27. Financial instruments – Risk management and fair value

Because financial instruments are used, the Group is exposed to the following risks:

• market risks, consisting of:

• • Interest rate risk

  • Currency risk

  • Energy price risk

• Credit risk

• Liquidity risk

• Insurance risks

Risk management framework

The Executive Board bears the final responsibility for the design and supervision of the Group’s risk management framework. The Risk and Audit Committee and the Supervisory Board ensure that the risk management framework is adequate in view of the risks to which the Group is exposed. The Group’s Risk and Audit Committee is supported in its supervisory role by NS Audit, NS Risk and the Group Control & Expertise department. NS Audit provides additional assurance concerning effective control of all NS business processes by performing regular and ad hoc evaluations. The findings of NS Audit are reported to the Risk and Audit Committee.

The Group's risk policy aims to identify and analyse the risks confronting the group, establish suitable risk limits and controls and monitor compliance with the limits. Policy and systems for financial risk management are regularly assessed and, where necessary, adjusted to allow for changes in market conditions and the Group's activities. Financial risk management is one element of the NS risk framework.

In order to ensure adequate risk management, additional policies have been defined for a number of business units. For instance, NS Insurance and Abellio have specific risk controls reflecting the nature of their activities, unlike the other business units, where Corporate Treasury determines the substance of the financial risk management.

The Group is involved in transport franchises abroad (the United Kingdom and Germany) through Abellio. These operations are primarily in the United Kingdom, mainly on an independent basis or with minority shareholders, and in part through a joint venture with the partner Serco, in which both partners have an equal share. The results from the activities in the United Kingdom are recognised as results from discontinued operations. The activities in Germany were deconsolidated as of 30 June 2021, as predominant control over these group companies has been lost. As a result, these activities no longer fall under Abellio’s financial risk management. However, the activities of the entities acquired in 2022 in Germany will return to the financial risk management of the Group with effect from the acquisition. The financial risk management of Abellio and Transport Holding Germany is part of the risk framework of foreign activities and therefore of the NS risk framework. Agreements were reached in 2016 with the shareholder about the amount of the financial resources permitted to be involved in the Group's activities abroad.

Market risks

Market risk is the risk that the Group's income and expenditure, or the value of investments in financial instruments, will be negatively affected by changes in market prices, such as commodity prices, currency exchange rates and interest rates. The management of market risk aims to keep the market risk position within acceptable limits while optimising return on investment. Market risk comprises three types of risk: interest rate risk, currency risk and price risk.

Interest rate risk

The Group's policy is aimed at ensuring that at least 50% of the interest rate risk on borrowings is based on a fixed rate of interest. When determining the interest rate risk on borrowings, the Group can take account of the cash and cash equivalents available that can neutralise the interest rate risk of loans at variable rates. The Group uses derivatives such as interest rate swaps to limit the interest rate risks. Interest rate risks are predominantly managed centrally. Regulations and defined position limits apply to interest rate positions held with regard to foreign units within the Group. No speculative positions are held.

Exposure to interest rate risks

The interest rate profile of the interest-bearing financial instruments is as follows:

The increase/decrease in interest rates by 100 basis points results in a higher/lower interest expense of € 4 million.

In 2022, the Group concluded a number of forward starting interest rate swaps to hedge the interest rate risk of future financing (cash flow hedge accounting). The nominal value of the forward contracts at year-end 2022 is € 350 million. The loans are expected to be contracted in 2023. The carrying amount of these instruments as at 31 December 2022 is € 38 million positive.

Currency risk

The Group is exposed to currency risks on purchases, trading activities, cash and cash equivalents, borrowings, other balance sheet positions and off-balance sheet commitments denominated in currencies other than the euro. Because of its business activities, the Group mainly has currency positions in pounds sterling (GBP) and Swiss francs (CHF).

The risk of fluctuations in exchange rates on repayments, interest and dividend flows within the Group is hedged by means of forward exchange contracts, spot and/or forward purchases and sales and swaps, thereby hedging one or more of the risks to which the primary financial instruments are exposed. Purchases and sales, investment and financing commitments and settling accounts with foreign railway companies mainly take place using the functional currencies of the Group's business units, namely euros (EUR) and pounds sterling (GBP).

The currency risk on the capital interests denoted in a foreign currency (pounds sterling and Swiss francs) is not hedged. The foreign exchange gains or losses for the regular balance sheet items in the value of the participating interest are recognised in equity through the legal reserve for exchange differences.

At the end of 2022 and 2021, no materially significant positions were held in currencies other than the functional currency of the business units concerned.

At the end of 2022, the Group entered into a number of forward contracts and currency swaps in GBP to hedge specific currency positions relating to loans to group companies and expected cash flows from the United Kingdom. The nominal value of the hedged positions as at the end of 2022 was € 133 million (year-end 2021: € 216 million). The fair value of these currency derivatives at the end of 2022 was € 3 million (2021: € 13 million negative).

Sensitivity analysis for foreign currencies

Given that no materially significant items in financial instruments were held in foreign currencies at the end of 2022 or the end of 2021, other than those referred to above, a change in the value of the euro with respect to a foreign currency at the end of the year will not have any material impact on equity and profits over the reporting period.

Energy price risk

The Netherlands

The Group is affected by market fluctuations in the price of energy. In 2014, the Group signed a ten-year contract (2014-2024) with Eneco for the supply of ‘green’ traction electricity for the rolling stock fleet in the Netherlands. From 2015 onwards, 50% of the trains in the Netherlands ran on ‘green’ electricity. Since 2017, the Group’s traction has been entirely green. The contract covers the following risks (in whole or in part):

• Price risk: the fees for the Programme for Responsibility and Guaranteed Origins are fixed for the entire contractual period. The contract offers the option of purchasing the requisite electricity for future years based on a hedging strategy, which limits the exposure to market prices.

• Credit risk: the credit risk is limited to the thresholds that depend on the credit rating. If the exposure (which allows for aspects such as the difference between market values and contract values of electricity covered using a hedging strategy) exceeds a certain threshold (that depends on the credit rating), the Group or Eneco must give the other party guarantees or provide cash collateral.

• Volume risk: the volume risk is limited because the volume for the previous year is given as the volume required in each new year. In addition, a range also applies in the year in question, within which fluctuations in the volume consumed do not affect the price.

The contract complies with the ‘own use’ criteria and is not classified as a derivative.

Credit risk

Credit risk is the risk of financial loss by the Group if a customer or counterparty to a financial instrument does not meet its contractual obligations. Credit risks mainly arise from receivables from customers and from investments. There was no significant concentration of credit risks as at the balance sheet date.

The carrying amounts of the financial assets represent the maximum credit risk. For details of the credit risk regarding Eurofima, see note 31. The maximum exposure to credit risk at the reporting date was as follows:

Investments

The Group limits its credit risk in its investments by only investing with other parties that comply with the policy drawn up by the Group. Regular checks are performed to establish whether the contractual parties still comply with the policy or whether further action is needed.

Given the creditworthiness of the counterparties, the Group expects that those counterparties will fulfil their obligations. No impairment losses were incurred on the investments, bonds and deposits in 2022 or 2021. Investments, except investments in money market funds, are in principle made with counterparties that have a credit rating of at least A- from Standard & Poor’s and a long-term credit rating of at least A3 from Moody’s, or with a number of Dutch municipalities. If a counterparty only has a single credit rating, it must satisfy Standard & Poor’s or Moody’s rating requirements as stated above. Investments that no longer comply with this policy are either permissible as exceptions and monitored frequently or reduced (generally through normal progression), which may persist for some time after the balance sheet date. For investments in money market funds there is no rating requirement, the fund is selected on the basis of the investment policy of the fund and NS periodically monitors the developments of the money market fund. The Group’s foreign companies do not have significant long-term material cash surpluses, unless this is the result of their normal business activities (monies received in advance).

Trade and other receivables

The Group's credit risk relating to trade and other receivables is mainly determined by the individual characteristics of the separate customers. The demographic features of the customer base, including the risk of non-payment in the sector and the country in which the customers are active, have less impact on the credit risk. About 17% (2021: 16%) of the Group’s revenues are from sales transactions with the Dutch Education Executive Agency (DUO). As part of the credit policy applied by the business units, the individual creditworthiness of each new customer is assessed before standard payment and delivery conditions are offered to the customer. In the case of contract renewals, figures from the business unit's own experience are also used in assessing creditworthiness. In the assessment of the credit risk, customers are divided into groups based on credit characteristics; these groups include government, companies, private individuals and customers with possible financial problems in the past. Deliveries to customers with a high risk profile are only made after approval by the Executive Board. Business has been conducted with the majority of customers for many years, with only occasional (non-material) losses having been incurred.

Liquidity risk

The liquidity risk is the risk that the Group will have difficulty meeting its obligations. Based on the principles underlying liquidity risk management, sufficient liquid assets must be retained, as far as possible, to be able to meet the current and future financial obligations in the short term, under both normal and difficult circumstances, without any unacceptable risks being incurred or the Group’s reputation being jeopardised. The Group has sufficient cash or assets that are readily convertible into cash. In addition, the Group can make use of credit facilities totalling € 950 million. Of these credit facilities, € 500 million relates to a so-called revolving credit facility (available until 20 December 2027), a € 200 million credit facility that will be used before 31 December 2023 to contract a long-term loan, and a financing facility is available under which one or more long-term loan(s) can be contracted for a maximum cumulative amount of € 250 million until 17 December 2024. In addition, the Group expects to be able to make use of alternative financing options if the situation so requires.

For the assumptions regarding the availability of cash, please refer to the section ‘Impact of COVID-19 and important (result) developments’ and the going concern assumptions used.

The Group manages the cash and cash equivalents on the basis of regular liquidity forecasts using a bottom-up approach. On the basis of this forecast, financing limits are set for the business units that are clients of Corporate Treasury’s in-house bank. The bank monitors these limits and they cannot be exceeded unless authorisation has been obtained. This gives Corporate Treasury an early warning system. The liquidity forecast and the aforementioned financing limits lets Corporate Treasury manage the cash and cash equivalents by lending and withdrawing funds.

The following table shows the contractual maturities of the financial liabilities, including the estimated interest payments. The sums are gross amounts and have not been discounted.

When calculating the future cash flows, it is assumed that the future variable interest rates are the same as the last known variable interest rates.

As regards the risks relating to capital, the Group has agreed a dividend policy with the shareholder.

Insurance risks

In the course of its operational activities, the Group is exposed to risks that can be insured against. Risks beyond the scope of the business units are managed via the subsidiary NS Insurance. This refers to the risk of losses due to collisions, fire and liability as well as direct trading loss. The maximum extent of these losses is calculated by external specialists once every three years, or more often if changed circumstances make this necessary. The subsidiary, NS Insurance, insures the above risks for the business units. It does not insure third parties. If the total claims burden in any year exceeds NS Insurance's own internal cover, the additional cover required is provided by reinsurance. The Group's loss claims are paid from the premium income and investment income of NS Insurance. If the total costs including the claims burden exceed the revenue, these costs are paid from the distributable reserve of NS Insurance (if this is sufficient).

NS Insurance uses stop-loss reinsurance contracts for reinsurance. MPL (maximum possible loss) studies are carried out regularly to determine limits for the insurance. Provided market conditions allow, NS Insurance only takes out reinsurance with parties that have at least an A- rating. If the rating drops below A-, it has the option of cancelling the reinsurance agreement. This has as yet never happened. The reinsurers of NS Insurance had ratings of at least A- as at the end of 2021.

NS Insurance is an insurance company and is supervised by De Nederlandsche Bank and the Netherlands Authority for the Financial Markets (AFM). Insurers must hold sufficient capital reserves to satisfy the minimum solvency requirement of Solvency II (SCR, the Solvency Capital Requirement). Insurers are also required to determine their own standard solvency requirement. NS Insurance has determined its standard solvency requirement in such a way that it will still be able to satisfy the SCR even if the stress scenario arises. Its standard solvency requirement is € 46 million. NS Insurance comfortably meets this requirement. NS Insurance is fully consolidated in the Group figures.