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Home Annual Statements Financial Statements 2013 Notes to the consolidated financial statements Management of financial and tax risks

Management of financial and tax risks
Financial risk factors

Due to the nature of its activities, Schiphol Group faces a variety of risks including market risk, counterparty risk and liquidity risk. The financial risk management programme (which is part of Schiphol Group’s overall risk management programme) focuses on the unpredictability of the financial markets and minimising any adverse effects this may have on Schiphol Group’s financial results. Schiphol Group uses derivative financial instruments to hedge certain risks. Financial risk management is carried out by the central treasury department (Corporate Treasury) and is part of approved Management Board policy. In addition to drawing up written guidelines for financial risk management, the Management Board determines the policy for specific key areas such as currency risk, interest-rate risk, credit risk, the use of derivative and non-derivative financial instruments, and the investment of temporary liquidity surpluses.

Market risk

Market risk comprises three types of risk: currency risk, price risk and interest-rate risk.

(a) Currency risk

Currency risk arises if future business transactions, assets and liabilities recognised in the balance sheet and net investments in activities outside the euro zone are expressed in a currency other than Schiphol Group’s functional currency (the euro). Schiphol Group operates internationally and faces currency risks on several currency positions, in particular in Japanese yen (borrowings) and US and Australian dollars (net investments in activities outside the euro zone).

Schiphol Group manages the currency risk on borrowings by using forward and swap contracts. The financial risk management policy is that virtually all expected cash flows are hedged. At 31 December 2013, 7.3% of group financing had been drawn in foreign currency (one loan with a carrying amount of 137.7 million euros (20 billion Japanese yen) nominal value) compared with 12.1% of total borrowings (one loan with a carrying amount of 174.4 million euros (20 billion Japanese yen) nominal value) a year earlier. In accordance with the policy, this position is fully hedged by means of currency swaps. Consequently, a movement in the exchange rate will not affect the results relating to these borrowings. The effect on equity is temporary (only for the duration of the hedging transaction) and amounted to 27.6 million euros negative in 2013 (after deferred tax).

Schiphol Group has a number of strategic investments in activities outside the euro zone and of these the net investments recognised in the balance sheet under ‘associates’ and ‘loans to associates’ are affected by a translation risk. In accordance with the policy, the currency position relating to Schiphol Group’s net investments in activities outside the euro zone, totalling 173.5 million euros at 31 December 2013 (180.1 million euros at 31 December 2012), is not hedged, with the exception of the Redeemable Preference Shares which Schiphol Group owns in Brisbane Airport Corporation Holdings Ltd. The currency risk on this receivable and the accrued dividend, which had a carrying amount of 59.5 million euros at 31 December 2013 (80.2 million euros at 31 December 2012), is largely hedged with forward exchange transactions. Consequently, a movement in the exchange rate will have only a minor effect on the results relating to this receivable. Exchange differences on the unhedged position relating to investments in associates are recognised in the exchange difference reserve and do not directly affect the result. The effect on equity in 2013 was 18.4 million euros, which leads to a decrease in the exchange difference reserve from 21.3 million euros at 31 December 2012 to 2.9 million euros at 31 December 2013.

Corporate Treasury is responsible for the management of the net position in individual foreign currencies.

(b) Price risk

Price risk is the risk of fluctuations in the value of assets and liabilities as a result of changes in market prices. Schiphol Group is affected mainly by the price risk on property investments which it recognises at fair value. This fair value is influenced by supply and demand and movements in interest rates and the rate of inflation. An average increase of 10% in the net initial yield on offices and commercial buildings demanded by property investors would reduce the value of those properties by a total of approximately 94 million euros . A decrease of the NAR of 10% will lead to an increase of approximately 78 million euros. Under the accounting policy, in that situation profitability before tax would fall by the same amount.

Schiphol Group purchases electricity and gas for its own use on long-term contracts. The remaining term of the net obligations under the long-term contracts for electricity and gas was as follows:

(in thousands of euros)

Total 2013

<= 1 year

> 1 year

> 5 years

Obligations relating to gas

3,192

3,192

-

-

Obligations relating to electricity

13,301

7,466

5,835

-

16,493

10,658

5,835

-

(in thousands of euros)

Total 2012

<= 1 year

> 1 year

> 5 years

Obligations relating to gas

3,404

3,404

-

-

Obligations relating to electricity

14,576

7,723

6,853

-

17,980

11,127

6,853

-

(c) Interest-rate risk

Interest-rate risk is divided into a fair value interest-rate risk and a cash flow interest-rate risk.

Fair value interest-rate risk

Fair value interest-rate risk is the risk of fluctuations in the value of a financial instrument as a result of movements in the market interest rate. Schiphol Group does not have any significant financial assets that attract a fair value interest-rate risk but is affected by fair value interest-rate risk on its fixed-interest borrowings. If market interest rates fell on average by 1%, this would lead to an increase of 113 million euros (5.3%) in the fair value of borrowings. An average increase of 1% in market interest rates would lead to a fall of 103 million euros (4.9%) in the fair value of borrowings. Schiphol Group’s policy is to draw at least 50% of borrowings at fixed interest rates, if necessary by using derivatives. At least 60% of borrowings relating to Airport Real Estate Basisfonds C.V. (AREB C.V.) should be fixed-interest or capped-interest borrowings. At 31 December 2013, 100% of borrowings were fixed-interest, excluding subsidiaries and associates (100% at 31 December 2012).

Cash flow interest-rate risk

The cash flow interest-rate risk is the risk of fluctuations in the future cash flows of a financial instrument as a result of movements in market interest rates. Except for cash and cash equivalents, Schiphol Group has no significant financial assets that attract a cash flow interest-rate risk. If the average interest received on deposits had been 0.4% lower during 2012 (tax rate would be 0%), the interest income relating to deposits would have been 1.3 million euros lower (2012: 1.7 million euros). In addition, Schiphol Group runs a cash flow interest-rate risk in respect of group financing at a variable interest rate. This position is limited by Schiphol Group’s policy of not drawing more than 25% of the funds borrowed at a variable interest rate, if necessary by using derivatives. A maximum of 40% applies for AREB C.V. At 31 December 2013, the figures for variable-interest borrowings were 0% for Schiphol Group and 1% for AREB C.V. (0% and 1% respectively at 31 December 2012).

The cash flow interest-rate risk is managed by using interest-rate swaps, under which a variable interest rate can be changed into a fixed interest rate, and interest rate caps, which limit any increase in interest rates. As part of an interest rate swap, Schiphol Group agrees with a counterparty to effect swaps, at predetermined times, of the difference between a fixed contract rate and a variable interest rate. This difference is calculated on the basis of the agreed underlying principal sum. If the average variable interest rate had been 1% higher during 2013, there would have been no interest expense effect relating to group financing (2012 no effect).

Derivatives were concluded to limit the cash-flow interest-rate risk on long-term loans in the medium term. These fix the rates of interest at which loans maturing in 2014 could be refinanced. The effect of these transactions on equity is temporary (only lasting until refinancing in 2014) and amounted to 54.3 million euros negative (after deferred taxes) at 31 December 2013 (2012: 37.0 million euros negative).

Counterparty risk

Counterparty risk is the risk that one party to a financial instrument fails to fulfil its obligations, causing the other party to suffer a financial loss. Schiphol Group’s counterparties in derivative financial instruments and liquidities transactions are restricted to financial institutions with high creditworthiness (a minimum S&P credit rating of A) and the net position for each counterparty may not exceed 200.0 million euros. The maximum net position at 31 December 2013 was 175.5 million euros (161.3 million euros at 31 December 2012).

At 31 December 2013, trade receivables amounted to 102.1 million euros (96.6 million euros at 31 December 2012) after a provision for doubtful debts of 5.4 million euros (EUR 4.6 million euros at 31 December 2012) and including 2.1 million euros in security deposits received (1.6 million euros at 31 December 2012). The provision covers all receivables owed by debtors that are in bankruptcy or have applied for a moratorium on payments, receivables older than one year and larger receivables younger than one year which are expected to be uncollectible.

The movements in the provision were as follows:

(in millions of euros)

2013

2012

Carrying amount 1 January

4.6

5.0

Utilised during the year

- 0.2

- 1.3

Added during the year

1.0

0.9

Carrying amount 31 December

5.4

4.6

102.1 million euros of the trade receivables (which amounted to 108.8 million euros before deduction of the provision for doubtful amounts of 5.4 million euros and security deposits received of 2.1 million euros) were past due but not provided for. It is expected that these amounts will be received as the debtors concerned have no default history. In 2014, of these amounts, 4 million euros haves been received.

(in millions of euros)

2013

2012

Less than 60 days

88.0

99.6

Older than 60 days

19.9

1.1

Older than 360 days

0.6

0.9

Bankruptcies

1.1

1.2

109.6

102.8

Provision for bad debt

- 5.4

- 4.6

Security deposits received

- 2.1

- 1.6

Total Trade receivables

102.1

96.6

Parties using services from Schiphol Group are first assessed for creditworthiness. Depending on the outcome of this assessment, they may be required to provide security in the form of a bank guarantee or deposit to limit the credit risk. At 31 December 2013, Schiphol Group held 45,3 million euros in bank guarantees and security deposits (27.1 million euros at 31 December 2012). Koninklijke Luchtvaartmaatschappij N.V. (KLM) has an individual balance in excess of 10.0 million euros.

Liquidity risk

Liquidity risk is the risk that Schiphol Group will have difficulty in raising the funding required to honour its commitments in the short term. Careful liquidity risk management means that Schiphol Group maintains sufficient liquid resources and has access to sufficient funding in the form of promised (and preferably committed) credit facilities and the EMTN programme. The financing policy is also aimed at reducing the refinancing risk. See note 30 on borrowings for further information on the margin and facilities. In connection with liquidity risk, Corporate Treasury manages the cash pool through which several of the subsidiaries’ bank balances are managed and netted for optimum balance management.

The remaining term of the net liabilities relating to financial instruments was as follows:

(in thousands of euros)

Total 2013

Contractual

<= 1 year

> 1 year

> 1 year but

> 5 years

cash flows

<= 5 years

Borrowings

1,934,854

2,022,571

420,395

1,514,459

373,113

1,141,346

Finance lease liabilities

57,145

57,145

3,182

53,963

10,702

43,261

Derivative financial instruments

39,256

39,256

33,429

5,827

5,827

-

Trade payables

102,986

102,986

102,986

-

-

-

Liabilities

2,134,241

2,221,958

559,992

1,574,249

389,642

1,184,607

Loans to associates

- 59,543

- 59,543

- 59,543

-

-

-

Other loans

- 7,869

- 7,869

- 942

- 6,927

- 6,927

-

Derivative financial instruments

- 14,685

- 14,685

- 13,017

- 1,668

-

- 1,668

Trade receivables

- 102,091

- 102,091

- 102,091

-

-

-

Cash and cash equivalents

- 489,263

- 489,263

- 489,263

-

-

-

Assets

- 673,451

- 673,451

- 664,856

- 8,595

- 6,927

- 1,668

Total

1,460,790

1,548,507

- 104,864

1,565,654

382,715

1,182,939

(in thousands of euros)

Total 2012

Contractual

<= 1 year

> 1 year

> 1 year but

> 5 years

cash flows

<= 5 years

Borrowings

1,886,221

1,919,779

191,510

1,694,711

743,485

951,226

Finance lease liabilities

56,546

56,546

2,498

54,048

9,166

44,882

Derivative financial instruments

115,868

115,868

1,586

114,282

8,453

105,829

Trade payables

108,379

108,379

108,379

-

-

-

Liabilities

2,167,014

2,200,572

303,973

1,863,041

761,104

1,101,937

Loans to associates

- 80,192

- 80,192

-

- 80,192

- 80,192

-

Other loans

- 8,476

- 8,476

- 936

- 7,540

- 7,540

-

Derivative financial instruments

- 22,851

- 22,851

-

- 22,851

-

- 22,851

Trade receivables

- 96,636

- 96,636

- 96,636

-

-

-

Cash and cash equivalents

- 445,122

- 445,122

- 445,122

-

-

-

Assets

- 653,277

- 653,277

- 542,694

- 110,583

- 87,732

- 22,851

Total

1,513,737

1,547,295

- 238,721

1,752,458

673,372

1,079,086

Financial instruments can be classified, according to the measurement policy applied, as follows:

(in thousands of euros)

Total 2013

Amortised

Fair value

Fair value through

cost

through equity

profit and loss

Borrowings

1,934,854

1,934,854

-

-

Finance lease liabilities

57,145

57,145

-

-

Derivative financial instruments

39,256

-

39,256

-

Trade payables

102,986

-

-

102,986

Liabilities

2,134,241

1,991,999

39,256

102,986

Loans to associates

- 59,543

- 59,543

-

-

Other loans

- 7,869

- 7,869

-

-

Derivative financial instruments

- 14,685

-

- 14,685

-

Trade receivables

- 102,091

-

-

- 102,091

Cash and cash equivalents

- 489,263

-

-

- 489,263

Assets

- 673,451

- 67,412

- 14,685

- 591,354

Total

1,460,790

1,924,587

24,571

- 488,368

(in thousands of euros)

Total 2012

Amortised

Fair value

Fair value through

cost

through equity

profit and loss

Borrowings

1,886,221

1,886,221

-

-

Finance lease liabilities

56,546

56,546

-

-

Derivative financial instruments

115,868

-

115,868

-

Trade payables

108,379

-

-

108,379

Liabilities

2,167,014

1,942,767

115,868

108,379

Loans to associates

- 80,192

- 80,192

-

-

Other loans

- 8,476

- 8,476

-

-

Derivative financial instruments

- 22,851

-

- 22,851

-

Trade receivables

- 96,636

-

-

- 96,636

Cash and cash equivalents

- 445,122

-

-

- 445,122

Assets

- 653,277

- 88,668

- 22,851

- 541,758

Total

1,513,737

1,854,099

93,017

- 433,379

All the above items are shown at the amounts at which they are recognised in the balance sheet and with a remaining maturity based on the date of redemption or settlement agreed with the counterparty. Schiphol Group’s policy is that no more than 25% of liabilities may have a term of less than one year. At 31 December 2013, this figure was 14.0% (14.0% at 31 December 2012).

Fair value estimates

The table below presents the financial instruments measured at fair value by the method used. Measurement is undertaken for each reporting period.

(in thousands of euros)

Total
31 December 2013

Level 1

Level 2

Level 3

Derivative financial instruments (assets)

14,685

-

14,685

-

Total assets

14,685

-

14,685

-

Derivative financial instruments (liabilities)

39,256

-

39,256

-

Total liabilities

39,256

-

39,256

-

(in thousands of euros)

Total
31 December 2012

Level 1

Level 2

Level 3

Derivative financial instruments (assets)

22,851

-

22,851

-

Total assets

22,851

-

22,851

-

Derivative financial instruments (liabilities)

116,407

-

116,407

-

Total liabilities

116,407

-

116,407

-

Level 1. Unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2. Quoted prices for similar assets and liabilities in active markets or information based on or supported by observable market inputs;

Level 3. Unobservable inputs used to determine the fair value of an asset or liability.

There have been no transfers between Level 1 and Level 2 measurements. Level 2 measurements are determined using various methods and assumptions based on market conditions on the reporting date. The fair value of these financial instruments is determined on the basis of the present value of the projected future cash flows converted into euros at the relevant exchange rates and the market interest rate applicable to Schiphol Group on the reporting date. Nominal value is assumed to approximate the fair value of loans to associates, trade receivables, cash and cash equivalents and trade payables.

It is assumed that the nominal value, reduced by the estimated adjustments for trade receivables and trade payables, approximates the fair value. For information purposes, the fair value of financial assets and liabilities is estimated by discounting future contractual cash flows at the market interest rate applicable to Schiphol Group for comparable financial instruments at that time.

The carrying amount of borrowings was 1.9 billion euros and their fair value was 2.1 billion euros. Fair value is estimated by discounting the future contractual cash flows using the market interest rates applicable to the borrower for similar financial instruments at that time.

Capital management

Schiphol Group’s long-term capital strategy and dividend policy is geared towards improving shareholder value, facilitating sustainable long-term growth and preserving an appropriate financial structure and sound creditworthiness. With its current shareholder base (public-sector shareholders), Schiphol Group only has access to the debt market and has a continued focus on further optimising its capital structure and cost of capital.

Schiphol Group uses certain financial ratios, including cash flow-based metrics, to capture the dynamics of capital structure, dividend policy and cash flow generation and monitors its capital structure in line with credit rating agencies and comparable best practices. In this context, key financial ratios employed include:

  • Funds From Operations (FFO) Interest Cover: the FFO plus interest charges divided by the interest charges.
  • Leverage: interest-bearing debt divided by equity plus the interest-bearing debt.
  • Funds From Operations (FFO)/Total Debt: the FFO divided by the total debt.

(in thousands of euros)

2013

2012

Operating result

320,698

296,494

Depreciation and amortisation

248,414

214,897

Impairment

17,410

22,741

Result from the sale of property, plant and equipment

- 280

- 18

Other income, from property

- 2,726

12,508

Costs related to sales of property

-

- 448

Non-cash movements in receivables

7,114

19,435

Movements in provisions

- 1,543

- 7,171

Income tax paid

- 31,648

- 24,005

Interest paid

- 98,689

- 98,580

Interest received

4,296

6,995

Dividend received

29,608

32,245

Funds From Operations

492,653

475,093

‘Funds From Operations’ is calculated specifically for the purpose of determining the financial ratios and differs from the cash flow from operations calculated in the consolidated cash flow statement in accordance with the reporting policies.

(in thousands of euros)

2013

2012

Non-current liabilities

Borrowings

1,514,459

1,694,711

Lease liabilities

53,963

54,049

Current liabilities

Borrowings

420,395

191,510

Lease liabilities

3,182

2,498

Total debt

1,991,999

1,942,768

For capital management purposes, debt consists of non-current and current liabilities as shown under ‘total debt’.

For capital management purposes, equity is equal to equity in the consolidated balance sheet. At 31 December 2013, equity was 3,362 million euros (3,198 million euros at 31 December 2012).

2013

2012

FFO / Total debt

24.7%

24.5%

Leverage

37.6%

37.8%

Funds From Operations (FFO) is the cash flow from operating activities adjusted for working capital. During 2013, FFO rose from 475 million euros to 493 million euros, mainly as a result of the increase in the operating result adjusted for depreciation and amortisation, impairment, other income from property and movements in provisions. Total debt rose from 1,943 million euros to 1,992 million euros.

The FFO interest coverage ratio is calculated by dividing the FFO plus the interest charges relating to borrowings and lease liabilities, amounting to 103.8 million euros in 2013 (103.4 million euros in 2012), by those interest charges. As a result, the FFO interest coverage ratio for 2013 was 5.7x (compared with 5.6x for 2012). The ratios at 31 December 2013 are consistent with Schiphol Group’s policy of maintaining a single A credit rating (S&P).

Tax risk factors

As a result of its wide range of activities, Schiphol Group is subject to many different types of tax. A general tax risk for Schiphol Group is the timely submission of complete tax returns and the payment of the tax concerned, as well as compliance with all tax laws and regulations and reporting requirements specifically relating to income tax. Activities abroad entail an increased risk because of different local tax laws.

The internal control procedures for these tax risks (also known as the ‘tax control framework’) are part of Schiphol Group’s overall risk management programme. This identifies tax risks and monitors internal control, focusing on mitigating tax risks. Schiphol Group has also developed and implemented a reasoned tax planning framework. Tax risk management is facilitated by the central control department (Corporate Control) and is part of approved Management Board policy. This policy is based on Schiphol Group’s aim to be a trustworthy taxpayer through the application of professional tax compliance procedures. On 16 November 2012, Schiphol Group concluded an individual ‘Horizontal Supervision’ covenant with the Dutch tax authorities. This is a standard covenant that covers all state taxes and their collection.