Commodity risk management and hedging framework of industrial portfolios

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Commodity risk management and hedging framework of industrial portfolios

22 November 2010, London

Managing Oil and Energy Risk Conference

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Contents

• The company

• Commodity risk management and hedging framework

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61 Mln clients

61 Mln clients

>81.000 employees

>81.000 employees

Generation1999

DistributionUpstream Gas Sales

1,5 Mln shareholders

1,5 Mln shareholders

Generates and distributes value in the international

energy market

Assets in 23 countries

Assets in 23 countries

Serving local communities

Serving local communities

Respect for environment

Respect for environment

Safety on the job

Safety on the job

Enel Group: integrated operator in the energy sector

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Abroad

Italy

1999

2002

2006

2009

89%

96%

8,9

52% 48%

11%

8

16

4%

7,9

55,8

94%

6%

46,5

80%

20%

50,8

42% 58% 95,3

78.510

98%

2%

76%

24%

47% 53%

71.204

58.548

81.208*

EBITDA (€ bn) Installed capacity (GW) Employees

+100% +88% +39%

Enel transformational growth

1999-2009: from Italian incumbent to international group

Source: annual report

* including 52 persons classified as “Held for sale”

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COLOMBIA• First operator in

generation (21%)• Second operator in

distribution (15%)• 2,3 mln clients

ARGENTINA• First operator in



CHILE• First operator in

generation (37%)• First operator in


PERU• First operator in



NORTH AMERICA• Diversified presence in

the main renewable technologies (hydro, geothermal, wind)

IBERIA• First operator in generation

(26%)• First operator in distribution

(43%)• 13 mln clients (electricity and

gas)

ITALY• First operator in

generation (26%)• First operator in

distribution (84%)• 33 mln clients (electricity

and gas)

SLOVAKIA• First operator in

generation (83%)

ROMANIA• Second operator in


RUSSIA• First vertically integrated

foreign operator (upstream gas, generation, supply)

BRAZIL• 5,4 mln clients

Market shares for distribution calculated per TWh of distributed energy

CENTRAL AMERICA• Hydro and wind power

plants in Costa Rica, Panama, El Salvador and Guatemala

Presence 40 countries on 4 continents61 million of clients81.000 employees

Enel: a world dimensionMajor areas of presence

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Enel: a major European operator2009

Installed capacity

GW

EBITDA

Mld EURO

Source: institutional presentations. Installed capacity of EDF - evaluation of financial analysts

1716

14 14

9

7

4

Enel is the second utility in Europe by installed capacity

140

95

73 73

5044

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Contents

• The company

• Commodity risk management and hedging framework

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A clear identification of the nature of the activity (industrial book vs. trading book) is critical to define the most appropriate Risk Management approach

• Management and mitigation of the market risk:

» Without necessity of having a market view through linear hedging and transfer of all risks

» With a market view/insight holding some risks or recurring to non linear instruments

• Asset and contract portfolio optimization through the market

» Research/ identification of flexibility sources in assets and contracts

» Monetization flexibility over temporal horizon (forward/spot)

• Asset support and optimization trading/hedging through market information and liquidity

• Additional value creation through:

» Exploitation of arbitrage opportunity

» Exploitation of asymmetrical information/ market insight

Risk mitigation

Hedging

Exploitation of the opportunity of value creation

Proprietary trading

• Additional value creation through:

» Supply to third parties of product and services based on modelling skills, competence and critical mass

» Exploitation of asymmetrical information on the market

Structuring/originationAsset backed trading

Risk position

Decrease

Stable

IncreaseFocus of trading portfolios

Focus of industrial portfolios

Trading and industrial portfolios operate on the same markets, with the same

instruments (derivatives contracts) and the same desks to execute deals but….

…Differ for risk metrics (PaR vs. VaR), risk limits (higher limits for industrial books),

control procedures (monthly vs daily) and accounting treatment (CFH/Own Use vs

MTM)

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Examples of industrial and trading book

Trading portfoliosIndustrial portfolios

• Power generation

• Gas mid-Stream

• Power Retail

• Gas Retail

• Oil

• Gas

• Italian Power

• European Power

• Structuring

• Origination

• Cross-commodities

PaR (Profit at Risk) VaR (Profit at Risk)Risk Metrics

Optimize investments (including contractual assets) and client base

Generate margins from view and value added services

Business rationale

Focus of the presentation

Medium-long term Short termTime frame

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Fuel Scenario

Power production forecast

Portfolio and Risk Management process High level view

Commercial channel analysis

Portfolio Analysisand identificationof net exposure

Market analysis and market view

definition

Availability Power Plant Efficiency curve

FWD MarketSingle Buyer Enel Energia (retailer)WholesalerOTC market

FWD MarketMacro Economic trend Gas MarketPower Market

Power ProductionFuel Consumption

FWD MarketCoal MarketOil Market

Coal MarketOil Market

Spot Marke

t

Production planReservoir target

Fuel supply

Gas

Detailed in the next chart

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Portfolio analysis and identification of net exposure

Native exposure Break down in base exposure

Spark

FX

CO2

Shipping

API2

Brent

Aggregation on key commodities and net exposure calculation

Native exposure can be splitted in base commodities plus spark spread using

indexes and market models

Exposure on commodities can be aggregated on “Reference” commodities (es. Sonatrach Basket aggregated on brent) to identify net

exposure

Real picture of the net exposure

ILLUSTRATIVE

Oil

Shipping

Coal

Gas(index)

ContractedIndex

ContractedFix

Uncontracted

CostRevenues

GASOIL 0,1

Shipping

Sonatrach LSFO FOB

Revenues Cost

Spark

FX

API2

Dated

API4

HSFO

IPE BrentLSFO CIF

CO2

GASOIL 0,2

Detailed in the next page

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Uncontracted power is splitted in commodities and spark spread using internal models

ContractedIndex

ContractedFix

Uncontracted

Revenue

Identifications of risk factors underlying uncontracted energy

Can’t be hedged with derivatives in a non mature market

Can be netted and hedged with the rest of the portfolio

Electricity exposed to market volatility

Impact of commodities

Spark spread

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In non liquid markets more sophisticated solutions are required to identify exposures underlying power price

• Due to the correlation between the price of electricity and that of fuels, electricity’s price variation can be calculated as a function of the generating plants’ fuel price variation

• Hedging a volume of each fuel that is equivalent to its contribution in this formula gives a good approximation of electricity hedge

Description of

electricity hedge

with fuels

Process to obtain the basket of fuels

→ Power formula based on basket of fuels

Power market long-term model

Sale 10 TWh

(power)=

Power = X e/Coal ·X e/CO2 + X e/Gas· P Gas· P Coal + P CO2

Sale R MMtn of coal

Sale S bcm of gas

Sale T tm of CO2

Sale U tm of freight

Sale V MM€ of €/$ swaps

2010 Coal forward price, PCoal

2010 CO2 forward price,, PCO2

2010 Gas forward price, PGas

2010 Freight forward price, PFreight

2010 €/$ swap forward price, P€/$

+ X e/Freight · P Freight + · P €/$X e/€/$

→ Objective: Hedging 10 TWh of generation power for delivery in 2010

Steps:

1. Hourly merit-curve calculation

2. 2010 hourly power prices

3. Repeat steps 1 and 2 for a number of different forward commodity prices

4. Find the multivariable regression (Xe) between power prices and forward commodity prices across the scenarios

+ K

ILLUSTRATIVE

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Exposure on detailed commodities is re-aggregated in “principal” hedgeable commodities

Base commodities Main commodities Synthetic risk drivers

Gasoil 0,1 FOB MED Cargoes / Gasoil 0,1 CIF MEDGasoil 0,2 CIF MED/ Gasoil 0,2 FOB MED

Gasoil 0,2 FOB NWE Barges / Gasoil 50PPM CIF MEDGasoil 10PPM CIF MED / Gasoil 10PPM FOB MED

…

Gasoil 0,1 FOB MED Cargoes / Gasoil 0,1 CIF MEDGasoil 0,2 CIF MED/ Gasoil 0,2 FOB MED

Gasoil 0,2 FOB NWE Barges / Gasoil 50PPM CIF MEDGasoil 10PPM CIF MED / Gasoil 10PPM FOB MED

…

HSFO 3,5% CIF NWE ARAHSFO 3,5% CIF MED / HSFO 3,5% FOB MED

…

HSFO 3,5% CIF NWE ARAHSFO 3,5% CIF MED / HSFO 3,5% FOB MED

…

API2 / New Castle / API4Coal Basket Ct…

API2 / New Castle / API4Coal Basket Ct…

Aggregation on hedgeable commodities (residual

unhedgeable basis risk)

Simplified picture for strategy definition

Starting point from desegregation of contracts

and other exposures

Algerian Crude BasketBrent Dated / ICE Brent

WTI Premium Unleaded 10ppm FOB

…

Algerian Crude BasketBrent Dated / ICE Brent

WTI Premium Unleaded 10ppm FOB

…

LSFO 1% CIF MED / LSFO 1% CIF MEDLSFO 1% CIF NWE ARA / LSFO 1% CIF NY Cargoes

LSFO 1% FOB MED/…

LSFO 1% CIF MED / LSFO 1% CIF MEDLSFO 1% CIF NWE ARA / LSFO 1% CIF NY Cargoes

LSFO 1% FOB MED/…

ICE GasoilICE Gasoil

HSFO 3,5% FOB NWE BargesHSFO 3,5% FOB NWE Barges

API2/API4API2/API4

ICE Brent

/WTI

ICE Brent

/WTI

LSFO 1% FOB NWE CargoesLSFO 1% FOB NWE Cargoes

ICE BrentICE Brent

API4API4

ILLUSTRATIVE

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Several risk analysis are performed to support the strategy definition

M5%

Margin

Statistical analysis of margin distribution and Profit at risk measurement – M. Euro

Spark Spread

Netting TotalShippingFxCO2CoalBrent equivalent

DNOSAJJMAMFJDNOSAJJMAMFJDNOSAJJMAMFJ Sept 11Jun 11 Mar 11Dec 10Today

Analysis of the profit at risk breakdown among the key risk drivers – Profit at risk M. Euro

Forward looking calculation exposrue evolution – Brent equivalent exposure MBBL

Y-2 Y-1 Y

Forward looking calculation of Profit at risk evolution – Profit at risk M. Euro

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Hedging deals flows management and trading integration

Enel Produzione

Enel Trade - Gas

Enel Energia

Enel Green Power

Active portfolio management ad

support in hedging strategy definition

On request support for

portfolio analysis

Enel Trade–Risk & Trading

Aggregation of hedging mandates and prop trading deals for a coordinated and

centralized execution

FX

Shipping

API4

API2

GO

FO

BTZ

ATZ

Brent

Market

Endesa

Centralized execution

Commodity risk management and hedging framework of industrial portfolios

Business

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