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Note 33 - Financial instruments and financial risk management

Financial risk management

Green Cargo is exposed to a number of financial risks. Management of financial risks is regulated in a finance policy established by the Board and in the company’s credit policy. The finance policy states that financial risks must be minimised and that access to liquidity must be secured. The Treasury unit is responsible for financial risk management.

Liquidity risk

Liquidity risk is the risk that liquidity will not be available to meet payment commitments, that a financial holding cannot be realised at its estimated value.

Currency risk

Currency risk is the risk of fluctuations in exchange rates adversely affecting cash flow. Exchange rate fluctuations also affect the income statement and balance sheet when income and expenses, and assets and liabilities, are translated from foreign currencies into Swedish krona.

Currency risks attributable to investments in foreign currency are managed primarily by raising loans in the corresponding currency to achieve a hedging relationship. However, Green Cargo's holding in associated companies entails a risk exposure to exchange rate fluctuations for its shares in CargoNet and SeaRail. The currency risk primarily refers to the revaluation of assets in NOK.

The risk of exchange rate fluctuations affecting profit/loss and profitability is managed by hedging projected income and expenses in foreign currencies – mainly by selling currency in advance on a forward contract, and a smaller proportion, via currency options.

¹⁾ The sensitivity analysis for 2008 only refers to currency hedges.

The effect of currency derivatives on operating profit/loss reached SEK -21 million (-10). The next table shows the value of outstanding contracts not taken up as income.

¹⁾Volume is expressed in millions in local currency.
²⁾The exchange rate is the spot rate.
³⁾Fair value, excl. deferred tax, recognised in reserves in equity on cash flow hedges where hedge accounting is applied.

Interest risk

The risk that changes in market interest rates will adversely affect cash flow or the fair value of financial assets and liabilities constitutes an interest risk. A large part of Green Cargo’s interest-bearing liabilities refer to leasing-financed investments with variable interest rates. Interest-bearing assets mainly comprise cash and cash equivalents and non-current and current investments. Interest risk is primarily managed using interest rate derivatives in the form of interest rate swap agreements. The interest risk for the liability portfolio is SEK –/+ 13.5 million (–/+ 7.6), including interest rate swap agreements, measured as the change in annual interest expense in a +/– 1 percent change in the interest rate. The interest risk for the assets portfolio is SEK +/– 4.6 million (+/– 3.9), measured as the change in annual interest income in a +/– 1 percent change in the interest rate. Interest risks are measured weekly.

On 31 December 2009, the Group had 11 (8) open interest rate derivatives in which variable interest was replaced with fixed interest, with a maturity between 11 (10) months and 9 (9) years. Nominal amounts and interest rates for these are as follows:

Credit risk

Credit risk is the risk that the counterparty in a transaction will not meet its financial contractual obligations and that collateral does not cover the company’s receivable.

Customer credit risk

The contract administration function may decide on credits in conjunction with new agreements and agreement extensions within established frameworks. The Treasury unit makes other credit decisions centrally.

¹⁾ The Group data include trade receivables from associated companies, and the Parent Company data include trade receivables from Group and associated companies.

Counterparty risk

Credit risks related to our financial counterparties arise in liquidity management. These counterparty risks are regulated in the finance policy, and investments are only permitted in instruments that are issued by counterparties with a high credit rating, with given limits per counterparty and for the risk class to which the counterparties belong.

Refinancing risk

Refinancing risk is the risk that a company cannot obtain financing or can only obtain it at significantly higher costs. Green Cargo maintains a minimum liquidity, which comprises bank deposits, (market) listed investments that can be converted into cash within three banking days and unused confirmed credit facilities. The maturities of the Group’s loans must also be spread out over time so that the loan maturities are evenly distributed or adapted to meet expected incoming payments.

Maturity structure for borrowing, Group:

Maturity structure for borrowing, Parent Company:

¹⁾ Contractually agreed future cash flows include estimated interest payments and other charges. Non-discounted amounts.
²⁾ Includes trade payables, Group accounts and borrowings.

¹⁾ Assets and liabilities valued at fair value via the income statement refer to those classified as held for trading per IAS 39.
²⁾ In the comparison figure for 2008, financial assets were corrected via a reclassification from current to non-current investments by 195. The asset classification was based on remaining maturity and the intention to hold them until maturity.

1) Fair value based on prices listed on an active market.
2) Fair value measurements use market prices, which are not included in Level 1.
3) Fair value based on inputs that are not observable market data.

For more detailed information about the different categories, see Note 2 "Summary of important accounting principles".

Financial assets and liabilities are valued according to Level 2. Fair value of interest rate derivatives and currency derivatives was calculated as the expenses/income that would have arisen if the contracts had ended on the balance sheet day. The banks’ official rates were used for this where such rates exist. In other cases, the value was calculated using return models based on expected cash flow.

No financial assets or liabilities are reported at a value that significantly deviates from fair value.

Hedge accounting

At the end of 2009, hedge accounting was applied per IAS 39 as follows:
- Cash flow hedge accounting of currency derivatives used to hedge future payments in foreign currency. For information on the amounts recognised in other comprehensive income and the amount removed from other comprehensive income and recognised in the profit for the year, see Note 30 "Disclosures about equity". There is no inefficiency for cash flow hedges.

- Hedge accounting of foreign net investments. A foreign currency loan of EUR 24 million was raised at the acquisition of associated company DB Schenker Rail Scandinavia A/S to meet value changes in equity at DB Schenker Rail Scandinavia A/S.

For more detailed information on reporting hedging instruments and hedged items, see Note 2 "Summary of important accounting principles".

Net gains/losses from financial instruments recognised in the income statement

The next table shows the following items, which were recognised in the income statement:
-Gains and losses regarding exchange rate differences that affected operating profit/loss, including gains and losses attributable to hedge accounting of cash flows
- Gains and losses regarding financial exchange rate differences
- Fair value profit/loss for financial assets/liabilities valued at fair value via the income statement.

Interest income and interest expense on financial instruments

The next table shows interest income and interest expense for all of Green Cargo’s financial assets and financial liabilities.