Fixed interest rate
Exchange rate risk.
Exchange rate risk applies to the following transactions:
- Debt contracted by Group companies in a currency other than that in which their cash flows are indexed;
- Payments to be made for the acquisition of materials associated with projects and payments for corporate insurance policies in a currency other than that in which their cash flows are indexed;
- Revenue for Group companies directly linked to the performance of currencies other than those of their cash flows;
- Cash flows from foreign subsidiaries to parent companies in Chile, exposed to exchange rate variations.
In order to mitigate exchange rate risk, Enel Group’s exchange rate hedge policy is based on cash flows and seeks to balance cash flows indexed to the US dollar with levels of assets and liabilities in that currency. The objective is to minimize exposure to cash flow affected by exchange rate risk.
The instruments currently used to meet this policy are currency swaps and exchange rate forwards. This policy also seeks to refinance debt in the functional currency of each company.
Enel Américas may be exposed to risk from the variation of prices for certain commodities mainly through:
- Purchase of fuels for electricity generation;
- Energy sale-purchase operations conducted in local markets.
In order to reduce risk in situations of extreme drought, the Group has designed a commercial policy that defines levels of sale commitment in accordance with its plants’ capacities during a dry year, including risk mitigation clauses in contracts with non-regulated clients. For regulated clients subject to long-term tender processes, indexing polynomials are determined to allow reduction of exposure to commodity risk.
With a view to the operating conditions affecting power generation, hydrology and the volatility of commodity prices in international markets, the company continuously checks the convenience of hedging to reduce the impact of these price variations on profit and loss. As of June 30, 2016, and December 31, 2015, there were no active commodity derivative operations.
The Group maintains a consistent liquidity policy when contracting long-term credit facilities and temporary financial investments for sums sufficient to cover projected needs for a period set depending on the situation and expectations for debt and capital markets.
These projected needs include due dates for net financial debt, that is, after financial derivatives. For more details on the characteristics and conditions of financial debt and financial derivatives, see Notes 19 and 21 and Appendix 4.
As of June 30, 2016, Enel Américas Group had liquidity of 1,113,569,619,000 Chilean pesos in cash and cash equivalents and 139,790,859,000 Chilean pesos in long-term lines of credit with unconditional availability. As of December 31, 2015, Enel Américas had liquidity of 1,185,163,344,000 Chilean pesos in cash and cash equivalents and 34,332,376,000 Chilean pesos in long-term lines of credit with unconditional availability.
Enel Américas monitors credit risk rigorously.
Commercial accounts receivable:
In credit risk from commercial accounts receivable, risk has historically been highly limited since short-term collections from clients ensure that no significant individual sums accumulate. This is applicable to both our electricity generation and distribution activities.
In the case of our electricity generation business, some countries allow supply to be cut off when payment is not made and almost all contracts establish non-payment as grounds for contract termination. For this purpose, credit risk is constantly monitored and maximum sums exposed to payment risk - which, as mentioned, are limited - are monitored.
All of our electricity distribution companies are empowered to cut off supply to clients in the event of non-compliance, applicable in accordance with the regulation in force in each country, thus facilitating the credit risk assessment process. In any case, such risk is always limited.
Excess revenue is invested in first-line domestic and foreign financial institution (with investment-grade risk ratings, whenever possible), with limits set for each institution.
Banks are selected for investments according to their ratings, using the three leading international rating agencies (Moody’s, S&P and Fitch).
Placements may be backed by treasury bonds issued by the countries where the Group operates and/or paper issued by first-line banks, with the latter being preferred as they offer higher returns (always operating within the framework of current placement policies).
Derivatives are taken out with highly solvent institutions so that all operations are conducted with institutions that have an investment grade rating.
Enel Américas prepares a measurement of Value at Risk for its positions with financial derivatives and debt, with the objective of monitoring the company’s risk and limiting the volatility of its profit and loss.
The portfolio of positions included for Value at Risk calculations comprises:
Debt hedge derivatives
The Value at Risk calculated represents possible variation in the value of the portfolio of positions described above during the quarter with 95% confidence. For this purpose, with regard to the Chilean peso, the volatility of risk variables affecting the portfolio of positions is studied, including:
Libor interest rates for the US dollar;
The different currencies in which our companies operate along with local standard banking indexes;
The exchange rates of the different currencies used in the calculation;
Value at Risk is calculated by extrapolating future scenarios (in a quarter) for the market values of the risk variables under scenarios based on real observations for the same period (quarter) over five years.
The Value at Risk for a quarter is calculated with 95% confidence as the worst fifth percentile of all possible quarterly variations.
Under this hypothesis, the Value at Risk for a quarter in the positions discussed above amounts to 104,474,460,000 Chilean pesos.
This value represents the potential increase in the debt and derivatives portfolio so the Value at Risk is intrinsically linked to factors that include the portfolio’s value at the end of each quarter.
As is normal practice in bank credit and capital market operations, some of the financial indebtedness of Enel Américas is subject to cross-default provisions. If certain defaults are not rectified, this may result in cross default, which may render certain liabilities held by Enel Américas payable.
Non-payment - following any grace period applicable to any debt owed by Enel Américas, not relating to its foreign subsidiaries - with a capital value exceeding US$30 million, or the equivalent in other currencies, may give rise to compulsory early payment of Yankee bonds.
Finally, for the local bonds and lines of credit of Enel Américas, early payment is triggered merely by non-compliance on the part of the Issuer or Debtor, that is, Enel Américas, with no reference to its foreign subsidiaries. Cross default may be triggered for local bonds when the amount in arrears exceeds 3% of Total Consolidated Assets for an individual debt or across all debts. For local debts, cross default is triggered if the amount in arrears for a debt exceeds US$50 million or the equivalent in other currencies, and additional conditions are met such as the expiry of grace periods. These lines have not been paid out.
There are no clauses in credit agreements whereby changes in the corporate classification of Enel Américas by credit rating agencies would lead to an obligation to prepay debt.