commodity risk management and hedging framework of industrial portfolios
TRANSCRIPT
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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
generation (16%)• Second operator in
distribution (17%)• 2,3 mln clients
CHILE• First operator in
generation (37%)• First operator in
distribution (32%)• 1,6 mln clients
PERU• First operator in
generation (30%)• Second operator in
distribution (19%)• 1,2 mln clients
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
distribution (30%)• 2,6 mln clients
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
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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