Risk management - Naturgy - Shareholders and investors

Risk management

Risk management model

Naturgy's risk management model aims to guarantee the predictability of the company’s performance in every aspect relevant to its stakeholders.

This requires establishing the risk tolerance by means of setting limits for the most relevant risk categories. With this, the company can anticipate the consequences of the materialisation of certain risks, thus being perceived in the markets as a solid and stable company, with the benefits this entails.

Naturgy has a framework which incorporates the company’s government vision, risks and compliance, allowing for an integrated vision of the group’s processes, existing controls of these processes and the associated risk.

Risk categories

Each business unit has specific information on the main types of risk that may affect it. The goal is to facilitate decision-making, which is positive for the company since it enhances profitability, predictability and efficiency.

The system addresses basically three categories of risk:

Market risk

Market risk, understood as the uncertainty related to commodity prices, exchange rates and interest rates, which may impact the company's balance sheet, its procurement costs or its ability to raise funding in the capital markets. It is measured using two yardsticks: in the short term, focused on the income statement, and in the long term, focused on enterprise value, including the capacity to generate cash flow and its stability, variations in the funding structure, and volatility in the applicable discount rates.

Risk type
Management approach
Commodity prices

Volatility in the international markets that set gas prices.
Physical and financial hedges. Portfolio management.
Decoupling of long-term contracts from hub prices. 
 Volatility in the Spanish and Portuguese electricity markets.
Physical and financial hedges.

Optimisation of the power generating fleet.
Penetration by renewables with zero marginal cost and intermittent production.
Volume Gas Mismatch between gas supply and demand. Optimisation of contracts and assets worldwide. Deterministic/

Aggregate demand pressure in Spain in a context of energy efficiency.
Electricity Reduction of the available thermal gap.

Uncertainty about volume of hydroelectric output. 
Optimisation of the balance between supply and generation.  Stochastic Aggregate demand pressure in Spain in a context of energy efficiency.
Regulatory Exposure to regulatory review of the criteria and returns recognised for regulated activities. Step up communications with regulators.

Adjust efficiency and capital expenditure to recognised rates.
Scenarios Different business units at different stages of maturity.
Exchange rate Volatility in international currency markets. Geographic diversification.

Hedging via local-currency funding and derivatives. Monitoring the net position.
Uncertainty regarding growth perspectives in Latin America.
Interest rate and credit spread Volatility in funding rates. Financial hedges.

Diversification of funding sources.

Uncertainty about the interest rate scenario.
Tax Ambiguity or subjectivity in the interpretation of current tax regulations, or due to a material amendment of same. Queries to independent expert bodies.

Engagement of top-level advisory firms.

Adoption of the Code of Best Tax Practices.

Recognition of provisions on a prudential basis.
Different business units are affected by different taxes.

Credit risk

Credit risk, i.e. the risk to the financial solvency of the company's receivables. It also incorporates the short-term measurement of returns on placing cash surpluses with financial institutions, the aim being to select the most efficient portfolios.

Risk type Description Management Metrics Trend
Credit   Uncertainty about performance of bad debt ratios as a result of the economic cycle. Analysis of customer solvency to define specific contractual conditions.

Debt collection process.
Pursues efficiency in debt collection.


Operating risk

Operating risk, i.e. the possibility of financial losses as a result of failures in processes, internal systems or other factors. It enables risk to be measured objectively, which is decisive for raising awareness within the company and for improving management of exposure, all of which have an essential impact on the reinsurance market's perception of Naturgy's operational excellence.. 

Risk type Description Management Metrics Trend
Operational: Insurable risks Accidents, damage and non-availability of Naturgy assets.  Continuous improvement plans.

Optimisation of total cost of risk and of hedges.
Stochastic Growing tension in the insurance market in the face of natural catastrophes.
Operational: Image and reputation Impaired perception of Naturgy by stakeholders. Identification and tracking of potential reputational events.

Stabilisation of MERCO index score.
Operational: Environment Harm to the natural and/or social environment.. Emergency plans at facilities with risk of environmental accident.

Specific insurance policies.

End-to-end environmental management.
Scenarios Implementation of an Integrated Management System that is audited and certified each year by AENOR.
Operational:  Climate change Business impact of measures to combat climate change. Effect of climate management on the company's valuation. Growing exposure of facilities to natural catastrophes in an increasingly restrictive reinsurance market.  Corporate positioning via the overall Environmental Policy and Environment Plan, which strengthen governance in climate issues and set emission reduction targets. Scenarios/Stochastic. Uncertainty about policy developments to encourage energy efficiency.
Operational: Cybersecurity Cyberattacks.  Implementation of security measures; Event analysis and remediation measures; Training. Scenarios The cybernetic scenario is becoming more demanding. Threat Protection Plan to mitigate the likelihood of these 

Metrics used

- Stochastic: production of trend lines for the main magnitudes, taking the maximum deviation from the benchmark scenario to be the risk, within a pre-set confidence interval. Those magnitudes are generally EBITDA, earnings after taxes, cash flow and value.

- Scenarios: analysis of the impact with respect to the benchmark scenario of a limited number of possible incidents.


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