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
 
Description
 
Management
 
Metrics
 
 
 
Trend
Commodity
prices
Gas
 
Volatility in the international markets that set gas prices.

Physical and financial hedges. 

Portfolio management
 
Stochastic.
 
 
 
Decoupling of long-term contracts from hub prices
 
Electricity
 
Volatility in the Spanish and Portuguese electricity markets.
 

Physical and financial hedges.

Optimisation of the power generating fleet.
 
Stochastic.
 
 
 
Penetration by renewables with zero marginal cost and intermittent production.
 
VolumeGasMismatch between gas supply and demand.Optimisation of contracts and assets worldwide.Deterministic/
Stochastic.
Aggregate demand pressure in Spain in a context of energy efficiency.
ElectricityReduction 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.
RegulatoryExposure 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.

 
ScenariosDifferent business units at different stages of maturity.
Exchange rateVolatility in international currency markets.
Geographic diversification.

Hedging via local currency funding and derivatives. 

Monitoring of the net position

 
StochasticUncertainty about growth prospects in Latin America.
Interest rate and
credit spread
Volatility in funding rates.
Financial hedges

Diversification of funding sources.

 
StochasticUncertainty about the interest rate scenario.
TaxAmbiguity 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

 
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.


Risk typeDescriptionManagementMetricsTrend
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
StochasticSpainPursues efficiency in debt collection.

 

Operational 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 typeDescriptionManagementMetricsTrend
Operational: insurable risksAccidents, damage and non-availability of Naturgy assets. Continuous improvement plans.

Optimisation of total cost of risk and of hedges.
StochasticGrowing tension in the insurance market in the face of natural catastrophes.
Operational: image and reputationImpaired perception of Naturgy by stakeholders.Identification and tracking of potential reputational events. 

Transparency in communications. 
Scenarios.
Stabilisation of MERCO index score.
Operational: environmentHarm 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 changeChanges 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.

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. 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.

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