Due to the nature of its business, the Group is exposed to a variety of risks, notably financial risks, industrial and environmental risks and regulatory risk. In order to mitigate its exposure to these risks, Enel conducts specific analysis, measurement, monitoring and management activities, as described in this section.
See also the “Reference scenario” section for an analysis of the factors that represent some of the underlying bases for these risks.
Strategic risks connected with developments in the market, competitive and regulatory environment
On November 21, 2017, the Enel Group presented its Strategic Plan for 2018-2020 to the financial community. It sets out the strategic guidelines and the performance and financial objectives of the Group. The document used for the presentation, “Capital Markets Day - Strategic Plan 2018- 2020”, is available to the public on the Enel Group website at www.enel.com in the Investor Relations section.
The Enel Group Strategic Plan is implemented through a process that involves all the Business Lines and the Countries/ Regions of the Enel Group, which prepare their action plans on the foundation of the strategic guidelines specified by the Parent Company. These plans are finally consolidated in the Group’s Strategic Plan.
The preparation of the Enel Strategic Plan is based, inter alia, on certain assumptions concerning future events that management expects will occur and actions that it intends to undertake at the time the Plan is prepared, as well as general assumptions about future events and management actions that may not necessarily occur, as they depend essentially on variables that are outside the control of management. More specifically, the Strategic Plan is based on assumptions about scenarios and the positioning of the business. The former include developments in electricity, gas, fuel and raw materials prices, the evolution of electricity and gas demand in the markets where the respective Groups operate, developments in macroeconomic variables, as well as the evolution of the regulatory framework.
The 2018-2020 Strategic Plan, drawn up on the basis of these assumptions, includes the following estimates and forecasts for the years 2018, 2019, 2020 and average growth in 2018-2020. The achievement of the objectives is based on a set of assumptions on the occurrence of future events and actions that the Enel Group plans to undertake, including assumptions of a general and hypothetical nature relating to future events and actions that will not necessarily occur. Accordingly, the forecasts, being based on hypotheses about future events and actions undertaken, or still to be undertaken, by management, are characterized by an inherent degree of subjectivity and uncertainty and, in particular, by the risk that forecast events and the actions that could follow from those events may not occur or may occur at different times and in different amounts from those originally planned, while events and actions that were unforeseeable at the time of preparation could instead occur. Therefore, divergences between final outcomes and forecast values could be significant.
In addition, the markets and businesses in which the Group operates are currently experiencing gradual and growing competition and change in their competitive, technological and regulatory contexts, with the timing and pace of these developments varying from country to country. As a result of these processes, the Group is exposed to increasing competition.
The business risks generated by the natural participation of the Group in such markets have been addressed by integrating along the value chain, with a greater drive for technological innovation, diversification and geographical expansion. More specifically, the initiatives taken have increased the customer base in the free market, with the aim of integrating downstream into final markets, optimizing the generation mix improving the competitiveness of plants through cost leadership, seeking out new highpotential markets and developing renewable energy resources with appropriate investment plans in a variety of countries.
The Group often operates in regulated markets or regulated regimes, and changes in the rules governing operations in such markets and regimes, and the associated instructions and requirements with which the Group must comply, can impact our operations and performance.
In order to mitigate the risks that such factors can engender, Enel has forged closer relationships with local government and regulatory bodies, adopting a transparent, collaborative and proactive approach in tackling and eliminating sources of instability in regulatory arrangements.
Risks connected with CO2 emissions
In addition to being one of the factors with the largest potential impact on Group operations, emissions of carbon dioxide (CO2) are also one of the greatest challenges facing the Group in safeguarding the environment.
EU legislation governing the emissions trading scheme imposes costs for the electricity industry. In order to mitigate the risk factors associated with CO2 regulations, the Group monitors the development and implementation of EU and Italian legislation, diversifies its generation mix towards the use of low-carbon technologies and resources, with a focus on renewables and nuclear power, develops strategies to acquire allowances at competitive prices and, above all, enhances the environmental performance of its generation plants, increasing their energy efficiency.
As part of its operations, Enel is exposed to a variety of financial risks that, if not appropriately mitigated, can directly impact our performance. These include market risks, credit risk and liquidity risk.
The financial risk governance arrangements adopted by Enel establish specific internal committees, composed of top management and chaired by the Chief Executive Officers of the companies involved, which are responsible for policy setting and supervision of risk management, as well as the definition and application of specific policies at the Group and individual Region, Country and Global Business Line levels 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, Country and Global Business Line 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 42 ”Risk management” of the consolidated financial statements.
The market risks to which the Group is exposed are connected to the fluctuation of commodity prices, exchange rates and interest rates.
To maintain the exposure to market risk within operating limits, Enel also uses derivatives.
Risks connected with commodity prices and supply continuity
Enel operates in energy markets and for this reason is exposed to changes in the prices of fuel and electricity, which can have a significant impact on its 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.
In order to mitigate the risk of interruptions in fuel supplies, the Group has diversified fuel sources, using suppliers from different geographical areas.
Exchange rate risk
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 currency of account 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 exchange rate risk is mainly linked to the US dollar and is attributable to:
- cash flows in respect of the purchase or sale of fuel or electricity;
- cash flows in respect of investments, dividends from foreign subsidiaries or the purchase or sale of equity investments;
- cash flows connected with commercial relationships;
- financial assets and liabilities.
The Group’s consolidated financial statements are also exposed to the exchange rate risk deriving from the conversion into euros of the items relating to investments in companies whose currency of account is not the euro (translation risk).
The exchange rate risk management policy is based on systematically hedging the exposures to which the Group companies are exposed, while translation risk is not hedged.
Appropriate operational processes ensure the definition and implementation of appropriate hedging strategies, which typically employ financial derivatives obtained on OTC markets.
Interest rate risk
The Group is exposed to the risk that changes in the level of interest rates could produce unexpected changes in net financial expense or the value of 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 policy for managing interest rate risk seeks to containing financial expense and its volatility by optimizing the Group’s portfolio of financial liabilities and by obtaining financial derivatives on OTC markets.
Commercial, commodity and financial transactions expose the Group to credit risk, i.e. the possibility of a deterioration in the creditworthiness of our counterparties that could have an adverse impact on the expected value of the creditor position and, for trade receivables only, increase average collection times.
The exposure to credit risk is attributable to the following types of operations:
- 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).
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 assign receivables without recourse, which results in the complete derecognition of the corresponding assets involved in the assignment.
Finally, with regard to financial and commodity transactions, risk mitigation is pursued through the diversification of the portfolio (preferring counterparties with a high credit standing) and the adoption of specific standardized contractual frameworks that contain risk mitigation clauses (e.g. netting arrangements) and possibly the exchange of cash collateral.
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 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 the cost of funding, with consequent negative effects on the performance and financial situation of the Group.
In 2017, Enel’s ratings from the rating agencies Moody’s and Fitch did not change, while Standard & Poor’s upgraded its rating from “BBB” to “BBB+”. Accordingly, at the end of the financial year, Enel’s rating was: (i) “BBB+” with a stable outlook for Standard & Poor’s; (ii) “BBB+” with a stable outlook for Fitch; and (iii) “Baa2” with a stable outlook for Moody’s.
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.
By now, more than 50% of the Enel Group’s total revenue is generated abroad. The substantial internationalization of the Group – which among other regions operates in South America, North America, Africa and Russia – requires Enel to consider and assess country risk, which consists of the macroeconomic, financial, regulatory, market, social and geopolitical risks whose manifestation could have an adverse impact on income or threaten corporate assets. Enel has therefore adopted a model for assessing country risk in the countries in which it operates. In order to mitigate country risk, the model supports capital allocation and investment evaluation processes.
The year 2017 was marked by the strengthening of the global recovery and international trade. The signals of more buoyant activity that emerged at the end of 2016 were confirmed in 2017. Economies boosted by cyclical factors and stimulated by expansionary monetary policies grew at a rapid pace. Despite the improvement in the global environment and the increase in the level of confidence, political and economic risks remain.
The former include the tensions in Spain, the talks for the renegotiation of NAFTA and those relating to Brexit, and the deterioration in relations between the United States and North Korea. In particular, in assessing risk, Brazil, while remaining in an intermediate class, showed a slight increase in risk associated with socio-political factors. Political instability in the country has delayed the implementation of structural reforms capable of raising the country’s potential. The results of elections in a number of European countries reduced political tensions, leaving the risk unchanged at a very low level. The economic factors include the risks associated with the sustainability of fiscal balances in the face of the investments necessary to increase productivity, or the lack of diversification of the South American countries, which increases their exposure to cyclical fluctuations, or the spread of protectionist policies. From a financial point of view, the gradual normalization of central bank policies, which could increase the volatility of financial markets, should not be overlooked. The global banking system, helped by the positive economic situation and as a consequence of the increasing level of regulation of the sector, is on a more solid footing than the previous year.
Industrial and environmental risks
Extreme weather events and natural disasters in the current climate scenario
Within the current climate scenario, the Group is exposed to the risk of damage to assets and infrastructures caused by extreme weather events or natural disasters and to the risk of the consequent prolonged unavailability of these assets. In order to mitigate these risks, the Group uses the most advanced prevention and protection strategies, with the concomitant aim of reducing the possible impacts on the communities and the areas surrounding the assets: constant monitoring and weather forecasting in the areas where the most exposed assets are located. Furthermore, numerous actions have been taken to increase the resilience of the assets most exposed to extreme weather or natural disasters.
All of the areas of the Group undergo ISO 14001 certification and potential sources of risk are monitored with the implementation of internationally recognized Environmental Management Systems (EMS) so that any critical issues can be detected promptly.
Failure to mitigate and adapt to climate change
The fight against climate change is one of the major global challenges, which exposes the Group to a variety of medium/ long-term risk factors. These include the risks related to legislative and regulatory changes associated with the fight against climate change. Work is also carried out to assess the risks connected with the impact of gradual climate changes (e.g. air and water temperatures) on the operation of our assets.
Furthermore, the socio-economic transformations related to climate change are analyzed to assess the impact they can have on the Group’s business and activities. In order to assess and quantify the main risks related to the failure of climate change mitigation efforts, an analysis of long-term climate scenarios was launched, in line with the indications of Bloomberg’s Task Force for Climate-related Financial Disclosures. The focus of the exercise was to analyze the possible impacts of developments in the main climatic variables (both gradual and extreme) on Enel’s businesses. These scenarios are used to assess the possible economic and financial impacts on the business and to evaluate the Group’s strategy and the related risk management and governance arrangements. Constant effort goes into monitoring the development and implementation of Community and national regulations, maintaining transparent and constructive relationships with local and international regulatory authorities and bodies.
The Group is also involved in the continuous improvement of the environmental impact of its existing activities through its emission reduction targets, first and foremost the goal of “zero-emission generation” in 2050. Enel adopts a strategy aimed at growth through development of increasingly low-carbon technologies and services, in line with the COP21 objectives.
Risks related to cyber attacks
The era of digitization and technological innovation means that organizations are increasingly exposed to cybernetic attacks, which are becoming increasingly numerous and sophisticated, partly reflecting the changes in the context in which they occur. The organizational complexity of the Group and the numerous environments it encompasses (data, people and the industrial world) expose our assets to the risk of attacks. The Enel Group has adopted a model for managing these risks based on a “systemic” vision that integrates the traditional information technology sector, the operational technology field most closely linked to the industrial sector and the Internet of Things associated with the networking of smart “objects”. In particular, Enel has adopted a “Cyber Security Framework” to guide and manage cyber security activities, which provides for the involvement of the business areas, the implementation of legislative, regulatory and legal requirements and recommendations, the use of the best available technologies, the preparation of ad hoc business processes and an informed workforce. The Framework bases strategic decisions and design activities on a “risk-based” approach and a design and development model that defines the appropriate security measures throughout the life cycle of applications, processes and services (cyber security by design). Enel has also created its own active Cyber Emergency Readiness Team (CERT), which is recognized and accredited by national and international communities, in order to direct an industrialized response to cyber threats and incidents.