Financial risk management
The information below is from the Annual Report 2016.
Foreign exchange risk
Foreign exchange exposures are monitored at the Business level and then netted and hedged at Group level. All fixed sales and purchase contracts are hedged. The estimated future commercial exposures are evaluated by the Businesses, and the level of hedging is decided by the Board of Management. Hedge accounting in accordance with IFRS is applied to most of the hedges of these exposures. The hedges cover such time periods that both the prices and costs can be adjusted to new exchange rates. These periods vary among Group companies from one month to two years. The Group also hedges its position of the statement of financial position, which includes receivables and payables denominated in foreign currencies. The Group does not expect significant losses from foreign exchange rate changes in 2017. The cancellation of orders could lead to ineffective currency hedge. Approximately 67% (64) of sales and 59% (57) of operating costs in 2016 were denominated in euros. The Group’s profits and competitiveness are also indirectly affected by the home currencies of its main competitors: USD, GBP, JPY and KRW.
The instruments, their nominal values, and currency distribution used to hedge the Group’s foreign exchange exposures are listed in Note 27. Derivative financial instruments.
Some Group companies in countries whose currencies are not fully convertible like Brazil have unhedged, intercompany loans nominated either in EUR or USD. Total amount of the loans is EUR 109 million (96).
Since Wärtsilä has subsidiaries and joint ventures outside the euro zone, the Group’s equity, goodwill and purchase price allocations are sensitive to exchange rate fluctuations. At the end of 2016, the net assets of Wärtsilä’s foreign subsidiaries and joint ventures outside the euro zone totalled EUR 1,071 million (1,036). In addition, goodwill and purchase price allocations from acquisitions nominated in foreign currencies amounted to EUR 613 million (591). In 2016, the translation differences recognised in OCI mainly come from changes in GBP exchange rate.
IFRS hedge accounting has been applied to EUR 1,468 million (1,837) currency forwards. A 10% change in the exhange rates would cause from these currency forwards an approximately EUR 109 million (147) net of tax impact on the equity. In 2016, EUR -16 million (-23) fair value adjustments related to cash flow hedges were recognised in equity. EUR -58 million (-21) of the fair value adjustments were transferred from equity to the statement of income as net sales or operating expenses during 2016. In 2016, the result from ineffective portion of the cash flow hedges was EUR -8 million (-1), which was booked in financial items and specified in Note 10. Financial income and expenses.
Interest rate risk
Wärtsilä is exposed to interest rate risk primarily through market value changes to the net debt portfolio (price risk) and also through changes in interest rates (re-fixing on rollovers). Wärtsilä hedges interest rate exposure by using derivative instruments such as interest rate swaps, futures and options. Changes in the market value of these derivatives are recognised directly in the statement of income. Interest rate risk is managed by constantly monitoring the market value of the financial instruments and by using sensitivity analysis.
Interest-bearing loan capital at the end of 2016 totalled EUR 629 million (724). The average interest rate was 1.3% (1.3) and the average re-fixing time 25 months (20). At the end of 2016, a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 15 million (15) increase/decrease in the value of the net debt portfolio, including derivatives.
Wärtsilä spreads its interest rate risk exposure by taking both fixed and floating rate loans. The share of floating rate loans as a proportion of the total debt can vary between 30–70%. At the end of 2016, the fixed rate portion of total loans was 69% (58) after adjustment for interest rate derivatives. A one percentage point change in the interest level would cause a EUR 2 million (3) change in the following year’s interest expenses of the debt portfolio, including derivatives.
Additional information related to loans can be found in Note 18. Financial assets and liabilities by measurement category and Note 25. Financial liabilities.
Liquidity and refinancing risk
Wärtsilä ensures sufficient liquidity at all times by efficient cash management and by maintaining sufficient committed and uncommitted credit lines available.
The existing funding programmes include:
• Committed Revolving Credit Facilities totalling EUR 640 million (629).
• Finnish Commercial Paper programmes totalling EUR 800 million (800).
The average maturity of the non-current debt is 43 months (43) and the average maturity of the confirmed credit lines is 33 months (33). Additional information in Note 25. Financial liabilities.
At the year end, the Group had cash and cash equivalents totalling EUR 472 million (334) as well as EUR 640 million (679) non-utilised committed credit facilities. On 31 December 2016, Commercial Paper Programme was not utilised. On 31 December 2015, utilisation amounted to EUR 130 million. Wärtsilä minimises its refinancing risk by having a balanced and sufficiently long loan portfolio.
The responsibility for managing the credit risks associated with ordinary commercial activities lies with the Businesses and the Group companies. Major trade and project finance credit risks are minimised by transferring risks to banks, insurance companies and export credit organisations.
The credit risks related to the placement of liquid funds and to trading in financial instruments are minimised by setting explicit limits for the counterparties and by making agreements only with the most reputable domestic and international banks and financial institutions.
The Group companies deposit the maximum amount of their liquid financial assets with the centralised treasury when local laws and central bank regulations allow it. The Group’s funds are placed in instruments with sufficient liquidity (current bank deposits or Finnish Commercial Papers) and rating (at least single-A rated instruments or other instruments approved by the Group’s CFO). These placements are constantly monitored by the Group Treasury, and Wärtsilä does not expect any future defaults from the placements.
Equity price risk
Wärtsilä has equity investments totalling EUR 12 million (11) in power plant companies, most of which are located in developing countries and performing well according to expectations. Additional information in Note 16. Available-for-sale financial assets.
Capital risk management
Wärtsilä’s policy is to secure a strong capital base to keep the confidence of investors and creditors and for the future development of the business. The capital is defined as total equity including non-controlling interests and net interest-bearing debt. The target for Wärtsilä is to maintain gearing below 0.50 and to pay a dividend equivalent to 50% of operational earnings per share.