Finance
Green Cargo's business is exposed to a number of financial risks that affect the consolidated profit/loss and cash flow. Green Cargo's Parent Company has a finance function charged with identifying, assessing and efficiently managing these risks. It functions as an internal bank and is responsible for capital supply and cash management. This assignment is conducted in accordance with the finance policy decided by the Board. It establishes the requirements on regular risk follow-up to facilitate good internal risk control. More information about Green Cargo's exposure to these risks is available in Note 33.
INVESTMENTS
Each investment can be linked to uncertainty if it does not generate the intended customer value. Green Cargo continues to invest in capacity with a low environmental impact in the form of new locomotives and locomotive modernisation. The ongoing locomotive modernisation project is progressing more or less according to plan, which decreases our investment risks. Before each investment, we rigorously analyse the business concept and customer relations. As a result of the economic situation, we decided to postpone investments totalling SEK 1 billion.
Key figures for follow-up: operating margin, return on equity, equity/assets ratio.
COST TRENDS
Financial risk increases as unit costs within Green Cargo increase, which is why we initiated a rationalisation program containing concrete measures for lowering unit costs. Because of the economic downturn, we are also taking additional measures to lower unit costs and improve efficiency in all areas of our business.
FIXED COSTS AND CUSTOMER CONTRACTS
Our operations require large amounts of resources. This is primarily due to the large amount of capital needed for production, in particular rail transports, which have an integrated system where all customers share resources. About 70 percent of the total costs for rail operations are fixed for 12 months. To increase flexibility, Green Cargo aims to:
- share volume risks with customers through a combination of variable and fixed pricing plans and longer contract terms.
- size operations taking more clearly into account the entire business cycle. n supplement company resources with contracted capacity.
- enhance opportunities for co-use of various resource categories.
For the Road operations, the total cost, including the fixed component, is relatively more volatile. Large volume decreases and the loss of important customer accounts can to a large extent be offset by a corresponding cut in costs. Risks within the Road operations can also be reduced through partnerships with contracted haulage companies.
The fixed costs for third party logistics, which are slightly less than 20 percent of total costs, are adjusted whenever possible to existing customer contracts. From a logistics perspective, the risks are limited by the attractiveness of the facilities and their location in attractive regions. Resources can be adapted to peak or low seasons by operating partially with temporary employees and outsourcing certain elements of our operations. Long-term, strong relations with customers and suppliers are the primary way for us to counteract the risks related to fixed costs.
Key figures for follow-up: operating margin, return on equity, equity/assets ratio.
FINANCIAL RISKS
Transactions with different parties can create risks for significant cost variations, such as interest risks, currency risks, counterparty risks, liquidity risks (our own liquidity) and refinancing risks. The current financial instability is causing financial risks to rise due to its influence on the interest and currency markets. In order to manage the financial risk exposure, the finance policy establishes boundaries for interest risks and currency exposure and specifies allowable counterparties and limits.
INTEREST RISKS
Interest risk must be limited to attain the Group objective of stable earnings growth. The finance policy defines parameters for permissible interest risk in average fixed-interest terms. For investments, the average term is a maximum of six months (operating liquidity) and two years (liquidity reserves). The maximum permissible fixed-interest term for borrowing is 39 months. Derivatives may be used to adjust fixed-interest terms. At year-end, the debts were primarily subject to variable rates. A sensitivity analysis shows that a change in interest rates of +/– 1 percentage point would affect net financial items by SEK +/– 9 million.
CURRENCY RISKS
Exposure in foreign currency is primarily related to the Group's international transports. Currency risk is reduced using currency forwards and to a certain degree, currency options. During the year, forecasted receivables in foreign currency were hedged. Currency hedges totalled EUR 41 million. At year-end, the company's outstanding forward contracts (maturity in 2010) had a value of EUR 40 million. A sensitivity analysis shows that a change in currency rates by EUR/SEK +/– 2.5 percent would affect net financial items by SEK +/– 12 million.
COUNTERPARTY/CREDIT RISKS
Counterparty risk is the risk that a counterparty will be unable to meet its obligations in full and/or on time. The Group's placements of cash and cash equivalents are restricted to liquid instruments with low counterparty risk. Our finance policy specifies (1) what counterparties are permitted and (2) amount limits per counterparty. Counterparty exposure falls into three categories with a maximum limit per issuer. At year-end total cash and cash equivalents exposure totalled SEK 551 million.
LIQUIDITY RISKS
Liquidity risk is defined as the risk of incurring costs or being compelled to suspend payments due to lack of access to liquid funds or inability to borrow to cover expenses. The category includes the risk that securities can not be sold at the desired time, at the desired price or in the desired volume. Liquidity risk is managed by setting a minimum level for assets disposable within three banking days.
REFINANCING RISKS
Refinancing risk is defined as the risk that Green Cargo will incur costs or be compelled to suspend payments because the company cannot cover a debt that has fallen due for payment with cash and cash equivalents or equivalent new financing. The debt maturity structure must be allocated evenly over time and, at the most, one-fourth of the consolidated loans may fall due within a 12-month period. At year-end the average remaining contract period for our financial liabilities was just under nine years.
Key figures for follow-up: operating margin, return on equity, equity/assets ratio.
Green Cargo's national transports are an approved Good Environmental Choice