As part of its operations, Enel is exposed to a variety of financial risks that, if not appropriately mitigated, can directly impact our performance.
In line with the Group’s risk catalog, these risks include the following:
The internal control and risk management system provides for the specification of policies that establish the roles and responsibilities for risk management, monitoring and control processes, ensuring compliance with the principle of organizational separation of units responsible for operations and those in charge of monitoring and managing risk.
The financial risk governance system also defines a system of operating limits at the Group and individual Region and Country levels for each risk, which are monitored periodically by risk management units. For the Group, the system of limits constitutes a decision-making tool to achieve its objectives.
For further information on the management of financial risks, please see note 45 of the consolidated financial statements.
|Interest rate||The Group is exposed to the risk that changes in the level of interest rates could produce unexpected changes in net financial expense or financial assets and liabilities measured at fair value.
The exposure to interest rate risk derives mainly from the variability of the terms of financing, in the case of new debt, and from the variability of the cash flows in respect of interest on floating-rate debt.
The interest rate risk management policy seeks to contain financial expense and its volatility by optimizing the Group’s portfolio of financial liabilities and using OTC derivatives.
Risk control through specific processes, risk indicators and operating limits enables us to limit possible adverse financial impacts and, at the same time, to optimize the structure of debt with an adequate degree of flexibility. The volatility that characterized the financial markets from the outset of the pandemic has in many cases returned to pre-COVID 19 levels and was offset by risk mitigation actions using derivative financial instruments.
Enel operates in energy markets and for this reason is exposed to the risk of incurring losses as a result of an increase in the volatility of commodity prices, such as the prices of fuels and electricity (price risk), or owing to a lack of demand or commodity shortages (volume risk). If not managed effectively, these risks can have a significant impact on results. To mitigate this exposure, the Group has developed a strategy of stabilizing margins by contracting for supplies of fuel and the delivery of electricity to end users or wholesalers in advance.
Enel has also implemented a formal procedure that provides for the measurement of the residual commodity risk, the specification of a ceiling for maximum acceptable risk and the implementation of a hedging strategy using derivatives on regulated markets and over-the-counter (OTC) markets. The commodity risk control process limits the impact of unexpected changes in market prices on margins and, at the same time, ensures an adequate margin of flexibility that makes it possible to seize short-term opportunities.
In order to mitigate the risk of interruptions in fuel supplies, the Group has diversified fuel sources, using suppliers from different geographical areas.
In 2020, the spread of the COVID-19 pandemic triggered a complex global economic crisis, causing significant increases in commodity price volatility. Enel has contained the risk below the limits estimated in 2019 for the current year, thanks to careful and timely mitigation measures, the geographical diversification of our business, the growing impetus given to the energy transition through the decarbonization process and the use of renewable sources for power generation.
Finally, the adoption of global and local strategies, such as flexibility in contractual clauses and proxy hedging techniques (in the event that hedging derivatives are not available on the market or are not sufficiently liquid), has made it possible to optimize results even in a highly dynamic market context.
In view of their geographical diversification, access to international markets for the issuance of debt instruments and transactions in commodities, Group companies are exposed to the risk that changes in exchange rates between the presentation currency and other currencies could generate unexpected changes in the performance and financial aggregates in their respective financial statements.
Given the current structure of Enel, the exposure to currency risk is mainly linked to the US dollar and is attributable to:
The Group’s consolidated financial statements are also exposed to the currency risk deriving from the translation into euros of the items relating to investments in companies whose presentation currency is not the euro (translation risk).
The currency risk management policy is based on systematically hedging the exposures of the Group companies, with the exception of translation risk.
Appropriate operational processes ensure the definition and implementation of appropriate hedging strategies, which typically employ financial derivatives obtained on OTC markets.
During the year, currency risk was managed through compliance with the risk management policies, encountering no difficulties in accessing the derivatives market. The volatility that characterized the financial markets during the initial phase of the pandemic has in many cases returned to pre-COVID 19 levels and was offset by risk mitigation actions using derivative financial instruments.
|Credit and counterparty||
The Group’s commercial, commodity and financial transactions expose it to credit risk, i.e. the possibility that a deterioration in the creditworthiness of counterparties or the failure to discharge contractual payment obligations could lead to the interruption of incoming cash flows and an increase in collection costs (settlement risk) as well as lower revenue flows due to the replacement of the original transactions with similar transactions negotiated on unfavorable market conditions (replacement risk). Other risks include the reputational and financial risks associated with significant exposures to a single counterparty or groups of related customers, or to counterparties operating in the same sector or in the same geographical area.
Accordingly, the exposure to credit risk is attributable to the following types of operations:
The policy for managing credit risk associated with commercial activities and transactions in commodities provides for a preliminary assessment of the creditworthiness of counterparties and the adoption of mitigation instruments, such as obtaining guarantees.
The control process based on specific risk indicators and, where possible, limits ensures that the economic and financial impacts associated with a possible deterioration in credit standing are contained within sustainable levels. At the same time, this approach preserves the necessary flexibility to optimize portfolio management.
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. Finally, with regard to financial and commodity transactions, risk mitigation is pursued through the diversification of the portfolio (giving preference to counterparties with a high credit rating) and 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 certain customer segments, which was taken into consideration in determining impairment of trade receivables, the Group’s portfolio has so far demonstrated resilience to the global pandemic. This reflects the expansion of digital collection channels and a solid diversification of commercial customers with a low exposure to the impact of COVID-19 (e.g. utilities and distribution companies).
Enel’s liquidity risk management policy is designed to maintain sufficient liquidity to meet expected commitments over a given time horizon without resorting to additional sources of financing, also retaining a prudential liquidity reserve, sufficient to meet any unexpected commitments. Furthermore, in order to meet its medium and long-term commitments, Enel pursues a borrowing strategy that provides for a diversified structure of funding sources, which it uses to meet its financial needs, and a balanced maturity profile.
Liquidity risk is the risk that the Group, while solvent, would not be able to discharge its obligations in a timely manner or would only be able to do so on unfavorable terms or in the presence of constraints on disinvestment from assets with consequent capital losses, owing to situations of tension or systemic crises (credit crunches, sovereign debt crises, etc.) or changes in the perception of Group riskiness by the market.
Among the factors that define the risk perceived by the market, the credit rating assigned to Enel by rating agencies plays a decisive role, since it influences its ability to access sources of financing and the related financial terms of that financing. A deterioration in the credit rating could therefore restrict access to the capital market and/or increase of the cost of funding, with consequent negative effects on the financial position, financial performance and cash flows of the Group.
In 2020, Enel’s risk profile did not change compared with 2019. Accordingly, at the end of the year, Enel’s rating was: (i) “BBB+” with a stable outlook for Standard & Poor’s; (ii) “A-” with a stable outlook for Fitch; and (iii) “Baa2” with a positive outlook for Moody’s. On January 15, 2021, Moody’s increased its Enel rating to Baa1. The upgrade reflected the progress achieved in improving the Group’s risk profile, the result of constant investment in grids and renewable energy, greater geographical diversification and a focus on centralized financing.
Enel’s liquidity risk management policies are designed to maintain a level of liquidity sufficient to meet its obligations over a specified time horizon, without having recourse to additional sources of financing, as well as to maintain a prudential liquidity buffer sufficient to meet unexpected obligations. In addition, in order to ensure that the Group can discharge its medium and long-term commitments, Enel pursues a borrowing strategy that provides for a diversified structure of financing sources to which it can turn and a balanced maturity profile.
In order to manage liquidity efficiently, treasury activities have largely been centralized at the holding company level, meeting liquidity requirements primarily by drawing on the cash generated by ordinary operations and manageing any cash surpluses appropriately.
As regards the impact of COVID-19, despite the effects of the pandemic the liquidity risk indices monitored for the Group remained within the limits established for 2020.