Corporate finances, financing and risk management
The main long-term goals for our financial guidance are:
- Good cost-effectiveness and continuous improvement of productivity in order to keep service prices at a moderate level. Our goal is to keep our cost-effectiveness on a par with the best in Europe and grid pricing in the best 25 per cent of the comparison group.
- A high credit rating to ensure the availability of diversified long-term financing, low financing costs and good debt-service capacity.
- Creating shareholder value by keeping the companys adjusted income at the level permitted by regulation and by paying dividends in compliance with shareholders profit targets.
We aim to guarantee the stable pricing development of our services through long-term planning of the companys finances, capital expenditure, risk management and financing. Short-term financial targets do not guide our investment decisions or other decisions. The companys consistently high rankings in annual international comparison studies on the cost-effectiveness and quality of grid operators, and the international certification for the management of physical assets (ISO 55001) granted to Fingrid serve as proof of the cost-effectiveness of our operations and our effective management of costs and other risks related to grid assets.
We set the pricing for our services one year at a time, striving for development that is as consistent as possible, regardless of uncertainty in the markets. However, major volatility on the market may necessitate price adjustments even within a single year. A considerable share of the income collected by Fingrid is used for domestic investments. In addition to this, other types of expenditure covered by the companys income include services procured from suppliers, payroll, compensations for landowners and financers, taxes and, finally, reasonable dividends to the owners, i.e. the State of Finland and domestic pension and insurance companies. In managing the companys finances, the Corporate Finance and Financing Principles approved by Fingrids Board of Directors are complied with.
Groups turnover was EUR 586.1 (600.2) million. Grid service income increased to EUR 382.4 (333.0) million, as a result of the change in grid pricing enacted at the start of the year and due to the growth in electricity consumption. Electricity consumption totalled 85.1 (82.5) terawatt hours. Fingrid transmitted 68.6 (67.9) terawatt hours of electricity in its grid, which represents 77.5 (77.1) per cent of all electricity transmitted in Finland. Imbalance power sales amounted to EUR 153.9 (137.1) million. The growth in imbalance power sales resulted from an increase in the volume of imbalance power and higher imbalance power prices. Cross-border transmission income from the connection between Finland and Russia increased to EUR 24.0 (11.2) million. This was due to the new dynamic tariff structure that was introduced as well as to increased imports from Russia. Fingrids congestion income from connections between Finland and Sweden declined to EUR 37.5 (86.8) million due to weakened hydrological conditions, which significantly decreased the number of congestion hours. Fingrids congestion income from the links between Finland and Estonia amounted to EUR 2.4 (4.2) million. Congestion income will no longer be reported in Fingrids turnover as of the beginning of 2016. Other operating income totalled EUR 12.7 (5.2) million. The growth in other operating income mainly resulted from the EUR 6.3 million in recognised congestion income, in compliance with the regulation concerning the costs from maintaining cross-border capacity and countertrade.
The Groups total costs amounted to EUR 442.2 (418.6) million. Imbalance power costs increased from the previous years level to EUR 121.7 (98.2) million, due to the increase in the volume and price of imbalance power. Loss power costs amounted to EUR 57.6 (68.6) million. The declining loss power costs have been affected by the lower price of loss power procurement and the slightly lower volume of loss power. The average price of loss power procurement was EUR 43.87 (48.22) per megawatt hour. The cost of reserves to safeguard the grids system security decreased to EUR 50.5 (54.7) million. The reason for the decreased cost was an interruption in the procurement of the automatic frequency control reserve until August, as well as the lower procurement cost of frequency controlled reserves for normal operation and disturbances due to high availability on the markets. Depreciation amounted to EUR 99.2 (94.1) million. Grid maintenance costs grew to EUR 24.1 (19.2) million. The maintenance costs were increased by the periodical felling of trees around substations and the trimming of trees at the edges of transmission line right-of-ways. Personnel costs increased as the payroll expanded, due to new operations and increased statutory duties and due to higher employer contributions in additional personnel expenses, and amounted to EUR 28.6 (25.8) million.
The Groups operating profit was EUR 192.0 (162.6) million. To recognise changes in the fair value of electricity derivatives and the currency derivatives related to capital expenditure and other operating expenses, EUR 35.4 (-24.3) million was recorded in operating profit.
Net financial costs in accordance with IFRS were EUR 18.7 (33.7) million, including a change of EUR -0.3 (-13.3) million in the fair value of financial derivatives.
The Groups profit before taxes was EUR 173.9 (129.3) million. The biggest differences from the last year are explained by changes in the market value of derivatives (EUR +72.7 million), the growth in grid service income (EUR +49.4 million), and a change in the reporting of congestion income (effect EUR -84.6 million). The profit for the year was EUR 138.7 (103.6) million. The equity to total assets ratio increased and was 36.4 (33.5) per cent at the end of the review period.
The parent companys turnover was EUR 581.4 (592.4) million, profit for the financial year EUR 103.9 (123.7) million and the distributable funds EUR 176.0 million.
By the companys own calculations, the return according to the regulatory model that governs grid operations amounts to a deficit of around EUR 40 million for 2016.
Profit before taxes
Our tax strategy is to be a responsible and exemplary tax payer. In accordance with our main principle, we pay and report the companys taxes and tax-based payments on time and without the use of tax planning. Our goal is for the companys taxes and tax-based payments to reconcile with the companys operations in terms of time. Operational tax matters are handled by the Groups finance function, which reports to the Groups Chief Financial Officer. In addition to our in-house resources, we also use external experts when necessary for assistance in tax matters and in making decisions. In handling tax matters, we comply with applicable legislation and regulations, and we communicate with the tax authorities in a professional manner in keeping with Fingrids values.
Direct economic value generated and distributed (€)
|Fingrid's tax footprint, EUR||2016||
|Unemployment insurance contributions||853,024||482,819||580,287|
|Social security contributions||460,905||438,785||436,274|
|Real estate tax||
|Electricity tax on auxiliary power||
|Taxes payable total||27,522,224||32,131,799||21,656,685|
|Taxes to be collected and remitted|
|Value added tax, net remitted||50,406,643||38,876,622||36,847,515|
|Electricity tax (incl. emergency-preparedness contribution)||38,471,425||36,245,597||33,508,431|
|Taxes to be remitted total||95,846,574||81,898,216||76,881,465|
The summary includes taxes and charges that Fingrid is under legal obligation to pay or to collect the tax or payment in question. However, taxes that are included in the purchase price of a product or service and which Fingrid is not under legal obligation to declare are not included in the summary data. For 2016, all taxes and similar charges have been paid in Finland. The Group did not have any operations outside Finland during the periods presented here.
Foremost uncertainty factors and risks to Fingrid and society
Since the company plays a significant role in Finnish society, the impact of risks is assessed from both the companys and societys perspective. The following have been identified as strategic risks:
Strategic risks - risks to society and to Fingrid
One of the companys biggest business risks and the biggest risk where society is concerned is a major disturbance related to the functioning of the power system. A widespread disturbance in the power system may be caused by several simultaneous faults in the grid or in electricity production. A disturbance can also result from the combination of a technical fault and human operating error, from an unexpected meteorological phenomenon, work error, accident, vandalism or deliberate intrusion in critical IT systems. The extent or duration of the disturbance can be increased by a severe fault, appearing in the companys operation control system or other system, that hinders the operation of the grid. A major disturbance can cause significant financial and physical damage to Fingrid and society in general. Through capital investments in the transmission grid and reserve power, we are prepared for a widespread disturbance affecting Finland or the Nordic power system. We develop the operations together with other transmission system operators. In our strategy, we focus on the diverse utilisation of the operation control system, expedited disturbance clearing and management of power shortages. We prepare for disturbances through continuity management, procedural guidelines, continuity plans and exercises, and by building up various reserves. Fingrid limits its financial claims liability in all cases of disturbances through contracts and insurance policies.
A poorly functioning electricity market is a significant risk for Fingrid and society. The reasons that may lead to the materialisation of this risk are a lack of regional energy policy co-ordination, market-distorting state subsidies and problems in the formation of the price of electricity. The impacts can be seen as a lack of investments and the exit of adjustable capacity from the markets due to unprofitability. In electricity market disturbances, a price cannot be calculated for electricity on the electricity exchange to guide production plants and electricity consumption. Efforts are being made to manage the risk by promoting market integration on the domestic and Nordic level. Promoting demand-side management, developing smart grid solutions for the retail market, increasing cross-border transmission capacity and carrying out investments that make it possible to maintain Finland as a single bidding area reduce the risks faced by the electricity market.
From the point of view of society and Fingrid, the most significant environmental risks are related to environmental damage and the failure to anticipate the environmental obligations set for the companys operations. We consider fuel and oil leaks and tank and transformer fires to be the most concrete risks. The key contingency measures for these environmental risks are proactive assessment of environmental impacts, monitoring of changes in legislation, prevention of accidents by technical means, contractual terms related to environmental issues and auditing.
Electrical and occupational safety risks are linked to the electrical safety of the transmission grid, especially in connection with construction and repair work. Electrical safety risks may also affect by-standers. The reason for a risk being realised may be, for example, human error or an accident close to live components, an error occurring in construction work, damage or vandalism to live structures or carelessness close to live components. Consequences of the materialisation of such a risk can include a severe hazard to people, serious injury, periods of sick leave, inability to work, disability or death. An accident may also cause electricity outages. We constantly improve the safety of the transmission grid by promoting safe ways of working and developing, for example, technical solutions, work methods, skills and communications.
Risks to society
Investments can sometimes take place at the wrong time. The reasons for incorrect timing of capital investments may be, for example, changes in the overall economic situation, regulation, or in electricity consumption and production, a postponement of a permit process, lack of resources or strike. Changes in energy policy goals can affect investments. Unsuccessful timing may cause restrictions in the electricity market whereby the market fails to operate efficiently. We carefully plan and build key projects to strengthen the cross-border transmission connections and the grid, and take into account the long-term effects on the market through regularly updated grid plans. Co-operation with customers, Nordic transmission system operators, other stakeholders and cross-national decision-making bodies reduces the risk of incorrect timing.
Long-term transmission capacity restrictions may be caused by, for example, technical failures or limitations related to system security and other operators. Restrictions and outages in power transmission may cause financial harm to customers and society. We manage the risk by securing the critical parts of the transmission grid and cross-border connections and by means of efficient outage planning. We maintain disturbance-clearing readiness by ensuring know-how and developing back-up systems. For example, outages are timed so that they have minimum financial harm to society.
A problem or error in the production of a service or the functioning of technology can cause significant harm to a customer. The consequences may be seen as a disturbance in the services produced by the power system or in the electricity market. Errors in Fingrids guidelines or decisions may also cause harm. For the customer, this harm may take the form of loss of income, material damage, personal injury, or unnecessary investments. Fingrid has limited its liability in the grid service contract in situations where the customer may have suffered harm.
Risks to Fingrid
Fingrids operations are subject to official regulation and supervised by the Energy Authority. Risks related to the unfavourable development of official regulation, such as changes in Finnish or European regulation or legislation, can weaken the companys financial position or its opportunities to pursue the objectives related to the development of the electricity market. We aim to establish effective co-operation and interaction models with the various stakeholders and to contribute actively to the reports and working groups of authorities and to increase understanding of grid operations.
Financing risks include currency risks, interest rate risks, commodity price risks, liquidity and refinancing risks, and credit risks. Financing risks can be caused by a major deviation in our operating environment or business, disturbances in the capital and money markets, by the realisation of counterparty risks in terms of derivatives or investments, by the realisation of credit risks in operations or disturbances in payment transactions. Liquidity risks can be caused by, e.g., an unexpected increase in market-based costs or an unexpected decrease in income. The goal is to limit risks through internal control, a high and stable credit rating, and a diverse financing structure with an even maturity profile. We aim to restrict unanticipated increases in costs or decreases in income by enhancing the Groups financial guidance and forecasting, and by assessing its financial latitude. We use derivative contracts to hedge against changes in the price of electricity. The counterparty risk related to obligations of parties having a contractual relationship with Fingrid is limited contractually, by defining limits and by regularly monitoring the financial position of the counterparties. More information about financing risks can be found in section 3.3. of the consolidated financial statements.
Personnel risks concern the maintenance of expertise. We strive to limit personnel risks by the companys strategic long-term personnel planning, targeted training programmes for personnel and high-quality communication with stakeholders. Developing deputy systems and occupational safety is part of our personnel planning. We strive to develop competence in the energy industry.
ICT risks can materialise as a result of an accident in ICT hardware facilities, long-term inoperability of telecommunications or a serious ICT system failure. Such a situation may also be caused by a work error or breach of data security. The incident may immediately and significantly harm the companys operations and also affect societys functioning if the grids operation or the electricity markets functioning are disturbed. We prepare for these risks through sufficient and solid ICT expertise and by ensuring that the operations are secured in terms of hardware facilities, telecommunications and systems. We also ensure sufficient expertise in terms of service providers. We have drawn up continuity plans for the most critical systems and we monitor and anticipate possible data-security and cyber-security threats.
Asset risks cover significant damage to Fingrids assets, such as widespread failures or failures rendering significant assets beyond repair. A permanent failure of significant assets, such as the grid, a reserve power plant or a submarine cable, may cause extensive damage. Other causes of damage may include other significant and unanticipated events such as storms, protests or war. We manage asset risks through grid safety planning, geographical diversification, preventive maintenance management, comprehensive insurance policies for the key grid components, detailed specifications for projects and maintenance management, quality control and the use of proven technology and suppliers.
Reputation risks can be caused by, for example, serious disturbances or accidents, changes in prices, redemption of land areas or delayed grid investments. Serious accusations directly linked to the companys operations or various reputation risks in the media may increase critical discussion about the companys operations. We strive to reduce these risks by means of effective risk and change management as well as responsible, transparent and impartial operations, high-quality communication and active stakeholder dialogue.
Fingrids associated companies are long-term holdings and are covered by the companys overall risk management system. The associated companies only slightly increase the risks to Fingrid Oyjs financial position, result and cash flow, as their operations are minor compared to the operations of the parent company. Risks related to associated companies include unfavourable regulatory development, incorrect timing of investments, financing risks, poorly functioning electricity market and ICT loss.