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Note 24 Financial risk management
Risk management principles and process
Stora Enso is exposed to several financial market risks that the group is responsible for managing under policies approved by the Board of Directors. The objective is to have cost-effective funding in group companies and manage financial risks using financial instruments to decrease earnings volatility. The main exposures for the group are interest rate risk, currency risk, funding risk and commodity price risk, especially for fibre and energy.

The Stora Enso Group Financial Risk Policy governs all financial transactions in Stora Enso. This policy and any future amendments take effect when approved by the Board of Directors and all policies covering the use of financial instruments must comply with it. Stora Enso Treasury Internal Risk Instruction refines the guidance into more detailed instructions. The major financial market risks are detailed below. Group’s joint operations companies operate under their own financial risk policies, which may not be fully similar to group’s policies.
Interest rate risk
Fluctuations in interest rates affect the interest expense of the group. The group’s aim is to keep interest costs stable. The group’s aggregate duration should not exceed the average loan maturity, and aiming towards longer duration. Duration above average loan maturity is approved by the Board of Directors.

As of 31 December 2016, one percentage point parallel change up or down in interest rates impacts annual net interest expenses by EUR 5 (EUR 11) million, assuming that the duration and the funding structure of the group stays constant during the year. This simulation calculates the interest effect of a 100 basis point parallel shift in interest rates on all floating rate instruments from their next reset date to the end of the year. In addition, all short-term loans maturing during the year are assumed to be rolled over at maturity to year end using the new higher interest rate.

The total group floating rate net interest-bearing liability position, excluding cash and cash equivalents but including floating legs of interest rate swaps, is some EUR 0.7 (EUR 1.4) billion. The average interest reset period for group net interest-bearing liabilities, including all interest rate derivatives but excluding cash and cash equivalents, is some 3.4 (2.9) years. A one percentage point parallel change up or down in interest rates would also result in gains or losses of EUR 15 (EUR 16) million effect before taxes in Cash flow hedge reserve in OCI regarding interest rate swaps under cash flow hedge accounting. Note 27 Derivatives summarises the nominal and fair values of the outstanding interest rate derivative contracts.
Currency transaction risk
The group is exposed to currency risk arising from exchange rate fluctuations against its reporting currency euro. Currency transaction risk is the impact of exchange rate fluctuations on the group Income Statement, which is the effect of currency rates on expected future cash flows. The group policy to mitigate this is to hedge 50% of the forecast major currency cash flows for 12 months.

The principal foreign exchange transaction exposure comprises both the geographical location of Stora Enso production facilities and the sourcing of raw material and sales outside the euro area, mainly denominated in Swedish crown, US dollars and British pounds.

The table below presents the estimated net operative foreign currency exposure for the main currencies, for the next 12 months and the related hedges in place as at 31 December, retranslated using year end exchange rates. The net operative receivables and payable exposures, representing the balances as at 31 December, include foreign currency exposures generated by external and intercompany transactions, in line with requirements of IFRS 7, although in practice mainly external exposures have been hedged through currency hedges. A positive amount of exposure in the table represents an estimated future receivable of a foreign currency amount.
Operative foreign currency exposure
As at 31 December 2016 As at 31 December 2015
EUR million SEK USD GBP BRL CZK SEK USD GBP BRL CZK
Estimated annual net cash flow exposure -870 1 290 320 - -180 -920 1 150 410 - -180
Cash flow hedges next 12 months 450 -660 -170 - 80 440 -550 -220 - 70
Estimated Annual Net Cash Flow Exposure, Net of Hedges -420 630 150 - -100 -480 600 190 - -110
Hedging Percentage as at 31 December for Next 12 Months 52% 51% 53% - 44% 48% 48% 54% - 39%
Translation exposure in Income Statement1 -300 90 10 -150 -170 -460 120 - -130 -170
Operative receivables and payables exposure 35 112 19 -8 -26 36 134 29 -91 -23
Currency hedges 64 -146 -24 - - 149 -119 -39 11 -
Statement of Financial Position Exposure, Net of Hedges 99 -34 -5 -8 -26 185 15 -10 -80 -23
Estimated Annual Operative Exposure, Net of Hedges -621 686 155 -158 -296 -755 735 180 -210 -303
1 Includes unhedged sales, costs and depreciation invoiced or expensed in the domestic currency of non-euro based entities, retranslated using year end exchange rates.
The table below includes the estimated effect on annual Operating Profit of a strengthening in EUR versus SEK, USD, GBP and CZK by 5% and versus BRL by 10%, as reasonably possible changes in rates, measured against year end closing rates. A corresponding decrease in the exchange rates would have approximately an equally opposite impact. A negative amount in the table reflects a potential net loss in the Income Statement or Equity and, conversely, a positive amount reflects a potential net gain. In practice, the actual foreign currency results may differ from the sensitivity analysis presented below since the Income Statements of subsidiaries with functional currencies other than the euro are translated into the group reporting currency using the average exchange rates for the year, whereas the Statements of Financial Position of such subsidiaries, including currency hedges, trade receivables and payable, are translated using the exchange rates at the reporting date.

The calculation includes currency hedges and assumes that no changes other than a single currency exchange rate movement have taken place. The currency effects are based on estimated operative foreign currency flows for the next twelve months, hedging levels at the year end and the assumption that the currency cash flow hedging levels, translation exposure in Income Statement and all other variables will remain constant during the next twelve months. Hedging instruments include foreign exchange forward contracts and foreign exchange options. Indirect currency effects with an impact on prices and product flows, such as a product becoming cheaper to produce elsewhere, have not been considered in this calculation.
Estimated currency effects of strengthening of EUR
As at 31 December 2016 As at 31 December 2015
EUR million SEK USD GBP BRL CZK SEK USD GBP BRL CZK
Currency change versus EUR -5% -5% -5% -10% -5% -5% -5% -5% -10% -5%
Effect on estimated annual net cash flow and translation exposure 59 -69 -17 15 18 69 -64 -21 13 18
Effect on hedging reserve before taxes as at year end1 -23 33 9 - -4 -22 28 11 - -4
EBIT impact as at year end2 -5 2 - 1 1 -9 -1 1 8 1
Estimated Annual EBIT Impact3 31 -34 -8 16 15 38 -37 -9 21 15
1 The effect on hedging reserve (other comprehensive income) before taxes at year end is related to the fair value change in derivatives contracts qualifying as cash flow hedges of highly probable forecast cash flows.
2 The Operating Profit impact as at year end represents the estimated currency effect related to operative payables and receivables, net of hedges.
3 The estimated annual Operating Profit impact includes currency effects in respect of operative exposures in the Statement of Financial Position, forecast cash flows and related hedges and translation exposure in Income Statement.
The table below presents, for the main currencies, the financial foreign currency exposure and the related hedges in place as at 31 December. Net debt includes loan payables and related interest rate derivatives, net of loan receivables and cash and cash equivalents. The currency derivatives hedge mainly financial exposures in the Statement of Financial Position and from time to time also forecast cash flows not qualifying under hedge accounting. These forecast cash flows are not included in the below table. A negative amount of exposure in the table represents a net payable of a foreign currency amount.

Additionally, the table includes the estimated effect on the Income Statement of a strengthening in the EUR versus SEK, USD, CNY and PLN by 5% and versus BRL by 10%, as reasonably possible changes in rates, measured against year-end closing rates. A corresponding decrease in the exchange rates would have approximately an equally opposite impact. A negative amount in the table reflects a potential net loss in the Income Statement and, conversely, a positive amount reflects a net potential gain. In practice, the actual foreign currency results may differ from the sensitivity analysis below as the exposure amounts may change during the year.
Financial foreign currency exposure and estimated currency effects in income statement
As at 31 December 2016 As at 31 December 2015
EUR million SEK USD CNY PLN BRL SEK USD CNY PLN BRL
Net debt excluding hedges 655 -470 538 199 61 879 -603 520 218 60
Currency hedges -754 -54 -96 - - -926 29 -55 - -
Net Financial Exposure -99 -524 442 199 61 -47 -574 465 218 60
Currency change versus EUR -5% -5% -5% -5% -10% -5% -5% -5% -5% -10%
Effect in the Income Statement 5 26 -22 -10 -6 2 29 -23 -11 -6
Currency translation risk
Translation risk results from fluctuations in exchange rates affecting the value of Stora Enso’s net foreign currency denominated assets and liabilities. Translation risk is reduced by funding assets, whenever economically possible, in the same currency as the asset.

The Statements of Financial Position of foreign subsidiaries, equity accounted investments and foreign currency denominated available-for-sale investments are translated into euros using exchange rates prevailing at the reporting date, thus exposing consolidated group equity to fluctuations in currency rates. The resulting translation differences, along with other movements such as the translation rate difference in the Income Statement, are recorded directly in Shareholders’ Equity, though these cumulative differences materialise through the Income Statement on the disposal, in whole or in part, of the foreign entity. The next table shows the translation exposure on equity before and after hedges.
Translation risk and hedges: 2016
As at 31 December
EUR million Euro area USD area2 Sweden China Poland Brazil Other Total
Translation Exposure on Equity 2 104 1 326 879 480 267 462 288 5 806
EUR/USD hedges1 332 -332 - - - - - -
Translation Exposure after Hedges 2 436 994 879 480 267 462 288 5 806
1 USD denominated bonds classified as hedges of investments in foreign assets.
2 Includes the joint operation Montes del Plata in Uruguay, which has USD as its functional currency.
Translation risk and hedges: 2015
As at 31 December
EUR million Euro area USD area2 Sweden China Poland Brazil Other Total
Translation Exposure on Equity 1 699 1 187 854 730 275 406 237 5 388
EUR/USD hedges1 321 -321 - - - - - -
Translation Exposure after Hedges 2 020 866 854 730 275 406 237 5 388
1 USD denominated bonds classified as hedges of investments in foreign assets.
2 Includes the joint operation Montes del Plata in Uruguay, which has USD as its functional currency.
The table below shows the effect on consolidated equity of a strengthening in the euro against the US dollar, Swedish crown, Chinese renminbi, Polish zloty and Brazilian real at 31 December. A corresponding decrease in the exchange rates would have approximately an equally opposite impact. The calculation includes the effects of currency hedges of net investments in foreign entities and assumes that no changes take place other than a single currency exchange rate movement on 31 December each year. The exposures used in the calculations are the foreign currency denominated equity and the hedging levels at 31 December. The hedging instruments used may be foreign currency forward contracts, currency options and foreign currency denominated borrowings. Full details of actual CTA movements and hedging results are given in Note 28 Cumulative translation adjustment and equity hedging.
Consolidated equity: Currency effects of strengthening of EUR before tax
As at 31 December 2016 As at 31 December 2015
EUR million Before Hedges Hedges Net Impact Before Hedges Hedges Net Impact
By 5% versus SEK -44 - -44 -43 - -43
By 5% versus USD -66 17 -49 -59 16 -43
By 5% versus CNY -24 - -24 -37 - -37
By 5% versus PLN -13 - -13 -14 - -14
By 10% versus BRL -46 - -46 -41 - -41
Total Effect from Above -193 17 -176 -194 16 -178
Liquidity and refinancing risk
Funding risk arises from the difficulty of obtaining finance for operations at a given point in time. Stora Enso’s funding policy states that the average maturity of outstanding loans and committed credit facilities covering short-term borrowings should be at least four years. The policy further states that the group must have committed credit facilities to cover planned funding needs, the current portion of long-term debt, commercial paper borrowings and other uncommitted short-term loans.

Refinancing risk, or the risk that maturing debt could not be refinanced in the market, is mitigated by Stora Enso’s target of maintaining an even maturity profile of outstanding debt.

The table below shows group contractual undiscounted interest-bearing financial liabilities, to be settled on a net cash basis, classified under principal headings based on the remaining period to contractual maturity at the reporting date. Forward rates were used at point of estimation for contractual finance charges.
Contractual maturity repayments of interest-bearing liabilities, settlement net: 2016
EUR million 2017 2018 2019 2020 2021 2022+ Total
Bond loans 265 237 475 - - 728 1 705
Loans from credit institutions 254 227 173 314 143 323 1 434
Financial lease liabilities 28 27 - - - 1 56
Other non-current liabilities 5 7 - - - - 12
Non-current Debt including Current Portion 552 498 648 314 143 1 052 3 207
Less fair value adjustments to carrying amounts - 5 4 4 3 11 27
Estimated contractual finance charges 125 109 93 59 50 352 788
Contractual Repayments on Non-Current Debt 677 612 745 377 196 1 415 4 022
Short-term borrowings, carrying amounts 452 - - - - - 452
Contractual finance charges 12 - - - - - 12
Bank overdrafts 4 - - - - - 4
Total Contractual Repayments at 31 December 2016 1 145 612 745 377 196 1 415 4 490
Contractual maturity repayments of interest-bearing liabilities, settlement net: 2015
EUR million 2016 2017 2018 2019 2020 2021+ Total
Bond loans - 295 573 545 - 421 1 834
Loans from credit institutions 200 359 172 163 302 441 1 637
Financial lease liabilities 7 27 27 - - - 61
Other non-current liabilities 21 10 2 - - 5 38
Non-current Debt including Current Portion 228 691 774 708 302 867 3 570
Less fair value adjustments to carrying amounts - 4 7 5 5 13 34
Estimated contractual finance charges 144 138 119 90 52 375 918
Contractual Repayments on Non-Current Debt 372 833 900 803 359 1 255 4 522
Short-term borrowings, carrying amounts 492 - - - - - 492
Contractual finance charges 11 - - - - - 11
Bank overdrafts 1 - - - - - 1
Total Contractual Repayments at 31 December 2015 876 833 900 803 359 1 255 5 026
Financial transactions counterparty credit risk
Financial counterparty risk is Stora Enso’s exposure on financial contracts arising from a deterioration in counterparties’ financial health.

This risk is minimised by:
• entering into transactions only with leading financial institutions and with industrial companies that have a good credit rating;
• investing in liquid cash funds only with financial institutions or companies that have a minimum rating of BBB-, with at least 50% of liquidity investments in funds with a minimum rating of A-, using Standard and Poor’s credit rating symbols;
• requiring parent company guarantees when dealing with any subsidiary of a rated company.

The Group Financial Risk Policy defines the limits for accepted counterparty risk, based on the tenor of financial contract and counterparty’s credit rating.

At year end 2016, the were no significant concentrations of risk with respect to counterparties of derivative contracts, with the highest counterparty exposure being at EUR 5 (EUR 7) million and credit rating of A (BBB+) using Standard and Poor’s credit rating symbols.
Raw material and energy price risk
Group earnings are exposed to commodity and energy price volatility. Financial energy hedges are part of the total energy price risk management in the group, whilst commodity risks are measured and hedged if economically possible. A 10% movement in energy and raw material prices would result in a EUR 34 (EUR 24) million change in the fair value of energy and raw material hedging contracts. The majority of these fair value changes, after taxes, are recorded directly in Equity under Hedging Reserves, until the contracts mature and the result is entered in the Income Statement. These estimates represent only the sensitivity of the financial instruments to market risk and not the group exposure to raw material and energy price risks as a whole, since the actual purchases are not financial instruments within the scope of the IFRS 7 disclosure requirements. At end 2016, the maturities of the energy and commodity contracts were between one month and six years. In 2015 the maturities ranged from one month to seven years.

The greater part of group energy price risk has been covered by entering into long-term physical fixed price purchase agreements. The group also has a 15.5% holding, valued at EUR 242 (EUR 123) million, in PVO, a privately owned group of companies in the energy sector. The value of these shares is dependent on energy prices and discussed in more detail in Note 14 Available-for-sale investments.

In addition, in an effort to mitigate the other commodity risk exposures, the group is a significant shareholder in major forest companies in Finland and Sweden thus if prices increase for fibre in these countries, so do the profits from these group interests.
Share price risk
The group has certain investments in publicly traded securities (Note 14 Available-for-sale investments). The market value of these equity investments was EUR 42 (EUR 28) million at the year end. Market value changes in these investments are recorded, after taxes, directly under Shareholders’ Equity in the Available-for-Sale Reserve.
Customer credit risk
Customer credit risk is Stora Enso’s exposure to contracts arising from deterioration in the financial health of customers. The group uses various different measures to reduce credit risks, including but not limited to letters of credit, prepayments and bank guarantees. The group has also obtained export guarantees, covering both political and commercial risks, which are used in connection with individual customers outside the OECD area. Management considers that no significant concentration of credit risk with any individual customer, counterparty or geographical region exists for Stora Enso. The Age Analysis of Trade Receivables is given in Note 17 Receivables.
Capital risk management
Stora Enso’s debt structure is focused on capital markets, whereas banks are primarily used to provide back-up facilities. Group objectives when managing capital are to safeguard the ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, as well as to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may, subject to shareholder approval as appropriate, vary the dividend paid to shareholders, buy its own shares in the market, return capital to shareholders, issue new shares or sell assets to reduce debt.

The group monitors its capital on the basis of a target debt-to-equity ratio of 0.80 or less, indicating a strong financial position, and financial flexibility. Debt-to-equity ratios are shown below:
Capital structure
As at 31 December
EUR million 2016 2015
Interest-bearing liabilities 3 774 4 197
Interest-bearing assets 1 048 957
Interest-bearing Net Debt 2 726 3 240
Equity Attributable to Owners of the Parent 5 806 5 388
Debt / Equity Ratio 0.47 0.60
In joint operation Montes del Plata and in subsidiary Stora Enso (Guangxi) Packaging Company Ltd. there are financial covenants related to the debt-to-assets ratio which have been complied with during the reported years.

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