Risk Management
An integrated risk management system has been developed at a Group level with the objective of being able to make use of an effective methodology for identifying priority risks, assessing their possible effects and taking the appropriate action to mitigate them. The guidelines for risk management are inspired by international best practice.
The main risk factors are as follows:
| Type of risk | Description | Exposure | Mitigating factors |
| Commodity risk, including currency risk | Risk linked to the volatility in the price of energy products (gas, electricity, fuel oil, coal, etc.) and environmental securities (ETS EUAs, green certificates, white certificates). | High | Risks are assessed at a Group level by a process netting total exposure, and the resulting assessment is monitored by making a comparison with a risk limit expressed in terms of economic capital and measured by the PaR and VaR. Hedging strategies are managed by the Risk Committee which, in observance of the Energy Risk Policy guidelines and by using derivative instruments, has the aim of reducing the volatility of the P&L of the total portfolio of the A2A Group. |
| Interest rate risk | The risk of incurring additional financial costs as the result of an unfavourable change in interest rates. | Medium | A hedging strategy aimed at minimising any losses arising from fluctuations in floating interest rates by swapping these for fixed rates or entering collar agreements, and minimising the spread between fixed rate loans and floating rate loans (negative carry). A structural model for analysing and managing interest rate risk has recently been developed in the Group. |
| Liquidity risk | The likelihood of being unable to meet obligations as they fall due to the inability to dispose of assets or obtain adequate funding (funding liquidity risk) or of being incapable of easily terminating contracts or counterbalancing specific exposures without a significant drop in market prices due to insufficient market liquidity or possible market interruptions (market liquidity risk). | Low | Hedging designed to negotiate adequate credit facilities, taking into account future cash flows and debt maturity dates. |
| Credit risk | The risk relating to the possibility of a loss due to the insolvency of a counterparty or the impossibility of that party to comply with its contractual obligations. | Medium | A credit policy has been introduced governing the assessment of the ability of a trade customer or trading counterparty to pay, the control of forecast collection flows, the granting of extended credit terms, if necessary, possibly supported by suitable guarantees, and the adoption of adequate recovery measures. |
| Default and covenant risk | This risk relates to the possibility that loan agreements or bond regulations may contain provisions that allow the counterparty to require the borrower to repay the amount lent immediately on the occurrence of specific events. | Low | A2A has stipulated a credit rating clause linked to smaller loans. Other clauses: negative pledges, cross default/cross acceleration, etc. |
Other risks:
Legislative and regulatory risk
A potential source of significant risk are the constant and not always predictable changes in the legislative and regulatory situation in the electricity and natural gas sector. Among the main topics currently affecting changes in legislation are the following:
- regulations governing local public services
- regulations governing large hydroelectric concessions
- the reform of the wholesale electricity market as per Decree Law no. 85/08, converted into law on 28 January 2009
- the evolution of the regulations of the CIP 6/92 convention.
Operational and process risk
The main operational risk to which A2A is exposed is connected with the ownership and management of electricity power stations, cogeneration plants and distribution networks and plants. These plants are naturally exposed to risks that may cause significant damage to the assets themselves, and in the more serious cases production capacity may be compromised. In this case adequate prevention measures are adopted and insurance cover is obtained.
Emission Trading Scheme
The main issues concerning the risks connected with the Emission Trading Scheme (ETS) are as follows:
- Legislative Uncertainty/Regulatory Risk:
at an international level, the legislation arising from the Kyoto Protocol expires in 2012. On the other hand with Directive 2009/29/EC the European Union has determined that it will keep the ETS in force until 2020, envisaging a greater degree of centralisation, coordination and harmonisation of the rules applied by the various Member States. - Market Risk:
The allowances to emit CO2, valid for the ETS EUAs (European Unit Allowances), are listed on organised stock exchanges (eg. ECX, Bluenext) and like all other commodities have prices which vary from one day to the next. An operator who has to buy or sell EUAs therefore has to assess the trends in the price of the product and the related opportunities. - Delivery Risk/Counterparty Risk:
Delivery and Counterparty Risk refer to the possible failure to physically deliver the CO2 allowances bought previously due to problems of a technical nature (for example, the failure of the computer registers of the Member States or the EU to work) or the default of the counterparty.
For further information please go to the Investor Annual Review
