Main risks and uncertainties

In addition to being one of the factors with the largest potential impact on Group operations, emissions of carbon dioxide (CO2) are also one of the greatest challenges facing the Group in safeguarding the environment.
EU legislation governing the emissions trading scheme imposes costs for the electricity industry, costs that could rise substantially in the future. In this context, the instability of the emissions allowance market accentuates the difficulties of managing and monitoring the situation. In order to mitigate the risk factors associated with CO2 regulations, the Group monitors the development and implementation of EU and Italian legislation, diversifies its generation mix towards the use of low-carbon technologies and resources, with a focus on renewables and nuclear power, develops strategies to acquire allowances at competitive prices and, above all, enhances the environmental performance of its generation plants, increasing their energy efficiency.

As part of its ordinary operations, Enel is exposed to changes in the prices of fuel and electricity, which can have a significant impact on its results.
To mitigate this exposure, the Group has developed a strategy of stabilizing margins by contracting for supplies of fuel and the delivery of electricity to end users or wholesalers in advance.
The Group has also implemented a formal procedure that provides for the measurement of the residual commodity risk, the specification of a ceiling for maximum acceptable risk and the implementation of a hedging strategy using derivatives.
For a more detailed examination of management of commodity risk and the derivatives portfolio, please see note 5 of the notes to the consolidated financial statements.
In order to limit the risk of interruptions in fuel supplies, the Group has diversified fuel sources, using suppliers from different geographical areas and encouraging the construction of transportation and storage infrastructure.

In its commercial and financial activities, the Group is exposed to the risk that its counterparties might not be able to discharge all or part of their obligations, whether these involve payment for goods already delivered and services rendered or payment of the expected cash flows under financial derivatives contracts.
In order to minimize such risks, the Group assesses the creditworthiness of the counterparties to which it plans to maintain its largest exposures on the basis of information supplied by independent providers and internal rating models.
This process provides for the attribution of an exposure limit for each counterparty, the request for appropriate guarantees for exposures exceeding such limits and periodic monitoring of the exposures.
For certain segments of its customer portfolio, the Group also enters into insurance contracts with leading credit insurance companies.

Enel SpA (directly and through its subsidiary Enel Finance International SA) is responsible for the centralized Group Treasury function (with the exception of the Endesa Group, where that function is performed by Endesa SA and its subsidiaries Endesa Internacional BV and Endesa Capital SA), meeting liquidity requirements primarily through cash flows generated by ordinary operations and drawing on a range of sources of financing. In addition, it manages any excess liquidity as appropriate.
Underscoring the Enel Group's continued capacity to access the credit market despite the recent financial crisis, bond issues for Italian and European retail investors totaling €3 billion (with demand exceeding €14 billion) were carried out successfully in 2010. Enel SpA and its subsidiary Enel Finance International SA also obtained a 5-year revolving credit facility for €10 billion to be used to manage working capital (it is not part of the Group’s debt refinancing program).

The possibility of accessing the capital market and other sources of financing, and the related costs, depend, among other factors, on the rating assigned to the Group.
Any reduction in the rating could limit access to the capital market and increase finance costs, with a negative impact on the performance and financial situation of the Group.
Enel’s ratings are reported in detail in the section “Bondholders” available by clicking on the following link: http://www.enel.com/en-GB/investor/bondholders/ratings/.

The Group is exposed to exchange rate risk associated with cash flows in respect of the purchase or sale of fuel or electricity on international markets, cash flows in respect of investments or other items in foreign currency and, to a marginal extent, debt denominated in currencies other than the functional currency of the respective countries. The main exchange rate exposure of the Enel Group is in respect of the US dollar.
During the year, management of exchange rate risk was pursued through compliance with internal risk management policies, which call for hedging of significant exposures, encountering no difficulties in accessing the derivatives market.
The main source of exposure to interest rate risk for Enel is floating-rate debt. In order to obtain a balanced structure for the debt, Enel manages the risk by reducing the amount of debt exposed to interest rate fluctuations, curbing borrowing costs over time and limiting the volatility of results.
The management policies implemented by Enel SpA also seek to optimize the Group’s overall financial position, ensure the optimal allocation of financial resources and control financial risks.
Under these policies, derivatives transactions for the management of interest rate risk and exchange rate risk are conducted, among other things, with careful selection of financial counterparties and close monitoring of the related exposures and ratings.
More detailed information is provided in note 5 to the consolidated financial statements.

By now, some 50% of the revenues of the Enel Group are generated outside Italy. The major international expansion of the Group – located, among other countries, in Latin America and Russia – therefore requires Enel to assess its exposure to country risk, namely the macroeconomic, financial, regulatory, market, geopolitical and social risks whose manifestation could have a negative impact on income or jeopardize corporate assets. In order to mitigate this form of risk, Enel has adopted a country risk calculation model (using a shadow rating approach) that specifically monitors the level of country risk in the areas in which the Group operates.