Financial risks

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 commodity risk, exchange rate risk, interest rate risk, 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 (including Enel SpA), 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 44 of the consolidated financial statements.

Commodity riskEnel 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 if not managed effectively.
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 management process allows us to limit the impact on margins of unexpected changes in market prices and, at the same time, provides an adequate degree of flexibility to enable use to seize short-term opportunities.
In order to mitigate the risk of interruption of fuel supplies, the Group has developed a strategy of diversification of supply sources, using suppliers located in different geographical areas.
Exchange risk

In view of the geographical diversification of 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 position 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, 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.
Controlling risk using dedicated processes and indicators makes it possible to limit potential adverse financial impacts while optimizing management of the cash flows of the portfolios.

Interest rate riskThe 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 contain financial expense and its volatility by optimizing the Group’s portfolio of financial liabilities and by obtaining financial derivatives on OTC markets.
Managing risk through the use of specific processes and indicators enables us to limit any adverse financial impact and, at the same time, to optimize the debt structure with an appropriate degree of flexibility.

Credit riskCommercial, 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 and commodity transactions provides for a preliminary assessment of the creditworthiness of counterparties and the adoption of mitigation instruments, such as obtaining guarantees.
Managing risk through the use of specific risk indicators, and limits where possible, ensures that the economic and financial impacts associated with a possible deterioration in creditworthiness are contained within sustainable levels. At the same time, the necessary flexibility to optimize portfolio management is preserved.
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 riskLiquidity 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 of the cost of funding, with consequent negative effects on the performance and financial situation of the Group.
In 2019, Fitch revised its rating for Enel upwards, from “BBB+” to “A-”. Moody’s also improved its outlook for Enel’s rating from stable to positive during the year. 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.
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.