| Financial Instruments | Note 21 - Financial Instruments
A.
Overview The Company has exposure to the following risks from its use of financial instruments:
●
Credit risk
●
Liquidity risk
●
Market risk This note presents quantitative and qualitative information about the Company’s exposure to each of the above risks, and the Company’s objectives, policies and processes for measuring and managing risk. In order to manage these risks and as described hereunder, the Company executes transactions in derivative financial instruments. Presented hereunder is the composition of the derivatives:
For the year ended December
2021
2020
€ in thousands
Derivatives presented under current assets
Currency swap 639 12
Forward contracts - 66
639 78
Derivatives presented under non-current assets
Financial power swap - 10,238
Currency swap 2,635 -
2,635 10,238
Derivatives presented under current liabilities
Swap contracts (3,431
) (1,378
)
Financial power swap (11,352
) -
(14,783
) (1,378
)
Derivatives presented under non-current liabilities
Financial power swap (9,542
) -
Currency swap - (144
)
Swap contracts (565
) (8,192
)
(10,107
) (8,336
)
The following table sets forth the details of the Company’s Forward and SWAP contracts with banking institutions:
December 31, 2021
Currency/
linkage/interest rate
receivable
Currency/
Linkage/interest rate Payable
Date of expiration
Fair value - € in
thousand
Euro 17.6 million interest swap transaction for a period of 18 years, semi-annually.
Euribor 6 months
Fixed 1%
December 20, 2037 (706 )
The principal of the interest rate swap transaction is based on a pre-determined sculptured repayment schedule in the maximum amount of Euro 131
Euribor 6 months
Fixed 0.9412%
September 30, 2031 (3,290 )
NIS 100 million currency swap transaction Euro/NIS for a period of 4 years, semi-annually.
NIS Euro
June 2025 3,274
Financial power swap- Electricity price swap fixed for float
Electricity price in Spain
Fixed price
September 30, 2030 (20,894 )
B.
Risk management framework The Company's management and board of directors have overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management of standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Company Audit Committee oversees how management monitors compliance with the Company’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. The Company Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.
C.
Credit Risk As at December 31, 2021, the Company does not have any significant concentration of credit risk. Cash and short-term deposits As at December 31, 2021 and 2020, the Company had cash and cash equivalents in the amount of €41,229 thousand and €66,845 thousand, respectively. The Company’s cash and cash equivalents are deposited with financial institutions that received a credit rating (international rating scale). See also Note 4. Marketable securities As at December 31, 2021 and 2020, the Company invested in a traded Bond in an amount of €1,946 thousand and €1,761 thousand, respectively, with the intention to maintain the value of its liquid resources. See also Note 5. Restricted cash As at December 31, 2021 and 2020, the Company had a balance of current restricted cash in an amount of €1,000 thousand and €0 thousand, respectively, and a balance of non-current restricted cash of €15,630 thousand and €9,931 thousand, respectively. See also Note 5. Trade and other receivables As at December 31, 2021 and 2020, the Company had a balance of trade receivables of €598 thousand and €382 thousand, respectively. This balance mainly refers to the balance from the IEC for the PV Plant located in Israel and is due in 30 days. It is also referring to NEXUS or GNERA that represent the PV Plants located in Spain in their dealings with the Spanish National Energy Commission, and are due within 60 days from issuance and trade receivables from Gas sold in market price in The Netherland due within 30 days from issuance. As at December 31, 2021 and 2020, the Company had a balance of revenue receivables of €3,794 thousand and €3,420 thousand, respectively. This balance refers to amounts to be paid from several entities. In Spain, the amounts to be paid are from NEXUS or GNERA that represent the PV Plants located in Spain in its dealings with the Spanish National Energy Commission. To the extent the facility is eligible to receive incentives (such as the Company’s four Spanish PV facilities that commenced operations prior to 2020), the incentives (consisting of an investment retribution and operational retribution) are paid on a monthly basis (commencing January) based on varying percentages of the accumulated incentives from the beginning of the fiscal year, provided that the entire amount of the incentives is required to be paid to the eligible entity by the end of June of the following fiscal year. In the Netherlands, the amounts to be paid are from Enterprise Agency that is responsible to pay the amount of subsidy for the Biogas installations in the Netherlands. The incentives are paid through equal monthly installments based on the effective production of the previous year for each plant, or if not available, on the basis of the regional forecast. The balance is paid within the end of June of the subsequent year. The Company’s management closely monitors the economic and political environment in which it operates. As per the Company's management estimations there are no significant credit risks assigned to the trade receivables and income receivables as these amounts are due by governmental agencies. As at December 31, 2021 and 2020, the Company had a balance of government authorities' receivables of €1,602 thousand and €3,232 thousand, respectively. This balance refers to VAT and withholding tax receivables in Spain, Italy, Israel and the Netherlands.
D.
Liquidity risk Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. The cash surpluses held by Company that are not required for financing their current activity, are invested in interest-bearing investment channels such as: short-term deposits and marketable securities. These investment channels are chosen by the Company’ managements based on future forecasts of the cash the Company will require in order to meet their liabilities. Cash flow forecasts are determined on both an individual company basis and a consolidated basis. The Company examines current forecasts of its liquidity requirements so as to make certain that there is sufficient cash for its operating needs, and it is careful at all times to have enough unused credit facilities so that the Company does not exceed its credit limits and is in compliance with its financial covenants. These forecasts take into consideration matters such as the Company’s plan to use debt for financing its activity, compliance with required financial covenants, compliance with certain liquidity ratios, and compliance with external requirements such as laws or regulation. The Company has contractual commitments due to debentures issued, financing agreements and EPC and O&M agreements of its subsidiaries in Spain and in Israel. See also Note 6, Note 11 and Note 12.
The following are the contractual maturities of financial liabilities at undiscounted amounts and based on the spot rates at the reporting date, including estimated interest payments. This disclosure excludes the impact of netting agreements:
December 31, 2021
Carrying
Contractual
Less than
More than
amount
cash flows
1 year
2 years
3-5 years
5 years
€ in thousands
Non-derivative financial liabilities
Long term loans, including current maturities 218,895 240,038 147,127 20,671 18,347 53,892
Debentures 137,299 150,116 24,244 66,481 59,391 -
Lease liabilities 20,129 25,825 4,832 2,244 2,201 16,548
Trade payables and other accounts payable 22,058 22,058 22,058 - - -
398,381 438,037 198,261 89,396 79,939 70,440
Derivative finance liabilities
Financial power swap 20,894 20,894 11,352 14,079 1,961 (6,498
)
Swap contracts 3,996 3,996 3,431 234 157 174
24,890 24,890 14,783 14,313 2,118 (6,324
)
December 31, 2020
Carrying
Contractual
Less than
More than
amount
cash flows
1 year
2 years
3-5 years
5 years
€ in thousands
Non-derivative financial liabilities
Long term loans, including current maturities 198,169 263,112 20,896 34,645 32,594 174,977
Debentures 82,724 91,431 13,502 33,368 44,561 -
Lease liabilities 17,789 28,910 1,051 1,941 1,799 24,119
Trade payables and other accounts payable 13,706 13,706 13,706 - - -
312,388 397,159 49,155 69,954 78,954 199,096
Derivative finance liabilities
Currency swap 132 132 (12
) 63 81 -
Swap contracts 9,570 9,570 1,378 2,490 2,109 3,593
9,702 9,702 1,366 2,553 2,190 3,593
E.
Market risk Market risk is the risk that changes in market prices will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. The principal risks that the Company faces, as assessed by management, are as follows: a change in the regulation applicable to the area of activity, a change in the tariffs as approved by the relevant electricity authorities in the countries in which the Company operates, changes in the situation of the electricity and gas market, political and security events. The Company uses hedging instruments in an attempt to manage interest rate, currency and other market-related risks. The majority of the Company's derivative contracts are OTC derivatives, i.e., derivative contracts that are not transacted on an exchange. These derivatives are entered into under ISDA Master Agreements. If counterparty defaults on these contracts, the underlying exposure would no longer be effectively hedged, which could result in losses. Disruptions such as market crises and economic recessions may put a strain on the availability and effectiveness of hedging instruments. For example, although the Company estimates the expected transition away from Libor and Euribor, as addressed by the Amendments to IAS 39, Financial Instruments, Interest Rate Benchmark Reform – Phase 2, not to have a material effect on the Company's financial statements, similar benchmark rates may have a different impact on the hedged item and the hedging instrument, which could cause some of the Company hedge to become ineffective, resulting in potential losses.
(1)
Foreign currency risk As a result of the Company’s operations and presentation currency, the Company is exposed to the impact of exchange rate fluctuations of the Euro/USD and NIS/Euro on the Company’s balance sheet and profit and loss. In order to manage the currency risk resulting from the Series B Debentures, which are denominated in NIS, the Company executed currency swap transactions in April 2017. The Company exchanged Series B Debentures NIS denominated notional principal in the aggregate amount of NIS 83,232 thousand with a euro notional principal. Such currency swap transactions qualified for hedge accounting. Following the repayment of the Series B Debentures, the Company realized the currency swap in the amount of €246 thousand. In order to manage the currency risk resulting from the Series C Debentures, which are denominated in NIS, the Company executed currency swap transactions in March 2021. The Company exchanged Series C Debentures NIS denominated notional principal in the aggregate amount of NIS 100,000 thousand with a euro notional principal. Such currency swap transactions qualify for hedge accounting.
(a)
The exposure to linkage and foreign currency risk The Company's exposure to linkage and foreign currency risk was as follow:
December 31, 2021
Non-monetary/ Non finance
NIS(*)
Unlinked
EURO
Total
€ in thousands
Current assets:
Cash and cash equivalents - 30,405 1,090 9,734 41,229
Marketable securities - - 1,946 - 1,946
Short term deposits - 28,410 - - 28,410
Restricted cash - - - 1,000 1,000
Receivable from concession project - 1,784 - - 1,784
Trade and other receivables 1,020 739 - 7,728 9,487
Non-current assets:
Investments in equity accounted investees 25,534 8,495 - - 34,029
Advances on account of investments 1,554 - - - 1,554
Receivable from concession project - 26,909 - - 26,909
Fixed assets 340,065 - - - 340,065
Right-of-use asset 23,367 - - - 23,367
Intangible asset 4,762 - - - 4,762
Restricted cash and deposits - 6,630 - 9,000 15,630
Deferred tax 12,952 - - - 12,952
Long term receivables 1,928 1,272 - 2,188 5,388
Derivatives - - - 2,635 2,635
Current liabilities:
Current maturities of long term bank loans - (2,024
) - (124,156
) (126,180
)
Current maturities of long term loans - - - (16,401
) (16,401
)
Current maturities of debentures - (19,806
) - - (19,806
)
Trade payables - (218
) - (2,686
) (2,904
)
Other payables - (6,882
) (527
) (13,397
) (20,806
)
Current maturities of derivatives - - - (14,783
) (14,783
)
Current maturities of lease liabilities (3,782
) - (547
) (4,329
)
Non-current liabilities:
Long-term lease liabilities - (5,154
) - (10,646
) (15,800
)
Long-term loans - (15,803
) - (23,290
) (39,093
)
Other long-term bank loans - (6,898
) - (30,323
) (37,221
)
Debentures - (117,493
) - - (117,493
)
Deferred tax (8,836
) - - - (8,836
)
Derivatives - - - (10,107
) (10,107
)
Other long-term liabilities - (3,905
) - - (3,905
)
Total exposure in statement
of financial position in
respect of financial assets
and financial liabilities 402,346 (77,321
) 2,509 (214,051
) 113,483 (*) Including items linked to the Israeli CPI
December 31, 2020
Non-monetary/ Non finance
NIS(*)
Unlinked
EURO
Total
€ in thousands
Current assets:
Cash and cash equivalents - 50,195 952 15,698 66,845
Marketable securities - - 1,761 - 1,761
Short term deposits - 8,113 - - 8,113
Restricted cash - 1,491 - - 1,491
Receivable from concession project 380 3,155 384 5,906 9,825
Non-current assets:
Investments in equity accounted investees 23,489 8,745 - - 32,234
Advances on account of investments 2,423 - - - 2,423
Receivable from concession project - 25,036 - - 25,036
Fixed assets 264,095 - - - 264,095
Right-of-use asset 17,209 - - - 17,209
Intangible asset 4,604 - - - 4,604
Restricted cash and deposits - 5,882 - 4,049 9,931
Deferred tax 3,605 - - - 3,605
Long term receivables 2,593 30 - 139 2,762
Derivatives - - - 10,238 10,238
Current liabilities:
Current maturities of long term bank loans - (1,762
) - (8,470
) (10,232
)
Current maturities of long term loans - - - (4,021
) (4,021
)
Current maturities of debentures - (10,600
) - - (10,600
)
Trade payables - (221
) - (12,166
) (12,387
)
Other payables - (974
) (666
) (1,953
) (3,593
)
Current maturities of derivatives - - - (1,378
) (1,378
)
Current maturities of lease liabilities - (77
) - (413
) (490
)
Non-current liabilities:
Long-term lease liabilities - (1,436
) - (15,863
) (17,299
)
Long-term loans - (15,520
) - (119,000
) (134,520
)
Other long-term bank loans - (5,102
) - (44,294
) (49,396
)
Debentures - (72,124
) - - (72,124
)
Deferred tax (7,806
) - - - (7,806
)
Derivatives - - - (8,336
) (8,336
)
Other long-term liabilities - (2,478
) (486
) - (2,964
)
Total exposure in statement
of financial position in
respect of financial assets
and financial liabilities 310,592 (7,647
) 1,945 (179,864
) 125,026 (*) Including items linked to CPI
Information regarding significant exchange rates:
For the year ended December 31
Rate of
Rate of
Change
Change
%
Dollar
%
NIS
1 Euro in 2021 (7.7
) 1.132 (10.8
) 3.520
1 Euro in 2020 9.3 1.227 1.7 3.944
(b)
Sensitivity analysis A change as at December 31 in the exchange rates of the following euro against the USD and euro against the NIS, as indicated below would have increased (decreased) equity by the amounts shown below (after tax). This analysis is based on foreign currency exchange rate that the Company considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant.
December 31, 2021
Increase
Decrease
Equity
Equity
€ thousands
Change in the exchange rate of:
5% in the USD 111 (111
)
5% in NIS (1,098
) 1,098
December 31, 2020
Increase
Increase
Equity
Equity
€ thousands
Change in the exchange rate of:
5% in the USD 79 (79
)
5% in NIS 290 (290
)
(2)
Interest rate risk The Company is exposed to changes in fair value, as a result of changes in interest rate in connection with its loans and borrowings. The debt instruments of the Company bear interest at variable rates. The Company entered into various project finance agreements that are based on EURIBOR rate and therefore it may be affected by adverse movements in interest rates. The Company utilizes interest rate swap derivatives to convert certain floating-rate debt to fixed-rate debt. The Company’s interest rate swap derivatives involve an agreement to pay a fixed-rate interest and receive a floating-rate interest, at specified intervals, calculated on an agreed notional amount that matches the amount of the original loan and paid on the same installments and maturity dates. Sensitivity analysis A change in interest rate would have increased (decreased) profit or loss by the amounts shown below:
December 31,
2021
2020
Profit or loss
Profit or loss
€ in thousands
Increase of 1% 2,446 803
Increase of 3% 7,368 2,444
Decrease of 1% (2,474
) (836
)
Decrease of 3% (7,396
) (2,477
)
(3)
Electricity market prices risk As a result of the Company’s operations in the electricity market, the Company is exposed to the impact of changes in the electricity prices. In June 2018, Talasol executed the PPA. The power produced by the Talasol Project is expected to be sold by Talasol in the open market for the then current market power price and the PPA is expected to hedge the risks associated with fluctuating electricity market prices by allowing Talasol to secure a certain level of income for the power production included under the PPA. The hedge transaction becomes effective on Talasol requesting that the counter party will fix the fixed price pursuant to the price adjustment mechanism. The PPA became effective in March 2019. The fair value of the PPA is measured by discounting the future fixed and assessed cash flows, over the period of the contract and using market interest rates appropriate for similar instruments. The value is adjusted for the parties’ credit risks. The future prices are assessed the electricity field.
F.
Fair value
(1)
Fair values versus carrying amounts The carrying amounts of certain financial assets and liabilities, including cash and cash equivalents, other accounts receivables, pledged deposits, financial derivatives credit from banks and trade payables and other accounts payables are the same or proximate to their fair value. The fair values of the other financial liabilities, together with the carrying amounts shown in the statement of financial position, are as follows:
December 31, 2021
Fair value
Carrying
Valuation techniques for
Inputs used to
amount
Level 1
Level 2
Level 3
determining fair value
determine fair value
€ in thousands
Non-current liabilities:
Debentures 137,299 140,293 - -
Loans from banks and others (including current maturities) 218,895 - 223,287 -
Discounting future cash flows by the market interest rate on the date of measurement.
Discount rate of Euribor+ 1.76%- 2.75% with a zero floor, Euribor+ 5.27%, fix rate for 5 years 2.9%-3.55% and 4.65% Linkage to Consumer price index in Israel
356,194 140,293 223,287 -
December 31, 2020
Fair value
Carrying
Valuation techniques for
Inputs used to
amount
Level 1
Level 2
Level 3
determining fair value
determine fair value
€ in thousands
Non-current liabilities:
Debentures 82,724 84,814 - -
Loans from banks and others (including current maturities) 198,169 - 209,005 -
Discounting future cash flows by the market interest rate on the date of measurement.
Discount rate of Euribor+ 2.53%, fix rate for 5 years 2.9%-3.1% and 4.65% Linkage to Consumer price index in Israel
280,893 84,814 209,005 -
F.
Fair value (cont’d)
(2)
Interest rates used for determining fair value The interest rates used to discount estimated cash flows, when applicable, are based on the government yield curve at the reporting date plus an adequate credit spread, and were as follows:
December 31
2021
2020
%
Non-current liabilities:
Loans from banks
Euribor+ 1.76%- 2.75% with a zero floor
Euribor+ 1.76%- 2.75% with a zero floor
Loans from banks
4.65% Linkage to Consumer price index in Israel
4.65% Linkage to Consumer price index in Israel
Loans from banks
fix rate for 5 years 2.9% - 3.55%
fix rate for 5 years 2.9% - 3.55%
Loans from others
Euribor+ 5.27%
Euribor+ 5.27%
Loans from others
7% Linkage to Consumer price index in Israel and fixed rate of 5.5%
3%
(3)
Fair values hierarchy The financial instruments presented at fair value are grouped into classes with similar characteristics using the following fair value hierarchy which is determined based on the source of data used in the measurement:
Level 1
-
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2
-
Inputs other than quoted prices included within Level 1 that are observable either directly or indirectly.
Level 3
-
Inputs that are not based on observable market data (unobservable inputs).
December 31, 2021
Level 1
Level 2
Level 3
Total
Valuation techniques for
€ in thousands
determining fair value
Marketable securities 1,946 - - 1,946
Market price
Swap contracts - (3,996
) - (3,996
)
Fair value is measured by discounting the future cash flows, over the period of the contract and using market interest rates appropriate for similar instruments, including the adjustment required for the parties’ credit risks.
Currency swap - 3,274 - 3,274
Fair value is measured by discounting the future cash flows, over the period of the contract and using market interest rates appropriate for similar instruments, including the adjustment required for the parties’ credit risks.
Dori Energy loan - - 8,495 8,495
The fair value is measured by discounting the expected future loan repayments and using market interest rates appropriate for similar instruments, including the adjustment required for the parties’ credit risks. The discounting rate was estimated at approximately 10% and the expected yearly change of Israeli Consumer Price Index, during the expected lifetime of the loan, was estimated at approximately 1%.
Financial power swap - - (20,894
) (20,894
)
Fair value is measured by discounting the future fixed and assessed cash flows, over the period of the contract and using market interest rates appropriate for similar instruments. The value is adjusted for the parties’ credit risks.
December 31, 2020
Level 1
Level 2
Level 3
Total
Valuation techniques for
€ in thousands
determining fair value
Marketable securities
1,761
-
-
1,761
Market price
Forward contracts
-
66
-
66
Fair value measured on the basis of discounting the difference between the forward price in the contract and the current forward price for the residual period until redemption using market interest rates appropriate for similar instruments, including the adjustment required for the parties’ credit risks.
Swap contracts
-
(9,570
)
-
(9,570
)
Fair value is measured by discounting the future cash flows, over the period of the contract and using market interest rates appropriate for similar instruments, including the adjustment required for the parties’ credit risks.
Currency swap
-
(132 )
-
(132 )
Fair value is measured by discounting the future cash flows, over the period of the contract and using market interest rates appropriate for similar instruments, including the adjustment required for the parties’ credit risks.
Dori Energy loan
-
-
8,745
8,745
The fair value is measured by discounting the expected future loan repayments and using market interest rates appropriate for similar instruments, including the adjustment required for the parties’ credit risks.
Financial power swap
-
-
10,238
10,238
Fair value is measured by discounting the future fixed and assessed cash flows, over the period of the contract and using market interest rates appropriate for similar instruments. The value is adjusted for the parties’ credit risks.
(4)
Level 3 financial instruments carried at fair value The table hereunder presents reconciliation from the beginning balance to the ending balance of financial instruments carried at fair value in level 3 of the fair value hierarchy:
Financial assets
Dori Energy loan
€ in thousands
Balance as at December 31, 2019 10,595
Total income recognized in profit or loss 758
Repayment (2,378
)
Foreign Currency translation adjustments (230
)
Balance as at December 31, 2020 8,745
Total income recognized in profit or loss 799
Grant of loan 335
Repayment (2,259
)
Foreign Currency translation adjustments 875
Balance as at December 31, 2021
8,495
Financial assets
Financial power swap
€ in thousands
Balance as at December 31, 2019 4,967
Total income recognized in other comprehensive income 5,271
Balance as at December 31, 2020 10,238
Total income is recognized in other comprehensive income (31,132 )
Balance as at December 31, 2021
(20,894
) |
