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Note 34 Information on risks and financial instruments

General

The following financial risks can be identified: market risk, credit risk and liquidity risk. Market risk is defined as the risk of loss due to an adverse change in market prices. Alliander's main exposure is to commodity price risk, currency risk and interest rate risk. The credit risk is the risk arising in connection with the default of counterparties to trading and sales transactions. The liquidity risk is the risk of the company being unable to meet its payment obligations as they fall due.

This note provides information on these financial risks to which Alliander is exposed, the objectives and policy for managing risks arising from financial instruments as well as the management of capital. Further quantitative information is provided in the various notes in the consolidated financial statements.

Market risk

Alliander is exposed to the following potential market risks:

  • commodity price risk the risk that the value of a financial instrument will fluctuate because of changes in commodity prices; this mainly affects the cost associated with network losses;
  • currency risk: the risk that the value of a financial instrument will fluctuate because of changes in exchange rates;
  • interest rate risk: the risk that the value of a financial instrument will fluctuate because of changes in market interest rates.

Alliander hedges market risks through the purchase and sale of derivatives and attempts to minimise income statement volatility as far as possible through the application of hedge accounting. All transactions are carried out within the guidelines approved by the Management Board.

Commodity price risk

As regards the cost of network losses, Alliander is sensitive to the effect of market fluctuations in the price of various energy commodities, including but not limited to electricity and green certificates (renewable energy certificates – RECs).

Currency risk

General

Alliander is exposed to currency risk on purchases, cash and cash equivalents, borrowings and other balance sheet positions denominated in a currency other than the euro. The currency risks concern transaction risks, i.e. risks relating to future cash flows in foreign currencies and balance sheet positions in foreign currencies. Currency risks as at 31 December 2015 mainly relate to balance sheet positions in USD. These risks are hedged as far as possible. Subsidiaries report currency positions and risks to Alliander's Treasury Department. These positions and risks are principally hedged back-to-back with external counterparties through spot and forward exchange contracts.

Exposure to currency risk and sensitivity analysis

Alliander's exposure to currency risk based on nominal value is presented in the table below. This table shows the pre-tax effect that a possible increase or decrease in the value of foreign currencies relative to the euro would have, assuming all other circumstances remained unchanged, on Alliander's finance income and expense and equity, taking into account derivatives concluded to hedge the currency risk. The effects on equity and income are calculated using the closing rate at the balance sheet date. Alliander operates mainly in the Netherlands and to a small extent in Germany and so has no currency risk on its normal operations. Non-operational risks of this nature as at year-end 2015 related to the assets and liabilities connected with two cross-border lease contracts disclosed in the financial statements plus the ECP finance issued at the end of 2015.

Liander recognises USD investments and liabilities for two CBL contracts in the balance sheet. The table shows that currency risks do not directly affect the equity position. All currency translation gains and losses are recognised through the income statement.

Finance was raised in 2015 under the Euro Commercial Paper Programme, denominated in US dollars (USD). This position, too, is hedged by means of a forward currency contract. The currency translation differences are recognised through profit or loss and do not affect the equity position.

Currency risk sensitivity analysis

 

Position

Income

Equity

€ million

 

Decrease by 10% relative to the euro

Increase by 10% relative to the euro

Decrease by 10% relative to the euro

Increase by 10% relative to the euro

As at 31 December 2015

     

Exposure in USD

46

-5

4

-

-

Hedged position in USD

-46

5

-4

-

-

      

Sensitivity of cash flow in USD (net)

-

-

-

-

-

      
      

Total exposure in foreign currencies

46

-5

4

-

-

Total hedged position in foreign currencies

-46

5

-4

-

-

      

Sensitivity of cash flow in foreign currencies (net)

-

-

-

-

-

      

As at 31 December 2014

     

Exposure in USD

158

-18

14

-

-

Hedged position in USD

-158

18

-14

-

-

      

Sensitivity of cash flow in USD (net)

-

-

-

-

-

      

Exposure in GBP

155

-17

14

-

-

Hedged position in GBP

-155

17

-14

-

-

      

Sensitivity of cash flow in GBP (net)

-

-

-

-

-

      

Total exposure in foreign currencies

313

-35

28

-

-

Total hedged position in foreign currencies

-313

35

-28

-

-

      

Sensitivity of cash flow in foreign currencies (net)

-

-

-

-

-

The following important exchange rates were applicable as at the balance sheet date:

Exchange rates

EUR

2015

2014

USD

1,09

1,21

GBP

n/a

0,78

Interest rate risk

General

The following table provides information on the extent to which Alliander is exposed to changes in interest rates on financial instruments and shows the effective interest rate at the balance sheet date and the maturity date or, if earlier, the contractual interest repricing date.

Alliander had no interest rate swaps outstanding as at year-end 2015 or 2014.

Maturity date or earlier contractual interest repricing date

 

Effective interest rate

Variable/ fixed

Carrying amounts

€ million

  

Less than 1 year

Between 1 and 5 years

Over 5 years

Total

As at 31 December 2015

      

Assets

      

Available-for-sale financial assets and other financial assets

4,2%

Fixed / variable

25

-

229

254

Loans and receivables

  

5

15

22

42

Cash and cash equivalents

 

Variable

89

-

-

89

       

Total assets

  

119

15

251

385

       

Loans received

      

Subordinated loans

8,6%

Fixed

-5

-24

-58

-87

Private and green loans

2,1%

Fixed

-20

-2

-11

-33

Euro Medium Term Notes

3,7%

Fixed

-400

-299

-796

-1.495

Euro Commercial Paper

0,4%

Fixed

-46

-

-

-46

Other

 

Variable

-

-

-7

-7

Finance lease obligations

6,6%

Fixed

1

6

-169

-162

       

Total liabilities

  

-470

-319

-1.041

-1.830

       

As at 31 December 2014

      

Assets

      

Available-for-sale financial assets and other financial assets

2,5%

Fixed / variable

159

-

200

359

Loans and receivables

  

26

23

19

68

Cash and cash equivalents

 

Variable

167

-

-

167

       

Total assets

  

352

23

219

594

       

Loans received

      

Subordinated loans

8,6%

Fixed

-5

-22

-68

-95

Private and green loans

2,9%

Fixed

-1

-20

-

-21

Euro Medium Term Notes

3,9%

Fixed

-

-399

-1.095

-1.494

Euro Commercial Paper

0,6%

Fixed

-153

-

-

-153

Other

 

Variable

-

-

-12

-12

Finance lease obligations

6,6%

Fixed

1

4

-150

-145

       

Total liabilities

  

-158

-437

-1.325

-1.920

Sensitivity analysis

Sensitivity analysis in relation to fixed-rate assets and liabilities

Alliander does not have any fixed-rate financial assets or liabilities carried at fair value through profit or loss.

Sensitivity analysis in relation to cash flows for variable-rate assets and liabilities

A change of 100 basis points in interest rates as at 31 December 2015 would, assuming all other circumstances remained unchanged, have a pre-tax effect on Alliander's equity and income on an annual basis (finance income and expense) as shown in the following table.

Interest rate risk sensitivity analysis

 

Position

Income

Equity

€ million

 

Decrease by 100 basis points

Increase by 100 basis points

Decrease by 100 basis points

Increase by 100 basis points

As at 31 December 2015

     

Variable-rate instruments

25

-

-

-

-

      

Sensitivity of cash flow (net)

25

-

-

-

-

      

As at 31 December 2014

     

Variable-rate instruments

184

-2

2

1

-1

      

Sensitivity of cash flow (net)

184

-2

2

1

-1

Hedging transactions

Fair value hedging

In order to provide a complete or partial hedge against risks of fluctuations in the fair value of financial assets and/or liabilities as well as commitments entered into, Alliander made use of derivative financial instruments in preceding years.

Using a number of interest rate swaps, a proportion of the fixed-rate bond loan issued in 2004 was converted into a variable-rate loan. Prior to 2007, changes in the market value of this loan as well as of the swaps designated as hedges were recognised in finance income and expense. Following the settlement of this fair value hedge in 2007, the loss carried in the fair value hedge reserve is being amortised over the remaining term to maturity of this loan (year-end 2014), or until such time as the loan is repaid.

Cash flow hedging

Alliander previously issued Euro Medium Term Notes. In the period leading up to the issue of the Medium Term Notes in 2004, Alliander hedged the risks connected with the future interest payments by means of interest rate swaps. These swaps were designated as cash flow hedges. When the loans were issued, the interest rate swaps were settled in cash and the loss up to that date, contained in the cash flow hedge reserve, is being amortised over the remaining life of the loans (2014) so that, on balance, the originally hedged interest rate level is recognised in the income statement. Since these interest rate swaps were settled when the loans were entered into, there are no future cash flows from these interest rate swaps. The negative balance as at 31 December 2015 was practically nil (2014: practically nil).

Cash flow hedges

€ million

Hedge ineffectiveness

Hedge reserve as at 1 January

Changes in fair value

Transfer to Income

Hedge reserve as at 31 December

2015

     

Interest rate risks

     

Interest rate swaps

-

-

-

-

-

      

Total 2015

-

-

-

-

-

      

2014

     

Interest rate risks

     

Interest rate swaps

-

-1

-

1

-

      

Total 2014

-

-1

-

1

-

The table above presents the pre-tax movements in the cash flow hedge reserve in the financial year. As at year-end 2015, the balance of the cash flow hedge reserve after deduction of deferred tax was practically nil (2014: practically nil).

Credit risk

General

Credit risk is the risk of a loss being incurred because a counterparty is unable or unwilling to meet its obligations. Credit analysis and management are applied throughout the organisation, with the degree of review undertaken varying depending on the magnitude of the credit risk in a transaction.

Surpluses of cash and cash equivalents are placed in the money and capital markets on market terms and conditions with institutions satisfying a list of criteria drawn up by the Management Board, making them approved counterparties, up to the maximum limit set for the party in question. In addition, minimum requirements have been set for the credit ratings of such investments set by credit rating agencies. Changes in investments made by Alliander relating to the cross-border lease contracts require the individual approval of the Management Board. These investments were made for long terms, with the intention of generating sufficient returns to meet future lease obligations. The portfolio of investments on which Alliander is exposed to credit risks consists mainly of deposits and securities. Credit risk is managed through an established credit policy, regular monitoring of credit exposures and application of risk mitigation tools.

Credit quality

Treasury

The creditworthiness of financial institutions from which Alliander has a receivable is monitored using specific credit analyses, CDS data and credit ratings. The greater part of the cash and cash equivalents, as well as cross-border lease investments and deposits and interest rate and currency derivatives, is placed or invested with parties with a credit rating of A or higher. 76% of the cash and cash equivalents (2014: 88%) is placed with parties with an AA rating or higher.

Sales

Alliander is exposed to credit risk; this is the risk of non-payment by customers for services provided. The company has procedures to limit credit exposure to counterparties and to ensure that outstanding positions are covered by collateral, for example, in the form of bank guarantees.

Maximum credit risk

The maximum credit risk is the carrying amount of each financial asset, including derivative financial instruments. The maximum credit risk that Alliander is exposed to in respect of the cross-border lease transactions is $2.6 billion (2014: $3.2 billion). The carrying amount of the associated available-for-sale financial assets included in Alliander's balance sheet amounts to €229 million (2014: €200 million).

Overdue instalments

Receivables which are past due, but for which no provision has been recognised, are without exception trade receivables from normal sales. The provision for bad debts also exclusively concerns trade receivables from normal sales. The ageing analysis of trade receivables was as follows on the balance sheet date (gross amounts):

Ageing analysis of trade receivables

€ million

2015

2014

Not overdue

34

27

0-30 days

23

30

31-90 days

7

6

91-360 days

6

6

> 360 days

4

6

   

Carrying amount as at 31 December

74

75

The movements in the provision for bad debts relating to trade receivables were as follows:

Movements in the provision for bad debt

€ million

2015

2014

Carrying amount as at 1 January

10

13

Utilised (trade receivables written off)

-2

-2

Released from / added to allowance account charged to income

3

-1

Reclassification to assets held for sale

-2

-

   

Carrying amount as at 31 December

9

10

The major part of the provision for bad debts is calculated using a graduated scale based on historical figures. The remainder is based on an assessment of individual accounts. The fair value of collateral obtained relating to overdue accounts and bad debts written off was nil (2014: nil). The other receivables and the prepayments and accrued income do not contain any accounts older than one year.

Liquidity risk

Liquidity risk is the risk that Alliander is unable to obtain the financial resources required to meet its financial obligations on time. In this connection, Alliander regularly assesses the expected cash flows over a period of several years. These cash flows include operating cash flows, dividends, interest payments and debt repayments, replacement capital expenditure and the effects of a change in Alliander's creditworthiness. The aim is to have sufficient funds available at all times to provide the required liquidity. Liquidity and capital requirement planning is performed with a four-year horizon as a minimum. As at year-end 2015 Alliander had a committed credit facility of €600 million (up to 30 June 2018). This facility can be used for general operating purposes, working capital financing or debt refinancing. In addition to this credit facility, which was not drawn on as at year-end 2015, Alliander has an ECP programme totalling €1.5 billion under which an amount of €0.05 billion was outstanding as at year-end (2014: €0.2 billion) and an EMTN programme of €3 billion under which an amount of €1.5 billion was outstanding as at 31 December 2015 (2014: €1.5 billion). To provide information on liquidity risk, the following table shows the contractual terms of the financial obligations (translated at the balance sheet rate), including interest payments.

The liquidity risk arising in connection with possible margin calls related to foreign currency and interest rate management transactions and commodity contracts intended for own use is closely monitored and limited by ensuring diversity in the number of counterparties with which transactions are entered into as well as ensuring that appropriate thresholds and other terms and conditions are included in ISDAs and CSAs (Credit Support Annexes). In 2015, as in the preceding year, Alliander did not receive any margin call requests.

Liquidity risk 2015 and 2014

 

Carrying amount

Contractual cash flows

€ million

 

Less than 1 year

1 - 5 years

Over 5 years

Total

As at 31 December 2015

     

Loans received

     

Principal amounts

-1.661

-470

-326

-868

-1.664

Interest

-

-61

-150

-316

-527

Finance lease obligations

-162

-11

-43

-238

-292

Accounts payable

-133

-133

-

-

-133

Other payables

-377

-370

-

-7

-377

Off balance sheet commitments

     

Operating lease liabilities

-

-24

-36

-5

-65

      
      

Total

-2.333

-1.069

-555

-1.434

-3.058

      

As at 31 December 2014

     

Loans received

     

Principal amounts

-1.763

-158

-747

-862

-1.767

Interest

-

-65

-213

-375

-653

Finance lease obligations

-145

-10

-39

-223

-272

Accounts payable

-103

-103

-

-

-103

Other payables

-379

-367

-

-12

-379

Off balance sheet commitments

     

Operating lease liabilities

-

-20

-34

-2

-56

      

Currency instruments

     

Forward obligations

-16

    

Buy

 

295

-

-

295

Sell

 

-311

-

-

-311

Total

 

-16

-

-

-16

      

Other derivatives

-

-

-

-

-

      

Total

-2.406

-739

-1.033

-1.474

-3.246

Measurement of fair value

The following table lists the financial instruments measured at fair value in descending order of the fair value hierarchy, with the levels of the input data used to measure the fair value defined as follows:

  • level 1, quoted prices (unadjusted) on active markets for comparable assets or liabilities;
  • level 2, inputs other than level 1 quoted prices observable for a particular asset or liability, either directly (i.e. in the form of actual prices) or indirectly (i.e. derived from prices);
  • level 3, inputs not based on observable market data.

Fair value hierarchy

 

31 December 2015

31 December 2014

€ million

Level 1

Level 2

Level 3

Total

Level 1

Level 2

Level 3

Total

Assets

        

Available-for-sale financial assets

-

229

-

229

-

359

-

359

Current derivatives

-

-

-

-

-

2

-

2

         

Total Assets

-

229

-

229

-

361

-

361

         

Liabilites

        

Current derivatives

-

-

-

-

-

18

62

80

         

Total Liabilities

-

-

-

-

-

18

62

80

The hierarchical analysis of the instruments is arrived at as far as possible on the basis of the availability of quoted prices on active markets or other observable inputs. Changes are made only as necessary owing to changes in the availability of the relevant inputs. No such changes were made during the year and there were therefore no transfers from one level of the fair value hierarchy to another.

Methods used for level 2 fair value measurement

Available-for-sale financial assets consist of investments in securities whose fair value is equal to the carrying amount. Part of these assets relates to cross-border lease contracts. The fair value is arrived at by discounting the future cash flows using the interbank interest rate as at the reporting date plus market credit spreads for these or similar investments.

Methods used for level 3 fair value measurement

The amount recognised as a current derivative under the liabilities as at year-end 2014 relates to a CDS associated with an available-for-sale financial asset maturing at the end of May 2015. For further disclosures concerning the measurement and the settlement of this instrument, reference is made to note [8]. The movements in this derivative during the reporting period were as follows:

Reconciliation in level 3 Instruments

€ million

CDS

  

Carrying amount as at 1 January 2015

62

Fair value movements CDS

4

Settlement options

-66

Carrying amount as at 31 December 2015

-

Fair value of other financial instruments

The following table lists the fair values of the financial instruments that are not recognised at fair value but at amortised cost, including the fair value hierarchy levels of the input data used.

Fair value of financial assets and liabilities measured at amortised costs

€ million

Note

31 December 2015

31 December 2014

  

Fair value

Level

Fair value

Level

Non-current assets

     

Other financial assets

7

47

2

44

2

      

Liabilities

     

Non-current liabilities

     

Finance lease liabilities1

19

-230

2

-142

2

Interest-bearing debt:

     

Euro Medium Term Notes

13

-1.236

1

-1.703

1

Other interest-bearing debt

13

-128

2

-180

2

Total non-current liabilities

 

-1.594

 

-2.025

 
      

Short-term liabilities

     

Interest-bearing debt:

     

Euro Medium Term Notes

13

-405

1

-

1

Euro Commercial Paper

13

-46

2

-153

2

Other interest-bearing debt

13

-38

2

-7

2

Total short-term liabilities

 

-489

 

-160

 
      

Total liabilities

 

-2.083

 

-2.185

 

Measurement of fair value

The fair value of these instruments is measured as follows:

Other financial assets: The fair value of loans granted by Alliander is measured on the basis of the incoming cash flows discounted using risk-free interest rates plus credit spreads for these or similar investments. As regards the current portion of these assets, it is assumed that the fair value is more or less the same as the carrying amount.

Loans received: The fair value of the Euro Medium Term Notes is measured on the basis of market prices quoted by Bloomberg. The fair value of the other loans received is measured on the basis of the outgoing cash flows discounted using risk-free interest rates plus credit spreads applicable to Alliander. As regards the current portion of these liabilities, it is assumed that the fair value is more or less the same as the carrying amount.

Finance lease obligations: The fair value of these obligations is measured on the basis of future cash flows discounted using risk-free interest rates plus credit spreads applicable to Alliander.

The fair value of the following financial assets and liabilities is more or less the same as the carrying amount.

  • trade and other receivables;
  • current tax assets;
  • current other financial assets;
  • cash and cash equivalents;
  • trade and other payables;
  • current tax liabilities.

Financial policy

Alliander's financial policy, which is part of its general policy and strategy, is to obtain an adequate return for shareholders and to protect the interests of bondholders and other providers of capital, while maintaining the flexibility to grow and invest in the business. As part of Alliander's financial framework, the subordinated perpetual bond loan issued in 2013 is treated as 50% equity and 50% borrowed capital. This is contrary to IFRS, under which the subordinated perpetual bond loan is considered to be 100% equity.

Finance income and expense

The table below shows the income and expenses in respect of financial instruments recognised in the income statement:

Effect of financial instruments on income statement

€ million

2015

2014

Net result on derivatives held for trading:

  

Fair value changes in currency instruments

-4

18

Fair value changes interest rate derivatives and options

-

-1

Net result on available-for-sale financial assets

29

-36

Net result on financial liabilities at amortised cost:

  

Interest charges on financial liabilities at amortised cost

-76

-86

Interest gains on cash equivalents, loans granted, trade receivables, other receivables and deposits

13

11

Currency translation differences on restricted cash

-30

21

Fees paid and received other than for the calculation of the effective interest rate

-2

-2

Net changes in fair value of cash flow hedges transferred from equity

-

-1

   

Net finance income and expense

-70

-76

   

Impairment of trade receivables

-3

1

Fair value changes CDS

62

80

   

Other operating expenses

59

81

The table below shows the income and expenses in respect of financial instruments recognised directly in equity:

Effect of financial instruments on equity

€ million

2015

2014

Net changes in fair value of cash flow hedges transferred to the income statement

-

1

   

Total recognised in cash flow hedge reserve

-

1

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