SÃ¶dra annual report 2012

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Note 22 Financial risk management The international and capital-intensive nature of its operations means Södra is constantly exposed to financial risks, such as market risk, credit risk and liquidity and financing risk. There are correlations between certain risk variables. According to the hedging strategy, focus shall be on hedging net exposures. The Group’s financial policy for handling financial risks is adopted by the Board and provides a framework of guidelines and rules in the form of risk mandates and limits for financial operations. Hedging measures are approved when the situation for such a measure is judged to be financially beneficial. Consideration is also taken to the current access to commercially acceptable hedging terms. Södra’s financial risk management is centralised to the Treasury function in the Parent Company. This enables economies of scale and synergy effects to be utilised and helps minimise handling risks. The overall objective is to provide cost-effective financing and liquidity administration while minimising the negative effects on consolidated income that arise from market risks. The financial risks are continuously measured and compliance with the financial policy is monitored. The key aspects of financial risk management within the Group are described below. Market risk Market risk involves the risk of the fair value of, or future cash flow from, a financial instrument changing due to fluctuating market prices. Market risk consists of foreign exchange risk, interest risk and other price risks. The market risks that primarily affect the Group are foreign exchange risk and raw material price risk. Foreign exchange risk Södra is exposed to different types of foreign exchange risk. The primary exposure arises from the Group’s sales and purchases in foreign currencies. These foreign exchange risks consist partly of the risk of fluctuations in the value of financial instruments and trade receivables and payables, and partly of foreign exchange risk in anticipated or contracted payment flows (transaction exposure). There are also foreign exchange risks in translation of the assets and liabilities of foreign subsidiaries to the functional currency of the Group (translation exposure). The Group is also exposed to foreign exchange risks attributable to investments in foreign currency (financial exposure). Consolidated income includes foreign exchange differences of negative SEK 53 million (neg: 16) in operating profit and of negative SEK 8 million (pos: 8) in finance income and expenses. Transaction exposure A substantial part of revenue is related to customers outside Sweden and most of the company’s products are invoiced in local currency or USD. Input goods are largely imported in foreign currency. These factors mean that changing foreign exchange rates have a major impact on Södra. To manage Södra’s net transaction exposure, forecast currency flow can be hedged using currency derivatives. Currency exposure is hedged in accordance with the financial policy. Temporarily attractive levels or specific factors can make it desirable to deviate from the hedging norms. The hedging interval determines the risk mandate that Södra Treasury has to follow for deviations from hedging norms. The currency hedging component of pulp hedges is included in the overall foreign exchange mandate. Under the policy, standardised forward contracts, currency swaps and acquired foreign exchange options may be used for hedging purposes. Hedge reporting is used when the demands for this are met. Transaction exposure 31 December 2012 (major currencies) Currency Forecast net influx Hedges % 2013 2014 Average rate Forecast net influx Hedges % Average rate USD million* 675 — — — 830 — — — EUR million 332 — — — 427 — — — GBP million 57 — — — 57 — — — Total 1,064 — — 1,314 — — Hedging interval 0–70 0–50 * The currency hedging component of pulp price hedges is included in forecast net influx; there are no pulp price hedges for 2013–2014. Transaction exposure 31 December 2011 (major currencies) Currency Forecast net influx Hedges % 2012 2013 Average rate Forecast net influx Hedges % Average rate USD million* 652 52 8 6.77 810 — — — EUR million 486 22 5 9.17 597 — — — GBP million 54 3 6 10.67 46 — — — Total 1,192 77 6 1,453 — — Hedging interval 0–70 0–50 * The currency hedging component of pulp price hedges is included in forecast net influx; there are no pulp price hedges for 2012–2013. 34 Södra 2012
Translation exposure Translation exposure refers to the net value in foreign subsidiaries. The basic principle is not to currency hedge this exposure. The most significant translation exposure pertains to equity in the following currencies: NOK 1,002 million (1,446), EUR 30 million (28), GBP 13 million (13), LVL 15 million (10) and DKK 48 million (57). As in the previous year, none of these translation exposures were hedged at year-end. Interest risk Interest risk represents the negative changes in market value that can arise with interest fluctuations in the yield curve (market interest for different terms). The objective in the financial policy is to maintain fixed interest terms for financial liabilities within the 3-15 month range. The fixed interest term of financial liabilities amounted to 6 months (7) at 31 December 2012. The financial policy specifies how interest risk is to be limited on the Group’s interest-bearing investments by allocating investments over different fixed rate periods. The basic idea is that the maturity structure of subscribed fixed income instruments is to counter forecast cash flow fluctuations. The fixed interest term of interest bearing investments amounted to 32 months (20) at 31 December 2012. Price risk Price risk pertains to the change in price of products or input goods and the subsequent effect on profit. Pulp price risk Pulp price risk is the risk of the average price received for pulp being less than the expected price. To reduce pulp price risk, Södra Treasury can trade in quoted pulp forward contracts, forward contracts or swap contracts on the OTC market. Södra hedges pulp price risk in two ways: hedging of cash flow risk from the future sale of Södra pulp, and hedging of fair value risk in fixed price customer contracts. Cash flow risk from the future sale of own production of pulp arises through cyclical variations in pulp price, expressed in foreign currency, which, in conjunction with variations in exchange rates, can mean the pulp price that Södra receives measured in SEK is less than the pulp price expected by the Group in the long term. The main strategy is to be restrictive with this kind of hedge and no hedges were in place at year-end. Fair value risk arises when Södra, through the value-added service Pulp- Services Hedging, utilises its financial competence in the field of pulp price risk, and offers pulp deliveries to buyers at a fixed price. To ensure the fixed prices contracted with customers will not deviate negatively from the prevailing market prices at the time of delivery, the fixed price contract is swapped to a variable price. Fixed price contracts may be signed for not more than 50 per cent of the total delivery volume to individual customers. The contract period may not exceed 24 months. Business cycles, market price level, demand for fixed price contracts and the potential to sign swap contracts on acceptable terms are factors that, over time, affect current hedging levels 2013 2014 Pulp price derivatives 31 December 2012 Ktonne % Ktonne % Fair value hedges 31 2 — — Forecast production 1,915 2,032 2012 2013 Pulp price derivatives 31 December 2011 Ktonne % Ktonne % Fair value hedges 41 2 — — Forecast production 2,040 2,013 Electricity price risk Södra has business areas with both a surplus and deficit of electricity. Södra Timber and Södra Interiör are at risk of heavy increases in the purchase cost of electricity, which would lower margins and weaken their competitive position. The major investments in electricity generating capacity made by Södra Cell and Södra Vind in recent years, which have made them net sellers of electricity, require reasonably high electricity prices to achieve the required return. To best hedge the different needs of the business areas while optimising the Group’s net position for electricity utilisation, Södra Treasury has a consumption portfolio and a production portfolio. The total net price position is hedged between the two portfolios using financial electricity contracts to avoid major profit effects of electricity price changes. The permitted hedging instruments consist of standard contracts on Nordpool. Södra’s forecast net position on electricity can be hedged for a period of five years with an annually declining maximum percentage level. For the first two years, up to 100 per cent of net position may be hedged. For the years 3–5, up to 80, 50 and 20 per cent of net position may be hedged, respectively. There is no electricity price hedging for 2013 and subsequent years. Oil price risk Södra’s business areas annually purchase oil-related products for approximately SEK 720 million. Most purchases are related to spot markets for specific products. The volatile nature of these markets means they may cause undesirable fluctuations in profit and Södra aims to limit this risk by trading in financial markets for oil-related products. The permitted hedging instruments consist of forward contracts and options. Oil-related products that may be hedged are diesel, fuel oil and Brent crude. Hedging may be done for an 18-month period with the following purchasing volumes for each 6-month period: 0–6 months 0–75 per cent, 7–12 months 0–50 per cent and 13–18 months 0–25 per cent. Södra’s total energy exposure means that consolidated profit is positively correlated with energy prices. There is no oil price hedging for 2013 and subsequent years. Share price risk Södra is exposed to price risk through its holdings of shares, share index certificates, share index bonds and share funds (see Note 21 Financial investments). Credit risk Financial credit risk Södra’s financial transactions create exposure to credit risk relative to financial counterparties. The financial policy specifies that transactions may only be undertaken with parties that have good credit ratings, defined as category BBB-/K1 or better under Standard & Poor’s system. Limits are set for each counterparty and revised regularly. To further limit counterparty risk, ISDA contracts (netting contracts) have been taken out with several banks. At 31 December 2012, Södra’s total counterparty exposure amounted to SEK 2,009 million. At 31 December, all counterparties were within the parameters set in Södra’s financial policy with regard to limits, durations and rating requirements. Credit risk in trade receivables The risk of customers not fulfilling their obligations, in other words payment not being received, represents a customer credit risk. Customer credit is checked using information on their financial position from various credit-rating agencies. Security is required for customers with an inadequate credit rating or weak credit history. Credit risks involving customers are described in more detail in Note 29 Operating receivables. Södra 2012 35
Page 1 and 2: Södra 2012 Annual Report
Page 3 and 4: Directors’ Report The Board of Di
Page 5 and 6: - At the closed Hjortsberga sawmill
Page 7 and 8: Consolidated statement of comprehen
Page 9 and 10: 31 December, SEK million Note 2012
Page 11 and 12: Consolidated statement of cash flow
Page 13 and 14: Parent Company balance sheet 31 Dec
Page 15 and 16: Parent Company statement of changes
Page 17 and 18: Note 1 Accounting policies Södra h
Page 19 and 20: Financial statements for foreign en
Page 21 and 22: carried out using a risk-adjusted d
Page 23 and 24: RFR 2 specifies that the Parent Com
Page 25 and 26: Note 3 Net revenue Note 4 Other rev
Page 27 and 28: Note 7 Other expenses Note 9 Paymen
Page 29 and 30: Note 11 Income from financial items
Page 31 and 32: Cash flow hedging - transferred to
Page 33 and 34: Note 17 Buildings and land Group Bu
Page 35: Note 19 Construction in progress No
Page 39 and 40: Maturity structure financial liabil
Page 41 and 42: Note 27 Inventories Note 29 Current
Page 43 and 44: Note 33 Interest-bearing liabilitie
Page 45 and 46: Fair value of plan assets Group 201
Page 47 and 48: Not 39 Group companies Specificatio
Page 49 and 50: Note 42 Statement of cash flows Not
Page 51 and 52: Other shares and participations inc
Page 53 and 54: Proposed appropriation of profits T
Page 56: Solberg This is Södra Södra is ba

SÃ¶dra annual report 2012

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