Consolidated financial statement 2011 - Aquafin

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56 Consolidated financial statement 2011 EXPLANATION 5.9 OTHER LONG-TERM FINANCIAL LIABILITIES n Hedge accounting - financial derivative instruments (in €000) 2011 2010 At 1 January 2010 Financial instruments to hedge the interest risk at market value 135,267 44,571 19,992 Other liabilities 133 120 104 TOTAL OTHER LONG-TERM FINANCIAL LIABILITIES 135,401 44,691 20,096 n Interest policy Care must always be taken to ensure that: Aquafin has significant interest burdens. They are accompanied by interest risks due to possible changes in the interest rates, which is both a disadvantage if the interest rate increases and a missed benefit if the interest rate drops. Aquafin wants to optimise the cost of financing through the active management of the interest risk by using financial instruments to have the cash flows be such that the risk is limited. In May 2006, the Board of Directors of Aquafin approved the implementation of a dynamic management procedure for interest rate risks. An interest policy was devised with the outlines of interest rate management set out; the policy was then approved by the board of directors. At 31 December 2011, Aquafin had outstanding long-term debt of €1.7 billion. The active interest management system can be applied to a maximum of 35% of that debt, with the aim of achieving interest savings for Aquafin. The interest management may be built up as follows: • minimum of 65% of the debt with fixed-rate interest • maximum of 35% of the liquid debt, of which: - 25% with limited risk (cap) - 10% fully liquid Aquafin not only has an existing debt that can be actively managed, but the future budgeted debt can also be hedged. On the basis of the investment programmes imposed on Aquafin by the Flemish Region, Aquafin can look several years into the future and make a reasonable assessment of its future financing needs. To cover future financing needs, the interest rate policy results in a dynamic interestmanagement programme up to 50% of the future long-term debts, with a 5-year horizon. • the risks are covered • an underlying loan is always budgeted against a hedging structure For 2011, interest savings of €2 million have been achieved through the active management of the interest risk. That financial result is the difference of the financing burden that Aquafin has as a result of the interest management and the financing burden that Aquafin would have had if it were subject to fixed interest without active management. This comparison is based on the so-called benchmark. The benchmark is the interest rate in effect, the fixed interest at which the underlying long-term loan would have been taken out at in accordance with the characteristics (term, repayment schedule) at the moment of finalising the financial instruments. Different financial instruments combined constitute the structure. The interest cost of the underlying loan is then seen together with the cash flows from the matching structure, resulting in the ultimate financing burden for Aquafin. The savings are settled with the drinking-water companies. At least 50% of that was immediately deducted from the invoice to the drinking-water companies. For 2011, €1.2 million has been credited. The remaining €0.8 million serves as a buffer for possible optimisations. At 31 December 2011, a total of €2 million was set aside for optimisations. That amount was built up in 2011 and previous years. Aquafin established some new structures in 2011, with an eye to the future financing needs. Existing strategies were also optimised. During 2011, an additional €195 million in loans were hedged. That allows Aquafin to stay within the 35% to 50% range.
n Application of Hedge accounting The variation in the value of the financial instruments to cover the interest risk can be compensated through hedge accounting in the realised and unrealised results, if they satisfy specific conditions. In the other event, the impact is accounted for in the profit and loss account. A distinction is made between two hedge categories. 1. Fair value hedge as a hedge of a change in the fair value of a financial asset or liability. Aquafin has financial instruments based on existing loans with fixed interest rates that are classified as fair value hedges. 2. Cash flow hedge as a hedge of the variability in cash flows that are either attributable to a particular risk of a recognised financial asset or liability or a very probable expected future transaction. Aquafin has financial instruments on existing loans with variable interest rates that are classified as cash flow hedges as well as those on future loans with a high degree of probability with respect to predicted financing requirements. Within those two hedge categories, the structures can 'qualify' for hedge accounting if they satisfy the condition that the underlying loan, in the event of an existing loan, is a perfect match with the structure or, in the event of a future loan, the budgeted loan will be taken up with certainty in accordance with the established structure. If one of the conditions is uncertain, Aquafin has opted not to qualify the structure. The following table shows a division of the structures by hedge category, qualification, outstanding amount (of the underlying loan or the future scheduled loan) and their market value. The market value of the structures is calculated as the discounted value of the estimated future cash flows and reflects the sales value at the moment of the applicable market interest rate (31/12/2011 and 31/12/2010). The figures are shown in '000 EUR. The decline in the total market value of the financial instruments is due to the declining interest rate. Setting up the structure is done at implementation at zero cost. The use of options such as fixed interest floors have a valuereducing effect in the event of declining interest rates. On the other hand, there is also the fact that the hedging portfolio is still being expanded due to the implementation of the interest policy. At 31 December 2011, Aquafin had established dynamic interest management for 37 structures. Three of those do not qualify for hedge accounting. The impact is therefore shown completely in the results. Of the 34 qualifying structures, four are assigned as fair value hedges. Those structures were set up for an existing loan with a fixed interest rate and then made variable. A fair value adjustment is applied to the nominal value of the underlying loan of those structures. The remaining structures all qualify for cash flow hedging. Every hedging transaction is fully documented when it is entered into. That includes the identification of the underlying position, the objectives of the interest rate policy, the nature of the hedged position and of the financial instruments. Outstanding amount Market value Market value Hedge category Qualifying Number 31/12/2011 31/12/2011 31/12/2010 (in €000) Fair value hedge No 2 113,333 308 507 Fair value hedge Yes 4 134,167 1,740 -28 Cash flow hedge No 1 100,000 -16,592 -7,651 Cash flow hedge Yes 30 772,500 -120,724 -37,400 TOTAL STRUCTURES 37 1,120,000 -135,267 -44,571 Consolidated financial statement 57
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Consolidated financial statement 2011 - Aquafin

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