44. 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, exchange risk and commodity risk, credit 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 2019, 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.

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, payables to 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, 2019 and December 31, 2019 broken down by type of contract.

Millions of euro

Notional amount

 

2019

2018

Floating-to-fixed interest rate swaps

7,932

10,032

Fixed-to-floating interest rate swaps

152

154

Fixed-to-fixed interest rate swaps

-

-

Floating-to-floating interest rate swaps

327

165

Interest rate options

50

50

Total

8.461

10,401


For more details on interest rate derivatives, please see note 46 “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 profit before tax would be affected by a change in the level of interest rates as follows.

Millions of euro

  

2019

 
  

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

21

(21)

-

-

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

-

-

166

(166)

Fair value hedges

25

-

-

-

-

At December 31, 2019, 22.5% (25.4% at December 31, 2018) 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), 85.9% of gross long-term financial debt was hedged at December 31, 2019 (82.5% at December 31, 2018).

Exchange risk

Exchange risk mainly manifests itself as unexpected changes in the financial statement items associated with transactions denominated in a currency other than the currency of account. 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 currency of account. The Group’s exposure to exchange 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 exchange 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 exchange 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 currency of account into an equivalent liability in the currency of account.
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, 2019 and December 31, 2018, broken down by type of hedged item.

 

Millions of euro

Notional amount

 

2019

2018

Cross currency interest rate swaps (CCIRSs) hedging debt denominated in currencies other than the euro

22.756

24,712

Currency forwards hedging exchange risk on commodities 

4,291

4,924

Currency forwards hedging future cash flows in currencies other than the euro

4,760

5,386

Other currency forwards

1,488

1,584

Total

33,294

36,606

 

More specifically, these include:

  • CCIRSs with a notional amount of €22,756 million to hedge the exchange risk on debt denominated in currencies other than the euro (€24,712 million at December 31, 2018); 
  • currency forwards with a total notional amount of €9,051 million used to hedge the exchange risk associated with purchases and sales of natural gas, purchases of fuel and expected cash flows in currencies other than the euro (€10,310 million at December 31, 2018); 
  • other currency forwards include OTC derivatives transactions carried out to mitigate exchange risk on expected cash flows in currencies other than the currency of account connected with the purchase of investment goods in the renewables and infrastructure and networks sectors (new generation digital meters), on operating expenses for the supply of cloud services and on revenue from the sale of renewable energy. 

At December 31, 2019, 52% (55% at December 31, 2018) of Group long-term debt was denominated in currencies other than the euro.
Taking account of hedges of exchange risk, the percentage of debt not hedged against that risk amounted to 18% at December 31, 2019 (19% at December 31, 2018).  

Exchange 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 profit before tax would be affected by changes in exchange rates as follows.

 

Millions of euro

  

2019

 
  

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%

525

(640)

-

-

Change in fair value of derivatives designated as hedging instruments

     

Cash flow hedges

10%

-

-

(2,929)

3,580

Fair value hedges

10%

7

(9)

-

-

       

Commodity risk

The risk of fluctuations in the price of energy commodities 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, 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).
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, 2019 and December 31, 2018, broken down by type of instrument.

 

Millions of euro

Notional amount

 

2019

2018

Forward and futures contracts

35,824

41,157

Swaps

5,706

6,346

Options

654

549

Embedded

68

-

Total

42,252

48,052


For more details, please see note 46 “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

 

2019

  

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%

(18)

79

-

-

Change in the fair value of derivatives on commodities designated as hedging instruments

15%

-

-

32

(29)

       

Credit risk

The Group’s commercial, commodity and financial operations expose it to credit 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 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). 

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 assign receivables without recourse, which results in the complete derecognition of the corresponding assets involved in the assignment, 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.

Financial receivables

Millions of euro

     
 

at Dec. 31, 2019

Staging

Basis for recognition of expected loss allowance

Avg loss rate (PD*LGD)

Gross carrying amount

Expected loss allowance

Net value

Performing

 12 m ECL

1.2%

6,691

78

6,613

Underperforming

 Lifetime ECL

41.8%

110

46

64

Non-performing

 Lifetime ECL

34.9%

307

107

200

Total

  

7,108

231

6,877

     

Contract assets, trade receivables and other receivables: individual measurement

 

Millions of euro

    
 

at Dec. 31, 2019

 

Avg loss rate (PD*LGD)

Gross carrying amount

Expected loss allowance

Net value

Contract assets

0.2%

640

1

639

Trade receivables

    

Trade receivables not past due

1.2%

4,872

58

4,814

Trade receivables past due:

    

- 1-30 days

1.5%

410

6

404

- 31-60 days

1.4%

218

3

215

- 61-90 days

3.1%

130

4

126

- 91-120 days

11.5%

52

6

46

- 121-150 days

7.4%

54

4

50

- 151-180 days

22.1%

398

88

310

- more than 180 days (credit impaired)

65.2%

1,177

767

410

Total trade receivables

 

7,311

936

6,375

Other receivables

    

Other receivables not past due

20.6%

228

47

181

Other receivables past due:

    

- 1-30 days

100.0%

97

97

-

- 31-60 days

-

-

-

-

- 61-90 days

-

-

-

-

- 91-120 days

-

-

-

-

- 121-150 days

-

-

-

-

- 151-180 days

-

3

3

-

- more than 180 days (credit impaired)

-

4

4

-

Total other receivables

 

332

151

181

TOTAL

 

8,283

1,088

7,195

       

Contract assets, trade receivables and other receivables: collective measurement

Millions of euro

    
 

at Dec. 31, 2019

 

Avg loss rate (PD*LGD)

Gross carrying amount

Expected loss allowance

Net value

Contract assets

6.7%

15

1

14

Trade receivables

    

Trade receivables not past due

0.8%

3,455

29

3,426

Trade receivables past due:

    

- 1-30 days

2.2%

1,660

36

1,624

- 31-60 days

11.7%

197

23

174

- 61-90 days

18.7%

139

26

113

- 91-120 days

24.5%

98

24

74

- 121-150 days

28.8%

80

23

57

- 151-180 days

37.9%

103

39

64

- more than 180 days (credit impaired)

61.1%

3,020

1,844

1,176

Total trade receivables

 

8,752

2,044

6,708

Other receivables

    

Other receivables not past due

1.5%

521

8

513

Other receivables past due:

    

- 1-30 days

-

911

-

911

- 31-60 days

-

3

-

3

- 61-90 days

-

21

-

21

- 91-120 days

-

2

-

2

- 121-150 days

-

5

-

5

- 151-180 days

-

8

-

8

- more than 180 days (credit impaired)

-

2

-

2

Total other receivables

 

1,473

8

1,465

TOTAL

 

10,240

2,053

8,187

       

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 performance and financial position.

The Group holds the following undrawn lines of credit:

Millions of euro

at Dec. 31, 2019

at Dec. 31, 2018

 

Expiring within one year

Expiring beyond one year

Expiring within one year

Expiring beyond one year

Committed credit lines

215

15,461

750

13,758

Uncommitted credit lines

927

-

355

-

Commercial paper

9,627

-

6,990

-

Total

10,769

15,461

8,095

13,758

 

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

2021

2022

2023

2024

Beyond

Bonds:

       

- listed, fixed rate

992

629

1,385

2,283

2,911

4,919

13,474

- listed, floating rate

-

258

329

518

703

486

1,194

- unlisted, fixed rate

-

-

-

1,825

2,217

1,328

8,989

- unlisted, floating rate

-

27

111

97

97

97

331

Total bonds

992

914

1,825

4,723

5,928

6,830

23,988

Bank borrowings:

       

- fixed rate

3

276

149

197

33

35

200

- floating rate

82

760

1,285

637

702

722

4,377

- use of revolving credit lines 

-

-

-

68

-

-

2

Total bank borrowings

85

1,036

1,434

902

735

757

4,579

Leases:

       

- fixed rate

67

190

229

430

126

99

715

- floating rate

6

12

18

15

14

14

29

Total leases

73

202

247

445

140

113

744

Other non-bank borrowings:

       

- fixed rate

27

65

71

117

137

30

375

- floating rate

3

12

23

15

8

-

8

Total other non-bank borrowings

30

77

94

132

145

30

383

TOTAL

1,180

2,229

3,600

6,202

6,948

7,730

29,694

   

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, 2019.  

Millions of euro

 

at Dec. 31, 2019

2016-2020

2021-2025

2026-2030

Beyond

Commitments to purchase commodities:

     

- electricity

97,472

26,667

22,603

17,041

31,161

- fuels

48,016

26,986

13,010

6,119

1,901

TOTAL

145,488

53,653

35,613

23,160

33,062