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.
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: 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.
Volatility in the international markets that set gas prices.
Physical and financial hedges.
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.|
Heightened intensity of communication with regulatory bodies.
Adjusting efficiencies and investments to recognised rates.
|Scenarios||Different business units at different stages of maturity.|
|Exchange rate||Volatility in international currency markets.|
Hedging via local currency funding and derivatives.
Monitoring of the net position
|Stochastic||||Uncertainty about growth prospects in Latin America.|
|Interest rate and|
|Volatility in funding rates.|
Diversification of funding sources.
|Stochastic||||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.
|Scenarios||||Different business units at different stages of maturity|
Credit risk understood: 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.
|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
|Stochastic||SpainPursues efficiency in debt collection.|
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.
|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. |
Transparency in communications.
|Scenarios.||Stabilisation of MERCO index score.|
|Operational: environment||Harm to the natural and/or social environment. |
Evolution of environmental regulation.
|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||Changes in environmental factors as a result of climate change. |
Regulation aimed at combating it.
|Corporate positioning visà-vis climate change.||Scenarios/ Stochastic.||Uncertainty about policy developments to encourage energy efficiency.|
- 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. Financial risks - interest rates, exchange rates, price of raw materials or commodities, credit risk, liquidity risk- are explained in Note 18 of the Consolidated Annual Report.