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35. Financial risk management

 

Principles of risk management

 

The target of financial risk management is to secure adequate and competitive financing for executing the Group’s operative businesses and strategy and to minimize the effects of market risks in Group’s financial results, financial position and cash flows. The Group aims to identify risk concentrations and hedge against them to necessary extent. The Group’s business involves financial risks, such as market, liquidity, credit and counterparty risks. Of Group's commodity risks, the price risk related to electricity is monitored actively, and managed with electricity derivatives.

 

Risk management organization

 

Group Treasury is responsible for the centralized management of finances and financial risks in line with the financing guidelines approved by the Board of Directors. Group Treasury is responsible for the entire Group's currency, interest rate, liquidity and refinancing risk management in close co-operation with the business groups. The business groups are responsible for the identification, management and reporting of the financial risks associated with their operations to Group Treasury. Credit risk related to customer receivables is managed by the sales organizations of the business groups.The Group's sourcing unit is responsible for managing the price risk of electricity.

 

Market risks

 

Currency risks

The goal of currency risk management is to reduce the Group’s currency risk to an optimal level as well as improve the transparency of profitability and predictability of financial results. The Group’s transaction risk primarily consists of currency-denominated receivables, payables and commitments. The key principle is to achieve full hedging against the transaction risks related to the balance sheet. Unhedged exposure is permitted within the limits specified in the Group’s financing policy. Loans granted by the parent company to subsidiaries are primarily in the subsidiary’s domestic currency, in which case the subsidiary has no currency risk arising from financial agreements. On the balance sheet date, Itella had external currency derivatives with a nominal value of EUR 105.5 million used to hedge against the currency risk associated with loans, receivables and other currency denominated commitments. The Group is exposed to translation risk in connection with investments in subsidiaries outside the euro zone. The objective of translation risk management is to ensure exchange rate fluctuations do not cause any material changes in the Group’s gearing. On the balance sheet date, the Group did not hedge against translation risk.

 

Major transaction risk positions on the balance sheet date

 

2013 EUR-companies  



RUB-companies
EUR million RUB SEK NOK PLN USD
USD
Trade receivables and payables 0.0 -0.1 -0.4 -0.7 0.0
-1.0
Loans and bank accounts*) 32.1 14.0 5.4 2.4 0.3
0.1
Derivatives**) -32.1 -14.1 -5.4 -2.3 0.0
9.6
Open position 0.0 -0.2 -0.4 -0.6 0.2
8.7








2012 EUR-companies  



RUB-companies
EUR million RUB SEK NOK PLN USD
USD
Trade receivables and payables 0.1 1.0 1.0 1.2 -0.5
-0.7
Loans and bank accounts*) 41.6 22.5 5.7 2.8 -41.8
0.0
Derivatives**) -41.5 -22.7 -6.1 -2.7 41.7
0.0
Open position 0.1 0.8 0.6 1.3 -0.6
-0.7








               

*) Includes cash and cash equivalents, interest-bearing receivables and liabilities

**) Including derivatives for hedging purposes

 

The sensitivity analysis on currency risk is based on financial instruments in other than functional currencies of the group companies on the balance sheet date. Based on the analysis, strengthening of the euro by 10 per cent against all other currencies would have an impact of EUR 0.2 million (2012: EUR -0.1 million) on the Group's profit before tax. Correspondingly, the strengthening of the USD against RUB by 10 per cent would have an impact of EUR 0.9 million (2012: -0.1 million) on the Group's profit before tax.

 

Major translation risk positions on the balance sheet date

 

2013              
EUR million RUB SEK NOK DKK


Net investment 193.7 28.8 16.1 44.0


Hedging - - - -


Open position 193.7 28.8 16.1 44.0










2012          

EUR million RUB SEK NOK DKK USD

Net investment 204.2 27.6 21.3 55.4 42.1

Hedging - - - - -

Open position 204.2 27.6 21.3 55.4 42.1









               

Interest rate risk

The Group is exposed to interest rate risks through its investments and interest bearing liabilities. The goal of interest rate risk management is to minimize financing costs and decrease the uncertainty that interest rate movements cause for the Group's financial result. The average interest-rate fixing period for the debt portfolio is determined in the financing policy. The objective of interest rate risk management related to liquid funds is to minimize the effect of interest rate movements on the fair value of the funds. In addition to diversification, interest rate risks associated with interest-bearing receivables and liabilities can be hedged through interest rate swaps, interest rate options and forward rate agreements.

 

On the balance sheet date, the Group's interest-bearing liabilities amounted to EUR 305.1 million and interest-bearing receivables to EUR 166.5 million. On the balance sheet date, all of the Group’s interest-bearing loans were subject to fixed interest rates. The loans were partly hedged by an interest-rate swap. The interest rate risk of the fixed rate bond issued by Itella Corporation for nominal value EUR 70 million is hedged by an interest rate swap. The Group applies fair value hedge accounting to the interest-rate swap hedging the loan. The hedge effectiveness is monitored every quarter. During financial year 2013 the hedging has been effective.

 

Net interest-bearing receivables and debt according to interest rate fixing

             
2013
Less than
More than


EUR million
1 year 1–5 years 5 years Total

Interest-bearing receivables
-125.5 -38.7 -2.3 -166.5

Bond
- 252.0 - 252.0

Pension loans
12.5 - - 12.5

Finance lease liabilities
9.0 29.6 1.8 40.5

Other liabilities
- 0.1 - 0.1

Net debt
-103.9 243.0 -0.5 138.6

Impact of interest-rate swaps
70.0 -70.0 - 0.0

Total
-33.9 173.0 -0.5 138.6









2012
Less than
More than


EUR million
1 year 1–5 years 5 years Total

Interest-bearing receivables
-113.3 -40.8 -9.3 -163.4

Bond
- 253.9 - 253.9

Loans from financial institutions
- 0.6 - 0.6

Pension loans
- 37.5 - 37.5

Finance lease liabilities
6.8 21.1 - 27.9

Other liabilities
5.1 - - 5.1

Net debt
-101.4 272.3 -9.3 161.4

Impact of interest-rate swaps
70.0 -70.0 - 0.0

Total
-31.4 202.3 -9.3 161.4









               

A change of 1 percentage point in the interest rate and the end of the financial period would affect the Group's profit before taxes for the next 12 months by EUR -1.1 million (2012: EUR -1.6 million).

 

Electricity price risk

The electricity price risk management aims to reduce the volatility in Group's profit and cash flows caused by electricity price fluctuations. The Group employs electricity derivatives to reduce the price risk related to electricity procurement. The Group uses standardized listed derivative products as hedging instruments. The derivatives are used for hedging purposes only, but hedge accounting as defined in the IFRS is not applied.

The Group has prepared a sensitivity analysis on open electricity derivatives at reporting date. A fluctuation of 10 percentage points in electricity price would have an impact of EUR 0.5 (0.2) million on the Group's profit before taxes.

 

               

Derivative contracts

 

2013
Nominal Net fair Positive Negative

EUR million
value value fair value fair value

Foreign currency derivatives:






Currency forward contracts, non-hedge accounting
95.6 -0.2 0.3 -0.5

Currency forward contracts, hedge accounting
9.8 0.0 0.0 0.0

Interest rate derivatives:






Interest rate swaps, hedge accounting
70.0 4.8 4.8 -

Electricity derivatives:






Electricity forwards, non-hedge accounting
6.5 -1.0 0.0 -1.1









2012
Nominal Net fair Positive Negative

EUR million
value value fair value fair value

Foreign currency derivatives:






Currency forward contracts, non-hedge accounting
121.4 -1.3 0.1 -1.3

Interest rate derivatives:






Interest rate swaps, hedge accounting
70.0 6.9 6.9 -

Electricity derivatives:






Electricity forwards, non-hedge accounting
8.0 -0.5 0.0 -0.5









               

Derivative instruments are used to hedge against currency, interest rate and electricity price risk. Currency forward contracts are measured at fair value using the forward rates at the reporting date. The fair values of interest rate swaps are calculated by discounting the forecasted cash flows of the contracts. The fair value of electricity derivatives is based on market prices on the reporting date.

 

Liquidity risk

The liquidity and refinancing risk means that the Group’s liquidity reserve is insufficient to cover the Group’s commitments and investment possibilities or that the cost of the refinancing or additional financing need is exceptionally high. The Group places a considerable emphasis on accurate cash management and liquidity planning in order to minimize liquidity risks generated by large daily fluctuations in the Group’s cash flows. In addition to cash and cash equivalents, the Group aims to secure sufficient financing in all circumstances, and has as financial reserves, a syndicated credit facility (committed) of EUR 120 million, maturing in 2015, and a non-binding commercial paper program of EUR 200 million.

 

On the balance sheet date, the Group had liquid funds and an unused committed credit facility of EUR 286.5 million (2012: EUR 268.3 million). Liquid funds include cash and cash equivalents and investments tradable on the secondary market whose tradability is secured by the liquid size of the issue and the creditworthiness of the issuer. In addition, the Group had an unused commercial paper program of EUR 200 million (2012: EUR 200 million).

 

Contractual cash flows from financial liabilities, including interests








2013






EUR million 2014 2015 2016 2017 2018–
Total
Bonds 11.2 11.2 161.2 104.6 -
288.2
Pension loans 12.7 - - - -
12.7
Finance lease liabilities 10.6 31.0 0.1 0.0 1.8
43.6
Other liabilities - 0.1 - - -
0.1
Trade payables 60.2 - - - -
60.2
Derivatives:






Interest rate derivatives, cash flows payable 1.1 1.1 1.1 - -
3.3
Interest rate derivatives, cash flows receivable -3.1 -3.1 -3.1 - -
-9.2
Currency derivatives, cash flows payable 0.7 - - - -
0.7
Currency derivatives, cash flows receivable -0.1 - - - -
-0.1
Electricity derivatives, cash flows payable 2.9 2.4 1.2


6.5
Total 96.2 42.7 160.5 104.6 1.8
405.9








2012






EUR million 2013 2014 2015 2016 2017–
Total
Bonds 11.2 11.2 11.2 161.2 104.6
299.4
Loans from financial institutions 0.2 0.1 0.1 0.1 -
0.6
Pension loans 25.9 12.7 - - -
38.5
Finance lease liabilities 7.5 21.3 0.1 0.1 0.7
29.8
Other liabilities 4.8 - - - -
4.8
Trade payables 74.5 - - - -
74.5
Derivatives:






Interest rate derivatives, cash flows payable 1.1 1.1 1.1 1.1 -
4.5
Interest rate derivatives, cash flows receivable -3.1 -3.1 -3.1 -3.1 -
-12.3
Currency derivatives, cash flows payable 1.6 - - - -
1.6
Currency derivatives, cash flows receivable 0.0 - - - -
0.0
Electricity derivatives, cash flows payable 3.3 2.2 1.7 - -
7.2
Total 127.0 45.6 11.2 159.5 105.3
448.6








               

Pension loans are secured with bank guarantees. Other loans have no security. Finance lease liabilities are in fact secured liabilities since, in default of payment, rights to leased property transfer back to the lessor.

 

Credit and counterparty risk

Pursuant to authorizations given by the Board of Directors, the Group invests its liquid funds in debt instruments and bonds issued by companies, banks and states with a high credit rating, as well as bank deposits. Itella concludes derivative contracts only with solvent banks and credit institutions. The book value of investments and derivative contracts corresponds to the maximum amount of the associated credit risk. Financing operations did not incur any credit losses during the financial year.

 

Trade receivables are subject to only minor credit risk concentrations due to the Group’s extensive customer base. The book value of trade receivables corresponds to the maximum amount of the credit risk associated with them. Credit losses recognized for 2013 were EUR 0.7 million (2012 EUR 3.4 million).

 

Aging of trade receivables:














EUR million


2013 2012

Not yet due


191.8 187.6

1–30 days overdue


21.5 27.7

31–60 days overdue


3.7 4.4

61–90 days overdue


1.2 1.2

91–180 days overdue


1.5 2.6

181–365 days overdue


1.1 1.0

Total


220.8 224.5









               

Offsetting of financial instruments





Financial


2013

Gross instru- Net

EUR million

amount ments*) amount

Derivative assets

5.2 -0.3 4.8

Derivative liabilities

1.6 -0.3 1.3













Financial


2012

Gross instru- Net

EUR million

amount ments*) amount

Derivative assets

7.0 -0.1 6.9

Derivative liabilities

1.9 -0.1 1.8









*) Related amounts not set off in the balance sheet












               

Derivative agreements are subject to offsetting in the case of default, insolvency or bankruptcy of the counterparty.

 

Capital management

 

The target of the Group's capital management is to secure financing required by businesses and the Group’s ability to operate in capital markets under all circumstances. Although the Group has no public credit rating issued by a credit rating agency, it seeks to maintain a capital structure that would be required for investment grade rating. The Board of Directors assesses the capital structure on regular basis. The covenants associated with the Group's loan agreements are standard terms and conditions that feature limitations on securities given, material changes in business activities, and changes in majority holdings. The Group has met the conditions of the covenants in 2013 and 2012. The Group’s loan agreements do not contain financial covenants.

 

The Group monitors its capital structure by assessing equity ratio and gearing.








Group's total capital


2013 2012

Interest-bearing liabilities


305.1 324.8

./. Interest-bearing receivables


166.5 163.4

= Interest-bearing net liabilities


138.6 161.4

Total equity


655.8 686.7









Equity ratio, %


47.5 46.2

Gearing, %


21.1 23.5