Financial liabilities, financial costs and managing the financial risks of liabilities

5.3 Financial liabilities, financial costs and managing the financial risks of liabilities

The company takes advantage of the opportunities offered by its credit ratings at any given time on the international and domestic debt capital and money markets. Market-based and diversified financing is sought from several sources aiming at a balanced maturity profile.Fingrid’s existing loan agreements, debt or commercial paper programmes are unsecured and do not include any financial covenants based on financial ratios. In 2016, the company issued bonds totalling EUR 80 million (EUR 50 million with a four-year maturity and EUR 30 million with a six-year maturity) to refinance current borrowings.

Borrowings are as follows:

14. BORROWINGS, €1,000
  2016 2015 Hierarchy level
  Fair value Balance
sheet value
% Fair value Balance
sheet value
%  
               
Non-current              
Bonds 791,948 691,662   829,075 734,366   Level 2
Loans from financial institutions 163,895 151,203   186,408 172,866   Level 2
  955,843 842,866 76 % 1,015,483 907,232 79 %  
               
Current              
Bonds 125,885 123,074   144,284 140,504   Level 2
Loans from financial institutions 23,246 21,662   22,195 20,710   Level 2
Other loans/Commercial papers (international and domestic) 120,059 120,128   75,022 75,003   Level 2
  269,190 264,865 24 % 241,501 236,217 21 %  
Total 1,225,033 1,107,730 100 % 1,256,984 1,143,448 100 %  
               

The fair values of borrowings are based on the present values of cash flows. Loans raised in various currencies are measured at the present value on the basis of the yield curve of each currency. The discount rate includes the company-specific and loan-specific risk premium. Borrowings denominated in foreign currencies are translated into euros at the mid-rate quoted by the ECB at the closing date.

Velan erääntymisprofiili
15. BONDS INCLUDED IN BORROWINGS, €1,000
        2016 2015
Currency Nominal value Maturity Interest    
EUR 20,000 11.04.2017 floating rate 20,000 20,000
EUR 25,000 11.04.2017 floating rate 25,000 25,000
EUR 30,000 15.06.2017 3,07% 30,000 30,000
EUR 50,000 20.09.2020 floating rate 50,000  
EUR 30,000 19.09.2022 floating rate 30,000  
EUR 30,000 11.09.2023 2,71% 30,000 30,000
EUR 300,000 03.04.2024 3,50% 298,961 298,837
EUR 25,000 27.03.2028 2,71% 25,000 25,000
EUR 10,000 12.09.2028 3,27% 10,000 10,000
EUR 80,000 24.04.2029 2,95% 80,000 80,000
EUR 30,000 30.05.2029 2,89% 30,000 30,000
        628,961 548,837
           
JPY 500,000 22.06.2017 1,28% 4,052 3,815
        4,052 3,815
           
NOK 200,000 17.10.2016 5,15%   20,827
NOK 200,000 11.04.2017 5,16% 22,011 20,827
NOK 200,000 10.11.2017 5,12% 22,011 20,827
NOK 200,000 12.11.2019 5,37% 22,011 20,827
NOK 100,000 16.09.2025 4,31% 11,006 10,413
        77,039 93,721
           
SEK 100,000 15.01.2016 3,30%   10,882
SEK 500,000 18.10.2016 interest rate structure   54,385
SEK 500,000 18.10.2016 3,50%   54,410
SEK 1,000,000 19.11.2018 interest rate structure 104,685 108,820
        104,685 228,497
Bonds, long-term total       691,663 734,366
Bonds, short-term total        123,074 140,504
Total       814,737 874,870

The company operates in the debt capital, commercial paper and loan markets:

  • For long-term financing, the company has a Medium Term Note Programme (“EMTN Programme”), totalling EUR 1.5 billion. 
  • Fingrid has a Euro Commercial Paper Programme (“ECP Programme”) totalling EUR 600 million.
  • Fingrid has a domestic commercial paper programme totalling EUR 150 million.
  • Furthermore, Fingrid has bilateral long-term loan agreements with both the European Investment Bank (EIB) and the Nordic Investment Bank (NIB).

The graph below illustrates Fingrid’s various sources of debt financing. Fingrid sources debt financing mainly from the international debt capital markets. 

Kokonaisvelka lähteittäin

The company defines net debt as the difference between cash in hand, and the financial assets recognized in the income statement at fair value and borrowings as shown in the balance sheet. The development of net debt is actively monitored.

16. RECONCILIATION OF DEBT, €1,000
  Borrowings
due within
1 year
Borrowings
due after
1 year
Total
Debt on 1 Jan 2015 263,033 962,324 1,225,358
Cash flow from financing activities -185,181 107,424 -77,757
Exchange rate adjustments -3,573 2,350 -1,223
Accrual of effective interest rates 1,051 12,873 13,925
Other changes not involving a payment transaction 161,937 -164,867 -2,930
Debt on 31 Dec 2015 237,268 920,105 1,157,373
Cash flow from financing activities -119,917 80,000 -39,917
Exchange rate adjustments -1,192 5,243 4,051
Accrual of effective interest rates 355 1,472 1,827
Other changes not involving a payment transaction 149,757 -149,608 149
Debt on 31 Dec 2016 266,271 857,211 1,123,482
Financial assets recognised in the income statement at fair value are liquid investments traded on active markets.
Reconciliation of net debt, € 1,000   2016 2015
Cash in hand and cash equivalents   21,939 23,099
Financial assets recognised in the income statement at fair value   57,790 93,451
Borrowings - repayable within one year   264,865 236,217
Borrowings - repayable after one year   842,866 907,232
Net debt   1,028,002 1,259,999
Pääomat ja nettovelkaantuminen

Interest income and costs on loans and other receivables are as follows:

17. INTEREST INCOME AND EXPENSES FROM LOANS AND OTHER RECEIVABLES, €1,000
  2016 2015
Interest income on held-for-trading financial assets 500 449
Interest income on cash, cash equivalents and bank deposits 189 174
Net foreign exchange gains and losses 0 77
Dividend income 5 5
  694 706
     
Interest expenses on borrowings -27,017 -29,650
Net interest expenses on interest rate and foreign exchange derivatives 7,261 8,250
Gains from measuring derivative contracts at fair value 6,016 3,749
Losses from measuring derivative contracts at fair value -6,358 -17,025
Net foreign exchange gains and losses -67 0
Other finance costs -1,236 -1,416
  -21,401 -36,092
Capitalised finance costs, borrowing costs;    
at a capitalisation rate of 2 % (note 11) 2,016 1,690
     
Total -18,691 -33,695
     

Managing the market risks of debt

Fingrid’s debts are based on both fixed and floating interest rates and issued in several currencies. They thus expose Fingrid’s cash flow to interest rate and exchange rate risks. Fingrid uses derivative contracts to hedge against interest rate risks on cash flow and exchange rate risks on borrowings. Fingrid generally retains issued bonds until the maturity date and thus does not value its bonds in the balance sheet at fair value or hedge against the fair value interest rate risk. The permitted hedging instruments are defined in the Treasury policy and are chosen in order to achieve the most effective hedging possible for the risks in question.

The functional currency of the company is euro. Generally, currency risks and the foreign exchange interest rate risk are fully hedged. A risk that amounts to less than EUR 5 million when realised can be unhedged for reasons of cost-effectiveness.

Lainat alkuperäisessä valuutassa
Transaktioriski

The company issues bonds in the international and domestic money and debt capital markets. The company’s loan portfolio is spread across euro and non-euro currencies, and the total debt portfolio and the related interest rate flows are hedged against the currency risk.  The currency risk for each bond is fully hedged in conjunction with its issuance. The company uses interest rate and cross currency swaps to hedge the exchange rate and interest risk of bonds.

Business-related currency risks are small and they are mainly hedged. During the financial year, the company used foreign exchange forwards to hedge business transaction risks. A summary of the derivatives is presented in Note 23.

The sensitivity analysis of changes in the foreign exchange rate is measured as a 10 per cent change between the euro and the currency in question. The most important foreign currency for the Group is the Swedish krona (SEK). If the rate of SEK on 31 December 2016 had been 10% lower/higher than the euro, with all other variables remaining unchanged, the profit after taxes would have been EUR 1,000 higher/EUR 1,000 lower (2015: EUR 32,000/EUR 36,000). The main impact on the net profit is caused by the change in the fair value of derivatives. Starting in 2016, the impact of the SEK-denominated forward curve is also taken into account in the sensitivity analysis. In 2016, loans amounting to SEK 1,100 million and their corresponding derivatives matured, which accounts for the reduced impact of the exchange rate changes.

Rahoituskulut

Interest rate risk

The company is only exposed to the interest rate risk in euros from its business operations, assets and borrowings. The company’s borrowings are, both in terms of principal and interest payments, fully hedged against exchange rate risks, and cash and cash equivalents and financial assets recognised in the income statement at fair value are denominated in euros.

Interest rate risk management will include optimisation of the future interest rate risk of business operations (risk-free interest in the WACC model described in the next infobox) together with the company’s net debt interest rate risk through a regulatory model specified by the Energy Authority.

The interest rate risk from business operations can in part or in its entirety be hedged in terms of the adjusted capital committed to grid operations. The Board of Directors always makes a separate decision on the hedging of operational interest rate risks. The interest rate risk included in business operations was not hedged in 2016. The interest rate risk inherent in Fingrid’s business operations is caused by changes in the risk-free interest in the WACC model. If the risk-free interest rate rises/falls by one percentage unit, the post-tax WACC rises/falls by 0.9%.

The objective of managing the interest rate risk on the loan portfolio is to minimise interest costs in the long term. The basic principle is to keep the interest rate exposure of the company’s loan portfolio linked to a floating rate of interest, targeting at most an average interest refixing period of 12 months.The loan portfolio’s interest rate risk arises from market interest rate volatility, which decreases or increases the annual interest expenses on the company’s floating-rate loans. When the interest rates increase (decrease) on the market, the interest expenses of the floating-rate loans also increase (decrease). The company hedges this so-called cash flow risk with derivatives. The exposure of the loan portfolio to interest rate risk is measured by using a Cash Flow at Risk (CFaR) type of model, more specifically the Autoregressive Integrated Moving Average (ARIMA) model. The key parameters of the model are the 3-month and 6-month Euribor rates, the historical development of which serve as a basis for a forward-looking simulation of the probable future interest expenses for Fingrid’s loan portfolio. The exposure on which the sensitivity analysis is calculated includes all of the Group’s interest-bearing borrowings, the loan portfolio’s derivatives and interest-rate options purchased to hedge against unexpected changes in interest rates. According to the model, there is a 95% (99%) probability that Fingrid’s interest expenditure will amount to no more than EUR 20 (20) million during the next 12 months.


Determination of the reasonable rate of return in regulation and operational interest rate risk 

The reasonable rate of return on adjusted capital committed to grid operations is determined by using the weighted average cost of capital model (WACC). The WACC model illustrates the average cost of the capital used by the company, where the weights are the relative values of equity and debt. The weighted average of the costs of equity and interest-bearing debt are used to calculate the total cost of capital, i.e. the reasonable rate of return per the regulation. The reasonable return is calculated by multiplying the adjusted capital invested in network operations by the WACC.

WACC post-tax = reasonable rate of return after corporate tax
CE = reasonable cost of equity
CD = reasonable cost of interest-bearing debt
E = adjusted equity invested in network operations
D = adjusted interest-bearing debt invested in network operations
ctr = current rate of corporate tax

CD = Rr + DP
Rr = risk-free interest rate
DP = risk premium of debt

CE = Rr  + βlevered × (Rm  – Rr ) + LP
Rr = risk-free interest rate
β levered = levered beta
Rm = average market return
Rm – Rr = market risk premium
LP = liquidity premium

The above-mentioned reasonable rate of return after taxes is then adjusted with the current rate of corporate tax.  This calculation gives the reasonable pre-tax rate of return.

WACC pre-tax = reasonable rate of return before corporate tax

A fixed capital structure is applied to the TSO, whereby the weight of debt capital is 50% and the weight of equity capital is 50%. The pre-tax reasonable rate of return is calculated as follows

Rk, pre-tax  = pre-tax reasonable return, EUR
WACC pre-tax = reasonable rate of return, %
E = adjusted equity invested in network operations, EUR
D = adjusted interest-bearing debt invested in network operations, EUR
E + D =  adjusted capital invested in network operations, EUR


wacc taulukko

Liquidity risk and refinancing risk

Fingrid is exposed to liquidity and refinancing risks arising from the redemption of loans, payments and fluctuations in cash flow from operating activities.The liquidity of the company must be arranged so that 110% of the refinancing needs for the next 12 months can be covered by liquid assets (cash and cash equivalents, and financial assets recognised in the income statement at fair value) and available long-term committed credit lines. 

The company has a revolving credit facility agreement of EUR 300 million signed on 11 December 2015. The maturity of the facility is five years. In addition to this, the company has two one-year extension options, one of which has been used. This extended the maturity of the revolving credit facility until 11 December 2021. The facility is committed and has not been drawn. The company additionally has uncommitted overdraft facilities totaling EUR 50 million.

The refinancing risk is managed by building an even maturity profile such that the share of long-term loans in a single year constitutes less than 30 per cent of the total debt and the average maturity of the company’s loan portfolio is at least three years. To secure refinancing, the company makes wide use of diverse sources of financing. The high credit rating and good bank and investor relations enable ready access to the debt capital market and thus minimises the company’s debt refinancing risks and financing costs.

The counterparty risks of financing activities are caused by counterparties related to investing (e.g. money market funds), derivatives counterparties and bank counterparties. The company minimises any counterparty risks. As a rule, credit rating categories are the decisive factor in specifying the counterparty limit.

Contractual repayments and interest costs on borrowings are presented in the next table. The interest rates on floating-rate loans are defined using the zero coupon curve. The repayments and interest amounts are undiscounted values. Finance costs arising from interest rate swaps are often paid in net amounts depending on the nature of the swap. In the following table, they are presented in gross amounts. 

18. DEBT REPAYMENTS, INTEREST PAYMENTS AND PAYMENTS AND RECEIVABLES UNDER DERIVATIVE CONTRACTS IN CASH, €1,000
                 
31 Dec 2016   2017 2018 2019 2020 2021 2022- Total
Bonds - repayments 123,074 104,685 22,011 50,000 0 514,967 814,737
  - interests 20,874 17,555 17,361 16,398 16,247 68,012 156,447
Loans from financial institutions - repayments 21,662 21,662 21,662 17,662 17,662 72,554 172,866
  - interests 3,264 2,859 2,572 2,305 1,999 4,383 17,382
Commercial papers - repayments 120,000 0 0 0 0 0 120,000
Currency swaps - payments 53,453 107,833 23,967 87 118 13,342 198,800
Interest rate swaps - payments 2,287 2,204 845 269 370 2,204 8,180
Forward contracts - payments 2,214 0 0 0 0 0 2,214
Total   346,829 256,798 88,419 86,721 36,397 675,463 1,490,626
Currency swaps - receivables 49,434 110,878 22,394 449 449 12,209 195,812
Interest rate swaps - receivables 4,933 4,015 3,859 3,662 3,371 8,381 28,221
Forward contracts - receivables 2,271 0 0 0 0 0 2,271
Total   56,638 114,893 26,253 4,111 3,820 20,590 226,304
Total   290,191 141,905 62,165 82,610 32,577 654,873 1,264,322
                 
31 Dec 2015   2016 2017 2018 2019 2020 2021- Total
Bonds - repayments 140,504 120,468 108,820 20,827 0 484,251 874,870
  - interests 24,850 21,043 18,711 17,111 15,993 83,757 181,465
Loans from financial institutions - repayments 20,710 21,662 21,662 21,662 17,662 90,216 193,576
  - interests 3,707 3,270 3,066 2,841 2,544 7,051 22,479
Commercial papers - repayments 75,000 0 0 0 0 0 75,000
Currency swaps - payments 146,373 53,753 108,408 24,160 170 13,889 346,753
Interest rate swaps - payments 3,632 2,102 1,991 1,029 534 3,715 13,003
Forward contracts - payments 2,266 1,914 0 0 0 0 4,181
Total   417,043 224,213 262,658 87,631 36,904 682,879 1,711,327
Currency swaps - receivables 148,587 49,939 111,766 22,394 449 12,658 345,792
Interest rate swaps - receivables 4,656 4,733 3,751 3,339 2,813 8,863 28,156
Forward contracts - receivables 2,222 1,871 0 0 0 0 4,093
Total   155,465 56,544 115,517 25,733 3,262 21,520 378,041
Total   261,578 167,669 147,141 61,897 33,642 661,358 1,333,285
             

Accounting principles

Borrowings

Borrowings are initially recognised at fair value net of the transaction costs incurred. Transaction costs consist of bond prices above or below par value, arrangement fees, commissions and administrative fees that are directly related to loan. Borrowings are subsequently measured at amortised cost; any difference between the loan amount and the amount to be repaid is recognised in the income statement over the loan period using the effective interest rate method. Borrowings are derecognised when they mature and are repaid.

Commitment fees to be paid on credit facilities are entered as transaction costs related to the loan insofar as partial or full utilisation of the facility is likely. In such cases, the fee is capitalized in the balance sheet until the facility is utilised. If there is no proof that loans included in a facility are likely to be drawn in part or in full, the fee will be recognised as an upfront payment for liquidity services and amortized over the maturity of the facility in question.