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

The company takes advantage of the possibilities 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 2017, the company issued a 10 year EUR 100 million green bond.

14. BORROWINGS, €1,000 2017 2016 Hierarchy level
  Fair value Balance sheet value % Fair value Balance sheet value %  
               
Non-current              
Bonds 766,069 683,863   791,948 691,662   Level 2
Loans from financial institutions 138,942 129,541   163,895 151,203   Level 2
  905,011 813,404 75 % 955,843 842,866 76 %  
               
Current              
Bonds 102,112 101,587   125,885 123,074   Level 2
Loans from financial institutions 23,817 22,474   23,246 21,662   Level 2
Other loans/Commercial papers (international and domestic) 145,116 145,243   120,059 120,128   Level 2
  271,045 269,304 25 % 269,190 264,865 24 %  
Total 1,176,057 1,082,707 100 % 1,225,033 1,107,730 100 %  
               

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 fixing rate quoted by the ECB at the closing date.

Velan erääntymisprofiili
15. BONDS INCLUDED IN BORROWINGS, €1,000       2017 2016
Currency Nominal value Maturity Interest Balance sheet value  
EUR 20,000 11/04/2017 floating rate   20,000
EUR 25,000 11/04/2017 floating rate   25,000
EUR 30,000 15/06/2017 3.07%   30,000
EUR 50,000 20/09/2020 floating rate 50,000 50,000
EUR 30,000 19/09/2022 floating rate 30,000 30,000
EUR 30,000 11/09/2023 2.71% 30,000 30,000
EUR 300,000 03/04/2024 3.50% 299,089 298,961
EUR 100,000 23/11/2027 1.13% 99,286  
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
        653,376 628,961
           
JPY 500,000 22/06/2017 1.28%   4,052
          4,052
           
NOK 200,000 11/04/2017 5.16%   22,011
NOK 200,000 10/11/2017 5.12%   22,011
NOK 200,000 12/11/2019 5.37% 20,325 22,011
NOK 100,000 16/09/2025 4.31% 10,162 11,006
        30,487 77,039
           
SEK 1,000,000 19/11/2018 floating rate 101,587 104,685
        101,587 104,685
Bonds, long-term total       683,863 691,663
Bonds, short-term total        101,587 123,074
Total       785,449 814,737

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 obtains 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 2016 236,217 907,232 1,143,448
Cash flow from financing activities -119,917 80,000 -39,917
Exchange rate adjustments -1,192 5,243 4,051
Other changes not involving a payment transaction 25 124 149
Transfer to short-term loans 149,732 -149,732  
Debt on 31 Dec 2016 264,865 842,866 1,107,731
Cash flow from financing activities -123,806 100,000 -23,806
Exchange rate adjustments -842 210 -632
Other changes not involving a payment transaction   -586 -586
Transfer to short-term loans 129,086 -129,086  
Debt on 31 Dec 2017 269,304 813,404 1,082,707
Financial assets recognised in the income statement at fair value are liquid investments traded on active markets.
Reconciliation of net debt, € 1,000   2017 2016
Cash in hand and cash equivalents   20,303 21,939
Financial assets recognised in the income statement at fair value   63,465 57,790
Borrowings - repayable within one year   269,304 264,865
Borrowings - repayable after one year   813,404 842,866
Net debt   998,939 1,028,002
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 2017 2016
Interest income on held-for-trading financial assets 312 500
Interest income on cash, cash equivalents and bank deposits 166 189
Dividend income 5 5
  483 694
     
Interest expenses on borrowings -21,843 -27,017
Net interest expenses on interest rate and foreign exchange derivatives 4,752 7,261
Gains from measuring derivative contracts at fair value 656 6,016
Losses from measuring derivative contracts at fair value -6,477 -5,346
Net foreign exchange gains and losses from borrowings, derivatives and FX-accounts -115 -67
Other finance costs -1,457 -2,248
  -24,484 -21,401
     
Capitalised finance costs, borrowing costs;    
at a capitalisation rate of 2 % (note 11) 1,223 2,016
     
Total -22,778 -18,691
     

Managing the market risks of debt

Fingrid’s debts are issued in both fixed and floating interest rates and in several currencies. They thus expose Fingrid’s cash flow to interest rate and exchange rate risks. Fingrid uses derivative contracts to hedge against these risks. Fingrid generally holds issued bonds to maturity 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.

Transaction risk

Lainat alkuperäisessä valuutassa

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 2017 had been 10% lower/higher than the euro, with all other variables remaining unchanged, the profit after taxes would have been EUR 1,000 lower/EUR 1,000 higher (2016: EUR 1,000 higher/EUR 1,000 lower). The main impact on the net profit is caused by the change in the fair value of derivatives. The impact of SEK-denominated forward curve and change in exchange rate are taken into account in the sensitivity analysis.

Rahoituskulut

Interest rate risk

The company is only exposed to euro denominated interest rate risk 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 includes optimisation of future interest rate risk of business operations (risk-free interest in the WACC model described in the next infobox) together with 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 2017. 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 floating interest rates, 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 market interest rates increase (decrease), 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, of which the historical time series 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

*Will be updated by end of 2019 for regulatory period 2020-2023 based on Bloomberg’s utility sector A-BBB rated companies’ fixed income indices


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, both of them have been used. These extended the maturity of the revolving credit facility until 11 December 2022. 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 2017   2018 2019 2020 2021 2022 2023- Total
Bonds - repayments 101,587 20,325 50,000   30,000 583,538 785,449
  - interests 18,635 18,404 17,559 17,416 17,386 57,364 146,765
Loans from financial institutions - repayments 21,662 21,662 17,662 17,662 17,662 54,892 151,203
  - interests 2,848 2,512 2,317 2,038 1,695 2,691 14,102
Commercial papers - repayments 145,000           145,000
Overdraft - payments 811           811
Currency swaps - payments 107,753 23,928 97 140 174 13,193 145,286
Interest rate swaps - payments 2,355 1,105 908 1,365 1,712 10,625 18,070
Forward contracts - payments 1,270           1,270
Total   401,923 87,936 88,544 38,622 68,629 722,302 1,407,956
Currency swaps - receivables 103,397 21,854 438 438 438 11,476 138,041
Interest rate swaps - receivables 5,181 5,014 4,584 4,185 3,953 10,846 33,764
Forward contracts - receivables 1,167           1,167
Total   109,745 26,868 5,022 4,622 4,391 22,323 172,972
Total   292,178 61,068 83,522 34,000 64,238 699,979 1,234,984
                 
31 Dec 2016   2,017 2,018 2,019 2,020 2,021 2022- Total
Bonds - repayments 123,074 104,685 22,011 50,000   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           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           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           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
             

 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.