Financial risk management
Capital management
The primary goal of Stedin Group's capital management is to safeguard access to the capital and money markets in order to optimise its financing structure and costs in accordance with the long-term financial plan and economic parameters determined by the regulator in each regulation period. Given the capital-intensive nature of the company, it is important to be able to contract financing in various different financing markets and thereby create a balanced financing mix. Stedin Group can influence its capital structure by altering its leverage ratio. Stedin Group regards both capital (including the perpetual subordinated bond loan) and non-subordinated debt as relevant components of its financing structure and therefore of its capital management. The present interest-bearing debt was raised in roughly equal proportions in the US private placement market, the European bond market and the private loan market. In addition to maintaining relationships with these existing investors in the above-mentioned financing markets, Stedin Group also maintains relationships with six Dutch and international banks that have all made financing capacity available to Stedin. These banks can also offer a wide range of financial products and services if required.
Since 2017, a Stedin Group financing strategy was formulated that targets the ratios which are relevant for the credit rating and particularly the core ratio: cash flow from operating activities/net interest-bearing debt. In this context, for the purpose of calculating the ratios, the perpetual subordinated bond loan issued in 2014 is classified by Standard & Poor's as an instrument with a 50% equity and 50% debt component. This qualification differs from the treatment under IFRS, for which the perpetual subordinated bond loan is treated entirely as equity. Net interest-bearing debt (excluding discontinued operations) is defined as non-current and current interest-bearing debt less cash and cash equivalents.
Financial risk management
The following financial risks can be identified in connection with the ordinary business operations: market risk, credit risk and liquidity risk. Market risk is the exposure to changes in value of current or future cash flows and financial instruments due to changes in market prices. Within this category, Stedin is mainly exposed to currency and interest rate risks.
Credit risk can be defined as the potential loss if a counterparty or its guarantor cannot or will not meet its contractual obligations.
The liquidity risk is the risk that the company will be unable to meet its payment obligations.
The policy is designed to minimise volatility and negative consequences of unforeseen circumstances on financial results. Procedures and guidelines have been drawn up in accordance with the objectives formulated for this, which are derived from the strategic objectives, and are evaluated and (if required) adjusted at least once a year.
The Board of Management is responsible for risk management. In this context, it sets out procedures and guidelines and ensures compliance. The authorisations to commit Stedin Group are specified in the Governance & Authority Structure document. Mandates have also been drawn up for all business units to manage the above risks; for instance, for purchasing. The Board of Management and operational management regularly review the results, the ratios, the principal risks (or the concentration of certain risks) and the measures to manage them.
Scenarios are applied in the long-term financial plan. Operational and staff management reports to the Board of Management by means of an In-control statement twice a year.
The internal Investment Risk Committee is in charge of the formulation and application of the risk policy, and advises the Board of Management accordingly. The Supervisory Board exercises supervision over the course of business and risk management by conducting reviews as well as discussions of strategic plans, budgets, key performance indicators, forecasts and results.
The Treasury department is responsible for the active monitoring and management of capital, market risks, credit risks and liquidity risks of Stedin Group and handling the internal financing of wholly-owned subsidiaries. The control principles for this risk are laid down in the Treasury Charter, as adopted by the Board of Management. The Treasury Charter describes, among other things, the risk tolerance and the instruments available for managing risks.
The table below shows the correlation between the financial risks to which Stedin Group is exposed with regard to assets and liabilities, the instruments used to manage them and the applicable accounting:
Balance sheet item | Classification and measurement | Risks, the instruments used to manage them and classification and valuation applied | |||
|---|---|---|---|---|---|
Foreign currency risk | Interest rate risk | Commodity price risk | Credit risk | ||
Loans, trade receivables, contract assets and other receivables | Amortised cost | No material risk | No material risk | No material risk | Provision for expected credit losses |
Interest-bearing and other liabilities | Amortised cost | Forward contract / Cross Currency SWAP | Interest rate swap | Not applicable | Not applicable |
Hedge accounting for changes in fair value | Hedge accounting for changes in fair value | ||||
Trade and other liabilities | Amortised cost | No material risk | No material risk | The purchasing strategy for expected grid losses limits price fluctuations. | Not applicable |
Paragraphs 33.1 to 33.4 discuss individual aspects of the table for each risk.
Market risk
Stedin Group has identified the following relevant market risks:
- Foreign currency risk: exposure to changes in value of financial instruments arising from changes in exchange rates.
- Interest rate risk: the exposure to changes in value in financial instruments arising from changes in market interest rates.
- Commodity price risk: the exposure to changes in value in financial instruments arising from changes in commodity prices. Stedin Group is faced with this type of risk mainly when purchasing for grid losses and is sensitive to the effect of market fluctuations in the prices of various energy commodities, such as electricity and green certificates. The commodity price risk is part of the financial long-term planning and is to date not hedged by means of derivative financial instruments.
The table below shows the fair value and the book value of the loans portfolio that is subject to market risks. Borrowings of € 2.2 billion are fixed rate (fair value risk). The other borrowings bear a variable interest rate which follows the development in market rates (cash flow/interest rate risk).
x € 1 million | Bookvalue as at 31 December 2019 | Fair value as at 31 December 2019 | Bookvalue as at 31 December 2018 | Fair value as at 31 December 2018 |
|---|---|---|---|---|
Bond loans | 1,796 | 1,846 | 1,293 | 1,288 |
Other loans | 1,122 | 1,348 | 1,751 | 1,925 |
Total | 2,918 | 3,194 | 3,044 | 3,213 |
The fair value of the bond loans was determined on the basis of the year-end closing rate. This value was measured in accordance with fair value level 1. The fair value of the other loans was determined using the present value method ('income approach'). This was based on the relevant market interest rates for comparable debt. Consequently, the information for establishing value is covered by fair value level 2. The table does not include the perpetual subordinated loan, as this item is classified as equity under IFRS; see note 23 Group equity for more details.
Foreign currency risk
Foreign currency risk within Stedin Group relates mainly to borrowings denominated in currencies other than the euro and to a lesser extent to purchasing and cash and cash equivalents. The foreign currency risks are risks in respect of future cash flows in foreign currencies and in respect of balance sheet positions in foreign currencies. To meet Stedin Group's financing requirements, loans were contracted in 2009 in non-euro currencies: US dollars (USD), Japanese yen (JPY) and pounds sterling (GBP).
Companies included in the consolidation are not permitted to maintain substantial positions in foreign currencies without the Treasury department’s approval. Based upon the aggregate foreign currency position and the associated limit set for open positions, the Treasury department determines whether hedging is desirable and the strategy to be followed.
Cash flow hedges for foreign currency risks
At 31 December 2019, the foreign currency risks arising from these loans are hedged for the entire term using cross-currency interest swaps and FX forward contracts. The main nominal values and rates of the derivative financial instruments as at 31 December 2019 are as follows:
Nominal cash flows less than one year | Nominal cash flows more than one year | Total nominal cash flows | Average rate | Nominal value | Book value | |
|---|---|---|---|---|---|---|
Expected cash flows | USD 15 | USD 251 | USD 266 | 1.324 | 201 | 200 |
GBP 6 | GBP 104 | GBP 110 | 0.851 | 129 | 88 | |
JPY 510 | JPY 29,690 | JPY 30,200 | 132.188 | 229 | 164 | |
Total | 559 | 452 |
Stedin applies cash flow hedging to these borrowings and derivative instruments and therefore the foreign currency exchange differences with regard to the borrowings and changes in fair value of the derivative financial instruments are taken in conjunction to the cash flow hedge reserve and any hedging ineffectiveness is taken in conjunction through the income statement. Further details of the hedging relationship are provided below:
Changes in the cash flow hedge and the cost of hedging reserve comprise: | Balance of the cash flow hegde reserve | Reclassification recognised in the income statement | |||
|---|---|---|---|---|---|
x € 1 million | Derivative financial instrument | The hedged risk | Derivative financial instrument recognised in other comprehensive income | ||
Expected cash flows | -26 | -39 | -26 | -56 | - |
Total | -26 | -39 | -26 | -56 | - |
The hedging relationships did not lead to hedge ineffectiveness in the reporting period. A breakdown of movements in the cash flow hedge reserve is provided in note 33.4 Derivative financial instruments and cash flow hedge reserve.
Interest rate risk
The interest rate risk policy is aimed at managing the net financing liabilities through fluctuations in market interest rates. A specified range for the proportions of loans at fixed and variable interest rates and a desired weighted average term of the debt portfolio serves as the base tool. Stedin Group can use derivative financial instruments to achieve the desired risk profile.
2019 | 2018 | |
|---|---|---|
Average interest rate | 2.4% | 2.9% |
The average interest rate is calculated as the weighted average of the monthly interest expense in 2019. If all other variables remain constant, it is estimated that a general increase of 1 percentage point in Euribor (for a period of twelve months) would lead to a decrease in profit before tax of € 7.0 million (at 31 December 2018: € 5.0 million).
Cash flow hedge for interest rate risk
In anticipation of the issue of loans, Stedin Group entered into derivative financial instruments to hedge the interest rate risk during the term of the loan. The derivative financial instruments entered into for this were settled at the balance sheet date.
x € 1 milion | Balance of the cash flow hegde reserve | Reclassification recognised in the income statement |
|---|---|---|
Cash flow hedge reserve for interest expense | 15 | 1 |
Total | 15 | 1 |
Fair value hedge
Stedin Group applies fair value hedges to convert part of its fixed-interest loans into variable-interest loans to achieve effective alignment with the strategic allocation between variable-interest and fixed-interest loans. The fair value hedging relationships for interest rate risks as at 31 December 2019 were as follows:
x € 1 million | Nominal cash flows less than one year | Nominal cash flows more than one year | Total nominal cash flows | Average rate | Nominal value | Book value |
|---|---|---|---|---|---|---|
Expected cash flows | 1 | 23 | 24 | 0.6% | 400 | 413 |
Total | 400 | 413 |
The table below shows details of the hedging relationship:
Change in the fair value of: | Accumulated change in interest-bearing debt | |||
|---|---|---|---|---|
x € 1 million | Derivative financial instrument | The hedged risk | Derivative financial instrument recognised in other comprehensive income | |
Expected cash flows | 13 | 13 | - | 13 |
Total | 13 | 13 | - | 13 |
The hedging relationships did not lead to hedge ineffectiveness in the reporting period. A breakdown of movements in the cash flow hedge reserve is provided in note 33.4 Derivative financial instruments and cash flow hedge reserve.
Commodity price risk
Stedin Group is faced with this type of risk mainly in connection with purchasing for grid losses. Stedin Group is exposed to the effect of market fluctuations in prices of various energy commodities, such as electricity and green certificates. Stedin has purchase contracts that provide access to the energy market for the expected purchase volumes. Stedin applies a policy of frequent purchasing for grid losses in line with actual consumption, which reduces its sensitivity to price fluctuations and targets an average price level. The remaining commodity price risk is not hedged by derivative financial instruments.
Credit risk
The maximum credit risk is equal to the book value of the financial assets, including derivative financial instruments. Stedin Group's credit risk towards financial institutions mainly concerns cash and cash equivalents and derivative financial instruments for interest and currency hedging transactions. The Treasury policy takes account of limits for each counterparty and term in order to limit any concentration of credit risks and requires a minimum credit rating of A- equivalent Standard & Poor’s (S&P) and/or Moody’s and/or Fitch (for which purpose the lowest rating is decisive).
Credit risk for trade receivables and contract assets
The credit risk policy is designed not to provide customers with any credit going beyond normal supplier credit as set out in the applicable conditions of supply. Measures in place to limit debtor risk are:
- credit limits or bank guarantees for business customers;
- in principle, receivables must be paid within thirty days in accordance with standard conditions of supply;
- receivables for which payment is overdue are monitored and active dunning is applied;
- recourse to debt collection agencies and different collection methods for current and former customers.
The credit risk on trade receivables can be subclassified into mainly low-use (regulated) and high-use customers.
Since the introduction of the suppliers model, the credit risk relating to retail consumers is borne by the energy suppliers, where the concentration risk has consequently grown. A range of risk-mitigating measures have been implemented for this, including periodic monitoring and reporting of the risk profile of the energy suppliers. Individual signals for potential bad debts and credit ratings are used to value credit risk on energy suppliers.
The credit risk for high-use customers, other receivables and contract assets is limited as most receivables are limited in size and the concentration risk is also limited. For the assessment of risks in the various high-use portfolios, Stedin Group uses a simplified model that is based on Stedin's experience of receivables with the same risk profile, supplemented by expected developments of the debtors and the economic environment.
Trade receivables, amounts not yet invoiced and other receivables are as follows:
x € 1 million | As at 31 December 2019 | As at 31 December 2018 |
|---|---|---|
Trade receivables | 120 | 115 |
To be invoiced | 44 | 37 |
Other receivables and accruals | 8 | 3 |
Total | 172 | 155 |
The breakdown of the outstanding trade receivables (including to be invoice, excluding other receivables and accruals) and bad debts provision by age is as follows:
x € 1 million | 2019 | 2018 | |||
|---|---|---|---|---|---|
Expected loss % | Receivables | Provision / impairments | Receivables | Provision / impairments | |
Receivables from low-use customers | 0.1% - 100% | 75 | 1 | 70 | 1 |
- | - | 0 | - | ||
Receivables from high-use customers, other receivables and to be invoiced | - | - | 0 | - | |
Before maturity date | 0.1% - 1% | 66 | 1 | 58 | 1 |
After maturity date | |||||
- under 3 months | 1% - 25% | 20 | 1 | 17 | - |
- 3 to 6 months | 1% - 100% | 3 | - | 1 | - |
- 6 to 12 months | 5% - 100% | 2 | 1 | 5 | - |
- over 12 months | 65% - 100% | 6 | 4 | 11 | 8 |
Face value | 172 | 8 | 162 | 10 | |
Less: provison / impairments | -8 | - | -10 | ||
Total | 164 | - | 152 | ||
In the bad debt provision an amount of € 3 million (2018: € 4 million) concerns trade receivables that have been provided in full. The table below presents the movements in the bad debts provision in detail:
x € 1 million | 2019 | 2018 |
|---|---|---|
As at 1 January | 10 | 11 |
Additions through income statement | 1 | 2 |
Withdrawals | -3 | -2 |
Reclassification to assets held for sale | - | -1 |
As at 31 December | 8 | 10 |
Liquidity risk
Liquidity risk is the risk that Stedin Group is unable to obtain the required financial resources to meet its obligations in a timely manner. In that connection, Stedin Group regularly assesses expected cash flows over a period of several years. These cash flows include operating cash flows, dividends, interest payable and debt redemption, replacement investments and the consequences of changes in Stedin Group's creditworthiness. The aim is to have sufficient funds at all times to meet liquidity requirements. Great importance is attached to managing all the above risks to prevent Stedin Group from finding itself in a position in which it cannot meet its financial obligations. In addition, liquidity needs are planned on the basis of short-, medium- and long-term cash flow forecasts. The cash flow forecasts incorporate operating and investing cash flows, dividends, interest payable and debt repayments. The Treasury department compares this capital requirement against available funds.
Financing policy and available credit
The financing policy aims to develop and maintain an optimal financing structure, taking into account the current asset base, agreements, and principles regarding regulation and the investment programme. The criteria for the financing policy are access to the capital market as well as flexibility at acceptable financing terms and costs. Financing is contracted centrally and apportioned internally. Subsidiaries are financed by a combination of equity and intercompany loans.
In mid-2017, Stedin Group concluded a revised Revolving Credit Facility of € 600 million with six banks. The facility matures at the end of July 2024 and can be used for general operational purposes, working capital financing or debt refinancing. Stedin Group also has a € 750 million Euro Commercial Paper programme under which € 0 million had been issued at year-end (2018: € 0 million) and a € 3 billion Euro Medium Term Note programme under which € 1.8 billion had been issued at 31 December 2019 (2018: € 1.3 billion).
Liquidity risk arising from potential margin calls relating to foreign currency and interest rate management transactions is closely monitored. There are also procedures to ensure that appropriate thresholds and provisions are included in ISDAs and CSAs (Credit Support Annex). As in 2018, Stedin Group did not receive any margin calls in 2019.
Cash outflows
The table below shows forecast nominal cash outflows and any interest arising from financial instruments over the coming years. The cash flows from derivative financial instruments are based on the forecast net cash outflows (also see note
26 Interest-bearing debt for the terms).
As at 31 December 2019 | Within 1 year | 1 to 5 years | After 5 years | Total |
|---|---|---|---|---|
Interest-bearing debt | 54 | 592 | 2,410 | 3,056 |
Derivative financial instruments | - | 25 | -38 | -13 |
Trade and other liabilities | 297 | 1 | - | 298 |
Total | 351 | 618 | 2,372 | 3,341 |
As at 31 December 2018 | Within 1 year | 1 to 5 years | After 5 years | Total |
|---|---|---|---|---|
Interest-bearing debt | 564 | 929 | 2,094 | 3,587 |
Derivative financial instruments | 11 | 9 | -53 | -33 |
Trade and other liabilities | 299 | 1 | - | 300 |
Total | 874 | 939 | 2,041 | 3,854 |
Trade and other liabilities include, in 'contract liabilities', deferred income of € 23 million (2018: € 24 million).
33.4 Derivative financial instruments and cash flow hedge reserve
Derivative financial instruments
The derivative financial instruments are of a long-term nature. As in 2018, the derivative financial instruments are categorised as fair value level 2. The cash flow hedge instruments applied are derivative financial instruments that are subject to net settlement between parties.
Cash flow hedge reserve
Movements in the cash flow hedge reserve with regard to the hedges referred to above were as follows:
x € 1 million | Interest rate | Foreign currency risk | Total |
|---|---|---|---|
As at 1 January 2018 | - | -65 | -65 |
Newly defined cash flow hedges in the financial year | - | - | - |
Movement in fair value of cash flow hedges | -6 | 5 | -1 |
Deferred tax liabilities | 1 | -4 | -3 |
Reclassification cash flow hedge reserve to income statement | - | 4 | 4 |
As at 31 December 2018 | -5 | -60 | -65 |
Movement in fair value of cash flow hedges | -13 | 3 | -10 |
Deferred tax liabilities | 2 | -1 | 1 |
Reclassification cash flow hedge reserve to income statement | 1 | 2 | 3 |
1 | 1 | ||
As at 31 December 2019 | -15 | -55 | -70 |
The cash flow hedge reserve can be subclassified as follows by active hedging relationships and reserves for which the hedge has been discontinued, and the reserve will be reclassified to the income statement with the future cash flows:
x € 1 million | Active hedging relationships | Discontinued hedging relationships | Total |
|---|---|---|---|
As at 1 January 2019 | -55 | -10 | -65 |
Movement in fair value of cash flow hedges | -8 | 1 | -7 |
Deferred tax liabilities | 1 | - | 1 |
Change in corporate income tax rate | 1 | - | 1 |
Reclassification of cash flow hedge reserve | 11 | -11 | - |
As at 31 December 2019 | -50 | -20 | -70 |
Periods in which the cash flows from the cash flow hedges are expected to be realised:
x € 1 million | As at 31 December 2019 | As at 31 December 2018 |
|---|---|---|
Expected cash flows | ||
Within 1 year | - | 11 |
1 to 5 years | 25 | 9 |
After 5 years | -38 | -53 |
Total | -13 | -33 |
The total cash flow hedges recognised in profit or loss in the future are recognised in the cash flow hedge reserve after deduction of taxes. Periods in which the cash flows from the cash flow hedges are expected to be realised:
x € 1 million | As at 31 December 2019 | As at 31 December 2018 |
|---|---|---|
Expected recognition through the income statement after income tax | ||
Within 1 year | 4 | -6 |
1 to 5 years | 20 | -24 |
After 5 years | 46 | -35 |
Total | 70 | -65 |
