45. Risk management

Financial risk management governance and objectives

As part of its operations, the Enel Group is exposed to a variety of financial risks, notably interest rate risk, commodity risk, currency risk, credit and counterparty risk and liquidity risk.

As noted in the section “Risk management” in the Report on Operations, the Group’s governance arrangements for financial risks include internal committees and the establishment of specific policies and operational limits. Enel’s primary objective is to mitigate financial risks appropriately so that they do not give rise to unexpected changes in results.

The Group’s policies for managing financial risks provide for the mitigation of the effects on performance of changes in interest rates and exchange rates with the exclusion of translation risk (connected with consolidation of the accounts). This objective is achieved at the source of the risk, through the diversification of both the nature of the financial instruments and the sources of revenue, and by modifying the risk profile of specific exposures with derivatives entered into on over-the-counter markets or with specific commercial agreements.

As part of its governance of financial risks, Enel regularly monitors the size of the OTC derivatives portfolio in relation to the threshold values set by regulators for the activation of clearing obligations (EMIR - European Market Infrastructure Regulation no. 648/2012 of the European Parliament and of the Council). During 2020, no overshoot of those threshold values was detected.

There were no changes in the sources of exposure to such risks compared with the previous year.

Finally, the impact of COVID-19 on risk management issues was limited and in any case not such as to directly and materially influence the valuation of derivative instruments and the outcome of the assessment of the effectiveness of hedges of exchange rates, interest rates and commodities.

The financial underlyings were not affected by the adverse impact of COVID-19 either, and no changes were recorded in the exposures.

Interest rate risk

Interest rate risk derives primarily from the use of financial instruments and manifests itself as unexpected changes in charges on financial liabilities, if indexed to floating rates and/or exposed to the uncertainty of financial terms and conditions in negotiating new debt instruments, or as an unexpected change in the value of financial instruments measured at fair value (such as fixed-rate debt).

The main financial liabilities held by the Group include bonds, bank borrowings, borrowings from other lenders, commercial paper, derivatives, cash deposits received to secure commercial or derivative contracts (guarantees, cash collateral).

The Enel Group mainly manages interest rate risk through the definition of an optimal financial structure, with the dual goal of stabilizing borrowing costs and containing the cost of funds.

This goal is pursued through the diversification of the portfolio of financial liabilities by contract type, maturity and interest rate, and modifying the risk profile of specific exposures using OTC derivatives, mainly interest rate swaps and interest rate options. The term of such derivatives does not exceed the maturity of the underlying financial liability, so that any change in the fair value and/or expected cash flows of such contracts is offset by a corresponding change in the fair value and/or cash flows of the hedged position.

Proxy hedging techniques can be used in a number of residual circumstances, when the hedging instruments for the risk factors are not available on the market or are not sufficiently liquid.

For the purpose of EMIR compliance, in order to test the actual effectiveness of the hedging techniques adopted, the Group subjects its hedge portfolios to periodic statistical assessment.

Using interest rate swaps, the Enel Group agrees with the counterparty to periodically exchange floating-rate interest flows with fixed-rate flows, both calculated on the same notional principal amount.

Floating-to-fixed interest rate swaps transform floating-rate financial liabilities into fixed rate liabilities, thereby neutralizing the exposure of cash flows to changes in interest rates.

Fixed-to-floating interest rate swaps transform fixed rate financial liabilities into floating-rate liabilities, thereby neutralizing the exposure of their fair value to changes in interest rates.

Floating-to-floating interest rate swaps transform the indexing criteria for floating-rate financial liabilities.

Some structured borrowings have multi-stage cash flows hedged by interest rate swaps that at the reporting date, and for a limited time, provide for the exchange of fixed-rate interest flows.

Interest rate options involve the exchange of interest differences calculated on a notional principal amount once certain thresholds (strike prices) are reached. These thresholds specify the effective maximum rate (cap) or the minimum rate (floor) to which the synthetic financial instrument will be indexed as a result of the hedge. Certain hedging strategies provide for the use of combinations of options (collars) that establish the minimum and maximum rates at the same time. In this case, the strike prices are normally set so that no premium is paid on the contract (zero cost collars).

Such contracts are normally used when the fixed interest rate that can be obtained in an interest rate swap is considered too high with respect to market expectations for future interest rate developments. In addition, interest rate options are also considered most appropriate in periods of greater uncertainty about future interest rate developments because they make it possible to benefit from any decrease in interest rates.

The following table reports the notional amount of interest rate derivatives at December 31, 2020 and December 31, 2019 broken down by type of contract.

Millions of euro Notional amount
  2020 2019
Floating-to-fixed interest rate swaps 7,323 7,932
Fixed-to-floating interest rate swaps 173 152
Fixed-to-fixed interest rate swaps - -
Floating-to-floating interest rate swaps 276 327
Interest rate options 50 50
Total 7,822 8,461


For more details on interest rate derivatives, please see note 47 “Derivatives and hedge accounting”.

Interest rate risk sensitivity analysis

Enel analyzes the sensitivity of its exposure by estimating the effects of a change in interest rates on the portfolio of financial instruments.

More specifically, sensitivity analysis measures the potential impact on profit or loss and on equity of market scenarios that would cause a change in the fair value of derivatives or in the financial expense associated with unhedged gross debt.

These market scenarios are obtained by simulating parallel increases and decreases in the yield curve as at the reporting date.

There were no changes introduced in the methods and assumptions used in the sensitivity analysis compared with the previous year.

With all other variables held constant, the Group’s pre-tax profit would be affected by a change in the level of interest rates as follows.

Millions of euro 2020
    Pre-tax impact on profit or loss Pre-tax impact on equity
  Basis points Increase Decrease Increase Decrease
Change in financial expense on gross long-term floating-rate debt after hedging 25 18 (18) - -
Change in fair value of derivatives classified as non-hedging instruments 25 6 (6) - -
Change in fair value of derivatives designated as hedging instruments          
Cash flow hedges 25 - - 112 (112)
Fair valuehedges 25 - - - -


At December 31, 2020, 24.6% (22.5% at December 31, 2019) of gross long-term financial debt was floating rate. Taking account of effective cash flow hedges of interest rate risk (in accordance with the provisions of the IFRS-EU), 86.3% of gross long-term financial debt was hedged at December 31, 2020 (85.9% at December 31, 2019).

Currency risk

Currency risk mainly manifests itself as unexpected changes in the financial statement items associated with transactions denominated in a currency other than the presentation currency. The Group’s consolidated financial statements are also exposed to translation risk as a result of the conversion of the financial statements of foreign subsidiaries, which are denominated in local currencies, into euros as the Group’s presentation currency.

The Group’s exposure to currency risk is connected with the purchase or sale of fuels and power, investments (cash flows for capitalized costs), dividends and the purchase or sale of equity investments, commercial transactions and financial assets and liabilities.

The Group policies for managing currency risk provide for the mitigation of the effects on profit or loss of changes in the level of exchange rates, with the exception of the translation effects connected with consolidation.

In order to minimize the exposure to currency risk, Enel implements diversified revenue and cost sources geographically, and uses indexing mechanisms in commercial contracts. Enel also uses various types of derivative, typically on the OTC market.

The derivatives in the Group’s portfolio of financial instruments include cross currency interest rate swaps, currency forwards and currency swaps. The term of such contracts does not exceed the maturity of the underlying instrument, so that any change in the fair value and/or expected cash flows of such instruments offsets the corresponding change in the fair value and/or cash flows of the hedged position.

Cross currency interest rate swaps are used to transform a long-term financial liability denominated in currency other than the presentation currency into an equivalent liability in the presentation currency.

Currency forwards are contracts in which the counterparties agree to exchange principal amounts denominated in different currencies at a specified future date and exchange rate (the strike). Such contracts may call for the actual exchange of the two principal amounts (deliverable forwards) or payment of the difference generated by differences between the strike exchange rate and the prevailing exchange rate at maturity (non-deliverable forwards). In the latter case, the strike rate and/or the spot rate can be determined as averages of the rates observed in a given period.

Currency swaps are contracts in which the counterparties enter into two transactions of the opposite sign at different future dates (normally one spot, the other forward) that provide for the exchange of principal denominated in different currencies.

The following table reports the notional amount of transactions outstanding at December 31, 2020 and December 31, 2019, broken down by type of hedged item.

Millions of euro Notional amount
  2020 2019
Cross currency interest rate swaps (CCIRSs) hedging debt denominated in currencies other than the euro 20,636 22,756
Currency forwards hedging currency risk on commodities 5,469 4,291
Currency forwards/swaps hedging future cash flows in currencies other than the euro 3,971 4,760
Other currency forwards 990 1,488
Total 31,066 33,295

 

More specifically, these include:

  • CCIRSs with a notional amount of €20,636 million to hedge the currency risk on debt denominated in currencies other than the euro (€22,756 million at December 31, 2019);
  • currency forwards with a total notional amount of €9,440 million used to hedge the currency risk associated with purchases of natural gas and fuel and expected cash flows in currencies other than the euro (€9,051 million at December 31, 2019);
  • other currency forwards include OTC derivatives transactions carried out to mitigate currency risk on expected cash flows in currencies other than the presentation currency connected with the purchase of investment goods in the renewables and infrastructure and networks sectors (new generation digital meters), on operating costs for the supply of cloud services and on revenue from the sale of renewable energy.

At December 31, 2020, 51% (52% at December 31, 2019) of Group long-term debt was denominated in currencies other than the euro.

Taking account of hedges of currency risk, the percentage of debt not hedged against that risk amounted to 17% at December 31, 2020 (18% at December 31, 2019).

Currency risk sensitivity analysis

The Group analyses the sensitivity of its exposure by estimating the effects of a change in exchange rates on the portfolio of financial instruments.

More specifically, sensitivity analysis measures the potential impact on profit or loss and equity of market scenarios that would cause a change in the fair value of derivatives or in the financial expense associated with unhedged gross medium/long-term debt.

These scenarios are obtained by simulating the appreciation/depreciation of the euro against all of the currencies compared with the value observed as at the reporting date.

There were no changes in the methods or assumptions used in the sensitivity analysis compared with the previous year.

With all other variables held constant, the pre-tax profit would be affected by changes in exchange rates as follows.

Millions of euro   2020
    Pre-tax impact on profit or loss Pre-tax impact on equity
  Exchange rate Increase Decrease Increase Decrease
Change in fair value of derivatives classified as non-hedging instruments 10% 605 (739) - -
Change in fair value of derivatives designated as hedging instruments          
Cash flow hedges 10% - - (2,968) 3,626
Fair value hedges 10% (53) 65 - -


Commodity price risk

The risk of fluctuations in the price of energy commodities such as electricity, gas, oil, CO2, etc. is generated by the volatility of prices and structural correlations between them, which create uncertainty in the margin on purchases and sales of electricity and fuels at variable prices (e.g. indexed bilateral contracts, transactions on the spot market, etc.).

The exposures on indexed contracts are quantified by breaking down the contracts that generate exposure into the underlying risk factors.

To contain the effects of fluctuations and stabilize margins, in accordance with the policies and operating limits determined by the Group’s governance and leaving an appropriate margin of flexibility to seize any short-term opportunities that may present themselves, Enel develops and plans strategies that impact the various phases of the industrial process linked to the production and sale of electricity and gas (such as forward procurement and long-term commercial agreements), as well as risk mitigation plans and techniques using derivative contracts (hedging).

As regards electricity sold by the Group, Enel mainly uses fixed-price contracts in the form of bilateral physical contracts (PPAs) and financial contracts (e.g. contracts for differences, VPP contracts, etc.) in which differences are paid to the counterparty if the market electricity price exceeds the strike price and to Enel in the opposite case. The residual exposure in respect of the sale of energy on the spot market not hedged with such contracts is aggregated by uniform risk factors that can be managed with hedging transactions on the market. Proxy hedging techniques can be used for the industrial portfolios when the hedging instruments for the specific risk factors generating the exposure are not available on the market or are not sufficiently liquid. In addition, Enel uses portfolio hedging techniques to assess opportunities for netting intercompany exposures.

The Group mainly uses plain vanilla derivatives for hedging (more specifically, forwards, swaps, options on commodities, futures, contracts for differences).

Some of these products can be indexed to a variety of underlyings (coal, gas, oil, CO2, different geographical areas, etc.) and the approaches can be assessed and adapted to specific needs.

Enel also engages in proprietary trading in order to maintain a presence in the Group’s reference energy commodity markets. These operations consist in taking on exposures in energy commodities (oil products, gas, coal, CO2 certificates and electricity) using financial derivatives and physical contracts traded on regulated and over-the-counter markets, optimizing profits through transactions carried out on the basis of expected market developments.

The following table reports the notional amount of outstanding transactions at December 31, 2020 and December 31, 2019, broken down by type of instrument.

Millions of euro Notional amount
  2020 2019
Forward and futures contracts 48,064 35,824
Swaps 1,862 5,706
Options 576 654
Embedded 7 68
Total 50,509 42,252


For more details, please see note 47 “Derivatives and hedge accounting”.

Sensitivity analysis of commodity risk

The following table presents the results of the analysis of sensitivity to a reasonably possible change in the commodity prices underlying the valuation model used in the scenario at the same date, with all other variables held constant.

The impact on pre-tax profit of shifts of +15% and -15% in the price curve for the main commodities that make up the fuel scenario and the basket of formulas used in the contracts is mainly attributable to the change in the price of electricity, gas and petroleum products and, to a lesser extent, of CO2. The impact on equity of the same shifts in the price curve is primarily due to changes in the price of electricity, petroleum products and, to a lesser extent, CO2. The Group’s exposure to changes in the prices of other commodities is not material.

Millions of euro   2020
    Pre-tax impact on profit or loss Pre-tax impact on equity
  Commodity price Increase Decrease Increase Decrease
Change in the fair value of trading derivatives on commodities 15% (43) 43 - -
Change in the fair value of derivatives on commodities designated as hedging instruments 15% - - 25 (25)


Credit and counterparty risk

The Group’s commercial, commodity and financial transactions expose it to credit and counterparty risk, i.e. the possibility that a deterioration in the creditworthiness of a counterparty that has an adverse impact on the expected value of the creditor position or, for trade payables only, increase average collection times.

Accordingly, the exposure to credit risk is attributable to the following types of transactions:

  • the sale and distribution of electricity and gas in free and regulated markets and the supply of goods and services (trade receivables);
  • trading activities that involve the physical exchange of assets or transactions in financial instruments (the commodity portfolio);
  • trading in derivatives, bank deposits and, more generally, financial instruments (the financial portfolio).

In order to minimize credit risk, credit exposures are managed at the Region/Country/Global Business Line level by different units, thereby ensuring the necessary segregation of risk management and control activities. Monitoring the consolidated exposure is carried out by Enel SpA.

In addition, at the Group level the policy provides for the use of uniform criteria – in all the main Regions/Countries/Global Business Lines and at the consolidated level – in measuring commercial credit exposures in order to promptly identify any deterioration in the quality of outstanding receivables and any mitigation actions to be taken.

The policy for managing credit risk associated with commercial activities provides for a preliminary assessment of the creditworthiness of counterparties and the adoption of mitigation instruments, such as obtaining collateral or unsecured guarantees.

In addition, the Group undertakes transactions to factor receivables without recourse, which results in the complete derecognition of the corresponding assets involved in the factoring, as the risks and rewards associated with them have been transferred.

Finally, with regard to financial and commodity transactions, risk mitigation is pursued with a uniform system for assessing counterparties at the Group level, including implementation at the level of Regions/Countries/Global Business Lines, as well as with the adoption of specific standardized contractual frameworks that contain risk mitigation clauses (e.g. netting arrangements) and possibly the exchange of cash collateral.

Despite the deterioration in the collection status of some customer segments, which was taken into account in the assessment of the impairment of trade receivables, to date the Group portfolio has displayed resilience to the global pandemic. This reflects the strengthening of digital collection channels and a sound diversification of commercial customers with a low exposure to the impacts of COVID (e.g. utilities and distribution companies).

LOAN ASSETS

Millions of euro          
  at Dec. 31, 2020
Staging Basis for recognition of expected credit loss allowance Average loss rate (PD*LGD) Gross carrying amount Expected credit loss allowance Carrying amount
Performing 12 m ECL 0.9% 7,088 65 7,023 
Underperforming Lifetime ECL 25.0% 88 22 66 
Non-performing Lifetime ECL 68.8% 176 121 55 
Total     7,352  208  7,144 

CONTRACT ASSETS, TRADE RECEIVABLES AND OTHER FINANCIAL ASSETS: INDIVIDUAL MEASUREMENT

Millions of euro        
  at Dec. 31, 2020
  Average loss rate (PD*LGD) Gross carrying amount Expected credit loss allowance Carrying amount
Contract assets 4.3% 23  22 
Trade receivables        
Trade receivables not past due 1.3% 4,953  66  4,887 
Trade receivables past due:        
- 1-30 days 1.5% 453  446 
- 31-60 days 2.8% 106  103 
- 61-90 days 12.8% 39  34 
- 91-120 days 28.0% 25  18 
- 121-150 days 12.9% 31  27 
- 151-180 days 100.0% 53  53 
- more than 180 days (credit impaired) 83.8% 1,692  1,418  274 
Total trade receivables   7,352  1,563  5,789 
Other financial assets        
Other financial assets not past due 3.1% 1,243  38  1,205 
Other financial assets past due:        
- 1-30 days 15.6% 499  78  421 
- 31-60 days - 11  11 
- 61-90 days -
- 91-120 days -
- 121-150 days -
- 151-180 days 40.0%
- more than 180 days (credit impaired) 6.3% 79  74 
Total other financial assets   1,837  123  1,714 
TOTAL   9,212  1,687  7,525 

 

CONTRACT ASSETS, TRADE RECEIVABLES AND OTHER FINANCIAL ASSETS: COLLECTIVE MEASUREMENT

Millions of euro        
  at Dec. 31, 2020
  Average loss rate (PD*LGD) Gross carrying amount Expected credit loss allowance Carrying amount
Contract assets 1.2% 163  161 
Trade receivables        
Trade receivables not past due 0.6% 5,487  32  5,455 
Trade receivables past due:        
- 1-30 days 7.2% 554  40  514 
- 31-60 days 16.2% 154  25  129 
- 61-90 days 26.4% 110  29  81 
- 91-120 days 36.6% 71  26  45 
- 121-150 days 43.1% 58  25  33 
- 151-180 days 100.0% 79  79 
- more than 180 days (credit impaired) 100.0% 1,468  1,468 
Total trade receivables   7,981  1,724  6,257 
Other financial assets        
Other financial assets not past due 2.2% 274  268 
Other financial assets past due:        
- 1-30 days -
- 31-60 days -
- 61-90 days -
- 91-120 days -
- 121-150 days -
- 151-180 days -
- more than 180 days (credit impaired) - 55  55 
Total other financial assets   333  327 
TOTAL   8,477  1,732  6,745 


Liquidity risk

Liquidity risk manifests itself as uncertainty about the Group’s ability to discharge its obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

Enel manages liquidity risk by implementing measures to ensure an appropriate level of liquid financial resources, minimizing the associated opportunity cost and maintaining a balanced debt structure in terms of its maturity profile and funding sources.

In the short term, liquidity risk is mitigated by maintaining an appropriate level of unconditionally available resources, including liquidity on hand and short-term deposits, available committed credit lines and a portfolio of highly liquid assets.

In the long term, liquidity risk is mitigated by maintaining a balanced maturity profile for our debt, access to a range of sources of funding on different markets, in different currencies and with diverse counterparties.

The mitigation of liquidity risk enables the Group to maintain a credit rating that ensures access to the capital market and limits the cost of funds, with a positive impact on its financial position and performance.

In order to respond to any exceptional circumstances that might arise in the context of the COVID-19 emergency, in 2020 the Group decided to further increase its already large and robust level of liquid financial resources available by expanding its committed credit lines and commercial paper programs.

The Group holds the following undrawn lines of credit and commercial paper programs.

Millions of euro at Dec. 31, 2020 at Dec. 31, 2019
  Expiring within one year Expiring beyond one year Expiring within one year Expiring beyond one year
Committed credit lines 4,028 14,531 215 15,461
Uncommitted credit lines 802 - 927 -
Commercial paper 7,591 - 9,627 -
Total 12,421 14,531 10,769 15,461


Maturity analysis

The table below summarizes the maturity profile of the Group’s long-term debt.

Millions of euro Maturing in
  Less than 3 months From 3 months to 1 year 2022 2023 2024 2025 Beyond
Bonds:              
- listed, fixed rate 175 866 2,256 2,085 4,595 3,408 9,667
- listed, floating rate - 260 437 580 397 308 818
- unlisted, fixed rate - - 1,677 2,032 1,217 1,213 7,045
- unlisted, floating rate - 111 97 97 97 97 234
Total bonds 175 1,237 4,467 4,794 6,306 5,026 17,764
Bank borrowings:              
- fixed rate 69 185 233 63 32 32 168
- floating rate 181 934 944 713 722 683 5,073
- use of revolving credit lines - - - - - - -
Total bank borrowings 250 1,119 1,177 776 754 715 5,241
Leases:              
- fixed rate 62 163 194 159 121 115 1,165
- floating rate 5 17 15 13 13 13 13
Total leases 67 180 209 172 134 128 1,178
Other non-bank borrowings:              
- fixed rate 21 53 63 90 130 24 258
- floating rate 44 22 24 17 14 19 39
Total other non-bank borrowings 65 75 87 107 144 43 297
TOTAL 557 2,611 5,940 5,849 7,338 5,912 24,480


Commitments to purchase commodities

In conducting its business, the Enel Group has entered into contracts to purchase specified quantities of commodities at a certain future date for its own use, which qualify for the own use exemption provided for under IFRS 9.

The following table reports the undiscounted cash flows associated with outstanding commitments at December 31, 2020:

Millions of euro          
Commitments to purchase commodities: at Dec. 31, 2020 2021-2024 2025-2029 2030-2034 Beyond
- electricity 67,400 19,058 15,730 13,273 19,339
- fuels 41,855 21,207 12,855 5,832 1,961
Total 109,255 40,265 28,585 19,105 21,300