16. DERIVATIVE FINANCIAL INSTRUMENTS

At 31 December 2014 and 2013 the REN Group had the following derivative financial instruments contracted:

31 December 2014

Assets

Liabilities

Notional

Current

Non-current

Current

Non-current

Derivatives designated as cash flow hedges

275,000,000 EUR

- - -

14,282

Interest rate swaps

10,000,000,000 JPY

- - - 10,300
Interest rate and currency swaps
Derivatives designated as fair value hedges
Interest rate swaps

400,000,000 EUR

-

21,970

- -
- 21,970 - 24,581
Derivative financial instruments - 21,970 - 24,581

31 December 2013

Assets

Liabilities

Notional

Current

Non-current

Current

Non-current

Derivatives designated as cash flow hedges

425,000,000 EUR

- - 2,341 15,997
Interest rate swaps

10,000,000,000 JPY

- - - 10,847
Derivatives designated as fair value hedges
Interest rate swaps

400,000,000 EUR

- - - 7,476
2,341 34,320
Negotiable derivatives - - 342 -
Derivative financial instruments - - 2,683 34,320

The valuation of the derivatives financial instruments portfolio is based on fair value valuations made by external specialized entities.

The amount recorded in this caption relates to five interest rate swaps and one cross currency swap, contracted by REN SGPS to hedge the risk of fluctuation of future interest and foreign exchange rates (Note 4.1), whose counterpart are foreign and national financial entities with a solid credit rating.

The amounts presented above include the amount of interest receivable or payable at 31 December 2014 relating to these derivatives financial instruments, in the total net amount receivable of 614 thousand Euros (1,781 thousand Euros payable at 31 December 2013).

The main features of the derivatives financial instruments contracted associated with financing operations at 31 December 2014 and 2013 is detailed as follows:

FAIR VALUE AT|COLPSAN:2


REFERENCE VALUE

CURRENCY

REN'S PAYMENTS

REN'S RECEIPTS

MATURITY

'14

'13

CASH FLOW HEDGE:

  

Interest rate swaps 275,000 tEuros EUR [1.89%; 2.77%] [0.0%;0.1%] - floating rates [DEC-2016; SEP-2017]

(14,282)

(18,338)
Interest rate and currency swaps 10,000,000 tJPY / 72,899 tEuros EUR/JPY 5.64% (TFLOATING RATE STARTING 2019) 2.71% 2024

(10,300)

(10,847)

(24,581)

(29,185)

Fair value hedge:

  

Interest rate swaps 400,000 TEUROS EUR [0.5%;0.6%] FLOATING RATES 1.72% 2020

21,970

(7,476)

21,970

(7,476)
Total

(2,611)

(36,661)

The periodicity of paid and received flows of the derivative financial instruments portfolio is quarterly and semi-annual contracts to the cash flow hedge contracts and biannual and annual basis for derivative designated as a fair value hedge.

The detail of the notional reference of cash flows and fair value hedge derivatives is presented in the following table:

'15

'16

'17

'18

'19

Following
years

Total

Interest rate swap (cash flow hedge) 5,769 205,769 63,462 - -

-

275,000

Interest rate and currency swap (cash flow hedge) - - - - - 72,899

72,899

Interest rate swap (fair value hedge) - - - - - 400,000

400,000

Total 5,769 205,769 63,462 472,899

747,899

SWAPS:

Cash flow hedges

The Group hedges part of its future payments of interests on borrowings and bond issues through the designation of interest rate swaps, on which REN pays a fixed rate and receives a variable rate with a total notional amount of 275,000 thousand Euros (425,000 thousand Euros at 31 December 2013). This is the hedging of the interest rate risk on payments of interest at variable rates on recognised financial liabilities. The risk covered is the variable rate index to which the borrowing interest relates. The objective of this hedging is to convert loans at variable interest rates to fixed interest rates, the credit risk not being hedged. The fair value of the interest rate swaps at 31 December 2014 was 14,282 thousand Euros negative (18,338 thousand Euros negative at 31 December 2013).

In addition, the Group hedges its exposure to cash flow risk on its bond issue of 10,000 million JPY resulting from foreign exchange rate risk, through a cross currency swap with the main features equivalent to the debt issued. The same hedging instrument is used to hedge the fair value of the exchange rate risk of the bond issue through the forward start swap component which will only start in June 2019. The variations in the fair value of the hedging instrument are also recognised in hedging reserves. As from June 2019 the object will be to hedge exposure to JPY and the interest rate risk, transforming the operation into a fair value hedge, the changes in fair value of the debt issued resulting from the risks covered becoming recognised in the statement of profit and loss. The credit risk is not hedged.

The amounts resulting from the hedging instrument are recognised in the statement of profit and loss when the transaction hedged affects results for the year.

The fair value of the cross currency swap at 31 December 2014 was 10,300 thousand Euros negative (10,847 thousand Euros negative at 31 December 2013). The underlying exchange variation (borrowing) for 2014, in the amount of, approximately, 243 thousand Euros (18,921 as of 31 December 2013), was offset by a similar variation in the hedging instrument in the statement of profit and loss. The inefficient component of the fair value hedge amounted to 4,463 thousand Euros positive (926 thousand Euros negative at 31 December 2013).

The amount recorded in reserves relating to the above mentioned cash flow hedges was 24,644 thousand Euros (23,362 thousand Euros in 31 December 2013).

The movements recorded in the hedging reserve (Note 19) were as follows:

FAIR
VALUE

DEFERRED
TAXES
IMPACT

HEDGING
RESERVES

1 January 2013

(35,431)

8,819

(26,612)

Changes in fair value and ineffectiveness

12,069 (3,445) 8,624
31 December 2013 (23,362) 5,373 (17,989)

1 January 2014

(23,362)

5,373

(17,989)

Changes in fair value and ineffectiveness (1,282) (198) (1,480)
31 December 2014 (24,644) 5,175 (19,468)

Fair value hedge

During the year 2013, the company issued debt in the amount of 400,000 thousand Euros at a fixed rate. To manage the fair value floating of this issue debt, the company contracted two swaps on which REN pays a variable rate and receives a fixed rate, with a notional amount of 400,000 thousand Euros. The risk covered is the fixed rate index to debt issued. The covered risk is related with fair value floating of the debt issues according to the interest rate fluctuations. The objective of this hedging is to convert loans at fixed interest rates to variable interest rates, the credit risk not being hedged. The fair value of these interest rate swaps at 31 December 2014 was 21,970 thousand Euros positive (7,476 thousand Euros negative as of 31 December 2013). 

Changes in the fair value of the debt issued resulting from the interest rate risk are recorded in the income statement to offset changes in the fair value of the hedge instrument recorded in the income statement. In the year ended 31 December 2014, the debt fair value changes related to the interest rates risk recorded in the income statement was 30,065 thousand Euros (negative) (8,150 thousand Euros (positive) as of 31 December 2013), resulting in an inefficient component of 1,276 thousand Euros (negative) (368 thousand Euros (positive) as of 31 December 2013).

Futures

REN SGPS through its subsidiary REN Trading, S.A., has carried out some financial operations in the energy, coal and carbon emission licenses futures market, through entering into standard contracts of International Swaps and Derivatives Association Inc. (“ISDA”) as well as through participation in futures trading exchanges.

REN SGPS and REN Trading entered into an agreement under which REN Trading manages the financial derivative contracts on account and for the benefit of REN SGPS, therefore ensuring a clear and transparent separation between these businesses, always on a predefined basis, continuously monitored as being of low exposure to risk.

These financial derivatives contracts in the futures market does not imply any physical liquidation of the underlying assets, being an activity of a purely financial nature, merely the financial management of assets, not being viewed as a regulated activity of the Commercial Agent.

The fair value of the futures energy contracts and carbon licenses at 31 December 2013 was as follows:

'13

Current
assets

Current
liabilities

Financial contracts in the energy market for 2013 - -

CO2 licenses

- 342
Fair vale at 31 December 2013 - 342

As of 31 December 2014, the Company does not hold any open position in futures contracts. To that extent, it was not recognised in the income any amount on the change in fair value in the period ended 31 December 2014 (on 31 December 2013 was 1,469 thousand Euros negative).