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3 Financial risk management
Risk management principles
Neste Oil recognizes that risk is an integral and unavoidable component of its business and is characterized by both threat and opportunity. Risks are generally managed at source, within the Group's business areas and common functions. A number of risk management strategies have been developed to address the impact of the risks related to Neste Oil's business activities. The Neste Oil Corporate Risk Management Policy with the related Corporate Risk Management Principles, approved by the Board of Directors, defines risk management governance, responsibilities and processes for communicating and reporting risks and risk management.
The documents define detailed principles covering strategic risks, market risks, including counterparty risks, operational and functional risks, including risks involving human safety, and legal liabilities. The Corporate Risk Management Policy and Principles complement Neste Oil's other management principles and instructions. The Treasury Principles and the Credit and Counterparty Risk Management Principles are also approved by the Board of Directors. The Board of Directors' Audit Committee regularly reviews and monitors financial risk management policy, principles, risk limits, and other risk management activities.
The management of financially related risks aims to reduce the volatility in earnings, the balance sheet, and cash flow, while securing effective and competitive financing for the Group.
Risk management organization
The Corporate Risk Management and risk management professionals in business areas and common functions are responsible for controlling special risk disciplines, consulting and facilitating risk management processes and developing risk management systems.
Neste Oil's Group Treasury is responsible for managing foreign exchange, credit and counterparty, interest rate, liquidity, and refinancing risks as well as insurance management. The price risk management i.e. hedging of the Group's refining margin and refinery inventory price risk is also organized in Group Treasury. In addition, Group Treasury coordinates the management of the price risk associated with utilities and the obligation to return emission allowances, and provides price hedging services.
The Corporate Risk Management and Group Treasury units are organized within Neste Oil's Finance function, headed by the Chief Financial Officer and both units work in close cooperation with the Group's business areas.
Oil Products and Renewables business area and other functions to a smaller degree enter into derivative contracts to limit the price risk associated with certain physical oil and freight contracts. Oil Products and Renewables business area also enters into derivative transactions for proprietary trading purposes within authorized risk limits.
Risk Management Committee monitors the risk management process and compliance. Neste Oil's risk management reporting is coordinated by the Chief Financial Officer. Major Group-level risks are reported to the Board of Directors, the Audit Committee, the Risk Management Committee, the President & Chief Executive Officer, and other corporate management as part of the strategy and planning process. A report on the market and financing risks of reporting segments and the Group is included in the monthly management report.
Market risks
Market risk is the risk or uncertainty arising from possible market price movements and their impact on the future performance of a business. The primary commodity price risks that the Group is exposed to include; crude oil, oil products, renewable feedstocks and renewable diesel prices that could adversely affect the value of the Group’s financial assets, liabilities or expected future cash flows. As the pricing currency used in the oil market is U.S. dollar and Neste Oil operates and reports in Euro, also this factor exposes Neste Oil's business to short-term transaction risks and longer-term economic currency risks. In accordance with the Group risk management principles the Group enters into various derivatives transactions for risk management purposes. The positions are monitored and managed on a daily basis according to the above mentioned risk management principles.
1. Commodity price risks
The main commodity price risks Neste Oil faces on its businesses are related to market prices for crude oil, renewable feedstocks and other feedstocks, as well as refined petroleum and renewable products. These prices are subject to significant fluctuations resulting from a periodic over-supply and supply tightness in various regional markets, coupled with fluctuations in demand.
Neste Oil's results of operations in any given period are principally driven by the demand for and prices of oil and renewable products relative to the supply and cost of raw materials. These factors, combined with Neste Oil's own consumption of raw materials and output of refined products, drive operational performance and cash flows in Oil Products and Renewables, which is Neste Oil's largest business area in terms of revenue, profits and net assets.
Neste Oil divides the commodity price risks affecting Neste Oil’s revenue, profits and net assets into two main categories; inventory price risk and refining margin risk.
Inventory price risk
From a price risk management perspective, Neste Oil’s refinery inventory consists of two components. The first and largest component remains relatively constant over time and is referred to as the 'base inventory’. The second and daily fluctuating component is the amount of inventories differing from the base inventory level and at Neste Oil it is called ‘transaction position’.
The base inventory is the minimum level of stocks with which can reasonably be assured that the refineries can be kept in operation and the deliveries are not compromised. It comprises inventories at the refineries and within supply chain. The base inventory includes the minimum level of stocks that Neste Oil is required to maintain under Finnish laws and regulations.
The role of price risk management involved in the logistics is particularly present in the Renewables business due to market practices on the feedstocks pricing and longer sea voyages. In the Renewables business the price risk related base inventory is higher than the physical inventory and is approximately one third of the annual renewables refining capacity used. In the traditional oil refining the base inventory is approximately one tenth of the total annual fossil fuel refining capacity.
The base inventory creates a risk in Neste Oil’s income statement and balance sheet inasmuch as Neste Oil applies the FIFO method for measuring the cost of goods sold, raw materials and inventories. Hedging operations related to price risk do not target the base inventory. Instead, Neste Oil’s inventory risk management policies target the ‘transaction position’ inasmuch as these stocks create cash flow risks depending on the relationships between feedstocks purchases, refinery production and refined petroleum product sales over any given period.
According to the Neste Oil risk management principle any open exposures of the transaction position are hedged without delay.
In hedging the transaction position, derivative financial instruments are used. Because of the differences between the qualities of the underlying feedstocks for which derivative financial instruments can be sold and purchased, and the actual quality of Neste Oil’s feedstocks, the business will remain exposed to some degree of basis risk. The basis risk is typically higher in the Renewables business due to the nature of feedstocks pool and limited availability of hedging instruments.
Refining margin risk
As the total refining margin is an important determinant of Oil Products and Renewables business area's earnings, its fluctuations constitute a significant risk.
In the traditional oil refining business the refining margin at risk is a function of the revenue from sold petroleum products and the cost of raw materials together with other costs. Neste Oil’s exposure to low refining margins in the traditional oil refining is partly offset by its high conversion refineries.
Neste Oil is exposed to greater margin volatility in the Renewables business compared to that in the fossil fuel refining. In Renewables business the refining margin is mainly a function of the renewable fuels sale price received and feedstocks used. The underlying indices used in the renewable diesel pricing are primarily oil products or conventional biodiesel related. Product prices fluctuate regionally depending on the nature of biomandates, local supply and demand, and fossil fuel prices. In Europe renewable fuels price is mainly determined by the price of local biodiesel price. Typical biodiesel qualities are Fatty Acid Methyl Ester (FAME) or Rapeseed-Oil Methyl Ester (RME). In the North America the local biodiesel reference and typical renewable fuels pricing driver is, including the value of the Renewable Identification Number (RIN), Soy Methyl Ester (SME). Cost of feedstocks depends on feedstocks selection and is typically derived from different vegetable oils and fats. Feedstock prices are mainly driven by supply and demand balances, crop forecasts and regional weather. In the Renewables business area, operational activities are the primary means of mitigating the margin volatility.
With the aim of securing its margin and cash flow, Neste Oil has defined margin hedging principles for its main refining businesses. In the fossil fuel refining business the hedging ratios used, measured as percentage of annual production volume, are typically moderate. In the Renewables business the targeted hedge ratios are typically higher. Hedge ratios can however be expected to fluctuate over the time. The hedge ratio for renewable business is measured and monitored as percentage of the quarterly sales volumes.
In hedging the refining margin, derivative financial instruments are used. Hedging transactions are targeted at the components of Neste Oil’s total refining margin, based on its forecasted or committed sales and refinery production, which are exposed to international market price fluctuations. Because of the differences between the qualities of the underlying feedstocks and refined petroleum products for which derivative financial instruments can be sold and purchased, and the actual quality of Neste Oil’s feedstocks and refined petroleum products in any given period, the business will remain exposed to some degree of basis risk. The basis risk is typically higher in the Renewables business than in the fossil fuel refining due to the nature of the feedstocks selection and limited availability of hedging instruments.
The exposure to open positions of oil derivative contracts as of 31 December 2013 (2012) is summarized in Note 25.
2. Foreign exchange risk
As the pricing currency used in the oil industry is the U.S. dollar and Neste Oil operates and reports in euro, this factor, among others, exposes Neste Oil's business to short-term transaction and longer-term economic currency risks.
The objective of foreign exchange risk management in Neste Oil is to limit the uncertainty created by changes in foreign exchange rates on the future value of cash flows and earnings, and in the Group's balance sheet. Generally, this is done by hedging currency risks in contracted and forecasted cash flows and balance sheet exposures (referred to as transaction exposure) as well as the equity of non-euro zone subsidiaries (referred to as translation exposure).
Transaction exposure
In general, all business areas hedge their transaction exposure related to highly probable future cash flows. Net foreign currency cash flows are forecasted over a 12-month period on a rolling basis, and hedged on average 80% for the first six months and 40% for the following six months for the fossil fuel businesses and on average 60% for the first six months and 25% of the next three months for the renewable business. Deviations from this risk-neutral benchmark position are subject to separate approvals set by the Treasury Principles. The most important hedged currency is the U.S. dollar. Other material hedged currencies are Malaysian Ringgit (MYR) and Swedish Crown (SEK). Singapore Dollar (SGD) is expected to become a material hedged currency in 2014.
The Group's net exposure is managed through the use of forward contracts and options. All transactions are made for hedging purposes and the majority is also hedge accounted for according to IFRS. Business areas are responsible for forecasting net foreign currency cash flows, while Group Treasury is responsible for implementing hedging transactions.
Neste Oil has several currency-denominated assets and liabilities in its balance sheet, such as foreign currency loans, deposits, net working capital and cash in other currencies than home currency. The principle is to hedge this balance sheet exposure fully using forward contracts and options. Open exposures are allowed based on risk limits set by the Treasury Principles. The largest and most volatile item in terms of balance sheet exposure is net working capital. Since many of the Group's business transactions, sales of products and services and purchases of crude oil and other feedstock are linked to the U.S. dollar, the daily exposure of net working capital is hedged as part of the balance sheet hedge in order to neutralize the effect of volatility in EUR/USD exchange rate. During 2013, the daily balance sheet exposure fluctuated between approximately EUR 151 million and 635 million. Similarly to commodity price risk management, the foreign exchange transaction hedging targets inventories in excess the base inventory. Group Treasury is responsible for consolidating various balance sheet items and carrying out hedging transactions. Foreign exchange risk is estimated by measuring the impact of currency rate changes based on historical volatility.
The table below shows the nominal values of the Group's interest-bearing debt by currency as of 31 December 2013 and 2012, in millions of euros.
MEUR 2013 2012
EUR 1,628 2,181
SGD 51 86
USD 79 67
Other - -
1,758 2,334
The nominal and fair values of the outstanding foreign exchange derivative contracts as of 31 December 2013 (2012) are summarized in Note 25.
Translation exposure
Group Treasury is responsible for managing Neste Oil's translation exposure. This consists of net investments in foreign subsidiaries, joint ventures, and associated companies. Although the main principle is to leave translation exposure unhedged, Neste Oil may seek to reduce the volatility in equity in the consolidated balance sheet through hedging transactions. Forward contracts are used to hedge translation exposure. Any hedging decisions are made by Group Treasury. The total non-euro-denominated equity of the Group's subsidiaries and associated companies was EUR 482 million as of 31 December 2013 (2012: EUR 500 million), and the exposures and hedging ratios are summarized in the following table.
Group translation exposure 2013 2012
MEUR Net
investment
Hedge Hedge % Net
investment
Hedge Hedge %
USD 50 - 0% 61 - 0%
SEK 207 - 0% 222 - 0%
CAD 101 - 0% 80 - 0%
RUB 71 - 0% 77 - 0%
LTL 31 - 0% 34 - 0%
Other 22 - 0% 26 - 0%
482 - 0% 500 - 0%
3. Interest rate risk
Neste Oil is exposed to interest rate risk mainly through its interest-bearing net debt. The objective of the Company's interest rate risk management is to limit the volatility of interest expenses in the income statement. The risk-neutral benchmark duration for the net debt portfolio is 12 months, and duration can vary between six and 36 months. Interest rate derivatives have been used to adjust the duration of the net debt portfolio. The Group's interest rate risk management is handled by Group Treasury. The nominal and fair values of the outstanding interest rate derivative contracts as of 31 December 2013 (2012) are summarized in Note 25.
The following table summarizes the re-pricing of the Group's interest-bearing debt.
MEUR
Period in which re-pricing occurs within 1 year 1 year -
5 years
> 5 years Total
Financial instruments with floating interest rate
Financial liabilities
Loans from financial institutions 292 0 0 292
Finance lease liabilities 4 50 0 54
Bonds 0 50 0 50
Effect of interest rate swaps 650 -450 -200 0
Financial instruments with fixed interest rate
Bonds 0 872 394 1,266
Finance lease liabilities 0 13 83 96
946 535 277 1,758
4. Key sensitivities to market risks
Sensitivity of operating profit to market risks arising from the Group's operations
Due to the nature of its operations, the Group's financial performance is sensitive to the market risks described above. The following table details the approximate impact that movements in the Group's key price and currency exposures would have on its operating profit for 2014 (2013), based on assumptions regarding the Group's reference market and operating conditions, but excluding the impact of hedge transactions.
Approximate impact on operating profit (IFRS), excluding hedges 1)
2014 2013
+/– 10% in the EUR/USD exchange rate EUR million − 99 / + 121 − 98 / + 120
+/– USD 1.00/barrel in total refining margin USD million +/– 110 +/– 105
+/– USD 10/barrel in crude oil price USD million +/– 100 +/– 100
+/– USD 100/t in palm oil price USD million +/– 55 +/– 55
+/– USD 50/t in Renewable Fuels refining margin USD million +/– 100 +/– 100
1) Inventory gains/losses excluded from comparable operating profit
Sensitivity to market risks arising from financial instruments as required by IFRS 7
The following analysis, required by IFRS 7, is intended to illustrate the sensitivity of the Group's profit for the period and equity to changes in oil prices, the EUR/USD exchange rate, the USD/MYR exchange rate, and interest rates, resulting from financial instruments, such as financial assets and liabilities and derivative financial instruments, as defined by IFRS, included in the balance sheet as of 31 December 2013 (2012). Financial instruments affected by the above market risks include working capital items, such as trade and other receivables and trade and other payables, interest-bearing liabilities, deposits, cash and cash equivalents, and derivative financial instruments. When cash flow hedge accounting is applied, the change in the fair value of derivative financial instruments is assumed to be recorded fully in equity.
The following assumptions were made when calculating the sensitivity to the change in oil prices:
• the flat price variation for oil derivative contracts of crude oil, refined oil products and vegetable oil is assumed to be +/- 10%
• the sensitivity related to oil derivative contracts held for hedging refinery oil inventory position is included; the underlying physical oil inventory position is excluded from the calculation, since inventory is not a financial instrument
• the sensitivity related to oil derivative contracts held for hedging expected future refining margin is included; the underlying expected refining margin position is excluded from the calculation
• the sensitivity related to oil derivative contracts for the price difference between various petroleum product qualities is excluded from the calculation, as the price variation of these contracts is assumed to be zero
• the sensitivity related to oil derivative contracts for the time spread of crude oil and petroleum products is excluded from the calculation, as the price variation of these contracts is assumed to be zero
The following assumptions were made when calculating the sensitivity to changes in the EUR/USD exchange rate:
• the variation in EUR/USD-rate is assumed to be +/– 10%
• the position includes USD-denominated financial assets and liabilities, such as interest-bearing liabilities, deposits, trade and other receivables, trade and other liabilities, and cash and cash equivalents, as well as derivative financial instruments
• the position excludes USD-denominated future cash flows

The following assumptions were made when calculating the sensitivity to changes in the USD/MYR exchange rate:
the variation in USD/MYR-rate is assumed to be +/– 10%
• the position includes MYR-denominated derivative financial instruments
• the position excludes MYR-denominated future cash flows
The following assumptions were applied when calculating the sensitivity to changes in interest rates:
• the variation of interest rate is assumed to be a 1% parallel shift in the interest rate curve
• the interest rate risk position includes interest-bearing liabilities, interest-bearing receivables, and interest rate swaps
• the income statement is affected by changes in the interest rates of floating-rate financial instruments, excluding those derivative financial instruments that are designated as and qualifying for cash flow hedges, which are recorded directly in equity.
The sensitivity analysis presented in the following table may not be representative, since the Group's exposure to market risks also arises from other balance sheet items than financial instruments, such as inventories. As the sensitivity analysis does not take into account future cash flows, which the Group hedges in significant volumes, it only reflects the change in fair value of hedging instruments. In addition, the size of the exposure sensitive to changes in the EUR/USD exchange rate varies significantly, so the position on the balance sheet date may not be representative for the financial period on average. Equity in the following table includes items recorded directly in equity. Items affecting the income statement are not included in equity.
Sensitivity to market risks arising from financial instruments as required by IFRS 7
2013 2012
Income statement Equity Income statement Equity
+/– 10% change in oil price 1) EUR million –/+ 8 +/– 0 +/– 9 –/+ 7
+/– 10% change in EUR/USD exchange rate EUR million + 59 / − 74 + 38 / − 34 + 63 / – 79 + 42 / – 39
1% parallel shift in interest rates EUR million +/– 7 +/– 0 +/– 9 +/– 0
+/– 10% change in USD/MYR exchange rate EUR million +/– 28 +/– 0 +/– 8 +/– 0
1) includes crude oil, refined oil products and vegetable oil derivatives
5. Hedge accounting
The Group uses foreign currency derivative contracts to reduce the uncertainty created by changes in foreign exchange rates on the future cash flows of forecasted future sales and earnings, as well as in Neste Oil's balance sheet. Foreign exchange derivative contracts have been designated as hedges of forecasted transactions, e.g. cash flow hedges, net investment hedges, or as derivative financial instruments not meeting hedge accounting criteria. The Group uses foreign exchange forward contracts and options as hedging instruments.
With the aim of securing a certain refining margin per barrel, the Group may hedge its refining margin using commodity derivative contracts. Certain commodity derivative contracts have been designated as hedges of forecasted transactions, e.g. cash flow hedges.
The Group uses interest rate derivatives and its variations e.g. callable swaps to reduce the volatility of interest expenses in the income statement and by adjusting the duration of the debt portfolio. Interest rate derivative contracts have been designated as hedges of forecasted transactions, e.g. cash flow hedges, hedges of the fair value of recognized assets or liabilities, or as derivative financial instruments not meeting hedge accounting criteria. The Group uses interest rate swaps as hedging instruments.
Cash flow hedges
Derivative financial contracts that meet the qualifications for hedge accounting are designated as cash flow hedges. Such contracts are certain commodity derivative contracts hedging refining margin, foreign currency derivative contracts hedging USD-sales, feedstock purchases priced in MYR or capital expenditure denominated in foreign currencies for the next twelve months, and interest rate swaps directly linked to underlying variable interest funding transactions maturing in 2018.
The effective portion of the changes in the fair value of the derivative financial instruments that are designated as and qualify for cash flow hedges are recognized in equity/other comprehensive income. However, changes in the time value of foreign currency options are booked in the income statement. Any gain or loss relating to the ineffective portion is recognized immediately in the income statement. In 2013 and 2012 the ineffective portion has been immaterial. Retrospective testing is conducted on a quarterly basis to review the effectiveness of hedging transactions.
Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects the income statement, e.g. when a forecasted sale, that is being hedged, takes place. The gain or loss relating to the effective portion of the foreign exchange derivative contracts hedging of the future USD-sales are recorded within sales. This is expected to take place within the next 12 months from the balance sheet date. The gain or loss to the effective portion of the foreign exchange derivative contracts hedging of the MYR based purchases are booked into equity/other comprehensive income until transferred to the inventory as part of raw-material purchase costs according to IAS 2. When the forecast transaction, which is being hedged results in the recognition of property, plant and equipment, the gain or loss is included in the cost of the asset. The amounts are ultimately recognized in depreciation in the income statement. Interest element of interest rate swaps hedging variable rate interest-bearing liabilities is recognized in the income statement within finance costs, and the change in fair value of the hedging instrument is accumulated in equity/ other comprehensive income. Movements in hedging reserve are presented in the statement of comprehensive income.
Fair value hedges
Certain interest rate swaps are designated as fair value hedges. Changes in the fair value of the derivative financial instruments designated and qualifying as fair value hedges, and which are highly effective, are recorded in the income statement, together with any changes in the fair value of the hedged assets or liabilities attributable to the hedged risk compensating the effect. The ineffective portion is also recognized in the income statement.
Items recognized in the income statement
MEUR 2013 2012
gain or loss on the hedging instrument -16 18
gain or loss on the hedged item 16 -18
Hedges of net investments in foreign entities
Hedges of the net investments in foreign operations are accounted for in a similar way to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in equity/ other comprehensive income, while any gain or loss relating to the ineffective portion is recognized immediately in the income statement. Gains and losses accumulated in equity /other comprehensive income are included in the income statement when the foreign operation is disposed of.
Liquidity and refinancing risks
Liquidity risk is defined as financial distress or extraordinarily high financing costs arising due to a shortage of liquid funds in a situation where business conditions unexpectedly deteriorate and require financing. The objective of liquidity risk management is to maintain sufficient liquidity and to ensure that it is available fast enough to avoid uncertainty related to financial distress at all times.
Neste Oil's principal source of liquidity is expected to be cash generated from operations. In addition, the Group seeks to reduce liquidity and refinancing risks by maintaining a diversified maturity profile in its loan portfolio. Certain other limits have also been set to minimize liquidity and refinancing risks. The Group must always have access to unutilized, committed credit facilities to cover all loans maturing within the next 12 months and any potential forecasted negative free cash flow. Unutilized committed credit facilities must always amount to at least EUR 500 million. In addition, total short-term financing shall not account for more than 30% of the total interest-bearing liabilities.
The average loan maturity as of 31 December 2013 was 3.7 years. The most important financing programs in place are:
• Revolving multicurrency credit facility (committed), EUR 1,500 million
• Overdraft facilities (committed), EUR 150 million
• Domestic commercial paper program (uncommitted), EUR 400 million
As of 31 December 2013, the Company had cash and cash equivalents and committed, unutilized credit facilities totaling EUR 2,156 million at its disposal.
Cash and cash equivalents and committed unutilized credit facilities
MEUR 2013 2012
Floating rate
– cash and cash equivalents 506 410
– overdraft facilities, expiring within one year 150 150
– revolving credit facility, expiring within one year 0 75
– revolving credit facility, expiring beyond one year 1,500 1,500
2,156 2,135
The contractual maturity of interest-bearing liabilities as of 31 December 2013 is presented in the following table.
MEUR 20141) 2015 2016 2017 2018 2019– Total
Bonds and debentures 59 360 345 277 66 416 1,523
- less finance charges 59 60 45 27 16 16 223
Repayment of bonds and debentures 0 300 300 250 50 400 1,300
Loans from financial institutions 166 52 8 47 7 17 297
- less finance charges 2 1 1 1 0 0 5
Repayment of loans from financial institutions 164 51 7 46 7 17 292
Finance lease liabilities 20 40 37 15 15 196 323
- less finance charges 14 13 12 12 12 110 173
Repayment of finance lease liabilities 6 27 25 3 3 86 150
Other liabilities 0 0 0 0 1 3 4
- less finance charges 0 0 0 0 0 0 0
Repayment of other long-term liabilities 0 0 0 0 1 3 4
Interest rate swaps
- less finance charges -11 -12 -9 -2 -1 -2 -37
1) Repayments in 2014 are included in current liabilities in the balance sheet
Finance charges are primarily interest expenses. The contractual maturities of derivative financial instruments are included in Note 25.
The contractual maturity of interest-bearing liabilities as of 31 December 2012 is presented in the following table.
MEUR 2013 1) 2014 2015 2016 2017 2018– Total
Bonds and debentures 59 60 359 345 277 482 1,582
- less finance charges 59 60 59 45 27 32 282
Repayment of bonds and debentures 0 0 300 300 250 450 1,300
Loans from financial institutions 359 372 52 8 48 24 863
- less finance charges 5 8 1 1 1 1 17
Repayment of loans from financial institutions 354 364 51 7 47 23 846
Finance lease liabilities 21 22 42 39 16 223 363
- less finance charges 15 15 14 13 13 130 200
Repayment of finance lease liabilities 6 7 28 26 3 93 163
Interest rate swaps
- less finance charges -3 -9 -10 -8 -2 -2 -34
1) Repayments in 2013 are included in current liabilities in the balance sheet
Credit and counterparty risk
Credit and counterparty risk arises from sales, hedging and trading transactions as well as from cash investments. The risk arises from the potential failure of counterparty to meet its contractual payment obligations, and the risk depends on the creditworthiness of the counterparty as well as the size of the exposure. The objective of credit and counterparty risk management is to minimize the losses incurred as a result of a counterparty not fulfilling its obligations. The management principles for credit and counterparty risk are covered in the Neste Oil Credit and Counterparty Risk Management Principles approved by the Board of Directors.
The amount of risk is quantified as the expected loss to Neste Oil in the event of a default by counterparty. Credit risk limits are set at the Group level, designated by different levels of authorization and delegated to Neste Oil's business areas, which are responsible for counterparty risk management within these limits. When determining the credit lines for sales contracts for oil deliveries, counterparties are screened and evaluated vis-à-vis their creditworthiness to decide whether an open credit line is acceptable or collateral for example letter of credit, bank guarantee or parent company guarantee have to be posted. In the event, that a collateral is required the credit risk is evaluated based on a financial evaluation of the party posting the collateral. If appropriate in terms of the potential credit risk associated with a specific customer, advance payment is required before delivery of products or services. In addition, Neste Oil may reduce its counterparty risk by e.g. selling trade receivables.
The credit lines for counterparties are divided into two categories according to contract type: physical sales contracts and derivative contracts. Credit lines are restricted in terms of the time horizon associated with the payment and credit exposure risk. In determining counterparty credit limits, two levels of delegation are used: authority mandates to the rated counterparties by the general rating agencies and authority mandates related to unrated counterparties. For OTC (over-the-counter) derivative financial instrument contracts, Neste Oil has negotiated framework agreements in the form of an ISDA (International Swaps and Derivatives Association, Inc.) Master Agreement with the main counterparties concerning commodity, emissions, currency and interest rate derivative financial instruments. These contracts permit netting and allow for termination of the contract on the occurrence of certain events of defaults and termination events. Some of these agreements concerning commodity derivatives include Credit Support Annexes with the aim of reducing credit and counterparty risk by requiring margin call deposits in the form of cash or letter of credit for balances exceeding the mutually agreed limit.
Neste Oil reduces credit risk by executing treasury transactions only with approved counterparties. All counterparties are rated with the minimum counterparty credit rating requirement being BBB (S&P). Foreign subsidiaries may have bank accounts in unrated financial institutions. In order to decrease credit risk associated with local banks used by subsidiaries in foreign countries, the subsidiaries are required to deposit their excess cash balances with the Group Treasury on an ongoing basis.
As to counterparty risk management vis-à-vis insurance companies for Neste Oil Group, the minimum credit rating requirement for the insurers and/or reinsurers is A– (S&P).
As of the balance sheet date, the biggest receivable balances were from the customers in the Scandinavian wholesale markets. In addition, the Group has a large number of different counterparties on the international markets. As to the range of the counterparties, the most significant types are mainly large international oil companies and financial institutions. However, the Group's exposure to unexpected credit losses within one reporting segment may increase with the concentration of credit risk through a number of counterparties operating in the same industry sector or geographical area, which may be adversely affected by changes in economic, political or other conditions. These risks are reduced by taking geographical risks into consideration in decisions on creditworthiness.
The Group follows the credit and counterparty guidelines in review and follow-up process of the credit limits daily. The impact of the financial market conditions to the Group's counterparties with regard to the associated credit risk are also assessed in the process, by taking into account all available information about counterparties, their financial situation and business activities. Balances due from a single sales transaction to a counterparty with open credit line may amount to approximately EUR 7.5–8 million due to the nature of the oil business, where cargoes including large volumes of refined oil products, for example 10,000 tons, are sold as one transaction. For this example, oil product price is based on a crude oil price of USD 110/barrel representing the price level prevailing at the turn of the financial period 2013/2014.
Vis-à-vis counterparties to the contracts comprising the derivative financial instruments exposure as at 31 December 2013, approximately 92% of the counterparties or their parent companies related to commodity derivative contracts have investment grade rating from Standard & Poor's, Moody's or Fitch. Respectively, Group Treasury had an exposure for currency and interest rate derivative contracts as at 31 December 2013 with banks, of which all have investment grade rating at a minimum. Derivative transactions are also done through exchange, which reduces credit risk.
The following table shows an analysis of trade receivables by age. 43% of the trade receivables portfolio exposure is from counterparties or their parent companies having credit rating BBB– (S&P) minimum. 57% consists of trade receivables from the counterparties not having credit rating, most of it comprising from a large number of corporate and private customers. With respect to undue trade receivables, there were no indications as of 31 December 2013 that the counterparties would not meet their obligations.
Analysis of trade receivables by age
MEUR 2013 2012
Undue trade receivables 832 961
Trade receivables 1–30 days overdue 37 47
Trade receivables 31–60 days overdue 2 0
Trade receivables more than 60 days overdue 5 0
876 1,008
Capital risk management
The Group's objective when managing capital is to secure a capital structure that ensures access to capital markets at all times despite the volatile nature of the industry in which Neste Oil operates. Despite the fact that the Group does not have a public credit rating, the Group's target is to have a capital structure equivalent to that of other refining and marketing companies with a public investment grade rating. The capital structure of the Group is reviewed by the Board of Directors on a regular basis.
The Group monitors its capital on the basis of leverage ratio, the ratio of interest-bearing net debt to interest-bearing net debt plus total equity. Interest-bearing net debt is calculated as interest-bearing liabilities less cash and cash equivalents.
Over the cycle, the Group's leverage ratio is likely to fluctuate, and it is the Group's objective to maintain the leverage ratio within the range of 25–50%. The leverage ratio as of 31 December 2013 and 2012 was as follows:
MEUR 2013 2012
Total interest-bearing liabilities 1) 1,758 2,345
Cash and cash equivalents 2) 506 410
Interest-bearing net debt 1,252 1,935
Total equity 2,924 2,540
Interest-bearing net debt and total equity 4,176 4,475
Leverage ratio 30.0% 43.2%
1) Includes EUR 11 million of interest-bearing liabilities related to Assets held for sale in 2012, as disclosed in Note 5.
2) Includes EUR 1 million of cash and cash equivalents related to Assets held for sale in 2012, as disclosed in Note 5.