Type of financial risks and related hedging policies

The ACEA Group’s activities expose it to a variety of financial risks, including interest rate and price risk.
The Group uses derivative instruments to hedge certain risk exposures, whilst such derivative or similar instruments are not generally used or held solely for trading purposes.

Foreign exchange risk

The Group is not particularly exposed to this type of risk, which is concentrated in the translation of the financial statements of its overseas subsidiaries.
As regards the 20 billion yen private placement, the exchange rate risk is hedged through a cross currency swap described in the section on interest rate risk. 

Market risk

As a result of the growth in AceaElectrabel Trading’s activities, the Group is exposed to market risk, represented by the risk that the fair value or future cash flows of a financial instrument fluctuate as a result of market price movements, above all in relation to the risk of movements in the prices of commodities in which the Group trades.

In purchasing and selling electricity, the company uses price indices that reflect both regulated tariffs to final customers and a basket of fuels used by Italian electricity generating companies.

In the natural gas sector, the Group uses indices based on baskets of fuels.

For the analysis of financial instruments employed, the Group makes use of:

  • values calculated with reference to forward price curves: this method is based on observed market prices. The forecast represents general market expectations for the future value of the commodity and is, therefore, reasonably reliable and results in a value that is calculated independently of the entity using the forecast. This method is the only one that allows contracts to be marked to market,
  • values calculated with reference to internal models: this method of forecasting, which is primarily used in markets where there is an insufficient degree of transparency and liquidity, is based on the total or partial use of internal valuation models.


In the last few months of 2009, AceaElectrabel Trading implemented the Central Risk Management unit responsible for managing and optimising the company’s overall portfolio (and exposures deriving from the Gas and Power portfolios), also through risk reporting procedures governed by risk policy manuals.

Decisions regarding hedging strategies and the execution of those strategies comply with the above procedures.
However, although on one hand, with the creation of the Central Risk Management Unit responsible for the centralised management of risk factors deriving from the two main portfolios (gas and power), the new organisational structure reduced the overall costs of hedging, also through the subdivision of complex indices; on the other, it made the application of the cash flow hedge rather complex, the logical consequence being that commodities derivatives stipulated by AceaElectrabel Trading were valued at FVTPL.

The only commodities derivatives which, as at 31 December 2010, qualified as hedges, and for which it was possible to demonstrate the hedge relationship required by IAS 39, relate to transactions entered into by jointly controlled company Tirreno Power, included in the perimeter of companies destined to be discontinued shown below.

Type of commodity Fair Value Amount to shareholders’ equity Amount to income statement
COAL 438 438 0
POWER 363 363 0
Total 801 801 0
Amounts are shown in thousand of euros

In particular, at the moment each derivative contract is stipulated, the investee company designates this as a hedge against the commitments to purchase electricity or other energy sources for the powering of thermoelectric plants through physical contracts. Again at the date of executing the transaction, the company prepares specific documentation demonstrating the prospective effectiveness of the hedge. This is done via simulation of what are assumed to be representative movements in the forward price curve for the respective indices, and the related comparison between movements in the fair values of the actual and hypothetical derivative instruments, where the latter represents a derivative financial instrument with contract terms matching those applicable to the physical contract. Power portfolio transactions qualify as effective when the hedging relationship, calculated on the basis of the ratio in absolute terms of movements in the actual derivative instrument and those in the hypothetical derivative instrument, lies within a range of 80%-125%, as defined by IAS 39. The retrospective and prospective effectiveness test applied to these transactions at the end of the year confirmed the hedging relationship.

However, should the derivative instrument, at the time of execution, be designated as a hedge of purchases of electricity in the form of contracts for difference (CFD), the company does not prepare specific documentation demonstrating the effectiveness of the hedge. In fact, the Group treats CFDs as financial instruments, which are activated when the relevant contractual condition is met, i.e. when at a certain hour of a certain day the price on the electricity exchange is higher or lower than the strike price (reference parameter). As a result, these transactions do not qualify as contracts that may be defined as hedging physical underlying transactions pursuant to IAS 39.

Gains and losses resulting from the management of market risk using these contracts are, in the case of both CFDs and derivative instruments, measured at fair value with the differences recorded in the income statement. The fair value of the CfDs at the end of the year was a negative 307 thousand euros.

Details of the hedges by type of commodity are shown below, including the relative fair values through the income statement.

Type of commodity Fair Value Amount to shareholders’ equity Amount to income statement
COAL 1,625  
CRUDE OIL (2,432)  
FOREX (116)  
FUEL OIL 391  
GAS OIL 3,767  
POWER (988)  
EMISSION (526)  
TRADING 2,373  
Totale 5,514 0 5,514
Amounts are shown in thousand of euros

Furthermore, limited speculative trading activity began 2009, in line with the provisions of the Risk Policy Manual. This activity mainly concerned the power portfolio.

The table below shows the results of the stress sensitivity test at 31.12.10 performed on AceaElectrabel Trading’s portfolio falling within the scope of IAS 39.

Sensitivity Analysis: 31/12/2010  
Variation (€Euro)
Brent Equivalent (Crude Oil) + 10 $/bbl -2.034.052
Euro/$ +10% 1.751.079
Brent Equivalent (Crude Oil) + Euro/$ + 10 $/bbl & +10% €Euro€/$ -98.059
Power +5 €Euro 8.137.935
Natural Gas +3 Euro -746.426
Emission +2 Euro 16.834

In March 2009, the IASB issued an amendment to IFRS 7, introducing a series of changes aimed at adequately meeting the need for greater transparency resulting from the financial crisis and linked to elevated uncertainty over market prices. These changes included the establishing of the fair value hierarchy. In particular, the amendment defines three levels of fair value (IFRS 7, parag. 27A):

  • level 1: if the financial instrument is listed on an active market;
  • level 2: if the fair value is measured using evaluation techniques that assess parameters, other than listings of the financial instrument, observable from the market;
  • level 3: if the fair value is calculated using evaluation techniques that assess parameters not observable on the market.

It should be noted that, as regards the types of commodity whose fair value is calculated,

  • for derivatives on single commodities (Brent, API#4, PUN - unique national price - standard base load products, Peak/Off Peak, Euro/USD, …) the fair value level is 1 given they are listed on active markets,
  • for complex indexes (ITRemix, PUN profiled products, ….) the fair value level is 2 given these derivatives are the result of formulas containing a mix of commodities listed on active markets.

Liquidity risk

ACEA SpA’s liquidity risk management policy is based on ensuring the availability of significant bank lines of credit. Such facilities exceed the average requirement necessary to fund planned expenditure and enable the Group to minimise the risk of extraordinary outflows. In order to minimise liquidity risk, the ACEA Group has adopted a centralised treasury management system, which includes the most important Group companies, and provides financial assistance to the companies (subsidiaries and associates) not covered by a treasury management contract.

As at 31 December 2010, the Parent Company held committed and uncommitted lines of credit totalling 1,360.7 million euros and 400 million euros respectively. No guarantees were issued to obtain said credit lines.
The committed lines of credit are revolving with a three-year term. A total of (i) 100 million euros of said credit lines is available until December 2012 and (ii) the remainder is available until the first quarter of 2013; the contracts entered into provide for the payment of a fee for non-use (minimum of 0.28% - maximum of 0.35 per annum) plus an upfront fee paid at the time the credit lines are opened.

On the amounts drawn down, ACEA pays an interest rate equal to the one, two, three or six month Euribor (depending on the period of use chosen beforehand), plus a spread which, in some cases, may vary in line with the rating assigned to the Parent Company.

Furthermore, it should be noted that ACEA has a medium/long-term committed credit line of 100 million euros in place, stipulated in September 2009, which has not been used as at the close of the financial year. The credit line expires in September 2012. On each amount used, the company can elect to apply a fixed rate or a floating rate and each disbursement may be repaid at ACEA’s discretion (i) in a lump sum or over a period to be included between the third and ninth years from the date of disbursement or (ii) on the basis of a repayment plan involving six-monthly instalments, of which the first must be paid no later than the fourth year and the last in a period included between the fourth and fifteenth year from the date of disbursement.

During the first quarter of 2010, ACEA:

  • subscribed a private bond (private placement), with maturity of 15 years, for 20 billion Japanese Yen (184 million euros). The Private Placement, fully underwritten by a single investor was simultaneously subject to interest and exchange rate risk hedges, for a total of roughly 161.8 million euros, regulated at a fixed rate.
  • issued a 10-year bond, for a total amount of 500 million euros, maturing on 16 March 2020, at a fixed rate of 4.5%. The Bond, assigned A- and A+ ratings from Standard & Poor’s and Fitch respectively, is listed on the Luxembourg Stock Exchange and was placed exclusively with institutional investors on the Euromarket. Regulation of the bond does not provide for special financial covenants or the change of control clause and early redemption under market conditions is permitted.

The goal of the two transactions is to extend the average life of the debt, ensuring coverage for the investments set out in the plan.

The liquidity derived from the placement of the two bonds in the first quarter of 2010 (totalling roughly 660 million euros) meant the Parent Company required significantly less use of the available credit lines than in previous years.

In addition, the liquidity in excess of the company’s requirements was used throughout 2010 in fixed term deposit and similar contracts: at the end of the year, ACEA had loans totalling 194.5 million euros in place.

With reference to some water companies operating in Tuscany and Campania it should be pointed out that:

  • Publiacqua: renewed the bridge loan (60 million euros) taken out in August 2008 expiring in February 2010. The loan was renewed for twelve months and a further 6-month extension is envisaged, provided it is completed before November 2010: a) the new agreement text was agreed with the Area Authority, (b) the Area Plan was defined, considered bankable by Lenders and (c) Technical and Legal Due Diligence regarding the financing project was accepted by the banks. Only two of the three conditions set out were observed within the prescribed terms: however, the banks were prepared to grant an additional extension and submitted the decision to their respective committees.
  • Acquedotto del Fiora: the bridge loan of 45 million euros, stipulated while awaiting the finalisation of project financing for consolidating the current financial exposure and meeting the remaining requirements regarding realisation of the Investment Plan until the end of the concession arrangement, expired in September 2010. A new bridge transaction (expiring on 5 March 2012) of 80 million euros was completed in September, 45 million euros of which was used to refinance the previous bridge loan.
  • Gori: a process is currently underway for the restructuring of the bridge loan of 40 million euros maturing in June 2011.

Tirreno Power not only as significant revocable lines of credit available, but has unused committed lines of credit of 120.7 million euros (Group portion 18.1 million euros), of which 105 million euros maturing on 30 June 2014, 2 million euros in December 2015 and 13.7 million euros in 2028.

The graph below depicts the future development of total cash flows based on the situation at the end of the year.

Rischio liquidità


Interest rate risk

The ACEA Group’s approach to managing interest rate risk, which takes account of the structure of assets and the stability of the Group’s cash flows, has essentially been targeted, up to now, at hedging borrowing costs and stabilising cash flows, in such a way as to safeguard margins and ensure the certainty of cash flows deriving from ordinary activities.

The Group’s approach to managing interest rate risk is, therefore, prudent and the methods used tend to be static in nature.

A static (as opposed to a dynamic) approach means adopting a type of interest rate risk management that does not require daily activity in the markets, but periodic analysis and control of positions based on specific needs. This type of management therefore involves daily activity in the markets, not for trading purposes but in order to hedge the identified exposure over the medium/long term.

ACEA has, up to now, opted to minimise interest rate risk by choosing a mix of fixed and floating rate debt instruments.

As previously noted, fixed rate debt protects a borrower from cash flow risk in that it stabilises financial outflows, whilst heightening exposure to fair value risk in terms of changes in the market value of the debt.

In fact, an analysis of the consolidated debt position shows that the risk the ACEA Group is exposed to is mainly in the form of fair value risk, composed as at 31 December 2010 of fixed rate borrowings (64.36%), which is set to increase in the future, reaching 100% in 2023. With reference to the current portfolio make-up, the Group is partly exposed to the risk of fluctuation in future cash flows and, by contrast, to a greater extent than changes in fair value.

Given the current mix of fixed and floating rate instruments, and also taking into account the trend in market rates, the company cannot exclude the use of hedging instruments that allow fair value risk to be contained within a more general approach to mitigating cash flow risk.

ACEA is bringing consistency to its decisions regarding interest rate risk management that essentially aims to both control and manage this risk and optimise borrowing costs, taking account of stakeholder interests and the nature of the Group’s activities, and based on compliance with the prudence principle and consistency with best market practices. The objectives of these guidelines are as follows:

  • to identify the optimum mix of fixed and floating rate debt,
  • to pursue a potential optimisation of the Group’s borrowing costs within the risk limits established by governance bodies and in accordance with the specific nature of the business,
  • to manage derivatives transactions solely for hedging purposes, should the Group decide to use them, in respect of the decisions of the Board of Directors and, therefore, the approved strategies and taking into account (in advance) the impact on the income statement and balance sheet of said transactions, giving preference to instruments that qualify for hedge accounting (typically cash flow hedges and, under given conditions, fair value hedges).

The Group currently uses derivative instruments to hedge interest rate risk exposure for the following companies:

  • Voghera Energia has swapped the interest rate on tranche A of the Senior Term Facility, amounting to 180 million euros, for a fixed rate in accordance with the loan agreement. Therefore, the company executed two different swap contracts with the same notional value,
  • Acque has swapped the interest rate on 80% of the loan obtained at the end of 2006 for a fixed rate. The company has thus executed two different swap contracts with the same notional value,
  • ACEA has:
    • swapped the 100 million euro loan obtained on 27 December 2007 for a fixed rate. The swap, a plain vanilla IRS, was stipulated on 24 April 2008, effective as of 31 March 2008 (date of drawdown of the underlying loan) and expires on 21 December 2021,
    • completed a cross currency transaction to transform to euro – through a plain vanilla DCS swap – the currency of the private placement (yen) and the yen rate applied to a fixed euro rate through a plain vanilla IRS swap,
  • Tirreno Power has swapped the interest rate on the Term Facility divided into two tranches for a fixed rate.
  • Umbra Acque swapped a medium/long term loan for a fixed rate.

All the above derivative instruments are non-speculative and the total fair value of these was a positive 10.8 million euros.

The following table shows the fair value of the above borrowings by type of borrowing and interest rate at 31.12.10.
The fair value of medium/long-term debt is calculated on the basis of the risk-free and the risk-adjusted interest rate curves.
The table does not contain the liabilities relating to companies held for sale.

Bank Loans: Amortised cost Risk-free FV Increase/ (Decrease) RISK ADJUSTED FV Increase/ (Decrease)
(A) (B) (A)-(B) (C ) (A)-(C )
Bonds 975,647 1,034,365 (58,719) 998,216 (22,569)
fixed rate 414,114 473,485 (59,371) 445,365 (31,251)
floating rate 724,537 739,002 (14,466) 735,549 (11,012)
floating rate to fixed rate 239,146 239,990 (844) 239,910 (764)
Total 2,353,443 2,486,843 (133,400) 2,419,040 (65,597)
Amounts are shown in thousand of euros

Sensitivity analysis has been carried out on medium/long-term financial liabilities using stress testing, thus applying a constant spread over the term structure of the risk-free interest rate curve (for the Euro area at 31.12.10). The following table shows overall movements in terms of the fair value of liabilities based on parallel shifts (positive and negative) between –1.5% and +1.5%.

Constant spread applied Movements in Present Value (€m)
-1.50% 151.5
-1.00% 98.7
-0.50% 48.2
-0.25% 23.8
0.00% 0.0
0.25% (23.3)
0.50% (46.1)
1.00% (90.1)
1.50% (132.3)

As regards the type of hedges for which the fair value is calculated and with reference to the hierarchies required by the IASB, given they are composite instruments, they are categorised as level 2 in the fair value hierarchy.

Credit risk

ACEA has issued credit policy guidelines which identify the different strategies which reflect the Customer-Centric philosophy: through flexibility criteria and on the strength of the activities managed, as well as customer segmentation, credit risk is managed by taking into account both the customer type (public or private) and the non-uniform behaviour of individual customers (behavioural scores).

The key principles on which the risk management strategies are based are as follows:

  • definition of the customer cluster categories through the abovementioned segmentation criteria;
  • standard cluster management in ACEA Group companies, based on the same risks and commercial characteristics, of defaulting end users;
  • collection methods and instruments used;
  • uniformity of standard criteria regarding the application of default interest; division into instalments of credit; definition of the necessary responsibilities/authorisations for any exceptions.
  • adequate reporting and training of dedicated staff.

With regards to electricity distribution activities the wholesalers represent credit risk. Credit management starts with the “behavioural score” or knowledge of the individual reseller through the constant analysis of payment attitudes/habits and is subsequently implemented through a series of targeted actions ranging from phone collection activities carried out in-house, remainders sent electronically, sending of notice letters via registered post, as provided under resolution ARG/elt 4/08, to termination of the transportation contract.

As regards sales of electricity, credit risk was measured beforehand, especially in relation to the sale of gas and electricity to industrial and business customers.

The activity was performed in accordance with Credit Risk Policy Manual rules, through an in-house process involving the evaluation of credit reliability, assignment of an internal rating and recognition of the maximum limits of financial exposure to the counterparty.

The constant monitoring of exposures through an analysis of the cash flows and the market trend and credit management activities are aimed at preventing criticalities and protecting credit through the necessary hedging provisions such as corporate and/or bank guarantees or contractual solutions which make it possible to reduce the exposure.

Customer evaluation

For AceaElectrabel Elettricità S.p.A., credit risk management is differentiated based on discriminating factors of customer segment (industrial, business, retail, domestic) and customer category (prospect, contract stipulated).

In the case of offers from the industrial or business segment with contractual values higher than a set amount and/or credit equivalent threshold (maximum potential credit exposure), for all counterparties, AceaElectrabel Elettricità S.p.A. personnel must ask the AceaElectrabel Risk Control Unit to perform an assessment of the customer/counterparty. An in-depth report drawn up by a company with expertise in risk assessment may be attached to said request.

The assessment is carried out through the following types of analysis:

  • financial (asset, profitability, cash flow)
  • commercial (segment, country, company)
  • corporate (strategic, management evaluation, transparency)


A judgment on the level of risk is provided for each level of analysis.

The overall customer rating is also provided; this identifies the unsecured credit limit. In the event said unsecured credit limit is exceeded with respect to the credit equivalent limit, this is provided for in a contract except in the case of obtainment of specific credit hedges (generally bank or corporate guarantees), indicated by the Risk Control Unit at the time of transmission of the evaluation outcome, or authorisation by the Risk Committee.

In the case of offers from the industrial or business segment with contractual values lower than a set amount and/or credit equivalent threshold, a risk evaluation is requested from specialised companies.

For each request, the rating agency indicates the rating, which corresponds to a judgment of reliability which can be very high, high, average or high risk. Based on the rating, a decision is taken on whether or not to request the issue of a guarantee. In extreme cases no contract is stipulated with the customer.

Credit Recovery

For customers in the industrial segment, in the event of non-payment a few days after expiry of the invoice, a reminder letter is sent out to the customer, followed by telephone contact. If the payment delinquency persists, a letter of default is sent and, if payment or a proposed repayment plan has not been received from the customer a further 5 days after delivery of said letter, a request is made to the distributor for suspension through default. Six months after expiry of the first invoice, the case is passed to an external legal office that proposes a repayment plan to the customer; if an agreement is not reached or in the event of non-compliance with the plan, the legal office proceeds with the coercive recovery of the credit with a subsequent increase in costs and fees for the customer.

In the case of Business and Retail segment customers:

  • A reminder letter is sent twenty days after the invoice expiry;
  • A registered letter of default and a notice of suspension of supply are sent forty days after the invoice expiry;
  • Distributors are asked to suspend supply;
  • The Supply Contract is resolved.

As regards credits relating to utility services discontinued for a total amount exceeding 20,000 euros the customer is placed in default by registered letter. If payment delinquency persists, procedures are launched for the recovery of the credit by legal means with, if necessary, an increase in the expenses incurred by the customer.

As regards credits relating to utility services discontinued for a total amount lower than 20,000 euros, two months after the end of services, the job of recovering the credit by extra-judicial means is entrusted to specialised credit recovery agencies. Where cases are closed unfavourably by the recovery agencies, procedures are launched for recovery by legal means where it is deemed to be economically advantageous.

A lodgement of claims is carried out for bankrupt customers.

In support of the above activities, and in line with previous years, spot and revolving without-recourse factoring of receivables due from Public Administration and private customers was carried out in 2009.

With regards to the supply of water, the implementation of credit risk management strategies started with a macro-distinction between public sector end users (municipalities, public administrations, etc.) and private sector end users (industrial, commercial, condominium, etc.), given that said categories present different levels of risk, in particular:

  • low risk of insolvency and high risk of late payment for public sector end users
  • variable risk of insolvency and late payment risk for private sector end users

As regards credits due from public sector end users, they are converted to cash through the without-recourse factoring to financial partners and a residual portion is managed directly through the offsetting of receivables/payables or by means of settlement agreements.

Credit management for private sector end users starts with behavioural scores or knowledge in terms of the probability of default of each individual customer through the constant analysis of payment attitudes/habits, and is subsequently implemented through a series of targeted actions ranging from reminder letters, assignment to specialised companies for credit recovery via phone collection, to detachment of the defaulting end users.

The water segment is also characterised by a significant amount of invoices to be issued which are determined by the characteristics of the business.

The following table summarises the different types of receivable described in Note 22 – Trade receivables.

Due from other customers
Balance at 31.12.10 Total receivables Due Past-due for > 0-30 days 30-90 days 90-180 days over 180 days
Current assets              
Outstanding amounts due from customers (A + B) 220,923            
Total amounts due from customers (A + B + C) 182,173            
Receivables for invoices issued: (A) 153,344 17,734 96,086 6,342 6,087 8,032 75.626
Networks 31,296 12,324 18,972 2,926 2,436 1,581 12,029
Energy 5,407   0        
Energy Generation 0 0 0 0 0 0 0
Sales 5,407 177 5,231 3,672 261 908 389
Development and Special Projects 2,496 32 2,464 1 178 500 1,786
Water 34,116   0        
Lazio/Campania 27,999 1,670 26,330 766 (249) 2,228 23,585
Tuscany/Umbria 6,117 1,813 4,303 1,083 330 224 2,668
Environment and Energy 32,848 4,004 28,843 2,457 2,992 5,476 17,919
Corporate 47,181 1,374 45,807 959 482 475 43,891
Receivables for invoices to be issued: (B) 67,579 67,579          
Networks 32,807 32,807          
Energy 2,727 2,727          
Energy Generation 0            
Sales 2,727 2,727          
Development and Special Projects 10,091 10,091          
Water 16,963 16,963          
Lazio/Campania 10,815 10,815          
Tuscany/Umbria 6,148 6,148          
Environment and Energy 1,436 1,436          
Corporate 3,555 3,555          
Provisions for impairment of receivables:(C) (38,750)            
Networks (1,239)            
Energy (583)            
Energy Generation 0            
Sales (583)            
Development and Special Projects (630)            
Water (11,534)            
Lazio/Campania (10,806)            
Tuscany/Umbria (728)            
Environment and Energy (1,409)            
Corporate (23,354)            

End users
Balance at 31.12.10 Total receivables Due Past-due for > 0-30 days 30-90 days 90-180 days over 180 days
Current assets              
Outstanding amounts due from customers (A + B) 943,533            
Total amounts due from customers (A + B + C) 809,091            
Receivables for invoices issued: (A) 544,147 22,214 19,655 3,723 459 434 15,040
Networks 41,869 22,214 19,655 3,723 459 434 15,040
Energy 246,818   0        
Energy Generation 0 0 0 0 0 0 0
Sales 246,818 92,495 154,323 33,214 18,495 12,738 89,876
Development and Special Projects 0   0        
Water 255,460   0        
Lazio/Campania 211,571 33,441 178,130 7,891 16,038 18,669 135,532
Tuscany/Umbria 43,889 13,099 30,790 7,782 3,849 2,508 16,650
Environment and Energy 0   0        
Corporate 0   0        
Receivables for invoices to be issued: (B) 399,386 9,049          
Networks 9,049 9,049          
Energy 99,345            
Energy Generation              
Sales 99,345 99,345          
Development and Special Projects 0 0          
Water 290,992            
Lazio/Campania 251,933 251,933          
Tuscany/Umbria 39,059 39,059          
Environment and Energy 0 0          
Corporate 0 0          
Provisions for impairment of receivables:(C) (134,442)            
Networks (20,326)            
Energy (54,495)            
Energy Generation              
Sales (54,495)            
Development and Special Projects 0            
Water (59,621)            
Lazio/Campania (41,959)            
Tuscany/Umbria (17,662)            
Environment and Energy 0            
Corporate 0