Financial risk management

(Financial Statements 2023)

Financing and financial risks are centrally managed by the finance operations of the TVO Group, in accordance with the Finance Policy approved by the Board of Directors. Compliance with the Finance Policy is monitored by the Board of Directors and the Company’s management. The SVP for Treasury is responsible for financing operations. In its business activities, the TVO Group is exposed to a variety of financial risks: liquidity, market and credit risks. These do not include the receivables and obligations between the Company and its owners, as the Company operates at cost price (see note 1, General information on the Group).
The TVO Group’s guiding financial principles are to ensure access to adequate liquidity reserves and, secondly, to reduce volatility in cash flows deriving form short and medium-term fluctuations in the financial markets.
In accordance with the Company’s Finance Policy, derivative instruments are entered into only with hedging purposes and they should qualify for hedge accounting under IFRS.

Liquidity risk

Liquidity and refinancing risk is defined as the amount by which earnings and cash flows are affected as a result of the Company not being able to secure sufficient financing. In addition to maintaining sufficient liquid assets and committed credit lines, the TVO Group aims to diminish the refinancing risk by spreading the maturity dates of its loans and different financing sources as much as possible.

In accordance with the Finance Policy of the TVO Group, the maturities and refinancing of long-term loans are planned in a manner where no more than 25 per cent of the outstanding loans mature during the next rolling 12-month period. The loans borrowed from the Finnish State Nuclear Waste Management Fund, which have been relent to the shareholders, are an exception to this.

The TVO Group issues commercial papers under the Commercial Paper Programme for short-term funding purposes. Committed credit lines with a minimum duration of 12 months shall always exist for an amount corresponding to the funding needs of the Company for the following 12 months.

In addition to long-term committed credit lines, the Company shall maintain liquid assets at an amount stated in the Finance Policy. In accordance with the Finance Policy, bank deposits, certificates of deposits, commercial papers, municipal papers and treasury notes as well as money market funds are accepted as investments. The latter are mostly used for short-term purposes with a maximum duration of 12 months.

Market risk

Currency risk

The TVO Group is exposed to currency risk mainly in connection with its fuel purchases. The currency for purchases of raw uranium and enrichment is frequently the US Dollar. Hedging of a currency-denominated purchase is commenced when an agreement is entered into and the forecast currency risk becomes highly probable. Both short-term and long-term loans are withdrawn mainly in euros. The loans denominated in other currencies than euros are hedged latest at the withdrawal date.

Currency swaps and forward exchange instruments can be used to hedge the currency exposure.

Interest rate risk

Interest-bearing liabilities expose the Company to interest rate risk. The objective of the Company’s interest rate risk management is to maintain the interest costs as low as possible and to diminish the volatility of interest costs. In accordance with the Finance Policy, the Company’s re-fixing time can vary between 36 and 48 months. At the closing date, the re-fixing time was approximately 43 months.

The average re-fixing time can be managed with fixed interest rate loans, interest rate swaps and forward rate agreements as well as with interest rate caps and floors.

The average interest rate on loans and derivatives on 31 December 2023 was 2.62% (2022: 2.09%).

Loans issued at variable rates expose the TVO Group to cash flow interest rate risk. Loans issued at fixed rates expose the TVO Group to fair value interest rate risk. The TVO Group aims to apply hedge accounting for cash flow and fair value whenever possible. Based on the various scenarios, the TVO Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. The economic effect of such interest rate swaps corresponds to converting loans from floating rates to fixed rates. The Company also enters into fixed-to-floating interest rate swaps to hedge the fair value interest rate risk.

Credit risk

Credit risk arises from the potential failure of a counterparty to meet its contractual payment obligations. Commercial trade receivables as well as receivables from financial institutions relating to investments, deposits and derivative transactions expose the Company to credit risk. In addition to money market funds, financial institutions that meet the long-term credit rating requirements of the Group’s Financial Policy are accepted as counterparties. Furthermore, the TVO Group has in place a master agreement (ISDA) with all derivative contract counterparties.

The loan from the Finnish State Nuclear Waste Management Fund has been relent under the same terms to the company’s shareholders; however, Fortum Power and Heat Oy’s share has been relent to Fortum Corporation. The loans do not have separate collateral. The nuclear waste management receivables and loans are valued at amortised cost. The management has assessed that the creditworthiness of the parties to the relending agreements is sufficient for these loans and, thus, the expected credit losses of the loan receivables are immaterial and do not include a significant credit risk.

Fuel price risk

The fuel used for electricity production by the Group is uranium.

The TVO Group purchases the uranium fuel from the global markets. The purchasing process consists of four stages: purchase of uranium concentrate, conversion, enrichment and fuel fabrication. The TVO Group employs long-term delivery contracts with diverse suppliers during all of these stages. According to the Company’s Purchase Policy, the availability of fuel is secured and the price risk is minimised by maintaining stock and diversifying the long-term agreements between different suppliers.

The TVO Group has not used commodity derivatives to hedge the fuel price risk.

Capital risk management

A sufficient amount of equity funding makes versatile financing sources possible.

 
The equity ratio of the Company varies according to investment cycles. The Group has targeted a minimum equity ratio (IFRS) of 25 per cent in the long term. When calculating the equity ratio, the loan from the Finnish State Nuclear Waste Management Fund (relent to the shareholders) and the provision related to the nuclear waste management obligation are excluded. Additionally, subordinated loans or equivalent loans from the shareholders are regarded as equity in full.

According to the terms of some loan agreements, the Company is obliged to maintain the equity ratio (IFRS) above 25 per cent. The TVO Group has no other key ratio-related covenants in the loan contracts.

¹⁾ Equity ratio % = 100 x ((equity + loans from equity holders of the company) / (balance sheet total - provision related to nuclear waste management - loan from the Finnish State Nuclear Waste Management Fund))

²⁾ Equity ratio % = 100 x ((equity + appropriations + loans from equity holders of the company) / (balance sheet total - loan from the Finnish State Nuclear Waste Management Fund))