Odfjell SE Annual Report 2012

odfjell group
Note 4 Financial Risk
management
Odfjell’s results and cash flow are influenced
by a number of variable factors. Our policy
is to manage the risks we are exposed to,
including, but not limited to market risk,
credit risk, liquidity risk, currency risk
and interest rate risk. Our strategy is to
systematically monitor and understand the
impact of changing market conditions on
our results and cash flow and to initiate
mitigating actions where required.
Financial risk management is carried out by
a central treasury function. Various financial
instruments are used to reduce fluctuations
in results and cash flow caused by volatility
in exchange rates, interest rates and bunker
prices.
The below table show sensitivity on the
Group’s pre-tax profit and equity due to
changes in major cost components on yearly
basis (calculation based on best estimates):
Cost component Equity Net Result
Bunkers,
USD 10 per tonne
higher 1.2 mill. (5.4 mill.)
Interest rates,
1% higher 3.2 mill. (10 mill.)
Currency,
USD 10% lower 2.2 mill. (11 mill.)
Credit risk
Multiple counterparts are used to hedge our
risk. We primarily use our lending banks as
counterparts to enter into hedging derivatives.
From time to time other counterparties
may be selected. We deem all to be high quality
counterparts. In addition, the Company’s
hedging policy establishes maximum limits
for each counterparty. The Group therefore
regards its maximum risk exposure as being
the carrying amount of trade receivables
and other current receivables (see note 29).
The Group has given guarantees for third
parties’ liabilities as shown in note 16.
Liquidity risk
The Group’s strategy is to have enough liquid
assets or available credit lines to, at any
time, to be sufficiently robust to withstand
prolonged adverse conditions in the markets
where we operate. Surplus liquidity is mainly
invested in bonds with low risk.
See also note 5, 7, 29 and 30 for aging analysis
and currency exposure.
Currency risk
The Group enters into currency contracts to
reduce currency risk in cash flows denominated
in non-USD currencies. Investments in
associated companies and subsidiaries with
a non-USD currency as functional currency
are generally not hedged. Such investments
generate foreign currency translation differences
that are booked directly to other
comprehensive income, see Statement of
other comprehensive income.
The Group has certain assets and liabilities
denominated in NOK that are not fully hedged.
Fluctuations in the USD/NOK exchange rate
will influence the Group’s profit. The most
material items are Tax liabilities (see note
8 Taxes) and Pension liabilities (see note 9
Pension liabilities) in Norway.
Bunker risk
The single largest monetary cost component
affecting the time charter earnings is bunkers.
In addition to bunker adjustment clauses in
Contracts of Affreightment, the Group enters
into several types of bunker derivatives to
hedge against fluctuations in the results due
to changes in the bunker prices.
Interest rate risk
The Group enters into several types of
interest rate derivatives to hedge against
fluctuations in the results due to changes in
interest rates. Typically, the Company enters
into interest rate swaps for the hedging of
a share of the interest paid related to our
loans portfolio.
Note 5 Derivatives activities
The Group uses different hedging instruments
to reduce exposures to fluctuations
in financial risks.
Cash flow hedging
The Group has highly probable future
major expenses that may be variable due
to changes in currency exchange rates,
interest rate levels or bunker prices. The
derivatives classified as cash flow hedges
are accounted for at market value (fair
value). The change in market value prior
to maturity is accounted for under assets
or liabilities and other equity. At maturity,
the result of the hedging transactions
is accounted for in the account to the
underlying exposure e.g. voyage-, operating-,
general and administrative expenses
or interest expenses in the net result.
Currency
The Group estimates future expenses in non-
USD currencies based on prior year’s actual
amounts and secures part of this exposure by
using forward contracts and options.
From time to time we enter into currency
options that do not qualify for hedge accounting
as it is uncertain if we will receive a future
delivery, also from time to time we may also
enter into currency derivatives on a trading
basis.
Bunkers
The Group estimates future fuel oil consumption
based on the fleet employment plan and
historical data. Platt’s fuel index '3.5% fob
Barges Rotterdam' is the index purchased
when we hedge our bunker exposure. Each
year we test the correlation of this index both
with the equivalent index for Houston and
Singapore, and the actual price for the fuel
we have purchased in these ports. Per 31
December 2012 these correlations are sufficient
to use as the reference index to hedge
our future bunker purchases in these ports.
Bunker hedging contracts used are a mix of
swaps and options. Average price is calculated
based on current market and might therefore
change if market changes.
A contract of affreightment (CoA) entered
into with a customer typically has a bunker
adjustment clause. This means that bunker
price for the bunker consumption related to
that contract is fixed or at least determined
within parameters. With a higher bunker
price in relation to trigger points our customer
will compensate us for the increased
cost. Likewise, with a lower bunker price we
have to compensate our customers.
Interest rates
The Group’s debt is divided between mortgage
lending, lease financing, unsecured
bonds and export financing. The interest rate
on this debt is typically floating. From time
to time we enter into derivatives to swap the
floating interest rate to fixed interest rate for
a period up to ten years.
From time to time we also sell interest rate
options that may, in the future, be turned into
a fixed rate swaps. We may also enter into
interest rate derivatives on a trading basis.
31
odfjell annual report 2012