4.    Financial risk management

TenneT’s policy is aimed at effective cash flow management and protection of the group equity against financial risks.

4.1    Risks associated with clearing transactions

The operation of energy exchanges, the auctioning of cross-border interconnection capacity (activity partially transferred in 2009 to CASC-CWE, the Capacity Allocation Service Company for the Central Western European Electricity Market), the implementation of the MEP grant scheme (activity transferred to SenterNovem as of 1 January 2009), and maintenance of the energy balance between supply and demand all require TenneT to handle large cash flows. The company’s policy is designed to minimise the risks associated with the clearing transactions of these cash flows.

Energy exchanges
The energy exchanges enter into contracts with participants, under which trading is permitted only insofar as the securities lodged by a trader are considered sufficient. Securities may include bank guarantees, cash and cash equivalents, and guarantees issued by parent companies.

Once a transaction has been made, settlement is effected against the trader’s securities, or receivables and payables are created (in the case of APX Commodities Ltd. only). Under the latter system, the amounts receivable from and payable to a participant are first set off against one another, after which the residual balances are collected or paid. Securities are also provided to cover the receivables involved.

Endex European Energy Derivatives Exchange N.V. has outsourced its clearing activities to ECC A.G. in order to avoid incurring a clearing risks on the contracts concerned.

Auctioning of cross-border interconnection capacity
TSO Auction B.V. enters into contracts with participants, under which capacity is made available on the annual, monthly and daily auctions only insofar as sufficient securities have been lodged. The securities concerned may consist of collaterals and bank guarantees. Once a transaction has been made, settlement is effected against the trader’s collaterals.

Market coupling
As of November 2006, the daily capacity available on the interconnections between the Netherlands and Belgium is traded directly on the energy exchanges. While the capacity on the cross-border interconnections is auctioned off, TenneT supplies the required energy by means of trading on power exchanges in the Netherlands and Belgium. Amounts receivable from and payable to market parties are set off against one another by the exchanges, where securities are also provided. Settlement with the Belgian TSO Elia takes place two months after the transaction concerned, resulting in temporary risk exposure. TenneT deems the risk involved to be low.

MEP grants
The payment of MEP grants is financed by the Ministry of Economic Affairs, which underwrites any shortfall.

Maintenance of the energy balance between supply and demand
TenneT TSO is responsible for maintaining the energy balance between supply and demand. The associated costs are covered by income from parties with programme responsibility, which are billed for any imbalances attributable to them. Any surplus is deducted from the tariffs for system services. Securities in the form of bank guarantees and collaterals are held as protection against default by the parties with programme responsibility.

In connection with the clearing transactions, TenneT’s balance sheet includes funds that are not at the group’s free disposal. The breakdown of these funds by origin is as follows:

4.2    Treasury risk

It is TenneT’s policy to minimise the treasury risks that are inherent to its operations.

TenneT’s Corporate Treasury department is responsible for managing the company’s financial risks. This does not apply to APX, which conducts its own risk management.

Funds that may only be released with the approval of the Netherlands Competition Authority, the Office of Energy Regulation  and market parties are kept separate from funds resulting from operational activities. The former funds, which are not at free disposal, are managed by the Foundation for the Management of Allocated Funds from the National High-Voltage Grid.

TenneT’s Treasury Regulations and the Management and Investment Regulations for Allocated Funds, which have been approved by the Supervisory Board, prescribe a framework for the activities of the Corporate Treasury department. Every quarter, the Corporate Treasury department reports to the Supervisory Board on the control of treasury risks. Use of all normal financial instruments is permitted, provided these are used solely to cover positions. The use of financial instruments without an underlying value is expressly forbidden.

The main treasury risks are market risks, credit risks, liquidity risks and refinancing risks.

4.2.1    Market risk

The main market risks to which TenneT is exposed are interest risks, foreign currency risks and commodity price risks.

Interest risk
Interest risk is defined as the risk that the interest paid on loan capital differs from the interest received on such capital. Under the prevailing regulatory system, TenneT receives regulated interest on loan capital. The relevant rate has been set at 4.8% for the 2008-2010 period.

In addition, TenneT has taken out several loans at floating rates of interest. In order to minimise the associated interest risk, interest rate swaps (IRSs) have been arranged, under which the floating rates are converted into fixed rates. These interest rate swaps expire on the redemption dates of the underlying loans.

TenneT uses scenarios to analyse its interest risk exposure. TenneT’s interest risk exposure is linear in nature.
Based on TenneT’s net financing position at 31 December 2008, an increase of 200 base points in the market interest rate would result in an increase of

EUR 3.4 million in the interest expenses. TenneT has covered a substantial portion of this interest risk by means of interest rate swaps. If the interest rate increased by 200 base points, the value of these interest rate swaps would increase by EUR 1.3 million.

Foreign currency risk
TenneT is exposed to only limited foreign currency risk, as most of its activities take place within the Eurozone. It is TenneT’s policy to cover foreign currency transaction risks as far as possible. In principle, the exchange rate risks associated with participating interests in the equity of subsidiaries are not covered. These risks are deemed to be inherent in doing business in countries outside the Eurozone.

TenneT is exposed to a transaction risk in pounds sterling in connection with the BritNed project. The positions in pounds sterling resulting from the investment cash flows are covered by means of forward exchange contracts concluded with financial parties.

If TenneT had not covered its positions in pounds sterling and the EUR/GBP exchange rate were to rise or fall by 20%, then the project costs would be

EUR 2.3 million lower or higher, respectively. If the forward exchange rate were to rise by 20%, the value of the forward contracts would increase by

EUR 2.3 million.

Commodity price risk
TenneT is exposed to a certain level of risk due to fluctuations in the prices of commodities like copper, lead, aluminium and oil. It is TenneT’s policy to cover the price risk associated with positions of this nature, to the extent that their timing and size can be estimated with sufficient certainty.

4.2.2    Credit risk

TenneT has established a policy for the management of its credit risks. Credit risks arise from TenneT’s transactions and positions with financial institutions, and from its accounts receivable position. On the balance sheet date, the maximum credit risk amounted to EUR 1.3 billion (2007: EUR 1.6 billion).

Concentration limits apply when funds are placed in deposit or when financial derivatives are arranged. In addition, the counterparty must have an AA- credit rating or higher. The terms of the deposits are geared to the expected time of deployment of the funds.

On the balance sheet date, TenneT TSO had deposited EUR 64 million with counterparties (2007: EUR nil). On the balance sheet date, the Foundation for the Management of Allocated Funds from the National High-Voltage Grid had deposited EUR 167 million with counterparties (2007: EUR 44 million).

4.2.3    Liquidity risk

The liquidity risk is defined as the risk that TenneT cannot meet its short-term financial obligations. In order to minimise its exposure to liquidity risks, TenneT has credit facilities at its disposal to accommodate any fluctuations. The scope of these credit facilities is such that any adverse financial developments and events can be accommodated and continuation of day-to-day operations is ensured.

On the balance sheet date, TenneT (i.e. TenneT TSO and TenneT Holding) had a total of EUR 512 million in cash and cash equivalents and unused credit facilities at its free disposal.

The maturity schedule below presents TenneT’s financial obligations at

31 December 2008 and 31 December 2007 on a non-discounted basis, using five maturity intervals.

From the maturity schedule for 2008, it can be concluded that TenneT is exposed to a limited liquidity risk: 74.6% (2007: 63%) of the balance that expires within 1 month is offset by financial assets. In all likelihood, redemption payments on the loan of EUR 200 million will probably be covered by credit facilities currently being negotiated by TenneT.

4.2.4    Refinancing risk

Refinancing risk is defined as the risk that funds cannot be obtained under reasonable conditions on the money or capital market when existing financing arrangements expire. The global credit crisis has focused renewed attention on this risk. TenneT will have a substantial refinancing requirement of

EUR 690 million in 2009 (existing bank facilities in the amount of EUR 480 million and several loans totalling EUR 210 million are set to expire in 2009). TenneT intends to manage this risk by starting negotiations with providers of funds well before the due date of the existing financing arrangements, and by diversifying its sources of funding in order to reduce the company's dependence on the banking sector.

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