Annual Report 2014 | Suomeksi |

3 Financial risk management

Download as Excel
Risk management objectives, principles and framework including governance, organisation and processes as well as description of risks i.e. strategic, financial and operational risks are described in the Operating and financial review (OFR).
See also Risk management.
3.1 Commodity market risks
Commodity market risk refers to the potential negative effects of market price movements or volume changes in electricity, fuels and environmental values. A number of different methods, such as Profit‑at‑Risk and Value‑at‑Risk, are used throughout Fortum to quantify these risks taking into account their interdependencies. Stress‑testing is carried out in order to assess the effects of extreme price movements on Fortum’s earnings.
Commodity market risk management aims to limit downside and capture potential upside by optimising hedging activities. Risk taking is limited through the use of risk mandates approved according to authority levels defined by the CEO. These risk mandates including volumetric limits, Profit‑at‑Risk limits and Stop‑Loss limits.
3.2 Electricity price and volume risk
Strategies for hedging the electricity price are developed and executed within the framework and risk mandates approved by the CEO. In the Nordic markets, the hedging strategies are executed by entering into commodity derivatives contracts such as forward or futures, mainly on Nasdaq OMX Commodities Europe. The majority of electricity price risk in Russia is hedged with physical fixed priced delivery contracts. Hedging strategies for Russia are developed in line with the development of the financial electricity market. Risk in the hedging strategies and their execution are continuously evaluated in accordance with models approved by the Chief Risk Officer.
Fortum's sensitivity to electricity market price is dependent on the hedge level for a given time period. As per 31 December 2014, approximately 50% of the Power Segment's estimated Nordic power sales volume was hedged for the calendar year 2015 and approximately 10% for the calendar year 2016. Assuming no changes in generation volumes, hedge ratios or cost structure a 1 EUR/MWh change in the market price of electricity would affect Fortum's 2015 comparable operating profit by approximately EUR 23 million and for 2016 by approximately EUR 41 million. The volume used in this sensitivity analysis is 45 TWh which includes the electricity generation sold to the spot market in Sweden and Finland in the Power Segment without minority owner's shares of electricity or other pass‑through sales, and excluding the volume of Fortum's coal‑condensing generation. This volume is heavily dependent on price level, the hydrological situation, the length of annual maintenance periods and availability of power plants. Sensitivity is calculated only for electricity market price movements. Hydrological conditions, temperature, CO2 allowance prices, fuel prices and the import/export situation all affect the electricity price on short‑term basis and effects of individual factors cannot be separated.
3.2.1 Sensitivity arising from financial instruments according to IFRS 7
Sensitivity analysis shows the sensitivity arising from financial electricity derivatives as defined in IFRS 7. These derivatives are used for hedging purposes within Fortum. Sensitivities are calculated based on 31 December 2014 (31 December 2013) position. Positions are actively managed in the day‑to‑day business operations and therefore the sensitivities vary from time to time. Sensitivity analysis includes only the market risks arising from derivatives i.e. the underlying physical electricity sales and purchase are not included. Sensitivity is calculated with the assumption that electricity forward quotations in NASDAQ OMX Commodities Europe and in EEX would change 1 EUR/MWh for the period Fortum has derivatives.
Sensitivity according to IFRS 7
+/‑ 1 EUR/MWh change in electricity forward quotations, EUR million Effect 2014 2013
Effect on Profit before income tax ‑/+ 7 7
Effect on Equity ‑/+ 13 22
3.2.2 Electricity derivatives
The tables below disclose the Group's electricity derivatives used mainly for hedging electricity price risk. The fair values represent the values disclosed in the balance sheet.
See also Note 16 Financial assets and liabilities by categories for accounting principles and basis for fair value estimations
and Note 7 Fair value changes of derivatives and underlying items in income statement.
Electricity derivatives by instrument 2014
Volume, TWh Fair value, EUR million
Under 1
year
1‑5
years
Over 5
years
Total Positive Negative Net
Electricity derivatives 75 33 1 109 304 219 85
Total 75 33 1 109 304 219 85
Netting against electricity exchanges 1) ‑139 ‑139 0
Total 164 80 85
Electricity derivatives by instrument 2013
Volume, TWh Fair value, EUR million
Under 1
year
1‑5
years
Over 5
years
Total Positive Negative Net
Electricity derivatives 79 36 0 115 502 292 209
Total 79 36 0 115 502 292 209
Netting against electricity exchanges 1) ‑227 ‑227 0
Total 277 68 209
1) Receivables and liabilities against electricity exchanges arising from standard derivative contracts with same delivery period are netted.
Maturity analysis of commodity derivatives
Amounts in the table are fair values.
2014 2013
EUR million Under 1
year
1‑5
years
Over 5
years
Total Under 1
year
1‑5
years
Over 5
years
Total
Electricity derivatives assets 114 49 1 164 192 83 2 277
Electricity derivatives liabilities 28 51 1 80 31 35 2 68
Other commodity derivatives, assets 12 3 15 29 3 0 32
Other commodity derivatives, liabilities 4 3 7 11 2 0 13
3.3 Fuel price and volume risks
Exposure to fuel prices is to some extent limited because of Fortum's flexible generation possibilities, which allow for switching between different fuels according to prevailing market conditions, and in some cases, the fuel price risk can be transferred to the customer. The remaining exposure to fuel price risk is mitigated through fixed price purchases that cover forecasted consumption levels. Fixed price purchases can be either for physical deliveries or in the form of financial hedges, such as oil and coal derivatives.
3.4 Emission allowance price and volume risk
Part of Fortum's power and heat generation is subject to requirements of emission trading schemes. Fortum manages its exposure to these prices and volumes through the use of CO2 forwards and by ensuring that the costs of allowances are taken into account during production planning. Most of these CO2 forwards are own use contracts valued at cost and some are treated as derivatives in the accounts.
3.5 Liquidity and refinancing risk
Fortum's business is capital intensive and the Group has a regular need to raise financing. Fortum has a diversified loan portfolio mainly consisting of long‑term financing denominated in EUR and SEK. Long‑term financing is primarily raised by issuing bonds under Fortum’s Euro Medium Term Note programme as well as through bilateral and syndicated loan facilities from a variety of different financial institutions. Seasonal variations in working capital are generally financed by issuing short‑term commercial papers under the Group’s Swedish (SEK) and Finnish (EUR) Commercial Paper programmes.
Financing is primarily raised on parent company level and distributed internally through various internal financing arrangements. For example Fortum’s Russian operations are mainly financed via intra group internal long term RUB denominated loans. The internal RUB loan receivables are hedged via external forward contracts offsetting the currency exposure for the internal lender. On 31 December 2014, 96% (2013: 95%) of the Group’s total external financing was raised by the parent company Fortum Oyj.
On 31 December 2014, the total interest‑bearing debt was EUR 6,983 million (2013: 9,058) and the interest‑bearing net debt was EUR 4,217 million (2013: 7,793). Net debt without Värme financing was EUR 3,664 million (2013: 6,658).
Fortum manages liquidity and refinancing risks through a combination of cash positions and committed credit facility agreements with its core banks. The Group shall at all times have access to cash, marketable securities and unused committed credit facilities including overdrafts, to cover all loans maturing within the next twelve‑month period. However, cash/marketable securities and unused committed credit facilities shall always amount to at least EUR 500 million.
On 31 December 2014, loan maturities for the coming twelve‑month period amounted to EUR 1,103 million (2013: 2,106). Liquid funds amounted to EUR 2,766 million (2013: 1,265) and the total amount of committed credit facilities amounted to EUR 2,214 million (2013: 2,218) of which EUR 2,214 million (2013: 2,218) was undrawn.
Maturity of interest‑bearing liabilities
EUR million 2014
2015 1,103
2016 860
2017 530
2018 614
2019 820
2020 and later 3,056
Total 6,983
Loan maturities per loan type, EUR million

Liquid funds, major credit lines and debt programmes 2014
EUR million Total facility Drawn amount Available amount
Liquid funds
Cash and cash equivalents 2,009
Bank deposits over 3 months 757
Total 2,766
of which in Russia (OAO Fortum) 134
Committed credit lines
EUR 2,000 million syndicated credit facility 2,000 2,000
Bilateral overdraft facilities 214 214
Total 2,214 2,214
Debt programmes (uncommitted)
Fortum Corporation, CP programme EUR 500 million 500 500
Fortum Corporation, CP programme SEK 5,000 million 532 532
Fortum Corporation, EMTN programme EUR 8,000 million 8,000 4,748 3,252
Total 9,032 4,748 4,284
Liquid funds, major credit lines and debt programmes 2013
EUR million Total facility Drawn amount Available amount
Liquid funds
Cash and cash equivalents 1) 1,265
Bank deposits over 3 months
Total 1,265
of which in Russia (OAO Fortum) 113
Committed credit lines
EUR 2,500 million syndicated credit facility 2,000 2,000
Bilateral overdraft facilities 218 218
Total 2,218 2,218
Debt programmes (uncommitted)
Fortum Corporation, CP programme EUR 500 million 500 381 119
Fortum Corporation, CP programme SEK 5,000 million 564 337 227
Fortum Corporation, EMTN programme EUR 8,000 million 8,000 5,839 2,161
Total 9,064 6,557 2,507
1) Including cash balances of EUR 0 million (2013: 15) classified as assets held for sale in the balance sheet.
Liquid funds amounted to EUR 2,766 million (2013: 1,265), including OAO Fortum's bank deposits amounting to EUR 131 million (2013: 101) earmarked for capacity increase investments in Russia. Of these deposits at year‑end 2014 EUR 30 million (2013: 58) were in euros and EUR million 101 (2013: 43) in Russian roubles.
See also Note 25 Liquid funds.
Maturity analysis of interest‑bearing liabilities and derivatives
Amounts disclosed below are non‑discounted expected cash flows (future interest payments and amortisations) of interest‑bearing liabilities and interest rate and currency derivatives.
2014 2013
EUR million Under
1 year
1‑5
years
Over 5
years
Total Under 1 year 1‑5
years
Over 5
years
Total
Interest‑bearing liabilities 1,295 3,370 3,265 7,930 2,374 3,896 4,249 10,519
Interest rate and currency derivatives liabilities 5,955 1,650 100 7,705 7,286 2,098 294 9,678
Interest rate and currency derivatives receivables ‑6,228 ‑1,890 ‑134 ‑8,252 ‑7,311 ‑2,179 ‑271 ‑9,761
Total 1,022 3,130 3,231 7,383 2,349 3,815 4,272 10,436
Interest‑bearing liabilities include loans from the State Nuclear Waste Management Fund and Teollisuuden Voima Oyj of EUR 1,040 million (2013: 995). These loans are renewed yearly and the related interest payments are calculated for ten years in the table above.
For further information regarding loans from the State Nuclear Waste Management Fund and Teollisuuden Voima Oyj, see Note 30 Nuclear related assets and liabilities.
3.6 Interest rate risk and currency risk
3.6.1 Interest rate risk
The Treasury risk policy stipulated in 2014 that the average duration of the debt portfolio shall always be kept within a range of 24 and 48 months and that the flow risk i.e. changes in interest rates shall not affect the net interest payments of the Group by more than EUR 50 million for the next rolling 12‑month period. Within these mandates, strategies are evaluated and developed in order to find an optimal balance between risk and financing cost.
On 31 December 2014, the average duration of the debt portfolio (including derivatives) was 3.7 years (2013: 2.4). Approximately 46% (2013: 51%) of the debt portfolio was on a floating rate basis or fixed rate loans maturing within the next 12 month period. The effect of one percentage point change in interest rates on the present value of the debt portfolio was EUR 151 million on 31 December 2014 (2013: 179). The flow risk, measured as the difference between the base case net interest cost estimate and the worst case scenario estimate for Fortum's debt portfolio for the coming 12 months, was EUR 18 million (2013: 14).
The average interest rate on loans and derivatives on 31 December 2014 was 3.7% (2013: 3.6%). Average cumulative interest rate on loans and derivatives for 2014 was 4.0% (2013: 4.1%).
3.6.2 Currency risk
Fortum's policy is to hedge major transaction exposures to avoid exchange differences in the profit and loss statement. These exposures are mainly hedged with forward contracts.
Translation exposures in the Fortum Group are generally not hedged as the majority of these assets are considered to be long‑term strategic holdings. In Fortum this means largely entities operating in Sweden, Russia, Norway and Poland, whose base currency is not euro.
The currency risk relating to transaction exposures is measured using Value‑at‑Risk (VaR) for a one‑day period at 95% confidence level. Translation exposures relating to net investments in foreign entities are measured using a five day period at 95% confidence level. The limit for transaction exposure is VaR EUR 5 million. On 31 December 2014 the open transaction and translation exposures were EUR 0 million (2013: 1) and EUR 4,310 million (2013: 4,837) respectively. The VaR for the transaction exposure was EUR 0 million (2013: 0) and VaR for the translation exposure was EUR 246 million (2013: 55).
Group Treasury's transaction exposure
2014 2013
EUR million Net position   Hedge Open Net position Hedge Open
SEK 4,821 ‑4,821 0 5,595 ‑5,595 0
USD ‑12 12 0 ‑11 11 0
NOK ‑75 75 0 39 ‑39 0
RUB 483 ‑483 0 523 ‑523 0
PLN 88 ‑88 0 110 ‑110 0
Other ‑10 10 0 59 ‑58 1
Total 5,295 ‑5,295 0 6,315 ‑6,314 1
In addition OAO Fortum is hedging its euro investments with euro deposits EUR 30 million (2013: 58), which qualifies as a cash flow hedge in Fortum group accounts.
Transaction exposure is defined as already contracted or forecasted foreign exchange dependent items and cash flows. Transaction exposure is divided into balance sheet exposure and cash flow exposure. Balance sheet exposure reflects currency denominated assets and liabilities for example loans, deposits and accounts receivable/payable in currencies other than the company’s base currency. Cash flow exposure reflects future forecasted or contracted currency flows in foreign currency deriving from business activities such as sales, purchases or investments. Net conversion differences from transaction exposure are entered under financial income or expense when related to financial items or when related to accounts receivable/payable entered under items included in operating profit. Conversion differences related to qualifying cash flow hedges are deferred to equity.
Fortum’s policy is to hedge balance sheet exposures in order to avoid exchange rate differences in the income statement. The Group’s balance sheet exposure mainly relates to financing of Swedish subsidiaries and the fact that the Group’s main external financing currency is EUR. For derivatives hedging this balance exposure Fortum does not apply hedge accounting, because they have a natural hedge in the income statement.
Contracted cash flow exposures shall be hedged to reduce volatility in future cash flows. These hedges normally consist of currency derivative contracts, which are matched against the underlying future cash flow according to maturity. Fortum has currency cash flow hedges both with and without hedge accounting treatment under IFRS. Those currency cash flow hedges, which do not qualify for hedge accounting are mainly hedging electricity derivatives. Unrealised hedges create volatility in the operating profit.
Group Treasury's translation exposure
2014 2013
EUR million Invest‑
ment
Hedge Open Invest‑
ment
Hedge Open
RUB 2,109 ‑198 1,911 3,187 ‑317 2,870
SEK 1,964 ‑364 1,600 1,303 1,303
NOK 580 580 440 440
PLN 152 152 138 138
Other 67 67 86 86
Total 4,872 ‑562 4,310 5,154 ‑317 4,837
Translation exposure position includes net investments in foreign subsidiaries and associated companies. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity. The net effect of exchange differences on equity attributable to equity holders mainly from RUB was EUR ‑ 1,320 million in 2014 (2013: ‑471). Part of this translation exposure has been hedged and the hedge result amounted to EUR 149 million in 2014 (2013: 28).
Interest rate and currency derivatives by instrument 2014
Notional amount Fair value
Remaining lifetimes
EUR million Under 1 year 1‑5
years
Over 5
years
Total Positive Negative Net
Forward foreign exchange contracts 5,167 163 5,330 270 31 239
Interest rate swaps 508 3,282 1,931 5,721 360 206 154
Interest rate and currency swaps 362 1,111 1,473 233 0 233
Forward rate agreements 0 0 0 0
Total 6,037 4,556 1,931 12,524 863 237 626
Of which long‑term 541 193 348
Short‑term 322 44 278
Interest rate and currency derivatives by instrument 2013
Notional amount Fair value
Remaining lifetimes
EUR million Under 1 year 1‑5
years
Over 5
years
Total Positive Negative Net
Forward foreign exchange contracts 7,092 420 7,513 76 49 27
Interest rate swaps 944 2,215 3,499 6,658 252 147 105
Interest rate and currency swaps 928 928 36 0 36
Forward rate agreements 56 56 0 0 0
Total 8,092 3,563 3,499 15,155 365 196 170
Of which long‑term 280 143 137
Short‑term 85 53 32
3.7 Credit risk
Fortum is exposed to credit risk whenever there is a contractual obligation with an external counterparty. Fortum has procedures in place to ensure that credit risks are kept at an acceptable level. All larger exposures are monitored centrally against limits which are approved according to authority levels defined in the Group Credit Instructions. Counterparty creditworthiness is continuously monitored and reported. Collaterals are used if dealing with counterparties without approved limits or when exposures arising from engagements are considered too high in relation to the counterparty creditworthiness. Parent company guarantees are requested when dealing with subsidiaries not considered creditworthy on a stand‑alone basis.
Credit risk exposures relating to derivative instruments are often volatile due to rapidly changing market prices and are therefore monitored closely. Currency and interest rate derivative counterparties are limited to investment grade banks and financial institutions. ISDA Master agreements, which include netting clauses and in some cases collateral support agreements, are in place with most of these counterparties. The majority of the Group's commodity derivatives are cleared through an exchange such as NASDAQ OMX Commodities Europe. Some derivative transactions are also executed on the OTC market. These OTC counterparties are limited to those considered of high creditworthiness. Master agreements, such as ISDA, FEMA and EFET, which include netting clauses, are in place with the majority of the counterparties.
Fortum, like any capital intensive business, is exposed to credit risks in the financial sector. Credit risk relating to banks is monitored closely as the creditworthiness of financial institutions can deteriorate quickly. Where possible, exposures have been concentrated to key relationship banks considered to be of high credit quality and importance to the financial stability of their respective countries. In Russia, bank guarantees are used to cover exposures to suppliers related to the investment programme of OAO Fortum. In case a contractor defaults or does not fulfil its obligations, there are guarantees covering prepayments as well as performance guarantees in place. Issuers of these guarantees are banks with a strong local presence and understanding of the contractor. The creditworthiness of these banks as well as exposures arising from issued guarantees is monitored closely.
Credit risk relating to customers is well diversified over a large number of private individuals and businesses across several geographic regions and industry sectors. Russia, Finland and Sweden account for most of the exposure, of which exposure to Russia represents the highest risk of non‑payment.
3.7.1 Credit quality of major financial assets
Amounts disclosed below are presented by counterparties for interest‑bearing receivables including finance lease receivables, bank deposits and derivative financial instruments recognised as assets.
2014 2013
EUR million Carrying amount of which
past due
Carrying amount of which
past due
Investment grade receivables 3,505 1,555
Electricity exchanges 75 185
Associated companies and joint ventures 2,061 2,601
Other 145 99
Total 5,786 4,440
Investment grade receivables consist of deposits and Treasury bank accounts EUR 2,636 million (2013: 1,163), fair values of interest rate and currency derivatives EUR 859 million (2013: 362) and fair values of electricity, coal, oil and CO2 emission allowance derivatives EUR 10 million (2013: 30). Electricity exchange receivable is the fair value of derivatives on NASDAQ OMX Commodities Europe. Associated company and joint venture receivables consist of loan receivables EUR 2,041 million (2013: 2,587), fair values of interest rate and currency derivatives EUR 4 million (2013: 3) and fair values of electricity, coal, oil and CO2 emission allowance derivatives EUR 16 million (2013: 11). Other receivables consist of Russian deposits with non‑investment grade banks EUR 63 million (2013: 0), loan and other interest bearing receivables EUR 4 million (2013: 14), finance lease receivables EUR 0 million (2013: 2) and fair values of electricity, coal, oil, and CO2 emission allowance derivatives EUR 78 million (2013: 83).
The following tables indicate how bank deposits and fair values of derivatives are distributed by rating class.
Deposits and Treasury Bank Accounts
EUR million 2014 2013
Counterparties with external credit rating from Standard & Poor's and/or Moody's Investment grade ratings
AAA
AA+/AA/AA‑ 632 410
A+/A/A‑ 1,923 658
BBB+/BBB/BBB‑ 81 95
Total investment grade ratings 2,636 1,163
BB+/BB/BB‑ 63
B+/B/B‑
Below B‑
Non‑investment grade ratings 63
Counterparties without external credit rating from Standard & Poor's and/or Moody's
Total 2,699 1,163
In addition, cash in other bank accounts totalled EUR 67 million on 31 December 2014 (2013: 102).
Interest rate and currency derivatives
2014 2013
EUR million Recei‑
vables
Netted amount Recei‑
vables
Netted
amount
Counterparties with external credit rating from Standard & Poor's and/or Moody's Investment grade ratings
AAA
AA+/AA/AA‑ 147 88 36 0
A+/A/A‑ 712 560 308 220
BBB+/BBB/BBB‑ 18
Total investment grade ratings 859 648 362 220
Total associated companies and joint ventures 4 4 3 3
Counterparties without external credit rating from Standard & Poor's and/or Moody's
Total 863 652 365 223
Electricity, coal and oil derivatives and CO2 emission allowances treated as derivatives
2014 2013
EUR million Receivables Netted amount Receivables Netted
amount
Counterparties with external credit rating from Standard & Poor's and/or Moody's Investment grade ratings
AAA
AA+/AA/AA‑ 0 0 0 0
A+/A/A‑ 10 6 30 21
BBB+/BBB/BBB‑ 0 0 0 0
Total investment grade ratings 10 6 30 21
Non‑investment grade ratings
BB+/BB/BB‑ 6 6 8 7
B+/B/B‑
Below B‑
Total non‑investment grade ratings 6 6 8 7
Total associated companies and joint ventures 16 5 11 2
Counterparties without external credit rating from Standard & Poor's or Moody's
Government or municipality 0 0 1 1
Fortum Rating 5 ‑ Lowest risk 15 15 1 1
Fortum Rating 4 ‑ Low risk 37 34 23 23
Fortum Rating 3 ‑ Normal risk 18 17 47 46
Fortum Rating 2 ‑ High risk 1 1
Fortum Rating 1 ‑ Highest risk 0 0 2 1
No rating 1 1 1 1
Total non‑rated counterparties 72 68 75 73
Total 104 85 124 103
For derivatives, the receivable is the sum of the positive fair values, i.e the gross amount. Netted amount includes negative fair values where a valid netting agreement is in place with the counterparty. When the netted amount is less than zero, it is not included. In cases where a parent company guarantee is in place, the exposure is shown on the issuer of the guarantee.
All counterparties for currency and interest rate derivatives and the majority of counterparties for bank deposits have an external rating from Standard & Poor's and Moody's credit agencies. The above rating scale is for Standard & Poor's rating categories. For those counterparties only rated by Moody's, the rating has been translated to the equivalent Standard and Poor's rating category. For counterparties rated by both Standard & Poor's and Moody's, a conservative approach is taken by choosing the lower of the two ratings.
In the electricity, coal and oil derivatives market, there are a number of counterparties not rated by Standard & Poor's or Moody's. For these counterparties, Fortum assigns an internal rating. The internal rating is based on external credit ratings from other credit agencies. The rating from Soliditet is used for Finnish, Norwegian and Swedish counterparties and for other counterparties the rating from Dun & Bradstreet is used. Governments and municipal companies are typically not rated, and are shown separately. This rating category does not include companies owned by governments or municipalities. Counterparties that have not been assigned a rating by the above listed credit agencies are in the "No rating" category.
X

Search Fortum Annual Report 2014

Start typing...

Search results