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Annual Statements

Financial reporting

Price winner 2012 in the category non-listed

Home Annual Statements Financial Statements 2012 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 2012, 12.1% of group financing had been drawn in foreign currency (one loan with a carrying amount of EUR 174.4 million (20 billion Japanese yen) nominal value) compared with 10.7% of total borrowings (one loan with a carrying amount of EUR 200.6 million (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 EUR 50.0 million negative in 2012 (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 EUR 180.1 million at 31 December 2012 (EUR 181.4 million at 31 December 2011), 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 EUR 80.2 million at 31 December 2012 (EUR 92.1 million at 31 December 2011), 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 2012 was EUR 0.7 million, which leads to a decrease in the exchange difference reserve from EUR 22.0 million at 31 December 2011 to EUR 21.3 million at 31 December 2012.

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 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 EUR 72 million. 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 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

-

(in thousands of euros)

Total 2011

<= 1 year

> 1 year

> 5 years

Obligations relating to gas

3,517

3,517

-

-

Obligations relating to electricity

16,761

9,133

7,628

-

20,278

12,650

7,628

-

(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. 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 2012, 100% of borrowings were fixed-interest, excluding subsidiaries and associates (100% at 31 December 2011).

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 1% lower during 2012, the interest income relating to deposits would have been EUR 1.7 million lower (2011: EUR 2.7 million). 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 AREB C.V. At 31 December 2012, the figures for variable-interest borrowings were 0% for Schiphol Group and 1% for AREB C.V. (0% and 34.6% respectively at 31 December 2011).

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 2012, there would have been no interest expense effect relating to group financing (2011 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 2013 and 2014 could be refinanced. The effect of these transactions on equity is temporary (only lasting until refinancing in 2013 and 2014) and amounted to EUR 37.0 million negative (after deferred taxes) at 31 December 2012 (2011: EUR 42.4 million 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 EUR 200.0 million. The maximum net position at 31 December 2012 was EUR 161.3 million (EUR 130.0 million at 31 December 2011).

At 31 December 2012, trade receivables amounted to EUR 96.6 million (EUR 74.7 million at 31 December 2011) after a provision for doubtful debts of EUR 3.5 million (EUR 3.9 million at 31 December 2011) and including EUR 1.6 million in security deposits received (EUR 2.2 million at 31 December 2011). 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)

2012

2011

Carrying amount 1 January

3.9

5.4

Utilised during the year

- 1.3

- 2.8

Added during the year

0.9

1.3

Carrying amount 31 December

3.5

3.9

EUR 1.5 million of the trade receivables (which amounted to EUR 101.7 million before deduction of the provision for doubtful amounts of EUR 3.5 million and security deposits received of EUR 1.6 million) 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 millions of euros)

2012

2011

Less than 60 days

98.5

76.2

Older than 60 days

1.1

2.6

Older than 360 days

0.9

1.0

Bankruptcies

1.2

1.0

101.7

80.8

Provision for bad debt

- 3.5

- 3.9

Security deposits received

- 1.6

- 2.2

Total Trade receivables

96.6

74.7

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 2012, Schiphol Group held EUR 27,1 million in bank guarantees and security deposits (EUR 32.7 million at 31 December 2011). Koninklijke Luchtvaartmaatschappij N.V. (KLM) has an individual balance in excess of EUR 10.0 million.

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 32 on borrowings for further information on the margin and facilities.

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

(in thousands of euros)

Total 2012

<= 1 year

> 1 year

> 1 year but

> 5 years

<= 5 years

Borrowings

1,886,221

191,510

1,694,711

743,485

951,226

Finance lease liabilities

56,546

2,498

54,048

9,166

44,882

Derivative financial instruments

115,868

1,586

114,282

8,453

105,829

Trade payables

108,379

108,379

-

-

-

Liabilities

2,167,014

303,973

1,863,041

761,104

1,101,937

Loans to associates

- 80,192

-

- 80,192

- 80,192

-

Other loans

- 8,476

- 936

- 7,540

- 7,540

-

Derivative financial instruments

- 22,851

-

- 22,851

-

- 22,851

Trade receivables

- 96,636

- 96,636

-

-

-

Cash and cash equivalents

- 445,122

- 445,122

-

-

-

Assets

- 653,277

- 542,694

- 110,583

- 87,732

- 22,851

Total

1,513,737

- 238,721

1,752,458

673,372

1,079,086

(in thousands of euros)

Total 2011

<= 1 year

> 1 year

> 1 year but

> 5 years

<= 5 years

Borrowings

1,875,711

101,834

1,773,877

794,131

979,746

Finance lease liabilities

58,511

5,914

52,597

6,192

46,405

Derivative financial instruments

69,311

6,311

63,000

6,442

56,558

Trade payables

95,767

95,767

-

-

-

Liabilities

2,099,300

209,826

1,889,474

806,765

1,082,709

Loans to associates

- 92,141

-

- 92,141

- 92,141

-

Other financial interests

- 6,141

-

- 6,141

-

- 6,141

Finance lease receivables

- 3,299

- 3,299

-

-

-

Other loans

- 1,591

- 30

- 1,561

- 1,561

-

Derivative financial instruments

- 89,565

-

- 89,565

-

- 89,565

Trade receivables

- 74,670

- 74,670

-

-

-

Cash and cash equivalents

- 413,287

- 413,287

-

-

-

Assets

- 680,694

- 491,286

- 189,408

- 93,702

- 95,706

Total

1,418,606

- 281,460

1,700,066

713,063

987,003

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

(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

(in thousands of euros)

Total 2011

Amortised

Fair value

Fair value through

cost

through equity

profit and loss

Borrowings

1,875,711

1,875,711

-

-

Finance lease liabilities

58,511

58,511

-

-

Derivative financial instruments

69,311

-

69,311

-

Trade payables

95,767

-

-

95,767

Liabilities

2,099,300

1,934,222

69,311

95,767

Loans to associates

- 92,141

- 92,141

-

-

Other financial interests

- 6,141

-

- 6,141

-

Finance lease receivables

- 3,299

- 3,299

-

-

Other loans

- 1,591

- 1,591

-

-

Derivative financial instruments

- 89,565

-

- 89,565

-

Trade receivables

- 74,670

-

-

- 74,670

Cash and cash equivalents

- 413,287

-

-

- 413,287

Assets

- 680,694

- 97,031

- 95,706

- 487,957

Total

1,418,606

1,837,191

- 26,395

- 392,190

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 2012, this figure was 14.0% (10.0% at 31 December 2011).

Fair value estimates

The fair value of financial instruments that are traded on active markets is based on their market prices on the reporting date (level 1). In the case of Schiphol Group, in 2011 this only concerned the 1% interest in Flughafen Wien AG, which was recognised at fair value under other financial interests.

The fair value of financial instruments that are not traded on active markets is determined with the aid of valuation techniques. Schiphol Group uses various methods and assumptions for this based on market conditions on the reporting date (level 2). 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 (for comparable financial instruments). In the case of Schiphol Group, these are borrowings, loans to associates and derivatives, with only the derivatives being recognised at fair value in the balance sheet. The fair value of the other items is only reported in the notes.

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 current market interest rate applicable to Schiphol Group for comparable financial instruments.

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)

2012

2011

Operating result

296,494

304,187

Depreciation and amortisation

214,897

206,134

Impairment

22,741

1,473

Result from the sale of property, plant and equipment

- 18

- 432

Other income, from property

12,508

88

Costs related to sales of property

- 448

-

Non-cash movements in receivables

19,435

2,357

Non-cash movements in non-current liabilities

-

- 1,992

Movements in provisions

- 7,171

- 13,883

Income tax paid

- 24,005

- 60,164

Interest paid

- 98,580

- 103,481

Interest received

6,995

11,347

Dividend received

32,245

12,991

Funds From Operations

475,093

358,625

‘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)

2012

2011

Non-current liabilities

Borrowings

1,694,711

1,773,877

Lease liabilities

54,049

52,597

Current liabilities

Borrowings

191,510

101,834

Lease liabilities

2,498

5,914

Total debt

1,942,768

1,934,222

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 2012, equity was EUR 3,201.9 million (EUR 3,174.5 million at 31 December 2011).

2012

2011

FFO / Total debt

24.5%

18.5%

Leverage

37.8%

37.9%

The increase in FFO/total debt was caused primarily by the increase in total debt being smaller than the increase in the FFO. The decrease in leverage is the result of the increase in interest-bearing loans being smaller than the increase in equity. Less income tax was paid in 2012, leading to a higher FFO/total debt ratio (which would have been 22.6% if this is ignored).

The FFO interest coverage ratio is calculated by dividing the FFO plus the interest charges relating to borrowings and lease liabilities, amounting to EUR 103.4 million in 2012 (EUR 103.6 million in 2011), by those interest charges. As a result, the FFO interest coverage ratio for 2012 was 5.6x (compared with 4.5x for 2011).

The ratios at 31 December 2012 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.