects of our policy. We have set up a system which guides the relevant processes, monitors performance and identifies points for improvement. We currently manage a 15,000km underground pipeline network and countless installations across the Netherlands and northern Germany. Due to the expansion of the urban environment and the increase in building work in general, it is becoming increasingly difficult to ensure the safe positioning of all our pipelines and to carry out the necessary maintenance and repair work to the network. Continuous care is therefore vital to prevent damage to the gas transport network and to guard against the potential consequences of such damage. We have an extensive management system for maintaining the integrity of the transport network. This includes cathodic protection, pipeline route control and pipeline monitoring. Our multi-year replacement programme focuses on renovating (where necessary) valve stations, gas receiving stations, and metering and regulating stations. Noise standards and integrity requirements are important criteria in this work. Technical security is assured through regular inspection and maintenance of the infrastructure. In addition to all technical guidelines, security guidelines and safety instructions, it is also important to maintain knowledge and expertise within the company, to keep the related core IT systems up to date and to ensure that the organisation is sufficiently flexible.
It is essential for any commercially healthy organisation to maintain a strong focus on its customers and to make continuous efforts to improve contact with them. Moreover, to meet customers’ needs and wishes, the organisation also needs to make timely innovations. It is only by operating in this way that an organisation will be able to respond adequately to changes in the market.
We participate in various partnerships with other market players, who include BBL, Gate terminal, Nord Stream, NEL and, for Gasunie Deutschland, the gas transport companies Deudan and Netra. Participating in these partnerships entails risks. We manage these risks by first defining in advance, as clearly as possible, the rights, obligations, responsibilities and authorisations of the parties involved, and then carrying out frequent reporting. The principal risks involved in the construction of major infrastructures lie in the often complex procedures for obtaining the necessary permits. These can lead to the delay or even cancellation of a project. To implement our strategy, we have substantial borrowing requirements. However, in the current financial market, there is a risk that it will be impossible to arrange sufficient financing, or only at a high price. We therefore need to monitor our creditworthiness, and take a broad view of the money and capital markets when looking for ways of meeting our financial needs. Fortunately, our current position is such that we are able to attract sufficient capital on favourable terms.
In Control Statement
The Executive Board is aware that, no matter how professional our risk management systems may be, they cannot provide an absolute guarantee that we will achieve our business goals, or that the risk of material inaccuracies, loss, fraud and infringements of legislation and regulations will not occur.
The Executive Board hereby states that, with regard to financial reporting risks, the internal risk management and audit systems offer a reasonable degree of certainty that the financial reporting does not contain any material inaccuracies, and that the risk management and audit systems functioned satisfactorily during the reporting year.