Capital management Financing policy
KPN is committed to strive for the right balance between a prudent financing policy, investments in the business and shareholder remuneration. KPN is committed to an investment grade credit profile. It is KPN’s policy to utilize its excess cash for operational and financial flexibility, (small) in-country mergers and acquisitions and/or shareholder remuneration.
The table below shows the calculation of KPN’s Net Debt/EBITDA ratio, which is based on numbers including E-Plus until its sale on October 1, 2014. Therefore, a number of corrections were made to the borrowings in Note 22 (which excludes E-Plus) in order to arrive at the Net Debt for the Net Debt/EBITDA calculation.
Amounts in millions of EUR 2014 2013
Total borrowings (carrying values, excluding derivatives, excluding E-Plus) [22] 10,441 13,663
Financial leases E-Plus – 352
Bank overdraft (included in net cash and cash equivalents) [18] -31 -326
Perpetual hybrid bonds (issued in EUR) 1,100 1,100
50% equity credit for hybrid bonds -1,013 -1,013
Cash collateral on derivatives -100 -6
Difference between carrying value and nominal value -821 -367
Adjusted gross debt 9,576 13,403
Cash and cash equivalents (including held for sale) 1,976 3,946
Bank overdraft -31 -326
Net cash and cash equivalents 1,945 3,620
Short-term investments 300 –
Net Debt 7,331 9,783
Normalized EBITDA 2,662 3,994
Net Debt/EBITDA 2.8x 2.4x
[..] Bracketed numbers refer to the related Notes.
KPN defines EBITDA as operating result before depreciation and impairments of property, plant and equipment and amortization and impairments of intangible assets. Note that KPN’s definition of EBITDA deviates from the literal definition of earnings before interest, taxes, depreciation and amortization and should not be considered in isolation or as a substitute for analyses of the results as reported under IFRS. In the Net Debt/EBITDA ratio, KPN defines Net Debt as the nominal value of interest-bearing financial liabilities excluding derivatives and related collateral, representing the net repayment obligations in EUR, taking into account 50% of the nominal value of the hybrid capital instruments, less net cash and short-term investments, and defines normalized EBITDA as a 12-month rolling total excluding restructuring costs, incidentals and major changes in the composition of the Group (acquisitions and disposals).
Shareholder remuneration policy
KPN is committed to strive for the right balance between a prudent financing policy, investments in the business and shareholder remuneration.
KPN did not pay dividends over 2013, nor did it return excess cash to shareholders in another way.
KPN recommenced dividend payments subsequent to the sale of E-Plus. KPN declared an interim dividend in respect of 2014 of EUR 0.02 per share, or in total EUR 85 million, which was paid on October 13, 2014. KPN intends to pay a total dividend per share of EUR 0.07 in respect of 2014. The final dividend of EUR 0.05 per share is expected to be paid in April 2015. KPN announced it would pay a total dividend per share of EUR 0.08 in respect of 2015.
This policy may change and is based on a number of assumptions concerning future events and is subject to uncertainties and risks that are outside KPN’s control.
FINANCIAL STATEMENTS — CONSOLIDATED FINANCIAL STATEMENTS
Key Consolidated Financial
Statements General Notes Notes to
Profit or Loss Notes to
Financial Position Other Notes
Corporate Financial
Statements Other Information
Other Notes to the Consolidated Financial Statements
< Notes to Financial Position 28 29 30 31 32 33 34 35 Corporate Financial Statements >
Financial risk management
KPN is exposed to a variety of financial risks. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on KPN’s financial position and performance. KPN uses derivative financial instruments to hedge certain risk exposures.
The financial risks are managed by KPN’s Treasury department under policies approved by the Board of Management. These policies are established to identify and analyze financial risks faced by KPN, to set appropriate risk limits and controls, and to monitor adherence to those limits. Treasury manages these risks in close cooperation with the Group companies, business operations and other corporate departments. During 2013 and 2014, several Treasury policies were reviewed and approved by the Board of Management. KPN’s key treasury risks are the following:
ý Credit risk and counterparty risk;
ý Liquidity risk; and
ý Market risk (currency risk and interest rate risk).
In addition, KPN’s Treasury department provides cash management and funding services to the Group companies and business operations.
This Note presents information about the Group’s exposure to each of the above-mentioned risks, the Group’s objectives, policies and processes for measuring and managing risks. Further quantitative disclosures are included throughout these Consolidated Financial Statements.
The table below summarizes the Group’s financial assets and liabilities:
Amounts in millions of EUR
December 31, 2014 December 31, 2013
Carrying amount Fair value Carrying amount Fair value
Financial assets
Fair value through profit and loss:
Derivatives – non-current [27] 328 328 117 117
Derivatives – current [27] – – – –
Loans and receivables:
Non-current receivables from financial leases [14] 2 2 3 3
Loans to associates and joint ventures [12] 19 19 453 453
Trade receivable [16] 514 514 690 690
Other receivables [16] 36 36 181 181
Other current financial assets [17] 300 300 – –
Cash and cash equivalents [18] 1,976 1,976 3,946 3,946
Subtotal 3,175 3,175 5,390 5,390
Available-for-sale financial assets [13] 2,713 2,713 20 20
Total 5,888 5,888 5,410 5,410
Financial liabilities
Fair value through profit and loss:
Derivatives – non-current [27] 191 191 753 753
Derivatives – current [27] 7 7 10 10
Subtotal 198 198 763 763
Loans and borrowings:
Borrowings [22] 10,441 11,556 13,663 14,404
Trade payables [26] 819 819 1,091 1,091
Other payables and accrued expenses and
interest [26] 1,208 1,208 1,255 1,255
Subtotal 12,468 13,583 16,009 16,750
Total 12,666 13,781 16,772 17,513
[..] Bracketed numbers refer to the related Notes.
Key Consolidated Financial
Statements General Notes Notes to
Profit or Loss Notes to
Financial Position Other Notes
Corporate Financial
Statements Other Information
< Notes to Financial Position 28 29 30 31 32 33 34 35 Corporate Financial Statements >
The following table presents the Group’s financial assets and liabilities that were measured at fair value at December 31, 2014.
Amounts in million of EUR
Total
Level 1 Level 2 Level 3 Balance
Assets
Financial assets at fair value through profit and loss:
Derivatives (cross-currency interest rate swap) – 74 – 74
Derivatives (interest rate swap) – 238 – 238
Other derivatives – 1 15 16
Available-for-sale financial assets:
Listed securities 2,703 – – 2,703
Unlisted securities – – 10 10
Total assets 2,703 313 25 3,041
Liabilities
Financial liabilities at fair value through profit and loss:
Derivatives (cross-currency interest rate swap) – 182 – 182
Derivatives (interest rate swap) – 13 – 13
Other derivatives – 3 – 3
Total liabilities – 198 – 198
The following table presents the Group’s financial assets and liabilities that are measured at fair value at December 31, 2013.
Amounts in million of EUR
Total
Level 1 Level 2 Level 3 Balance
Assets
Financial assets at fair value through profit and loss:
Derivatives (cross-currency interest rate swap) – 13 – 13
Derivatives (interest rate swap) – 93 – 93
Other derivatives – – 11 11
Available-for-sale financial assets:
Listed securities 10 – – 10
Unlisted securities – – 10 10
Total assets 10 106 21 137
Liabilities
Financial liabilities at fair value through profit and loss:
Derivatives (cross-currency interest rate swap) – 415 – 415
Derivatives (interest rate swap) – 13 – 13
Other derivatives – 1 334 335
Total liabilities – 429 334 763
Fair value estimation
The fair value of financial instruments traded in active markets is based on quoted market prices. If applicable, these instruments are included in Level 1.
An instrument is included in Level 2 if the financial instrument is not traded in an active market and if the fair value is determined by using valuation techniques based on maximum use of observable market data for all significant inputs. For the derivatives used for hedging purposes, KPN uses the estimated fair value of financial instruments determined by using available market information and appropriate valuation methods, including relevant credit risks. The estimated fair value approximates to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
KPN has its derivative instruments outstanding with financial institutions that had a credit rating equivalent to A3 or higher with Moody’s at December 31, 2014.
If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3 and the fair value is estimated using models and other valuation methods. To the extent possible, the assumptions and inputs used take into account market pricing information and expectations. However, such information is by its nature subject to uncertainty. Changes arising as new information becomes available could impact income or other comprehensive income.
The valuation of available-for-sale unlisted securities is based upon a discounted cash flow model.
FINANCIAL STATEMENTS — CONSOLIDATED FINANCIAL STATEMENTS
Key Consolidated Financial
Statements General Notes Notes to
Profit or Loss Notes to
Financial Position Other Notes
Corporate Financial
Statements Other Information
< Notes to Financial Position 28 29 30 31 32 33 34 35 Corporate Financial Statements >
Other Notes to the Consolidated Financial Statements
Other derivatives under financial liabilities at fair value through profit and loss in 2013 are the call/put arrangements of Reggefiber Group B.V. consisting of a call/put option to acquire an additional 9% stake in Reggefiber and a put option held by Reggeborgh to sell the remaining 40% of its shares in Reggefiber to KPN. These options are valued using a binominal tree approach and depend on the business performance of Reggefiber under various scenarios with different probabilities (combination of penetration rates, Capex per home passed), the probability of approval by Dutch competition authority ACM, discount rates and the conditions of the call/put arrangement itself. Based on realized business performance and management’s best estimate of the likelihood of possible scenarios and expected business performance, the value of the call/put arrangements at October 31, 2014 (the date control of Reggefiber was obtained after regulatory approval to acquire an additional 9% stake in Reggefiber through exercise of the call option) was EUR 493 million, at December 31, 2013, EUR 334 million and at January 1, 2013 EUR 278 million (liability). During 2014, the change in the value of the call/put arrangements resulted in a loss of EUR 159 million in the Consolidated Statement of Profit or Loss (2013: EUR 56 million).
These options have been exercised in 2014 (refer to Note 31).
The following table presents the net changes in ‘other derivatives’ in Level 3:
Amounts in million of EUR 2014 2013
Balance as of January 1 334 278
Losses recognized in profit or loss [6, 31] 159 56
Exercise [31] -493 –
Balance as of December 31 – 334
[..] Bracketed numbers refer to the related Notes.
For other financial assets and liabilities, the following methods and assumptions were used to determine fair value:
ý Borrowings: based on the listed price of the bonds.
ý Cash, cash equivalents, other current financial assets, accounts receivable and payable, Preference Shares B: as the maturity of these financial instruments is short, the carrying value approximates to fair value.
Listed securities in 2014 includes KPN’s 20.5% share in Telefónica Deutschland (refer to Note 13).