Finance and treasury
The objective of Fingrid’s finance and treasury functions is to operate cost-effectively and create value for shareholders.
Fingrid’s business model and the regulation of transmission system operations
Fingrid constitutes a natural monopoly as referred to in the Finnish Electricity Market Act (588/2013), with duties defined in legislation. The company’s operations, reasonableness in pricing and financial result are regulated and overseen by the Energy Market Authority. The Energy Market Authority determines Fingrid’s allowable financial income over four-year regulatory periods (2016–2019 and 2020–2023).
Grid operations, in other words the transmission of electricity in the nationwide grid owned by the company, constitutes the bulk of Fingrid’s turnover, profit and balance sheet. The allowed financial result from transmission system operations is calculated by multiplying the total adjusted capital invested in the transmission network operations (transmission network assets valued at the regulatory present value) with the reasonable rate of return defined by the Energy Market Authority. The reasonable financial result allowed by the regulation forms the basis of Fingrid’s financial planning and pricing. The required amount of turnover can be calculated by adding up the operating expenses and the result.
Fingrid’s turnover mainly constitutes from the pricing of the transmitted electricity, in other words the consumption of Fingrid’s customers. Fingrid additionally charges fees for output from and input into the grid, and power generation capacity fees. The company determines in advance for the next year the unit prices for the transmission of electricity necessary to recover the required turnover. Fingrid’s total costs consist of the operating expenses and finance costs and taxes, which are excluded from the regulatory calculations.
The so-called adjusted profit, realised in compliance with the regulation, is calculated by adjusting the parent company’s operating profit according to the Energy Market Authority’s regulation methods and by adding the impact, either positive or negative, of the incentives. The incentives include capex, quality, efficiency improvement and innovations incentives (R&D).
Any realised regulatory profit over a regulatory period that exceeds the allowed return constitutes a surplus that must be returned to the customers in the form of lower future prices. If the realised regulatory profit over a regulatory period is below the allowed return, this leads to a deficit which Fingrid may recover from the customers in the form of higher future prices. No regulatory surplus or deficit income is recorded in the financial statements. The aim of Fingrid’s business operations is to achieve, as a rule, the allowed financial result each year.
Corporate finance principles
Key long-term goals for Fingrid’s financial control:
- Good cost-effectiveness, responsible operations and continuous improvement of productivity in order to maintain service pricing on a moderate level. The company aims at being among the most cost-effective TSOs in Europe and maintaining its grid pricing among the three most affordable in its peer group (companies with similar grids).
- High credit rating to ensure the availability of long-term decentralised funding, affordable funding costs and good debt service capacity.
- Creating shareholder value, which is achieved by maintaining the company’s adjusted income on the level allowed by regulation and paying dividends that correspond to shareholders’ profit targets.
Cost-effective operational activities
Fingrid’s cost-effectiveness is based on an operational model where the company merges its core competence with the best suppliers. Additionally, Fingrid actively co-operates to plan activities with its customers and innovates with third parties. This produces better and more efficient solutions in areas such as grid investments and development.
Image: World-class efficiency
Fingrid has outsourced operations such as grid construction and maintenance, which serves to optimise the use of financial and production resources in a scalable way. Monitoring and control of the grid is centralised in a single location. The company increasingly makes use of the possibilities created by digitalisation in areas such as grid maintenance and investments. A good example of this is the digital substation pilot project. The company’s management system is based on a matrix organisation and empowered experts to ensure effective engagement of the personnel across organisational boundaries. This increases the efficiency of operational activities.
Pricing in transmission system operations
Fingrid aims to guarantee the stable pricing development of its services through long-term planning of the company’s finances, capital expenditure, risk management and financing. Neither investment decisions nor any other decisions are dictated by our short-term financial targets.
The company’s 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 are indications of the cost-effectiveness of the company’s operations and of its effective management of cost and other risks related to grid assets. The Council of European Energy Regulators’ (CEER) benchmarking study placed Fingrid among the most cost-effective TSOs in Europe in 2019.
Fingrid’s grid prices generally apply one year at a time. The aim of the pricing is to secure as stable development as possible, despite market-term uncertainties. However, major volatility on the market may necessitate upward or downward price adjustments even within a single year. The pricing of imbalance settlement and cross-border transmission services is slightly more dynamic, reflecting the nature of these services and the need to respond to changes more quickly.
Generation of economic value
Fingrid’s profits are directed to the services procured from suppliers, payroll, payments to financers, taxes and, finally, dividends to the owners, in other words the State of Finland and domestic pension and insurance companies. The company additionally carries out major capital expenditure each year in Finland.
Image: Direct economic value generated and distributed
Equity and liabilities as shown in the balance sheet are managed by Fingrid as capital. The balance sheet according to the company’s accounting is smaller than the balance sheet under the Finnish Energy Authority’s regulations, in which grid assets have been measured at the regulatory present value in use. The company’s borrowings are presented at their carrying amount also on the regulatory balance sheet. Equity on the accounting balance sheet is smaller than equity on the regulatory balance sheet, which balances out the difference in the grid asset carrying amount and the value in use. The principal aim of Fingrid’s capital management and grid asset management is to secure the company’s ability to conduct uninterrupted operations, value retention and rapid recovery from any exceptional circumstances. A key goal is to maintain an ideal capital structure such that the company’s credit rating remains solid, cost of capital remains reasonable, and the company can pay dividends to its shareholders.
The company aims to maintain a credit rating of at least ‘A-’. The company has not set specific key figure targets for accounting balance sheet or regulatory balance sheet capital management, but instead monitors and controls the overall situation, for which credit ratings and their underlying risk analyses and other parameters create a foundation.
The company takes advantage of the opportunities offered by credit ratings at any given time on the international and domestic money markets. Market-based and diversified financing is sought from several sources. The goal is a balanced maturity profile. Fingrid’s existing loan agreements as well as debt and commercial paper programmes are unsecured and do not include any financial covenants based on financial ratios.
The company is exposed to various financing risks such as market risks, liquidity risks, counterparty risks and credit risks. The aim of financing risk management is to protect shareholder value by securing the financing required for the company’s business operations, by hedging against the main financial risks and by minimising financial costs within the risk limits.
Fingrid operates in the debt capital, commercial paper and loan markets:
- For long-term financing (more than 12 months), the company has an international Medium Term Note Programme (“EMTN Programme”), totalling EUR 1.5 billion.
- For short-term financing (less than 12 months), the company has an international Euro Commercial Paper Programme (“ECP Programme”) totalling EUR 600 million.
- Fingrid additionally has a domestic commercial paper programme totalling EUR 150 million.
Furthermore, Fingrid has bilateral long-term loan agreements with both the European Investment Bank (EIB) and the Nordic Investment Bank (NIB). To secure liquidity, the company has a revolving credit facility and overdraft facilities at its disposal.
Green financing is an important part of Fingrid’s financing strategy and responsible operating model. Fingrid was the first Finnish company to issue a Green Bond in 2017. Green Bonds are used to finance projects that are expected to have long-term net positive environmental impacts. Green Bond projects connect renewable energy production to Fingrid’s transmission network, reduce electricity transmission losses and create smart solutions that save energy and the environment. Fingrid annually reports on the impacts of its Green Bond projects by publishing a separate impact report on its website under Investors. As of 2019, the company also discloses the estimated amount of carbon dioxide emissions that have been avoided through these projects in carbon dioxide equivalent tonnes. The company’s objective is to increase the share of green financing in its total financing.