Main risks and uncertainties

Enel SpA, in its role as an industrial holding company, is essentially exposed to the same business risks and uncertainties as the rest of the Group, as well as the specific financial risks associated with the central treasury functions performed on behalf of the entire Group. The main risks are discussed below.

Business risks
The energy markets in which Enel operates are currently undergoing gradual liberalization, which is being implemented using different approaches and timetables from country to country. As a result of these processes, Enel is exposed to increasing competition from new entrants and the development of organized markets.
The business risks generated by the participation of Enel in such markets have been addressed by integrating along the value chain, with a greater drive for technological innovation, diversification and geographical expansion. Changes in the rules governing operations in regulated markets, and the associated instructions and requirements with which Enel 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.
Community legislation governing the emissions trading scheme for carbon dioxide (CO₂) imposes costs for the electricity industry, costs that could rise substantially in the future. In this context, the instability of the emissions allowance market accentuates the difficulties of managing and monitoring the situation. In order to mitigate these risk factors, Enel 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.
Other business risks include breakdowns, accidents or fuel supply interruptions that temporarily interrupt operations at Enel’s plants. In order to mitigate such risks, Enel adopts a range of prevention and protection strategies, including preventive and predictive maintenance techniques and technology surveys to identify and control risks, and implement international best practices. Any residual risk is managed using specific insurance policies to protect corporate assets and provide liability coverage in the event of harm caused to third parties by accidents, including pollution, that may occur in during the production and distribution of electricity and gas.
As part of its strategy of maintaining and developing its cost leadership in the markets in which it has generation operations, Enel is involved in numerous projects for the development, improvement and reconversion of its plants. These projects are exposed to the risks commonly associated with construction activities, which Enel mitigates by requiring its suppliers to provide specific guarantees and, where possible, obtaining insurance coverage against all phases of construction risk.
In order to limit the risk of interruptions in fuel supplies, Enel has diversified fuel sources, using suppliers from different geographical areas and encouraging the construction of transportation and storage infrastructure.
To mitigate the exposure to changes in fuel and electricity prices, Enel has developed a strategy of stabilizing margins by contracting for supplies of fuel and the delivery of electricity to end users in advance. We have also implemented a 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.

Financial risks
The company is exposed to the following main financial risks.

Exchange rate and interest rate risk
The Enel Group is exposed to exchange rate risk associated with cash flows in respect of the purchase or sale of fuel or electricity on international markets, cash flows in respect of investments or other items in foreign currency and, marginally, debt denominated in currencies other than the functional currency of the respective countries. The main exchange rate exposure of the Enel Group is in respect of the US dollar.

During the year, management of exchange rate risk was pursued through compliance with internal risk management policies, which call for full hedging of exposures, encountering no difficulties in accessing the derivatives market.
The management of interest rate risk seeks to ensure a balanced structure of the debt, reducing the amount of debt exposed to interest rate fluctuations, curbing borrowing costs over time and limiting the volatility of results. The main source of the exposure to interest rate risk for Enel is floating-rate debt.
In order to reduce the exposure and minimize borrowing costs, Enel SpA uses various types of derivative, notably interest rate swaps and interest rate options.
The management policies established at Enel SpA are also intended to optimize the Group’s overall financial position, ensure the optimal allocation of financial resources and control financial risks.

Under these policies, derivatives transactions for the management of interest rate risk and exchange rate risk are conducted, among other things, with careful selection of financial counterparties and close monitoring of the related exposures and ratings.

Liquidity risk
Liquidity risk is managed (with the exception of Endesa SA and its subsidiaries) by the Group Treasury unit at Enel SpA (and through the subsidiary Enel Finance International), which ensures adequate coverage of cash needs (using lines of credit and issues of bonds and commercial paper) and appropriate management of any excess liquidity.
During the year, Enel’s access to the credit market was confirmed and it carried out a number of operations with a view to strengthening the Group’s financial structure even further. More specifically, in June Enel carried out a capital increase of some €8 billion and in the 2nd Half of the year it carried out bond issues with a total nominal value of €10 billion.

Rating risks
The possibility of accessing the capital market and other sources of financing, and the related costs, depend, among other factors, on the rating assigned to the Group.
Enel’s current rating is equal to: (i) “A-” with a stable outlook (Standard & Poor’s); (ii) “A-” with a stable outlook (Fitch); and (iii) “A2” with a negative outlook (Moody’s). All the agencies removed the negative credit watch during the year. Enel’s ratings are reported in detail in the section “Enel and the financial markets”.
Any reduction in the rating could make it more difficult to access the capital market and increase finance costs, with a negative impact on the performance and financial situation of the Group.

More detailed information on the financial risks of Enel SpA is provided in note 4 to the financial statements.