Risk management principles and process
Stora Enso is exposed to several financial market risks that the Group is responsible for managing under policies approved by the Board of Directors. The objective is to have cost-effective funding in Group companies and manage financial risks using financial instruments to decrease earnings volatility. The main exposures for the Group are interest rate risk, currency risk, funding risk and commodity price risk, especially for fibre and energy.The Stora Enso Group Financial Risk Policy governs all financial transactions in Stora Enso. This policy and any future amendments take effect when approved by the Board of Directors. All policies covering the use of financial instruments must comply with that. Stora Enso Treasury Internal Risk Policy refines the guidance into more detailed instructions. The major financial market risks are detailed below. Group’s joint operations companies operate under their own financial risk policies, which may not be fully similar to Group’s policies.
Interest rate risk
Fluctuations in interest rates affect the interest expense of the Group. The Group’s aim is to keep interest costs stable. Group’s duration is capped to the Group’s average loan maturity. Duration above average loan maturity is approved by the Board of Directors. As of 31 December 2014, a one percentage point parallel change up or down in interest rates impacts annual net interest expenses by EUR 6 (EUR 12) million, assuming that the duration and the funding structure of the Group stays constant during the year. This simulation calculates the interest effect of a 100 basis point parallel shift in interest rates on all floating rate instruments from their next reset date to the end of the year. In addition, all short-term loans
maturing during the year are assumed to be rolled over, thus being artificially prolonged from maturity to year end using the new higher interest rate.
The total Group floating rate net interest-bearing liability position, excluding cash and cash equivalents but including floating legs of interest rate swaps, is some EUR 0.6 (EUR 1.3) billion. The average interest reset period for Group net interest-bearing liabilities, including all interest rate derivatives but excluding cash and cash equivalents, is some 3.4 (3.4) years. A one percentage point parallel change up or down in interest rates would also result in fair valuation gains or losses of some EUR 14 (EUR 22) million, presented under Other Financial Items, coming mainly from interest rate swaps not qualifying for fair value hedge accounting. Note 27 Derivatives summarises the nominal and fair values of the outstanding interest rate derivative contracts.
Currency transaction risk
The Group is exposed to currency risk arising from exchange rate fluctuations against its reporting currency euro. Currency transaction risk is the impact of exchange rate fluctuations on the Group Income Statement, which is the effect of currency rates on expected future cash flows. The Group policy to mitigate this is to hedge 50% of the forecast major currency cash flows for 12 months.
The principal foreign exchange transaction exposure comprises both the geographical location of Stora Enso production facilities and the sourcing of raw material and sales outside the euro area, mainly denominated in Swedish krona, US dollars and British pounds sterling. The table below shows the sales and costs by invoicing currency.
Sales and Costs in Main Currencies
Year ended 31 December
2014 2013
EUR million EUR USD SEK GBP Other Total EUR USD SEK GBP Other Total
Sales 5 947 1 565 1 100 538 1 063 10 213 6 270 1 440 1 180 550 1 123 10 563 Costs -5 235 -494 -1 980 -98 -1 327 -9 134 -5 580 -400 -2 220 -70 -1 156 -9 426
Net amount 712 1 071 -880 440 -264 1 079 690 1 040 -1 040 480 -33 1 137
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33
Operative Foreign Currency Exposure
As at 31 December 2014 As at 31 December 2013
EUR million SEK/EUR EUR/USD EUR/GBP SEK/USD SEK/GBP BRL/USD SEK/EUR EUR/USD EUR/GBP SEK/USD SEK/GBP BRL/USD
Estimated annual net cash flow exposure 842 785 336 332 126 - 775 642 378 305 155 - Cash flow hedges next 12 months -456 -408 -176 -182 -68 - -448 -281 -187 -167 -76 -
Estimated Annual Net Cash Flow Exposure,
Net of Hedges 386 377 160 150 58 - 327 361 191 138 79 -Hedging Percentage as at 31 December for
Next 12 Months 54% 52% 52% 55% 54% - 58% 44% 49% 55% 49%
-Net trade receivables and payables exposure 68 84 24 32 14 124 95 19 55 25 20 72
Currency hedges -105 -82 -48 -40 -17 -50 -110 -87 -58 -27 -20 -18
Statement of Financial Position Exposure,
Net of Hedges -37 2 -24 -8 -3 74 -15 -68 -3 -2 - 54 Estimated Annual Operative Exposure,
Net of Hedges 349 379 136 142 55 74 312 293 188 136 79 54
Estimated Currency Effects of Strengthening by 10% of the Domestic Currencies
As at 31 December 2014 As at 31 December 2013
EUR million SEK/EUR EUR/USD EUR/GBP SEK/USD SEK/GBP BRL/USD SEK/EUR EUR/USD EUR/GBP SEK/USD SEK/GBP BRL/USD
The table below presents the estimated net operative foreign currency exposure for the main currency pairs for the next 12 months and the related hedges in place as at 31 December 2014 and 31 December 2013, respectively. The net trade receivables and payable exposures include foreign currency exposures generated by external and intercompany transactions, in line with requirements of
IFRS 7, although in practice mainly external exposures have been hedged through currency hedges. The currency pairs have been presented so that the first in the pair is the domestic currency and the second is the foreign currency. A positive amount of exposure in the table represents an estimated future receivable of a foreign currency amount.
The table below includes the estimated effect on annual EBITDA of a 10% strengthening in the domestic currencies versus the foreign currencies, measured against year-end closing rates. A 10% decrease in the exchange rates would have approximately an equally opposite impact. A negative amount in the table reflects a potential net loss in the Income Statement or Equity and, conversely, a positive amount reflects a potential net gain. In practice, the actual foreign currency results may differ from the sensitivity analysis below.
The calculation includes currency hedges and assumes that no changes other than a single currency exchange rate movement have taken place. The currency effects are based on estimated operative foreign currency flows for the next twelve months, hedging levels at the year end and the assumption that the currency cash flow hedging levels and all other variables will remain constant during the next twelve months. Hedging instruments include foreign exchange forward contracts and foreign exchange options. Indirect currency effects with an impact on prices and product flows, such as a product becoming cheaper to produce elsewhere, have not been considered in this calculation.
The table below presents the financial foreign currency exposure for the main currency pairs for the next 12 months and the related hedges in place as at 31 December 2014 and 2013, respectively. Net debt includes loan payables and related interest rate derivatives, net of loan receivables and cash and cash equivalents. The currency derivatives hedge mainly financial exposures in the Statement of Financial Position and from time to time also forecast cash flows not qualifying under hedge accounting. These forecast cash flows are not included in the below table.
The currency pairs have been presented so that the first in the pair is the domestic currency and the second is the foreign currency on a net basis. Net basis means that in table below SEK/EUR column includes both EUR exposures in SEK based companies and with
opposite sign SEK exposures in EUR based companies. A negative amount of exposure in the table represents a net payable of a foreign currency amount.
Additionally, the table includes the estimated effect on the Income Statement of a 10% strengthening in the domestic currencies versus the foreign currencies, measured against year-end closing rates. A 10% decrease in the exchange rates would have approximately an equally opposite impact. A negative amount in the table reflects a potential net loss in the Income Statement and, conversely, a positive amount reflects a net potential gain. In practice, the actual foreign currency results may differ from the sensitivity analysis below.
Financial Foreign Currency Exposure and Estimated Currency Effects in Income Statement
As at 31 December 2014 As at 31 December 2013
EUR million SEK/EUR EUR/USD PLN/ EUR SEK/USD CNY/USD EUR/CNY BRL/USD SEK/EUR EUR/USD PLN/ EUR SEK/USD CNY/USD EUR/CNY BRL/USD
Net debt excluding hedges -728 -150 -232 45 -278 1 -53 -461 -330 -281 140 -255 - -93
Currency hedges 668 6 - -38 - 104 - 847 319 - -136 - 162
-Net Financial Exposure -60 -144 -232 7 -278 105 -53 386 -11 -281 4 -255 162 -93 Effects based on 10%
Strengthening in Domestic
Currencies 6 14 23 -1 28 -11 5 -39 1 28 - 26 -16 9
The foreign exchange exposure of the Group to Russian rouble comes mainly from EUR denominated net debt of Russian subsidiaries which amounted to EUR 38 (EUR 60) million at year end. During 2014 the foreign exchange impact from retranslation of these balances resulted in losses in Income Statement of EUR 16 (EUR 9) million due to depreciation of Russian rouble against EUR by 60% (12%).
Currency translation risk
Translation risk is the danger that fluctuations in exchange rates will affect the value of Stora Enso’s net foreign currency denominated assets and liabilities. Translation risk is reduced by funding assets, whenever economically possible, in the same currency as the asset.
The Statements of Financial Position of foreign subsidiaries, equity accounted investments and foreign currency denominated available-for-sale investments are translated into euros using exchange rates prevailing at the reporting date, thus exposing consolidated Group equity to fluctuations in currency rates. The resulting translation differences, along with other movements such as the translation rate difference in the Income Statement, are recorded directly in Shareholders’ Equity, though these cumulative differences materialise through the Income Statement on the disposal, in whole or in part, of the foreign entity. The next table shows the translation exposure on equity before and after hedges.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33
The table below shows the effect on consolidated equity of a +/- 10% change in the value of the euro against the US dollar, Swedish krona, Chinese Renminbi and Brazilian real at 31 December. The calculation includes the effects of currency hedges of net investments in foreign entities and assumes that no changes take place other than a single currency exchange rate movement on 31 December each year. The exposures used in the
calculations are the foreign currency denominated equity and the hedging levels at 31 December. The hedging instruments are foreign currency forward contracts, currency options and foreign currency denominated borrowings. Full details of actual CTA movements and hedging results are given in Note 28 Cumulative Translation Adjustment and Equity Hedging.
Consolidated Equity: Currency Effects before Tax of a +/- 10% Movement
As at 31 December 2014 As at 31 December 2013
EUR million HedgesBefore Hedges Net Impact HedgesBefore Hedges Net Impact
10% change in the EUR/SEK rate 35 -4 31 117 -53 64
10% change in the EUR/USD rate 91 -29 62 56 - 56
10% change in the EUR/CNY rate 73 - 73 27 - 27
10% change in the EUR/BRL rate 61 - 61 61 - 61
Total Effect from Above 260 -33 227 261 -53 208
Translation Risk and Hedges: 2013
As at 31 December
EUR million Euroarea USD area2) Sweden China Poland Brazil Other Total
Translation Exposure on Equity 1 965 561 1 169 268 310 606 334 5 213
EUR/USD hedges1) 525 - -525 - - - -
-Translation Exposure after Hedges 2 490 561 644 268 310 606 334 5 213
1) SEK denominated bonds classified as hedges of investments in foreign assets.
2) Includes the joint operation Montes del Plata in Uruguay, which has USD as its functional currency.
Translation Risk and Hedges: 2014
As at 31 December
EUR million Euroarea USD area3) Sweden China Poland Brazil Other Total
Translation Exposure on Equity 1 827 908 352 726 359 607 291 5 070
EUR/SEK hedges1) 37 - -37 - - - -
-EUR/USD hedges2) 288 -288 - - - - -
-Translation Exposure after Hedges 2 152 620 315 726 359 607 291 5 070
1) SEK denominated bonds classified as hedges of investments in foreign assets. 2) USD denominated bonds classified as hedges of investments in foreign assets.
Liquidity and refinancing risk
Funding risk arises from the difficulty of obtaining finance for operations at a given point in time. Stora Enso’s funding policy states that the average maturity of outstanding loans and committed credit facilities covering short-term borrowings should be at least four years and not more than seven years. The policy further states that the Group must have committed credit facilities to cover planned funding needs, the current portion of long-term debt, commercial paper borrowings and other uncommitted short-term loans.
Refinancing risk, or the risk that maturing debt could not be refinanced in the market, is mitigated by Stora Enso’s target of maintaining an even maturity profile of outstanding debt. The table below shows Group contractual undiscounted interest-bearing financial liabilities, to be settled on a net cash basis, classified under principal headings based on the remaining period to contractual maturity at the reporting date. Forward rates were used at point of estimation for contractual finance charges.
Contractual Maturity Repayments of Interest-bearing Liabilities, Settlement Net: 2014
EUR million 2015 2016 2017 2018 2019 2020+ Total
Bond loans 405 535 287 572 539 244 2 582
Loans from credit institutions 162 133 329 111 107 572 1 414
Financial lease liabilities 8 7 27 27 - - 69
Other non-current liabilities 36 29 4 5 - 2 76
Non-current Debt including Current Portion 611 704 647 715 646 818 4 141
Less fair value adjustments to carrying amounts -4 2 3 7 6 13 27
Estimated contractual finance charges 185 148 122 104 74 340 973
Contractual Repayments on Non-Current Debt 792 854 772 826 726 1 171 5 141
Short-term borrowings, carrying amounts 487 - - - 487
Contractual finance charges 11 - - - 11
Bank overdrafts 2 - - - 2
Total Contractual Repayments at 31 December 2014 1 292 854 772 826 726 1 171 5 641
Contractual Maturity Repayments of Interest-bearing Liabilities, Settlement Net: 2013
EUR million 2014 2015 2016 2017 2018 2019+ Total
Bond loans 287 492 773 305 572 748 3 177
Loans from credit institutions 236 109 104 299 78 572 1 398
Financial lease liabilities 8 8 7 27 27 - 77
Other non-current liabilities 13 43 25 5 5 2 93
Non-current Debt including Current Portion 544 652 909 636 682 1 322 4 745
Less fair value adjustments to carrying amounts 7 -5 -12 3 7 18 18
Estimated contractual finance charges 224 190 157 113 91 354 1 129
Contractual Repayments on Non-Current Debt 775 837 1 054 752 780 1 694 5 892
Short-term borrowings, carrying amounts 510 - - - 510
Contractual finance charges 9 - - - 9
Bank overdrafts 12 - - - 12
Total Contractual Repayments at 31 December 2013 1 306 837 1 054 752 780 1 694 6 423
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33
Financial transactions counterparty
credit risk
Financial counterparty risk is Stora Enso’s exposure on financial contracts arising from a deterioration in counterparties’ financial health. This risk is minimised by:
• entering into transactions only with leading financial institutions and with industrial companies that have a good credit rating; • investing in liquid cash funds only with financially secure
institutions or companies;
• requiring parent company guarantees when dealing with any subsidiary of a rated company.
Ratings for external counterparties should be above or equal to A- for banks and BBB for industrial companies dealing in commodities, and ISDA or equivalents are signed with the counterparty. Any other counterparty not meeting the requirements presented above has to be approved by the CEO.
The following table shows the balance of major financial institutions counterparties at the reporting date using Standard and Poor’s credit rating symbols.
A subordinated Vendor Note issued by the Altor subsidiary Papyrus Holding AB, a non-rated company, is classified as a non-current loan receivable and had at year end a carrying value of EUR 49 (EUR 47) million and a fair value of EUR 52 (EUR 49) million. The valuation of the note requires management judgement, and hence it is subject to uncertainty.
Raw material and energy price risk
Group earnings are exposed to commodity and energy price volatility. Financial energy hedges are part of the total energy price risk management in the Group, whilst commodity risks are measured and hedged if economically possible. A 10% movement
The greater part of Group energy price risk has been covered by entering into long-term physical fixed price purchase agreements. The Group also has a 14.8% holding, valued at EUR 437 (EUR 352) million, in PVO, a privately owned group of companies in the energy sector. The value of these shares is dependent on energy prices and discussed in more detail in Note 14 Available-for-Sale Investments. In addition, in an effort to mitigate the other commodity risk exposures, the Group has major associated interests in forest companies in Finland and Sweden thus if prices increase for fibre in these countries, so do the profits from these Group interests.
Share price risk
Stora Enso utilises total return swaps (TRS) to partially hedge exposures to changes in the price of share awards granted under the Long Term Incentive programmes (see Notes 6 Staff Costs and 21 Employee Variable Compensation and Equity Incentive Schemes). While these TRS instruments allow the Group to partially stabilise future cash flows related to future share awards, they result in certain market risks relating to Group share price developments. Group TRS instruments do not qualify for hedge accounting, and periodic changes to their fair value are recorded in the Income Statement.
As of 31 December 2014 there were TRS instruments outstanding covering 3 500 000 (4 000 000) underlying Stora Enso Oyj R shares recorded at a net fair value asset of EUR 1 (EUR 2) million, as disclosed in Note 27 Derivatives. A 10% increase in the share price of ordinary R shares would result in a gain in the net fair value of the TRS instruments of EUR 3 (EUR 3) million, based on a closing share price at year end of EUR 7.44 (EUR 7.30) on NASDAQ OMX Helsinki. The Group has certain investments in publicly traded securities (Note 14 Available-for-Sale Investments). The market value of these equity investments was EUR 30 (EUR 10) million at the year end. Market value changes in these investments are recorded, after taxes, directly under Shareholders’ Equity in the Available-for-Sale Reserve.
Customer credit risk
Customer credit risk is Stora Enso’s exposure to contracts arising from deterioration in the financial health of customers. Credit External Counterparty Exposure
As at 31 December
EUR million Rating 2014 2013
Company A A- 18 27
Capital risk management
Stora Enso’s debt structure is focused on capital markets, whereas banks are primarily used to provide back-up facilities. Group objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, as well as to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may, subject to shareholder approval as appropriate, vary the dividend paid to shareholders, buy its own shares in the market, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors its capital on the basis of a target debt-to-equity ratio of 0.80 or less, indicating a strong financial position, and financial flexibility. Debt-to-equity ratios are shown below:
Capital Structure
As at 31 December
EUR million 2014 2013
Interest-bearing liabilities 4 894 5 501
Interest-bearing assets 1 620 2 310
Interest-bearing Net Debt 3 274 3 191 Equity Attributable to Owners
of the Parent 5 070 5 213 Debt / Equity Ratio 0.65 0.61
In joint operation Montes del Plata there is a financial covenant related to the debt-to-assets ratio which has been complied with during the reported years.
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