31. Financing policy and risks associated with financial instruments

General

The financing policy of Enexis Groep is aimed at securing the independent financing of Enexis by providing timely, permanent, and sufficient access to capital and money markets while optimising the financing structure, costs, and risks. The execution of the financing policy is laid down in the Treasury Charter, which contains the Treasury department's objectives, task description, and mandate, reporting, risk management, and organisational and administrative frameworks for financing.

The funding of Enexis Groep takes place by means of external funding raised by Enexis Holding N.V., which funding is then loaned inter-company to the group companies. As part of its business operations, Enexis Holding N.V. is exposed to a number of risks, including market risk, credit risk, solvency risk, liquidity risk and process risk. One of the objectives of the financing policy is to minimise the effect of the above-mentioned risks on the financial results and equity position. Enexis Holding N.V. can make use of financial instruments and derivatives for this purpose.

Market risk

Market risk relates to changes in the value of cash flows and financial instruments as a result of changes in market interest rates, foreign exchange rates, and market prices. Enexis Holding N.V. and its group companies do not hold any financial instruments for trading purposes.

Market risk consists of interest rate risk, foreign exchange rate risk, and commodity price risk:

Interest rate risk

The interest rate risk partly consists of the risk that the interest component in the regulatory return will be lower in the future. This will have a dampening effect on Enexis’s income. The compensation for interest expenses may also be lower than the interest payments laid down in existing loan agreements, while there is also a risk that the interest rates to be paid for future financing will be higher than the current market interest rate. Furthermore, there is a risk that the value of a financial instrument will change as a result of fluctuations in market interest rates.

The basis for the interest rate risk policy is diversification. By means of diversification in refinancing, financing, and maturities of loans, interest rate fixing, and interest-typical maturity (fixed or floating), type of loan, and possibly geographical diversification over financing markets, availability is ensured and the interest rate risk is reduced.

Within the adopted policy, Enexis Holding N.V. has the option to use derivatives to hedge specific risk positions, including but not limited to the interest rate risk. As in 2022, Enexis Holding N.V. did not use derivatives to hedge interest rate risks in 2023, nor does it have any derivatives outstanding.

Receivables

Enexis limits the interest rate risk on receivables in two ways:

• by matching the maturities of the receivables, including the financial assets such as short-term deposits, with the liquidity forecast; and

• by agreeing contractual interest rates beforehand with regard to the financial assets until the expiry date of the concluded contracts. Only part of the surplus cash and cash equivalents may be invested with a short horizon or at a floating interest rate to ensure diversification and flexibility.

Borrowed capital

Interest-bearing loans had the following maturities, interest rates, and maturity dates at year-end 2023:

The fair value of the interest-bearing loans (excluding lease liabilities) amounted to € 2,685 million at year-end 2023 (year-end 2022: € 2,463 million). The fair value of listed bonds is based on their listed prices. The fair value of other loans, including the convertible hybrid shareholders’ loan, is based on the calculation method using the Euro Utility (A) BFV yield curve as at 31 December 2023. A mark-up for the subordinated and illiquid character of the loan is taken into account in the calculation of the fair value of the convertible hybrid shareholders’ loan. The fair value of the interest-bearing loans has increased due to the listed green bond of € 500 million issued in 2023. 

At year-end 2023, all interest-bearing loans were fixed-interest loans.

The bonds concern "level 1" financial instruments. For Enexis Holding N.V., this means that the fair value is based on listed prices in an active market. The other loans, including the convertible hybrid shareholders’ loan, concern “level 2” financial instruments. This means that for Enexis Holding N.V., the fair value is based on discounting the nominal cash flows at applicable market discounting curves.

Foreign exchange rate risk

Enexis may be exposed to foreign exchange rate risk when issuing financial instruments and when making purchases in currencies other than the euro. It is Enexis Holding N.V.'s policy to directly hedge most of the exchange rate risk when issuing financial instruments in foreign currencies.

The total amount of cash and cash equivalents, receivables, and liabilities held in foreign currencies was minimal at the end of 2023, which means that foreign exchange rate risks and sensitivity to foreign exchange rate fluctuations were not relevant. As in 2022, Enexis Holding N.V. did not use derivatives to hedge foreign exchange rate risks in 2023, nor does it have any derivatives outstanding to hedge foreign exchange rate risks.

Commodity price risk

Enexis is mainly exposed to fluctuations in energy prices. Grid losses are set off by means of the purchase of energy. The energy price risk is largely limited by repeatedly fixing the price a number of years in advance by means of the purchase of forward contracts so that the forecast volume has already been purchased physically at the beginning of the year.

The forward contracts are concluded for own use and therefore do not qualify as derivatives in accordance with IFRS 9. Therefore, the forward contracts have not been recognised in the balance sheet at year-end 2023 (2022: also not recognised). For more information about the long-term financial liabilities in connection with forward contracts, reference is made to note 33. Off-balance sheet liabilities and assets.

Despite Enexis's policy to purchase the energy a number of years in advance, the cost of distribution losses is expected to remain higher than before 2022 in the coming years due to higher energy prices. However, the cost of distribution losses will decrease in the coming years compared to 2023. This is also apparent from the multi-year financial liabilities for grid losses as stated in note 33. Off-balance sheet liabilities and assets. As the regional grid operators receive compensation in the regulation method for their efficient costs and investments including a reasonable return, this higher cost level of distribution losses will also lead to an increase in the future tariffs and thus an increase in revenue. Therefore, it is expected that the financial consequences for Enexis will be limited.

Credit risk

The credit risk is the risk of sustaining a loss in the event that a counter party is unable or unwilling to fulfil its obligations. The majority of the activities of Enexis Holding N.V. and its group companies are regulated. The debtor risks in regulated markets are lower than the debtor risks in liberalised energy markets. For all low-volume consumer debtors with regard to the to be paid grid payments, the receivables are collected by the energy suppliers who bear the debtor risk with regard to the end customer. However, Enexis Netbeheer B.V. does run a debtor risk with regard to the energy suppliers. 

The maximum credit risk is, in principle, equal to the carrying amount of the receivables and current assets.

Liquidity surpluses are placed, at market terms and conditions, with financial institutions and investment funds that are subject to the supervision of a central bank or legally appointed supervisor and with Dutch national or regional grid operators that satisfy the specified minimal rating requirements, or with the Dutch government in securities guaranteed by the Dutch government. In addition, Enexis aims to spread investment risks by observing counter party limits in combination with minimum rating requirements.

Solvency and Liquidity Risk

Solvency risk

Solvency risk is the risk that Enexis's equity or capital base is insufficient to allow it to meet its obligations in the long term. We aim for at least an A credit rating profile (A/A2 with a stable outlook) for both Enexis Holding N.V. and Enexis Netbeheer B.V. This objective is monitored on the basis of the defined minimum financial ratio as set out in the section ‘Capital Management’. This credit rating profile ensures that Enexis Holding N.V. has sufficient access to international capital markets.

Liquidity risk and contractual term analysis

Liquidity risk

Liquidity risk concerns the risk that Enexis Groep will not be able to meet its short-term payment obligations.

As a minimum, Enexis Holding N.V. aims for an “adequate” liquidity profile in accordance with the current definitions applied by rating agency S&P for regulated grid operators, which includes liquidity requirements always being covered for a year in advance with a safety buffer of 10%. Enexis Holding N.V. regularly evaluates and adjusts its liquidity profile for the long, medium and short term.

To hedge the liquidity risk, Enexis Holding N.V. also has a committed Revolving Credit Facility (RCF) available of € 736 million (2022: € 850 million) up to December 2025. The RCF was lowered following the departure of one of the participating banks.

Enexis Holding N.V. did not make use of this RCF in 2023; however, Enexis retains this facility for any unforeseen liquidity requirements. In order to retain the RCF, Enexis Holding N.V. has contractual obligations to the participating banks.

In addition to an availability fee, these obligations mainly concern providing information to the banks involved, satisfying the usual financial covenants and other general covenants that are customary for these facilities, such as pari passu and negative pledge. There are no financial covenants tied to the RCF.

In addition, Enexis concluded a € 500 million loan with the European Investment Bank (EIB) for investments in its electricity grid in 2023. These investments are necessary to further expand and upgrade the grid. It is expected that the investments that Enexis is financing with this loan will be completed by the end of 2024. Enexis has the possibility to make draw downs under this facility in the coming three years with a maximum term of 13 years. No draw downs under this facility took place in 2023.

Furthermore, Enexis Holding N.V., Enexis Netbeheer B.V., Enexis Vastgoed B.V., Enexis Personeel B.V., and Enpuls B.V. have placed all bank accounts in a cash pool. 

Enexis Holding N.V. had a consolidated positive cash balance of € 127 million at the end of 2023, of which € 96 million in excess liquidity was placed in money market funds (year-end 2022: a positive net balance of € 217 million). 

Contractual term analysis

The table below shows the contractual non-discounted cash flows at year-end 2023:

The contractual and non-discounted cash flows at year-end 2022 amounted to:

Process risk

Process risk consists of the risks associated with setting up the organisation, the procedures and the activities of the Treasury department of Enexis Holding N.V. These risks are hedged by an organisational segregation of duties between the front office and the back office, as well as by means of the adopted financing policy, the Treasury Charter, the Treasury Control Framework, and related internal assessments and internal audits.

Capital management

The capital managed by the company includes the share capital paid up by shareholders and the accrued general reserves.

The capital management of Enexis Groep is aimed at maintaining a financially healthy capital structure and at least an A credit rating profile (A2/A with a stable outlook) for Enexis Holding N.V. and Enexis Netbeheer B.V. to support the continuity of its operations and to be able to realise planned investments.

To maintain an at least A credit rating profile and a financially sound capital structure, a minimum value in the FFO / net interest-bearing liabilities is aimed for:

The long-term credit rating issued by S&P for Enexis Holding N.V. and Enexis Netbeheer B.V. was changed to A+ with a positive outlook (previously A+ with a stable outlook) in February 2023. The reason for this change was that in February 2023 S&P assigned the Government-Related Entities (GREs) status to the regional grid operators. After the balance sheet date on 7 February 2024, the long-term credit rating issued by S&P for Enexis Holding N.V. and Enexis Netbeheer B.V. was improved to AA- with a stable outlook. Moody’s only issues a credit rating for Enexis Holding N.V. and this remained unchanged at Aa3 with a stable outlook.

After being granted the GRE status by S&P, Enexis decreased its minimum target for the ratio FFO/net interest-bearing liabilities from 16% to 12% to maintain at least an A credit rating profile and a financially robust capital structure. For the definition of the ratio ‘FFO/net interest-bearing liabilities’ reference is made to the glossary. 

The short-term credit rating of Enexis Holding N.V. at year-end 2023 was: P-1 (Moody’s) and A-1 (Standard and Poor) and were unchanged.

By maintaining a minimum credit rating profile target, Enexis Groep amply satisfies its statutory requirements concerning capital ratios and creditworthiness (Besluit financieel beheer netbeheerders - Network Operator Financial Management Decree) as well as the financial covenants under existing financing agreements.

Enexis Groep manages its capital structure and adjusts its capital structure to changes in economic conditions and statutory or regulatory requirements taking into account its minimum credit rating profile target. In order to maintain or adjust its capital structure, subject to specific conditions, Enexis Groep can revise its dividend policy, distribute capital to shareholders, or issue new shares.

Group funding

Group funding takes place within Enexis Groep, which means that Enexis Holding N.V. raises the necessary funding for the whole Enexis Groep on external capital markets and money markets, as well as, if necessary, makes use of credit facilities agreed with banks. All companies also have a current account relationship with Enexis Holding N.V. so that inter-company receivables and liabilities can be set off against one another internally.

Externally-raised funding is loaned to other group companies via inter-company loans and settled via the bank accounts or internal current account of the group companies and included in the joint cash pool. Interest and balance compensation takes place within the cash pools (notional cash pooling). The inter-company loans and cash-pool structure comply with the legal requirements for the group financing of grid companies, under which the grid operator may not provide security or assume liability for the financing of non-regulated activities. 

Distinction is made between regulated and non-regulated activities when determining the financing conditions and interest rates of inter-company loans. Group funding for regulated activities takes place based on equal conditions and interest rates relative to financing externally raised by Enexis Holding N.V., assuming that Enexis Holding N.V. and Enexis Netbeheer B.V., as grid operators with regulated activities, both have equivalent creditworthiness and credit rating profiles. Group funding for non-regulated activities occurs according to conditions and at interest rates established on an arm’s length basis, resulting in a market interest surcharge on top of the standard market interest rates that corresponds to the estimated credit risk of the relevant company.

Funding of associates is also carried out by Enexis Holding N.V. on an arm’s length basis according to conditions and a market interest surcharge on top of the standard market interest rates established for each associate.

For the interest rates within the joint cash pool, a distinction is also made between regulated and non-regulated activities by setting up two sub-cash pools. The regulated sub-cash pool comprises the bank accounts of grid operator Enexis Netbeheer B.V. and the interest calculation is based on the current account rate agreed with the bank. The non-regulated sub-cash pool comprises the bank accounts of the other group companies, including Enexis Holding N.V., with a market interest surcharge applied above the bank’s rate.

The benefits of the group funding are allocated to Enexis Holding N.V. and Enexis Netbeheer B.V.