1. business and industrial

2014
Consolidated
and Separate
Financial
Statements
9
Gruppo Hera il Bilancio consolidato e d’esercizio
Introduzione
Relazione sulla gestione
CHAPTER 1
Report on
Operations
Hera Group –Consolidated and Separated Financial Statement as at 31 December 2014
1.06.03 FINANCIAL POLICY AND RATING
Financial
markets
ECB’s
monetary
policy
Banking
system:
prudent credit
decisions
In 2014 financial markets exhibited a significant acceleration of volatility indicators, as a
consequence of a macroeconomic scenario that failed to live up to expectations, thus
engendering fears and uncertainty on the economy of the Eurozone.
Even though the European Central Bank (ECB) is stepping up its accommodative policy,
Europe is still stagnating, with negative effects on financial markets. Loans to households
and companies were still down, as banks are prudent in their credit decisions, in view of a
demand that is still weak.
The ECB’s monitoring of the 15 Italian banking groups that have been under its
supervision since November demands more stringent capital requirements, thereby
tightening credit even further. In fact, the outcome of the ECB’s “Comprehensive
Assessment” was not so favourable – against all hopes – thus bringing to the fore the
need for Italian banks to recapitalize.
Furthermore, in December 2014, Standard & Poor’s lowered Italy’s long-term debt rating
to BBB with a stable outlook, due to the significant increase of public debt, coupled with
constantly weak growth and low
competitiveness.
2,50%
Swap Rate Trend 2,00%
Interest rates
at record low
Flat market
curves
headed south
S&P cut
sovereign rating
from BBB to
BBB- d
confirmed
Hera’s rating
However, the ECB’s decision to
1,50%
Irs 10Y
adopt extraordinary measures to
1,00%
support the economy of the
Irs 2Y
Eurozone had a positive effect on 0,50%
interest rates, which hit a record 0,00%
low. The slope of the swap curve
(which is used by the bond market
as a reference) is flattening, with
the result that swap rates from 2 to 10 years are lower than 70 basis points, compared to
a medium/long-term equilibrium reading that is expected to reach 125/120 basis points.
Despite the complicated economic and financial cycle, the spread between 10-year Italian
government bonds (BTPs) and the German Bund (the reference for the cost of money)
narrowed during the year, falling by about 100 basis points compared to the peak of 225
basis point at the end of January 2014, with a benefit for businesses in terms of cost of
funds.
Against this backdrop, the Group continued to borrow from capital markets, by leveraging
its solid creditworthiness and its competitiveness. Despite the downgrade of Italy’s rating,
S&P confirmed Hera’s rating, showing a positive view of the Group’s risk profile in terms
of soundness and good balance of the business portfolio managed.
Approved by the Hera Spa Board of Directors on 24 March 2015
60
Hera Group –Consolidated and Separated Financial Statement as at 31 December 2014
Issue of first
Green Bond
in Italy
Active debt
management
EIB: 15-year loan
Committed
Lines
On 4 July 2014, the Group issued the first Italian Green Bond under the Euro Medium
Term Notes program for a principal amount of €500 million, maturing in July 2024, with an
interest rate of 2.375% and a yield of 2.436% per annum. The bond is listed on the
Luxembourg Stock Exchange.
Issuing the Green Bond was for Hera a natural development of its substantial efforts
since inception to achieve sustainability, thus making it possible to meet the demand of a
growing number of international investors that are sensitive to these aspects. In fact, the
proceeds from this placement were used by the Group to repay early part of the debt
incurred to fund environment-friendly projects and to fund new ones in the same area, to
address climate change, to improve air quality, to purify water and to recover matter from
waste.
The debt refinanced with the Green Bond refers essentially to 61% of the €500-million
Eurobond maturing in February 2016.
Proceeds from the Green Bond were used also to refinance two additional existing
bonds, one for €100 million (maturity November 2020) and one for €17 million, maturing
in 2025, issued in a private placement.
In December 2014, a €50 million tranche was drawn down – under the €100 million line of
credit established by the European Investment Bank (EIB) - at the highly attractive rate
of 1.428%, with a 15-year maturity and the first instalment due in 2018.
To support liquidity risk indicators and to optimize any opportunity cost for its funding, the
Group started negotiations to obtain committed lines of credit, to extend their expiration
dates and to increase their amount from a total of €295 million at 31 December 2014.
These negotiations with banks are expected to result in committed lines of credit for €395
million, with an average length of 4 years.
The financial risk management strategy
The following notes discuss the policies and principles to manage and control financial
risks, such as the liquidity risk and related default and debt covenant risk, interest rate
risk, exchange rate risk and rating risk.
An active and
prudential risk
management
model
Liquidity risk
The Group tries to match the maturities of its assets and liabilities, linking its investments
to sources of funds that are consistent in terms of maturity and manner of repayment,
taking into account the refinancing requirements of the current debt structure.
Liquidity risk refers to the company’s failure to meet its financial obligations, due to the
inability to obtain new funds or to sell assets in the market.
The Group’s objective is to ensure such a level of liquidity as to make it possible to meet
its contractual obligations both under normal conditions and under critical conditions
through the availability of lines of credit, liquidity and a timely start of negotiations on
maturing loans, optimizing the cost of funding on the basis of current and future market
conditions.
Approved by the Hera Spa Board of Directors on 24 March 2015
61
Hera Group –Consolidated and Separated Financial Statement as at 31 December 2014
Liquidity
adequate to a
worst case
scenario
The table below shows the ‘worst case scenario’, where no consideration is given to
assets (cash, trade receivables etc.) and emphasis is placed on financial liabilities – both
principal and interest – trade payables and interest rate derivatives. All demand loans are
called in while other loans mature on the date when repayment can be demanded.
31.12.2014
Worst case scenario
(€/million)
Bonds
from 3
from 1 to
months to
3 months
1 year
31.12.2013
from 3
from 1 to 2
from 1 to from 1 to
months to
years
2 years 3 months
1 year
43
286
83
59
100
603
366
128
95
242
309
158
Trade payables
1,194
0
0
1,192
0
0
Total
1,603
414
178
1,494
409
760
Bonds and another financial liabilities
To guarantee sufficient liquidity to meet every financial obligation for at least the next two
years (the time horizon of the above worst case scenario), at 31 December 2914 e Group
had €834.5 million in liquidity, €295 million in unused committed lines of credit and a
substantial amount that can be drawn down under the uncommitted lines of credit (€1,000
million).
The lines of credit and the relevant financial activity are not concentrated in a specific
lender but are distributed among the main Italian and foreign banks, with a use much
lower than the total available.
Average
maturity of debt
over 8 years
At 31 December 2014, the Group had mainly a long-term debt structure, accounting for
90% of total borrowings, of which about 70% reflects bonds repayable at maturity. The
average term to maturity is over 8 years, of which 62% maturing beyond five years.
The table below shows the cash outflows broken down by maturity within and beyond five
years:
Gross borrowings (*)
(€/millions)
fixed rate
floating rate
Total
31.12.2014
31.12.2013
% with without
without
with
with
% with
derivates derivates derivative derivates derivates derivatives
2,888
2,013
56%
2,762
1,911
53%
711
1,586
44%
841
1,693
47%
3,599
3,599
100%
3,604
3,604
100%
Default and debt covenant risk
This risk is related to the possibility that the loan agreements entered into contain clauses
whereby the lender might demand accelerated repayment of the loan in the presence of
certain events, thus giving rise to a potential liquidity risk.
Approved by the Hera Spa Board of Directors on 24 March 2015
62
Hera Group –Consolidated and Separated Financial Statement as at 31 December 2014
At 31 December 2014, a significant portion of the Group’s net borrowings was covered
by loan agreements containing a number of clauses, in line with international practices,
that place some restrictions. The main clauses guarantee equal treatment of all debt
holders (pari passu) and prevent the company from granting to subsequent lenders, with
the same seniority status, better security and/or liens on its assets (negative pledge).
As to acceleration clauses, there are no financial covenants on debt except that no
amount in excess of €150 million in debt can be rated below investment grade (BBB-) by
even one rating agency.
On the remaining part of the debt, the acceleration clause is triggered only in case of a
change of control for the Group that entails a downgrading below investment grade or the
termination of the publication of the rating.
Balanced fixedand floating rate
instrument mix in
portfolio
56% of debt
carries a fixed rate
of interest
Interest rate risk
The Group uses external funding sources in the form of medium- to long-term financial
debt, various types of short-term credit facilities and invests its available cash primarily in
immediately realizable highly liquid money market instruments. Changes in interest rates
affect both the financial costs associated with different types of financing and the revenue
from different types of liquidity investment, causing an impact on the Group's cash flows
and net financial charges.
The Group’s financial policy is designed to identify an optimal mix of fixed- and floatingrate funding, in connection with a prudential approach to interest rate risk management.
Interest rate risk management aims to stabilize cash flows, so as to maintain the margins
and the certainty of cash flows from operating activities.
Interest rate risk management entails, from time to time, and depending on market
conditions, the execution of transactions involving a combination of fixed-rate and
floating-rate financial instruments as well as derivative products.
In keeping with the Hera Group’s risk policy, the share of floating-rate borrowings is 44%
of total borrowings. The remaining 56% consists of fixed-rate medium- and long-term
borrowings which might expose the Group to changes in fair value.
The Group applies a financial management approach based on risk mitigation, adopting a
risk hedging policy that leaves no room for the use of derivatives for speculative
purposes. In fact, derivatives are a perfect hedge of the underlying debt instruments.
Debt repayment outlays (mln€)
31.12.2015 31.12.2016 31.12.2017 31.12.2018 31.12.2019
Bonds
Over 5
years
Total
0
195
0
0
500
2,035
2,731
Bank debt / due to others
476
88
69
50
47
316
1,044
Total
476
283
69
50
547
2,351
3,775
*Total borrowings: does not include cash and cash equivalents, other current and non-current financial
receivables
Approved by the Hera Spa Board of Directors on 24 March 2015
63
Hera Group –Consolidated and Separated Financial Statement as at 31 December 2014
Exchange rate risk unrelated to commodity risk
The Group adopts a prudential approach towards exposure to currency risk, in which all
currency positions are netted or hedged using derivative instruments (cross-currency
swaps). Currently the Group has a bond outstanding for 20 billion Japanese yen, fully
hedged by a cross currency swap.
The rating
confirms the
strengths that the
Group has built
over time
Rating
Hera S.p.A. has a “Baa1” rating by Moody’s with a negative outlook and a “BBB” rating
by Standard & Poor’s with a stable outlook.
On 18 December 2014 Moody’s issued a Credit Opinion confirming the Baa1 Negative
Outlook rating, placing the Hera Group one notch above Italy (Baa2 Stable Outlook),
because it feels at the company has the ability to mitigate the negative impact of the
country’s weak macroeconomic context, thanks to the business diversification and its
moderate exposure to cyclical activities. However, the negative outlook remains, due to
Italy’s critical economic conditions and the consequent pressure that they might
determine on the Group’s financial profile.
As mentioned, on 19 December 2014 S&P confirmed the Group’s rating. The stable
outlook reflects S&P’s expectation that the Group might reach the target rating level and
hat its solvency is not fully dependent on the situation of Italy as a country.
Given the current macroeconomic context and the uncertainty of Italy’s regulatory and
economic prospects, the Group strengthened its actions and strategies with a view
to maintaining and/or upgrading its rating.
Approved by the Hera Spa Board of Directors on 24 March 2015
64