Financial risk management
32 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 current interest-bearing debt is, aside from the private loans, raised mainly in the European bond 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, there has been a Stedin Group financing strategy that targets the ratios that 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 2021 (which replaces the perpetual subordinated bond loan issued in 2014 that was redeemed in 2021) 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, which qualifies the perpetual subordinated bond loan entirely as equity. Net interest-bearing debt (excluding discontinued operations) is defined as current and non-current interest-bearing debt less cash and cash equivalents.
Financial risk management
The following financial risks can be identified in connection with 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.
Liquidity risk arises when 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 enter into commitments on behalf of 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 and staff 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 and discussions of strategic plans, budgets, key performance indicators, forecasts, results and risk policy.
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 these risks are laid down in the Treasury Charter, as adopted by the Board of Management. The Treasury Charter describes, amongst other things, the risk appetite 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 measurement 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 | Cross Currency SWAP | Interest rate swap | Not applicable | Not applicable |
Hedge accounting | Hedge accounting | ||||
Trade and other liabilities | Amortised cost | No material risk | No material risk | The purchasing strategy for expected grid losses limits price fluctuations. | Not applicable |
Market risk
32.1 Market risk
Stedin Group has identified the following relevant market risks:
foreign currency risk: the exposure to changes in value in 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 network 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 carrying amount of the loans portfolio that is subject to market risks. Borrowings of €3.2 billion are fixed rate (fair value risk). The other borrowings bear a variable interest rate that follows the development in market rates (cash flow / interest rate risk).
x € 1 million | Bookvalue as at 31 December 2022 | Fair value as at 31 December 2022 | Bookvalue as at 31 December 2021 | Fair value as at 31 December 2021 |
|---|---|---|---|---|
Bond loans | 2,456 | 2,190 | 2,302 | 2,342 |
Other loans | 940 | 954 | 905 | 1,052 |
Total | 3,396 | 3,144 | 3,207 | 3,394 |
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 data for this measurement are 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 22 Group equity 22 Group equity for more details.
Currency risk
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 currency risks are risks in respect of future cash flows in foreign currencies as well as 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).
In 2021, Stedin Group carried out the early repayment of two loans, in GBP and USD, with a carrying amount of €196 million. As a result of this early repayment, the financing expenses for these loans were brought forward, which gave rise to a one-off interest expense of €38 million in 2021. This is offset by lower interest expenses for future years.
Companies included in the consolidation are not permitted to maintain substantial positions in foreign currencies without the Treasury department’s approval. Based on the aggregate foreign currency position and the associated limit set for open positions, the Treasury department determines whether hedging is desirable and determines the strategy to be followed.
Cash flow hedges for foreign currency risks
As at year-end 2022, the foreign currency risks arising from these loans were hedged for the entire term using cross-currency interest swaps and. The main nominal values and rates of the derivative financial instruments as at 31 December 2022 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 | |
|---|---|---|---|---|---|---|
JPY 510 | JPY 28,670 | JPY 29,180 | 132.188 | 221 | 141 | |
Total | JPY 510 | JPY 28,670 | JPY 29,180 | JPY 132.188 | 221 | 141 |
As Stedin applies cash flow hedging to these borrowings and derivative instruments, the foreign currency exchange differences relating to the borrowings and changes in fair value of the derivative financial instruments are recognised in conjunction in the cash flow hedge reserve and any hedging ineffectiveness is recognised in conjunction in 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 currency risk | Derivative financial instrument recognised in other comprehensive income | ||
Expected cash flows | -24 | -10 | -24 | 10 | 8 |
Total | -24 | -10 | -24 | 10 | 8 |
The hedging relationships did not lead to hedge ineffectiveness in the reporting period. Note Derivative financial instruments and cash flow hedge reserve provides a breakdown of movements in the 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. To this end, a specific range for the ratio of fixed-interest to variable-interest loans and a desired weighted average term of the debt portfolio are applied. Stedin Group can use derivative financial instruments to achieve the desired risk profile.
Changes are expected in interest rate benchmarks. These amendments do not have consequences for the financial statements of Stedin Group, because there have been no changes to the market interest rate used for hedge accounting. Apart from this, Stedin only recognises financial instruments on the balance sheet that are linked to Euribor, which already complies with the European Benchmark Regulation arising from this amendment and therefore does not need to be replaced.
2022 | 2021 | |
|---|---|---|
Average interest rate | 1.3% | 1.6% |
The average interest rate is calculated as the weighted average of the monthly interest expense in 2022. If all other variables remain constant, it is estimated that a general increase of one percentage point in Euribor (for a period of 12 months) would lead to a decrease in profit before income tax of €2.0 million (at 31 December 2021: €1.0 million).
Cash flow hedge for interest rate risk
In the past, 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 million | Balance of the cash flow hegde reserve | Reclassification recognised in the income statement |
|---|---|---|
Cash flow hedge reserve for interest expense | 5 | 1 |
Total | 5 | 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 2022 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 | -2 | -17 | -19 | 1.19% | 200 | 171 |
Total | -2 | -17 | -19 | 1.19% | 200 | 171 |
The table below shows details of the hedging relationship:
Change in the fair value of: | Accumulated change in interest-bearing debt | Reclassification recognised in the income statement | |||
|---|---|---|---|---|---|
x € 1 million | Derivative financial instrument | The hedged interest risk | Derivative financial instrument recognised in other comprehensive income | ||
Expected cash flows | -29 | -29 | - | 43 | 2 |
Total | -29 | -29 | - | 43 | 2 |
The hedging relationships did not lead to hedge ineffectiveness in the reporting period. Note Derivative financial instruments and cash flow hedge reserve provides a breakdown of movements in the cash flow hedge reserve.
Commodity price risk
Stedin Group is faced with Commodity price risk mainly in connection with purchasing for network losses. Stedin Group is exposed to the effect of market fluctuations in prices of various energy commodities, such as electricity, gas and green certificates. In December 2021, partly with a view to the turbulent market, a change in approach was initiated for the purchasing strategy for electricity grid losses. This is aimed at greater predictability. This policy reduces sensitivity to short-term price fluctuations. In addition, very frequent consultation takes place with a member of the Board of Management to facilitate timely intervention if required by the situation. The remaining commodity price risk is not hedged by derivative financial instruments.
Credit risk
32.2 Credit risk
The maximum credit risk is equal to the balance sheet 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 by 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 30 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 heavy-use customers.
Since the introduction of the suppliers model, the credit risk relating to low-use customers 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 heavy-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 heavy-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 2022 | As at 31 December 2021 |
|---|---|---|
Trade receivables | 131 | 118 |
To be invoiced | 44 | 43 |
Prepayments | 35 | - |
Other receivables and accruals | 12 | 4 |
Total | 222 | 165 |
The breakdown of the outstanding trade receivables (including those not yet invoiced, excluding other receivables and accruals) and bad debts provision by age is as follows:
x € 1 million | 2022 | 2021 | |||
|---|---|---|---|---|---|
Expected loss % | Receivables | Provision / impairments | Receivables | Provision / impairments | |
Receivables from low-use customers | 0.1% - 100% | 88 | 4 | 79 | 4 |
Receivables from high-use customers, other receivables and to be invoiced | |||||
Before maturity date | 0.1% - 1% | 75 | - | 69 | - |
After maturity date | |||||
- under 3 months | 1% - 25% | 11 | 1 | 13 | 1 |
- 3 to 6 months | 1% - 100% | 2 | 1 | 2 | - |
- 6 to 12 months | 5% - 100% | 4 | 1 | 2 | 1 |
- over 12 months | 65% - 100% | 5 | 3 | 4 | 2 |
Face value | 185 | 10 | 169 | 8 | |
Less: provision / impairments | -10 | - | -8 | ||
Total | 175 | - | 161 | ||
In the bad debts provision, an amount of €3 million (2021: €4 million) concerns trade receivables that have been provided for in full. The table below presents the movements in the bad debts provision in detail:
x € 1 million | 2022 | 2021 |
|---|---|---|
As at 1 January | 8 | 6 |
Additions through income statement | 4 | 4 |
Withdrawals | -2 | -2 |
As at 31 December | 10 | 8 |
Liquidity risk
32.3 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 credit rating. 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 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 €150 million had been withdrawn at 31 December 2022 (2021: €- million) and a €3 billion Euro Medium Term Note programme under which €2.5 billion had been issued at 31 December 2022 (2021: €2.3 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 the preceding year, Stedin Group did not receive any margin calls in 2022.
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 25 Interest-bearing debt for the terms).
As at 31 December 2022 | Within 1 year | 1 to 5 years | After 5 years | Total |
|---|---|---|---|---|
Interest-bearing debt | 280 | 1,367 | 1,749 | 3,396 |
Lease liabilities | 12 | 29 | 30 | 71 |
Derivative financial instruments | 19 | - | 34 | 53 |
Trade and other liabilities | 308 | - | - | 308 |
Total | 619 | 1,396 | 1,813 | 3,828 |
As at 31 December 2021 | Within 1 year | 1 to 5 years | After 5 years | Total |
|---|---|---|---|---|
Interest-bearing debt | 531 | 1,069 | 1,606 | 3,206 |
Lease liabilities | 14 | 35 | 26 | 75 |
Derivative financial instruments | -15 | - | 64 | 49 |
Trade and other liabilities | 308 | - | - | 308 |
Total | 838 | 1,104 | 1,696 | 3,638 |
Trade and other liabilities include, in ‘contract liabilities’, deferred revenue of €23 million (2021: €23 million).
Derivative financial instruments and cash flow hedge reserve
32.4 Derivative financial instruments and cash flow hedge reserve
Derivative financial instruments
The derivative financial instruments are of a long-term nature. As in 2021, 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 2021 | -13 | -65 | -78 |
Movement in fair value of cash flow hedges | 2 | 21 | 23 |
Deferred tax liabilities | -1 | -7 | -8 |
Reclassification cash flow hedge reserve to income statement | 2 | 8 | 10 |
As at 31 December 2021 | -10 | -43 | -53 |
Movement of cash flow hedges | 5 | 52 | 57 |
Deferred tax liabilities | -2 | -11 | -13 |
Reclassification cash flow hedge reserve to income statement | 1 | -7 | -6 |
As at 31 December 2022 | -6 | -9 | -15 |
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 2022 | -43 | -10 | -53 |
Movement of cash flow hedges | 50 | 1 | 51 |
Deferred tax liabilities | -13 | - | -13 |
Reclassification of cash flow hedge reserve | -4 | 4 | - |
As at 31 December 2022 | -10 | -5 | -15 |
Periods in which the cash flows from the cash flow hedges are expected to be realised:
x € 1 million | As at 31 December 2022 | As at 31 December 2021 |
|---|---|---|
Expected cash flows | ||
Within 1 year | -19 | 15 |
1 to 5 years | - | - |
After 5 years | -34 | -64 |
Total | -53 | -49 |
The total cash flow hedges to be 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 2022 | As at 31 December 2021 |
|---|---|---|
Expected recognition through the income statement after income tax | ||
Within 1 year | -1 | 2 |
1 to 5 years | -6 | -16 |
After 5 years | -9 | -39 |
Total | -16 | -53 |
