Hera Group - Financial Results 2009

Derivative financial instruments classified under non-current assets amount to Euro 419 thousand, (Euro 241 thousand as at 31 December 2008), and all refer to interest rate derivatives. Derivative financial instruments classified under non-current liabilities amount to Euro 40,394 thousand, (Euro 23,571 thousand as at 31 December 2008); Euro 31,956 thousand refer to interest rate derivatives, and Euro 8,438 thousand refer to exchange rate derivatives.
The reduction in fair value, compared to the previous year, was due to unfavourable fluctuations in interest rates (within the context of hedges implemented) and to the subscription of new hedging derivatives which showed a negative fair value as at 31 December 2009, as compared to their subscription date.

Derivative financial instruments classified under current assets amount to Euro 50,199 thousand (Euro 300,387 thousand as at 31 December 2008) and relate to the positive fair values of commodity derivatives contracts in existence at the balance sheet date.

Derivative financial instruments classified under current liabilities amount to Euro 54,633 thousand (Euro 295,309 thousand as at 31 December 2008) and relate to the negative fair values of commodity derivatives contracts in existence at the date in question.

The significant decrease in the value of assets and liabilities attributable to commodity derivative contracts, compared to 31 December 2008, reflecting lower volumes treated, mainly MWh in the Electricity area, as a result of a focused strategy that, in the presence of a market situation considered more uncertain, implemented a significant reduction in the trading business and an equally conservative choice in the opening of new positions in the medium term.

The fair value used as the basis for the interest rate swap valuations was obtained from market prices. In the absence of these, the discounted cash flow method was used, taking the interest rate curve as a reference. The fair value of the commodity derivatives is calculated on the basis of market prices. All derivative contracts stipulated by the Group are with leading institutional counterparties.

Interest rate derivative instruments held as at 31 December 2009, subscribed in order to hedge loans, can be classed into the following two categories (figures in thousands of €):

Interest rate derivatives identified as cash flow hedges show a residual notional amount of Euro 655.6 million against variable rate mortgage loans of the same amount.
Income and charges in hedge accounting associated with interest rate derivatives predominantly refer to cash flow effects, or to the recording of shares of future flows, which shall have a financial impact in future years. As already illustrated previously with regard to the reduction in fair value, the increase 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 unfavourable trend (in the context of hedges implemented) in interest rates and to the subscription of new hedging derivative contracts which determined an increase in the reference notional amount.

The degree of ineffectiveness of this class of interest rate derivative led to the recording of net charges totalling Euro 451 thousand in the income statement. All the hedges of the aforementioned derivative contracts and related underlying liabilities are classed as "cash flow hedges", with a specific negative reserve recorded in shareholders' equity, relating to contracts subscribed by the parent company, totalling negative Euro 13 million net of tax, with reference to contracts subscribed by other group companies, a negative reserve of Euro 7.1 million net of tax.

Interest rate derivatives identified as fair value hedges show a residual notional amount of Yen 20 billion against a loan in foreign currency of the same amount. In particular, subscription of a derivative hedging said loan led to the recording of financial charges for a total of Euro 9,688 thousand. In parallel, however, a fair value assessment of the underlying loan was performed, recording financial income for a total of Euro 8,657 thousand.

The remaining interest rate derivatives not in the hedge accounting have a notional residual value of Euro 108.2 million; most of these contracts are the result of mirroring transactions carried out in previous years as part of a restructuring of the derivatives portfolio.

Please refer to the explanations in Note 30 with regard to the incorporated derivatives.

Commodity derivative instruments held as at 31 December 2009 can be classed into the following two categories (figures in thousands of €):

Commodity derivatives recorded under hedge accounting were all closed as at 31 December 2009.
Commodity derivatives recorded in non-hedge accounting also include contracts entered into with substantial hedging objectives. These contracts, which under strict international criteria set down in the international principles cannot be dealt with under hedge accounting, nevertheless generate income and charges relating to the higher/lower purchase cost of raw materials and as such are classified as operating costs.
On the whole, in 2009, the commodity derivatives generated Euro 388,672 thousand in income and Euro 370,980 thousand in charges, for a net gain to the income statement of Euro 17,692 thousand.