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21 Financial instruments - derivatives

 
Non-current Assets/Liabilities 
€ / 000
Fair value hierarchy Hedged underlying asset 30-Jun-12 31-Dec-11
   NotionalFair Value of AssetsFair Value of LiabilitiesNotional Fair Value of AssetsFair Val. of Liabilities
Derivatives on exchange rates        
- Interest rate Swap2Loans502.1 mln47.133 502.3 mln18.864 
- Interest rate Swap2Loans319.1 mln 24.868331.5 mln 16.991
- Interest rate Option2Loans8.3 mln 6319.1 mln 666
Total derivatives on exch. rates      47.13325.499  18.86417.657
Derivatives on exch. rates
(finantial transactions)
        
- Cross Currency Swap2Loans20 mld JPY65.862 20 mld JPY61.684 
Total derivatives on exch.rates (fin.transactions)  65.8620  61.6840
Total      112.99525.499  80.54817.657

 

Non-current Assets/Liabilities 
€ / 000
Fair value hierarchy Hedged underlying asset 30-Jun-12 31-Dec-11
   NotionalFair Value of AssetsFair Value of LiabilitiesNotional Fair Value of AssetsFair Val.of Liabilities
Derivatives on exchange rates        
- Interest rate Swap2Loans   3.9 mln22 
- Interest rate Swap2Loans200.6 mln 1.969203.9 mln 4.712
- Interest rate Option2Loans   3.6 mln 105
Total derivatives on exch. rates    0 1.969  22 4.817
Derivatives on commodities                
- Swap2Foreign Gas Hub600,800 MWh1.294    
- Swap2Crude oil625,500 Bbl4.695 1,232,300 Bbl4.866 
- Swap2Commodity259,500 Ton11.986 21,550 Ton562 
- Swap2El. Energy formula5,122,291 MWh21.103 3,833,855 MWh32.782 
- Swap2Fuel formula131,760 MWh392 153,590 MWh610 
- Swap2Crude oil533,200 Bbl 2.949508,300 Bbl 1.694
- Swap2Commodity53,300 Ton 2.599163,250 Ton 3.274
- Swap2El. Energy formula5,069,979 MWh 25.3052,992,735 MWh 35.548
- Swap2Fuel formula21,590 MWh 103   
Total derivatives on commodities   39.470 30.956  38.820 40.516
Derivatives on exch.rates
(commercial transactions)
               
- Swap2Exchane rate95,5 mln Usd3.581 68,5 mln Usd1.800 
- Swap2Exchane rate80,0 mln Usd 3.20055,5 mln Usd 2.377
Total derivatives on exch.rates (commercial transactions)  3.581 3.200  1.800 2.377
Total    43.051 36.125  40.642 47.710

Derivative financial instruments classified under non-current assets amount to EUR 112,995 thousand, (EUR 80,548 thousand as at 31 December 2011); EUR 47,133 thousand refer to interest rate derivatives, and EUR 65,862 thousand refer to exchange rate derivatives. Derivative financial instruments classified under non-current liabilities amount to EUR 25,499 thousand, (EUR 17,657 thousand as at 31 December 2011), and all refer to interest rate derivatives.

Financial instruments recorded under current assets and liabilities represent derivative contracts expected to be realised within the next year. Derivative financial instruments classified under non-current assets amount to EUR 43,051 thousand, (EUR 40,642 thousand as at 31 December 2011); EUR 39,470 thousand refer to commodity derivatives, and EUR 3,581 thousand refer to exchange rate derivatives related to commercial transactions. Derivative financial instruments classified under current liabilities amount to EUR 36,125 thousand, (EUR 47,710 thousand as at 31 December 2011); EUR 1,969 thousand refer to exchange rate derivatives, and EUR 30,956 thousand refer to commodity derivatives and EUR 3,200 thousand refer to exchange rate derivatives related to commercial transactions.

With regard to derivatives on current and non-current interest rate as at 30 June 2012, the Group net exposure is negative by EUR 19,665 thousand, compared to a negative exposure of EUR 3,588 thousand as at 31 December 2011. The highly positive change in fair value compared to the previous year is mainly due to the decrease in the interest rate curve within the various types of hedges and to a lesser extent to the realisation of cash flows, corresponding to contractual maturities, linked to derivatives with a negative fair value as at 31 December 2011.

The fair value of the derivatives subscribed to hedge the exchange rate and the fair value of the loans denominated in foreign currency as at 30 June 2012, is positive by EUR 65,862 thousand, compared with a positive value, equal to EUR 61,684 thousand, as at 31 December 2011. The increase in fair value recorded over the period is attributable to the trend of interest rate curves, given a euro/Japanese yen Exchange rate substantially unchanged compared to 31 December 2011.

As at 30 June 2012, the net fair value of commodity derivatives and derivatives related to commercial transactions is positive by EUR 8,895 thousand compared to a negative fair value, equal to EUR 2,273 thousand as at 31 December 2011. The change in fair value, recorded over the period, is attributable to the price trend of commodities related to the type of hedging transactions as well as to a simultaneous change in volumes subject to hedging. In particular, the increase in value of the notional of assets and liabilities, compared to 31 December 2011, is attributable to the type of trading activities, which generated contracts with a yearly duration, expiring by the end of the financial year.

The fair value of financial instruments, both on interest rates and foreign exchange rates, derives from market prices; in the absence prices quoted on active markets, the method of discounting back future cash flows is used, taking the parameters observed on the market as reference. The fair value of the commodity derivatives is calculated using input directly observable on the market. All derivative contracts entered into by the Group are with leading institutional counterparties.

Interest rate and foreign exchange derivative instruments held as at 30 June 2012, subscribed in order to hedge loans, can be classed into the following categories (figures in thousands of €):

Hedging derivatives on interest/exchange rates (financial transactions)Underlying assets 30-Jun-1231-Dec-1130-Jun-11
  Notional Fair Value of AssetsFair Value of LiabilitiesInc.Char.NotionalFair Value of AssetsFair Value of LiabilitiesNotionalFair Value of AssetsFair Value of LiabilitiesInc.Char.
- Cash Flow Hedge Loans374.2 mln015.96315.501386.2 mln018.117387.8 mln015.348405.946
- Fair Value Hedge Loans649.8 mln112.99411.47735.38218.858649.8 mln80.5484.191649.8 mln26.62810.29913.36324.265
- Non Hedge Accounting Loans6.1 mln1281615918.3 mln2216637.2 mln61374495470
Total   112.995 27.46835.54424.418  80.570 22.474  26.689 26.02113.89830.681

Interest rate derivatives identified as cash flow hedges show a residual notional amount of EUR 374.2 million (EUR 386.2 million as at 31 December 2011) against variable rate loans of the same amount.
Income and charges associated to said class of derivatives predominantly refer to cash flows realised, or to the recording of shares of future flows, which shall have a financial impact in the following period.

As at 30 June 2012 the breakdown of net charges relating to derivatives classified as cash flow hedges, amounting to EUR 5,500 thousand, is as follows:

 Cash Flow Hedge30-Jun-1230-Jun-11
€/000Income / (Charges)Income / (Charges)
- Realised Cash Flow-5.116-6.121
- Accrued Interest-337238
- Ineffective portion-47-23
Total-5.500-5.906

The reduction in net financial charges compared with the same period in the previous year (see Note 13 "Financial income and charges") is predominantly due to the trend (in the context of hedges entered into) in interest rates. The interval between the end of 2011 and the first months of 2012 is in fact characterised by higher Euribor rates than those reported in the compared period, generating a positive effect on fixed rate hedges entered into. Another factor which contributed marginally to the decrease in net cash flows paid was the gradual reduction in the notional value of some derivatives linked to loans in the repayment phase.
The ineffective portion relating to this class of interest rate derivative led to the recording of net charges totalling EUR 47 thousand in the income statement. All the hedging relationships between the aforementioned derivatives contracts and the related underlying liabilities are qualified as "Cash Flow Hedges" and involved the recording in the Group shareholders' equity, of a specific negative reserve, amounting to EUR 6,612 thousand, net of the related tax effect.

Interest rate and foreign exchange derivatives identified as fair value hedges of liabilities recorded in the income statement show a residual notional amount of EUR 649.8 million (unchanged compared to 31 December 2011), against loans of the same amount. In the case of loans denominated in foreign currency, the notional amount of the derivative expressed in EUR is the translation to the original exchange rate hedged. Specifically, the financial liabilities hedged comprise a bond loan in Japanese Yen with a residual notional amount of JPY 20 billion and a ten-year fixed rate bond of EUR 500 million. These derivatives required the recognition of EUR 35,382 thousand in financial income and financial charges of EUR 18,858 thousand; it is hereby noted that concurrently the underlying loans were measured at fair value which resulted in net financial charges of EUR 13,540 thousand.
As at 30 June 2012, the breakdown of income and charges relating to derivatives classified as fair value hedges and the related underlying liabilities valued at fair value was as follows:

Fair Value Hedge30-Jun-12 30-Jun-11
€/000IncomeChargesTotalIncomeChargesTotal
- Evaluation of derivatives 20.825-7.28513.5400-14.026-14.026
- Accrued Interest11.622011.62210.762010.762
- Realised Cash Flow 2.935-11.573-8.6382.601-10.239-7.638
- Ineffective portion000000
Totale effetto economico derivati 35.382 -18.858 16.524 13.363 -24.265 -10.902

 

Hedged underlying30-Jun-12 30-Jun-11
€/000IncomeChargesTotalIncomeChargesTotal
Evaluation of financial liabilities 3.274-16.814-13.54014.026014.026
Total3.274-16.814-13.54014.026014.026

The economic effect connected with this type of hedges is substantially unchanged compared to the previous year. The slight decrease reported in net income is due to higher Euribor rates reported between the end of 2011 and the first months of 2012, compared with those recorded in the compared period.

The remaining interest rate derivatives not in the hedge accounting have a notional residual value of EUR 6.1 million (EUR 18.3 million as at 31 December 2011); some of these contracts are the result of mirroring transactions carried out in previous years as part of a restructuring of the derivatives portfolio. The remaining contracts which, under the criteria envisaged by the international accounting standards, cannot be accounted for under hedge accounting, were however put in place for hedging purposes only.

Commodity derivative instruments held as at 30 June 2012 can be classed into the following categories (figures in thousands of €):

Commodity / foreign exchange derivatives (commercial transactions) Underlying 30-Jun-1231-Dec-1130-Jun-11
  Fair Value of AssetsFair Value of LiabilitiesIncomeChargesFair Value of AssetsFair Value of LiabilitiesFair Value of AssetsFair Value of LiabilitiesIncomeCharges
- Cash Flow HedgeElectricity formula0000000000
- Non Hedge AccountingCommodity transactions43.05134.15651.24741.89640.62042.89321.54815.45526.43212.575
Total  43.051 34.156 51.247 41.896 40.620 42.893 21.548 15.455 26.432 12.575

There are no commodity derivatives recognised under hedge accounting at the closing date.
The commodity derivatives classified as non-hedge accounting also include contracts put in place substantially for hedging purposes, but which, on the basis of the strict requirements set forth by international accounting standards, cannot be formally classified under hedge accounting. In any event, these contracts generate income and charges referring to higher/lower purchase prices of raw materials and, as such, are recognised as operating costs.
In the first half of 2012, in aggregate, these derivatives generated income totalling EUR 51,247 thousand and charges amounting to EUR 41,896 thousand, with a positive net effect to the income statement equal to EUR 9,351 thousand, compared to a net positive effect of EUR 13,857 thousand as at 30 June 2011. The significant change of the net economic effect is connected with the change in fair value, the reasons of which have already been described. It is worth noting that the economic effect of the sale of these swap commodity contracts is substantially offset by a change in purchase costs of raw materials. A more thorough description of the latter can be found in the specific analysis of costs.

Interest rate risk and currency risk on financing transactions
The Group's financial requirements are also met by turning to outside resources in the form of debt. The cost of the various forms of borrowing can be affected by market interest rate fluctuations, with a consequent impact on the amount of the net financial charges. Equally, interest rate fluctuations also influence the market value of financial liabilities. In the case of loans denominated in foreign currency, the cost may also be affected by exchange rate fluctuations with an additional effect on net financial charges. To mitigate interest rate volatility risk and, at the same time, guarantee the correct balance between fixed rate indebtedness and variable rate indebtedness, the Group has stipulated derivatives on interest rates (Cash Flow Hedges and Fair Value Hedges) against part of its financial liabilities. At the same time, to mitigate exchange rate volatility risk, the Group has stipulated foreign exchange derivatives (Fair Value Hedges) to fully hedge loans in foreign currency.

Market risk and currency risk on commercial transactions

In relation to the wholesale activities carried out by the subsidiary Hera Trading Srl, the Group must handle the risks associated with the misalignment between the index-linking formulas relating to the purchase of gas and electricity and the index-linking formulas linked to the sale of said commodities, including therein fixed price contracts stipulated, as well as any exchange rate risk in the event that the commodity purchase/sale agreements are concluded in currencies other than the EUR (essentially the US dollar).
With reference to those risks, the Group objective is to lessen the risk of fluctuation in the forecast budget margins. The instruments used for handling price risk, both with regards to the price of the goods and the related Euro/Dollar exchange rate, are carried out through swap agreements, aimed at pre-establishing the effects on the sales margins irrespective of the changes in the aforementioned market conditions.
Though these transactions are substantially put in place for hedging purposes, in order to realise all possible synergies and decrease operating costs, they are concretely implemented by destructuring the indices included in the underlying contracts and reaggregating them by individual type and net external exposure. As a result, in most cases, the direct correlation of the hedging transactions with the related underlying elements is lost, thereby making these transactions non-compliant with the requirements of IAS 39 for hedge accounting.


 

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