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Financial Policy and Rating

The objective of the Groups financial management is to maintain an adequate current and prospective balance between investments and uses of capital on the one hand and sources of funds on the other, in terms of the repayment schedule as well as the rate type.

Following are the policies and principles for the management and risk control of the Groups financial management such as liquidity risk, interest rate risk and exchange risk.

Liquidity risk -Debt quality

The liquidity risk is the risk that the company will not be able to honour its payment commitments due to its inability to access new funds or liquidate assets on the market.

The table below shows the worst case scenario in which assets (liquidity, trade receivables, etc.) are not taken into consideration while the financial liabilities, principal and interest, trade payables and derivative contracts on interest rates are shown. The revocable credit facilities are shown as expiring on demand while other loans are shown as becoming due on the first due date in which repayment may be required (put bonds are considered as being repaid on the first exercise date of the put).

Worst case31.12.201031.12.2009
(in millions of )from 1 to 3 monthsfrom 3 months up to 1 yearfrom 1 to 2 yearsfrom 1 to 3 monthsfrom 3 months up to 1 yearfrom 1 to 2 years
Bonds27.9244.8415.028.0237.3272.7
Payables and other financial liabilities69.861.245.334.070.072.6
Trade payables1,061.00.00.01,048.20.00.0
Total1,1593064601,110307345

The Groups objective is to ensure a liquidity level that will allow it to cover its contractual obligations both in the normal course of business and under crisis conditions through maintenance of available credit facilities, liquidity and rapid undertaking of negotiations in regard to loans about to mature, optimising the cost of funding in relation to current and future market conditions.

Against its short term financial debt as at 31 December 2010, the Group has available Euro 538 million in cash, Euro 430 million in unused committed credit facilities and abundant uncommitted credit facilities (over Euro 1,300 million) so as to ensure sufficient liquidity for covering each financial commitment at least over the next two years.

The credit facilities and the related financial activities are not concentrated on any specific financial backer but are distributed equally among leading Italian and International Banks with a use much lower than the total available.

In regard to the debt structure in the medium and long term, on 11 November 2010 a 140,000,000 1.75 per cent. Equity-Linked Bonds due 2013 bond maturing 1 October 2013 was issued and placed on the Luxembourg Stock Exchanges EURO MTF market on 21 January 2011.

The bond issue became convertible into ordinary Hera shares on 27 January 2011 following the approval by the extraordinary shareholders' meeting of the share capital increase with exclusion of the purchase option.
The price per share (including the par value and share-premium) is equal to Euro 1.834, subject to any adjustments to the conversion price, as provided in the Bond Regulation.
The transaction has reinforced the financial structure of the Company in the very short and the medium term so as to make it possible to reap future market and business opportunities that could arise in the immediate future.

As at 31 December 2010 the Group had a structure in which the long term debt was 96% of the total financial debts. The average term is approximately 10 years and 75% of the debt matures in over 5 years.

Following are the nominal flows expected on the tranches maturing in up to five years and the over 5 year portion.

Nominal debit flow (millions of )31.12.201131.12.201231.12.201331.12.201431.12.2015over 5 yearsTotal
Bonds000001,2501,250
Convertible bonds00140000140
Put Bond / Loan00000540540
Payables to Banks/others5936332820262420
Gross financial indebtedness5936173282021,8522,350

These transactions do not provide for financial debt covenants, apart from the corporate rating limit by one rating agency only that is lower than Investment Grade level (BBB-).

Interest Rate Risk

The Group is exposed to interest rate fluctuations (Euribor) insofar as the financial expenses that refer to indebtedness.

Following is the debt structure in relation to the portion of fixed and variable rates, with and without the effect of hedging derivatives.

Gross financial indebtedness (*)31.12.201031.12.2009
(millions of )without derivativeswith derivatives% with derivativeswithout derivativeswith derivatives% with derivatives
fixed rate1,819.81,665.569%1,439.82,040.990%
variable rate588.5742.831%816.4215.210%
Total2,4082,408100%2,2562,256100%

(*) Flusso nominale che include gli scoperti di conto. Limporto non include le disponibilit liquide e altri crediti finanziari correnti e non correnti

The portion of the debt which is exposed to interest rate risk is approximately 30%. The residual debt (70%) is based on a fixed rate. The debts are perfectly consistent with the underlying debt and in compliance with IAS standards.

The Groups hedging policy does not provide for the use of financial instruments for speculative purposes and aims to achieve an optimal identification between the fixed rate and the variable rate as part of a prudent risk fluctuation strategy. The interest rate risk management essentially aims to stabilise the financial flows so as to ensure the revenue therefrom and the certitude of the cash flows from operations.

During 2010, though the structure was strongly characterised by the long term debt (approximately 95%), the Group was able to maintain its cost at 4.2% overall.

Exchange risk not connected to commodity risk

The Group adopts a prudential strategy towards exposure to exchange risk, so that all currency positions are netted or hedged using derivatives (cross currency swaps).

Currently the Group is holding a bond in a foreign currency of JPY 20 billion which is fully hedged by a cross currency swap.

Rating

Hera S.p.A.s long term ratings are confirmed as "A3 Stable Outlook" for Moodys and BBB+ Stable Outlook for Standard & Poors. The rating was reviewed by the Rating Agencies respectively in July and June of 2010.

One of the chief aims of the Group in defining its plans is to implement strategies aimed at ensuring the maintenance/improvement of high rating levels.

 
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