Enterprise Risk Management in Enel. Fulvio Conti CEO of Enel spa Rome, October 2 nd, 2008

Transcription

1 Enterprise Risk Management in Enel Fulvio Conti CEO of Enel spa Rome, October 2 nd, 2008

2 Agenda Enel Overview ERM as a tool to protect and grow shareholder s value The ERM effect in rating agencies assessment analysis Enel s approach to ERM 1

3 % indicates Enel s ownership Enel, an international Group 1 A global dimension Americas NORTH AMERICA Installed capacity 472 MW Europe FRANCE Enel France: supplier of electricity in the French market 12.5% of Flamanville EPR Option on next 5 EPR projects 5% Powernext Enel-Erelis: Wind power plant (500 MW in different stages of development) 3 SLOVAKIA 66% of Slovenské Elektrárne: total installed capacity 5,633 MW 2 RUSSIA 49.5% of RusEnergoSbyt 40% of SeverEnergia gas reserves (total p1+p2 700 bcm) 55.78% of OGK-5 (installed capacity 8,220 MW 2 ) LATIN AMERICA Enel s installed capacity 664 MW Endesa s installed capacity 10,111 MW 6 Endesa s customers 8.1 million 6 SPAIN AND PORTUGAL 67.05% of Endesa 5 (15,748 MW, 8.1 mn customers) 6 50% of EUFER: installed capacity 361 MW 7 ITALY Enel s installed capacity 40,936 MW Enel s customers 33.2 million MOROCCO Endesa s installed capacity 257 MW 6 GREECE Renewables (wind) 91 MW (total installed capacity) MW (development) GW 1 of installed capacity 52 1 million customers 86,000 4 employees ROMANIA 51% Enel Distributie Banat & Dobrogea and Enel Energie 1.4 mn customers, 53,000 km of distribution network % Electrica Muntenia Sud 1.1 mn customers and 43,350 km distribution network 2 BULGARIA 73% Maritza East III: installed capacity 581 MW 2 1 Source: Enel, based on 2007 pro-forma data with Endesa, OGK-5 and Electrica Muntenia Sud consolidated respectively at 67.05%, 100% and 100%. Data net of asset transfer to E.On 2 100% consolidated data 3 Values not consolidated 4 Value representing Enel employees in 2007, plus Endesa, Electrica Muntenia Sud and OGK-5 consolidated 100%. Data net of asset transfers to E.On. 5 An additional 25% stake is owned by Enel s partner Acciona 6 Values corresponding to 67.05% of Endesa s total capacity and customers 7 Value corresponding to 50% of Eufer s total capacity 2

4 Enel group overview A relevant scale within the European energy landscape 2007 data* Pre 08 M&As Post 08 M&As 15,2 15,2 13,7 13** 16,3 15,2 13** 13,7 13,1 EBITDA ( mld) 8,0 7,9 5,5 5,4 2,6 2,3 2,1 1,1 7,9 5,5 4,4 2, Capacity (GW) 95 82,3** ,3** One of the largest European Players * 2007 data - Enel includes Endesa ed OGK 5 consolidated at 100%. Data net of asset transfer to E.On. - E.On includes OGK4 asset transfer from Enel/Endesa. 3 **Enel, 2007 pro-forma data with Endesa, OGK-5 consolidated respectively at 67.05% and 100%. Data net of asset transfer to E.On

5 Enel group overview Financial highlights: consolidated full year results mn FY06 FY07 % Revenues 38,513 43, EBITDA 8,019 10, EBIT 5, , Group net income 3,036 3, Net debt 11,690 55, Including capital gain raising from Wind-Weather share transaction for 263 mn 2. Net of discontinued operations 4

6 1H2008 results Enel group overview Financial highlights: consolidated first half results mn 1H07 1H08 % Revenues 18,857 29, EBITDA 4,462 7, EBIT 3,134 5, Group net income 1,982 2, Net debt 55,791 1,2 51, Figures as of Not including net debt of discontinued activities 5

8 The importance of managing risks It is impossible to predict or control exactly how every external variable will create opportunities or threats All the business plans and forecasts can not be considered as something already achieved: we try to stress them to verify their capability to absorb uncertainties In a world of uncertainty we have to develop strategies to anticipate and respond to a wide range of new situations We have to improve our capability to manage risks rather than trying to avoid them Companies make money by taking risks and lose money by not managing risks 7

9 How Enterprise Risk Management can help Enterprise risk management is a process, effected by an entity s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. (*) ERM: includes all business risks, not just financial ones integrates into the management process, becoming every manager s responsibility addresses both the quantitative and qualitative risk management analysis (*) ERM Integrated Framework, COSO Committee of Sponsoring Organizations of the Treadway Commission, Sept

10 Distorted perception of Enterprise Risk Management E.R.M. is often considered as E.R.R. Enterprise Risk Management Enterprise Risk Reporting Common mistakes in ERM perception: To consider ERM as a risks mapping yearly exercise, rather than a real daily management of risks to consider ERM as a support function rather than a partner in business 9

11 Why ERM can add value for our shareholders improves decision making processes and reduces overall risk exposure creates a risk culture awareness adds a level of sophistication to business planning and capital budgeting reduces losses when risks occur provides improvement in corporate governance and compliance standards by the delivery of risk assurance creates competitive advantage incorporating risk-return considerations into all aspects of business 10

12 Parallel with Financial Market Activities Value Creation Financial Market Activities: we are used to manage financial risks and exposures to protect shareholder s value, since more than a decade we add value in different ways (e.g. funding centralization, risk management centralization, cash pooling, netting) ERM: generates value increasing risks awareness across the business and creating a risk culture often is not reported in the books as Financial Market Activities, but its capability of generating value could be much higher 11

14 Assessment of ERM process by S&P s In May 2008 Standard & Poor's announced that they will enhance their ratings process for non financial companies through an Enterprise Risk Management review. S&P s expects that deterioration (or improvement) in a company's ERM quality would potentially drive rating and outlook changes before the consequences are apparent in published financial results Companies with efficient and effective ERM should have less volatility in earnings and cash flow, and should optimize the risk/return relationship and should be more capable to meet financial obligations in full and on time Improved ERM leads to higher ratings and to lower cost of funding 13

15 Comments on S&P s approach ERM review is an enhancer of rating attributed, but even excellent ERM process doesn t prevent risk occurrence Sector weighting is necessary to create ERM benchmarks Shift focus from cost based to value based Whatever your views on ERM, it now counts for rating reviews, better to be prepared! 14

17 Enterprise Risk Management in Enel Risk Management in Enel is a well established practice, developed in the last 10 years through a continous improvement of methodologies and organization s capabilities The governance of each type of risk is coordinated and operatively executed centrally at Group level At Corporate level there is a dedicated, highly specialized organizational unit for each type of risk, responsible of analyising, managing and controlling risk centrally The risks have been divided in 5 Classes: Financial Operating Strategic Compliance Reporting 16

18 Focus on Financial Risks INTEREST RATE RISK Mainly linked to financial indebtedness CURRENCY RISK Mainly linked to commodity purchases in non Euro currencies Minor risk on financial indebtedness Capex and other cash flows in non Euro currencies COMMODITY RISK Fuel Oil Coal Gas Electric Power CO2 Copper Aluminium INSURANCE RISK Property Liability Injury CREDIT RISK Counter party Risk Country Risk LIQUIDITY RISK Liquidity Risk 17

19 Financial Risk Management in Enel Guidelines Risk appetite is defined by CEO, and a Risk Supervision Committee assigns PaR and Var Limits to each Risk Management Desk Hedge all financial risks for the entire Group Centralise risk management: each business unit quantifies risk exposure and asks Central Risk Management Unit to hedge the net positions Continuous monitoring of Group financial risks Formal procedures based on segregation of duties, between who owns and manages risks and who analyses, monitors, controls and reports on risks Optimise market interventions trough limited and strictly controlled trading activities 18

20 Financial Risk Management in Enel Central Hub for dealing with Markets FINANCIAL MARKET COMMODITY MARKET INSURANCE MARKET Finance Dept. of Enel S.p.A. ENEL TRADE S.p.A. Finance Dept. of Enel S.p.A. ENEL RE Ltd. 19

21 Enel s Commodity Risk Management We are mainly exposed to oil-based commodity prices for fuel purchases and gas sold to customers, and to Power Exchange Market Price for the energy sold. To hedge this exposure: we are expanding our customer base in the free market offering fixed price contracts for 24 months time horizon we use bilateral contracts and CFDs (contract for difference) to hedge and lock part of our exposure The remaining exposure on power is disaggregated on oilbased commodities with an internally developed model. As a consequence, we can manage oil and power hedging in an integrated way, using derivative instruments based on benchmark indexes (for example, IPE Brent, NYMEX, WTI) on the international market Secure operating margins in the core business 20

22 Final remarks: Enel Top 5 ERM Priorities 1. Reduction of volatility in earning and cash flow 2. Alignment of risk exposures and mitigation programs across the whole group 3. Insurance that risk issues are explicitly considered in every level decision making 4. Integration of ERM into corporate reporting practices and institution of more rigorous risk measurement in all operating units 5. Use of risks control as competitive tool 21

23 BACK UP 22

24 Commodity Risk Management Back-up Centrally controlled by Commodity Risk Control, who: defines adequate risk measurement methodologies defines risk limits measure risks for every Business Unit and at Group Level approves proposed hedging strategies reports to Top Management on commodity risk evaluates derivatives and define accounting method for IFRS/IAS Centrally managed by Enel Trade, who: supports BUs to define proposals of hedging strategies aggregates internal hedging requests deals with markets to hedge the net position 23

25 FX and Interest Rate Risk Management Back-up Centrally controlled by Financial Risk Manager, who: measures overall risks at Group level supports BUs to analyze risks and define proposals of hedging strategies report to Top Management on interest rate and currency risk evaluates derivatives and define accounting method for IFRS/IAS Centrally managed by Finance Treasurer, who: hedges risk exposure to keep risk within limits aggregates and nets internal hedging requests deals with markets to hedge the net currency position and the interest rate exposure 24

26 What has to change in most Corporate ERM perception From Negative / time constraining Reactive Silos approach Narrowly-focusing Reporting of risks Functionally-driven Cost-based (-) Historical-looking Ad hoc / specific Fragmented Secondary function To Positive / value adding Proactive Global and systematic approach Broadly-focusing Management of risks Process-driven Value-based (+) Forward-looking Continuous / comprehensive Integrated Primary function 25

27 The COSO ERM Framework backup COSO ERM framework defines essential components, suggests a common language, and provides clear direction and guidance for ERM 26

28 Risk Management ERM Cube backup Key Components Internal Environment the internal environment sets the basis for how risk is viewed and addressed, including risk management philosophy and risk culture. Objective Setting ERM ensures that management has in place a process to set objectives, establishes the risk appetite of the entity and align risk tolerance, the acceptable level of variation around objectives, with risk appetite. Event Identification Internal and external events affecting achievement of the objectives must be identified, distinguishing between risks and opportunities. Risk Assessment Risks are analysed, considering likelihood and impact, as a basis for determining how they should be managed. Risks are assessed on an inherent and a residual basis. Achievement of Objectives Strategic high-level goals, aligned with and supporting its mission Operations effective and efficient use of its resources Reporting reliability of reporting Compliance Compliance with applicable laws and regulations Risk Response Management selects risk responses avoiding, accepting, reducing, or sharing risk developing a set up of actions to align risks with the entity s risk tolerances and risk appetite. Control Activities Policies and procedures are established and implemented to help ensure the risk response are effectively carried out. Information and Communication Relevant information is identified, captured and communicated in a form and timeframe that enable people to carry out their responsibilities. Monitoring The entirety of management is monitored and modifications made as necessary. Monitoring is accomplished through ongoing management activities, separate evaluations or both. Source: COSO Enterprise Risk Management, Integrated Framework, Sep

29 Enel approach to ERM Since 2007, Enel mainly focused on the following components of the COSO* framework: Risk assessment review of inherent risk / assessment of residual risk Risk assessment Risk Response Control Activities Risk response - assessment of management responses to risks Control activities - policies and procedures (IT controls, specific line controls, etc) established and implemented to ensure the risk response are effectively carried out (*) ERM Integrated Framework, COSO Committee of Sponsoring Organizations of the Treadway Commission 28

30 Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Impossibile visualizzare l'immagine. La memoria del computer potrebbe essere insufficiente per aprire l'immagine oppure l'immagine potrebbe essere danneggiata. Riavviare il computer e aprire di nuovo il file. Se viene visualizzata di nuovo la x rossa, potrebbe essere necessario eliminare l'immagine e inserirla di nuovo. Classification of risks backup The Risks associated to each process are identified and evaluated in terms of : Probability: uncertainty of occurrence Impact: consequence of occurrence HIGH Medium Medium High High The two components are measured using qualitative/quantitative criteria, as High, Medium and Low. PROBABILITY MEDIUM Medium Low Medium Medium High The final outcome is expressed in terms of RESIDUAL RELEVANCE, ranked in 5 levels (Low, Medium-Low, Medium, Medium-High, High). LOW Low Medium Low LOW MEDIUM HIGH IMPACT Medium 29

31 The Final Outcome Summary of Results = Inherent Risk COMPANY A = Residual Risk COMPANY B COMPANY C = EBITDA COMPANY D COMPANY E COMPANY F Low Medium Low Medium Medium High High Average INHERENT VS Average RESIDUAL RELEVANCE 30

32 The Final Outcome Inherent and Residual Risk on Processes Example: Company A FUEL SUPPLY PLANT DESIGN&CONSTRUCTION =Inherent Risk =Residual Risk GENERATION ADMINISTRATION, PLANNING & CONTROL ICT ENERGY MGNT HR & ORGANIZATION ù PURCHASES & SERVICES REGULATORY AFFAIRS COMMUNICATION FINANCE CORPORATE AFFAIRS LEGAL RELEVANCE Low Medium Low Medium Medium High High 31