Risk management model
Naturgy's risk management model seeks to ensure that the company's performance is predictable in all aspects that are of relevance to its stakeholders.
The main objective of the model is to ensure that the main risks are properly identified, assessed and managed, the goal being to ensure that the level of risk exposure assumed by Naturgy in the course of its business is consistent with the company's defined overall risk profile and the attainment of annual and strategic objectives.
The Integrated Risk Management and Control System is structured as follows:
– Risk Appetite: definition of risk tolerance by setting limits for the main risk categories, by risk and by business, as a function of the targets.
– Risk Assessment: methodology, procedure and process for identifying, assessing and measuring risks.
– Risk Governance & Management: risk governance and management mechanism for all risk classes and all businesses.
– Risk Reporting: regular systematic reporting and monitoring of risk at the various levels of management: Business, Business Units, Chairman's Office and Board of Directors
Each 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.
Risk factors are grouped basically into the following risk categories:
- Business risk, uncertainty associated with the pursuit and achievement of business units' objectives as a result of the emergence of factors that hinder the implementation of Naturgy's strategy, and that may have an impact on its value and/or on the annual accounts.
- Market risk, i.e. the uncertainty related to commodity volumes and prices.
- Regulatory risk, i.e. the potential impact on the achievement of strategic objectives produced by changes in the regulatory frameworks under which Naturgy businesses operate.
- Tax risk, arising from uncertainty as to whether the tax authorities will accept the tax treatment adopted in tax returns that have been filed or are to be filed.
- Legal risk, caused by the eventual outcome of litigation, arbitration or legal claims against Naturgy.
- Financial risk, understood as the uncertainty related to exchange rates and interest rates, which may impact the company's balance sheet and its ability to raise funding in the capital markets.
- 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.
- Operational risk, i.e. the uncertainty associated with losses resulting from inadequate or faulty processes, personnel performance, operational asset availability or the occurrence of any external event.
- Environmental risk, associated with the possibility that natural phenomena or human action, may result in the environmental limits being exceeded or in damage to ecosystems and biodiversity.
- Climate Change Risk, arising from the energy transition (regulation, markets, technologies, etc.) and the physical impacts of climate change.
- Reputational Risk, i.e. uncertainty about trends in stakeholder's perception of the company's reputation as a result of conduct by the company or its employees, including corruption, and its influence on earnings in the short, medium and long term.
- Cybersecurity risk, arising from malicious attacks or accidental events with an operational impact that affect data, computer networks or technology.
- Fraud risk, derived from any intentional breach of the law by an employee or a third party to benefit themselves or the company, directly or indirectly, through the improper use of Naturgy resources or assets.
|Risk type||Description||Management approach||Metric||Trend|
|Macroeconomic context||Macroeconomic, social and geopolitical instability||Step up communications with government agencies.
Adopt specific measures
|Deterministic||Impact of the COVID-19 health crisis|
|Commodity prices||Gas||Volatility in the international markets that determine the gas price.||Physical and financial hedges. Portfolio management||Stochastic||Mismatch between long-term contracts and hub prices.|
|Electricity||Volatility in electricity markets.||Physical and financial hedges. Optimisation of the generation fleet.||Stochastic||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/Stochastic||Aggregate demand pressure.|
|Electricity||Reduction of the available thermal gap.
Uncertainty as to renewable production volume.
|Optimisation of the supply-generation balance.||Stochastic||Aggregate demand pressure.|
|Regulatory||Exposure to reviews of criteria and returns recognised for regulated activities.||Step up communications with regulators.
Adjust efficiency and capital expenditure to recognised rates.
|Scenarios||Pressure from regulators, as a function of the situation of the country/industry.|
|Tax||Ambiguity or subjectivity in the interpretation of current tax regulations, or material amendments to 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 are affected by different taxes.|
|Legal||Uncertainty as to the eventual outcome of litigation, arbitration or legal claims.||Analysis and mitigation of legal risk affecting the company's operations and corporate governance.
Engagement of top-level law firms.
Recognition of provisions on a prudential basis.
|Scenarios||Different business units are affected by different laws in each country.|
|Exchange rate||Volatility in international currency markets.||Geographic diversification. Hedging via local-currency funding and derivatives.
Monitoring the net position.
|Stochastic||Uncertainty about growth prospects in Latin America.|
|Interest rate and credit spread||Volatility in funding rates.||Financial hedges.
Diversification of funding sources
|Stochastic||Uncertainty about interest rate scenarios.|
|Credit||Uncertainty about bad debt trends driven by the economic cycle.||Analysis of customer solvency in order to define specific contractual conditions.
Debt collection process.
|Stochastic||Transitory effect of COVID-19.|
|Insurable risks||Accidents, damage or 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.|
|Environment||Exceedance of environmental limits or harm to ecosystems or biodiversity due to natural causes or human action.||Emergency plans at facilities with risk of environmental accident.
Specific insurance policies.
End-to-end environmental management.
|Scenarios||Implementation of an Integrated Management System certified and audited each year by AENOR.|
|Climate change risk|
|Climate change and energy transition||Uncertainty arising from the energy transition (regulation, markets, technologies, etc.) and the physical impacts of climate change.||Corporate positioning via the overall Environmental Policy and Environment Plan, which strengthen governance in climate issues and set emission reduction targets.||Stochastic/ Scenarios||Regulatory uncertainty.|
|Image and reputation||Impairment of stakeholders' perception of Naturgy.||Identification and tracking of potential reputation events.
|Scenarios||Stabilisation of MERCO index score.|
|Cybersecurity||Malicious attacks or accidental events with an operational impact that affect data, computer networks or technology.||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 risks and their associated impact.|
- 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.