ANNUAL REPORT 2006 - Skanska

0—15 MUSD, 25%
• 15—30 MUSD, 11%
31—100 MUSD, 23%
• >100 MUSD, 41% •
0—15 MUSD, 93%
•
15—30 MUSD, 3%
31—100, 3%
>100 MUSD, 1%
Project size
Order backlog SEK 135 bn
Number of projects
USD 0—15 M, 25%
• USD15—30 M, 11%
USD 31—100 M, 23%
• USD >100 M, 41% •
USD 0—15 M, 93%
•
USD 15—30 M, 3%
USD 31—100 M, 3%
USD >100 M, 1%
tions. Another support unit, Skanska Financial Services, evaluates
financial risks related to cash flows, customers, subcontractors and
joint venture partners.
Fewer loss-making projects
In all types of major projects that continue over a long period,
Skanska conducts regular follow-up of its risk assessment. The
Senior Executive Team carries out quarterly reviews of major
projects equivalent to about one third of total project volume,
loss-making Order projects backlog and USD those XXX projects billion deemed to involve special
risks. Project Since size systematic risk management Number work of projects was introduced in
2002, the number of new loss-making projects and their annual
adverse impact on
USD
earnings
0—15 M,
has
25%
declined. • USD15—30 M, 11%
Risks related to USD 31—100 M, 23%
material prices
In Skanska’s operations • USD >100 there M, 41% are many different types •
USD >100 M, 1%
of contractual
mechanisms. The degree of risk associated with the prices
of goods and services varies greatly, depending on the contract
type. In cases where Skanska works on a cost-plus basis, any
price increases are passed directly to the customer. However, in
assignments for public sector customers, Skanska often has fixedprice
contracts. Because projects often continue over many years,
conditions may change. Even if there are sharp price increases on
materials or Order wages, backlog for example, EUR XXX billion a fixed tender price applies in
principle. Certain contracts contain indexing clauses that allow
Project size
Number of projects
an upward revision of the contract value, equivalent to price
increases. But in some geographic markets, there is no such tradi-
USD 0—15 M, 25%
tion; instead the contractor is bound by the quoted price even if
USD15—30 M, 11%
costs increase. To protect USD 31—100 itself M, 23% against such risks Skanska
•
endea-
• USD >100 M, 41%
USD 0—15 M, 93%
•
USD 15—30 M, 3%
USD 31—100 M, 3%
USD 0—15 M, 93%
USD 15—30 M, 3%
USD 31—100 M, 3%
vors to procure materials and approve subcontractors as soon as
feasible after signing a contract. In most cases, finished agreements
are in place as early as the tendering phase and are conditional on
Skanska signing a contract with its customer.
Financial risks
Foreign exchange risks
Project revenue and costs are normally denominated in the same
currency, and transaction risks from exchanges between different
currencies are thus very limited. Known and budgeted financial
flows are hedged. The foreign exchange risk that arises because
portions of the Group’s equity are invested long-term in foreign
subsidiaries – translation exposure – is normally not hedged. One
exception is for example Skanska’s American operations, where half
the equity is hedged. Investments in development business streams
are hedged, since the intention is to sell these assets over time.
Interest rate risks
Interest rate risk is the impact on earnings arising from a change
in interest rate. Interest-bearing assets exceed interest-bearing
liabilities. This means that net financial items are favorably affected
by an increase in interest rate. At year-end 2006, the average interest
refixing period for interest-bearing assets, SEK 15.4 billion,
was 0.2 (0.1) years and on interest-bearing liabilities, excluding
pension liabilities, of SEK 3.5 billion, it was 0.9 (1.0) years. The size
of Skanska’s interest-bearing pension liability, SEK 1.6 billion (2.4),
is largely connected to the interest rate on long-term central government
debt. An increase or decrease in long-term interest rates
leads to a decrease or increase in pension liability. Such changes
are recognized directly in the equity of the Group (see Note 28).
Refinancing risks and liquidity
Refinancing risk is the risk caused by lack of liquidity or by difficulty
in obtaining or rolling over external loans.
At year-end 2006, the Group’s unutilized credit facilities
totaled SEK 6.3 billion (6.1) and the average maturity of the borrowing
portfolio, including unutilized credit facilities, was 3.6 (3.8)
years.
• USD >100 M, 1% 9
Impact on the Group of a change in SEK
against all currencies and a change in USD
against SEK, based on the 2006 income
statement and balance sheet
Of which
SEK M +/– 10% USD+/– 10%
Revenue +/–9,916 +/–4,132
Operating income +/–252 +/–87
Equity +/–920 +/–360
The above sensitivity analysis shows in SEK M the Group’s sensitivity
to a 10 percent unilateral change in SEK against all currencies and a
10 percent unilateral change in USD against SEK.
Interest-bearing liabilities and assets
Dec. 31, Dec. 31,
SEK bn 2006 2005
Interest-bearing gross liabilities –5.1 –5.9
Cash and cash equivalents and
interest-bearing receivables 15.4 17.0
Interest-bearing net receivable 10.4 11.1
Sensitivity of pension obligation to change in discount rate
SEK M Sweden Norway U.K. U.S. Total
Pension obligation,
December 31, 2006 3,936 1,957 4,393 602 10,888
Discount rate
increase/decrease
of 0.25 percent 1 +/–150 +/–100 +/–250 – +/–500
1 Estimated change in pension obligation/pension liability if the discount rate changes.
If pension liability increases, the Group’s equity is reduced by about 75 percent of
the increase in pension liability, after taking into account deferred tax and social
insurance contributions.
Skanska Annual Report 2006 Risk management 9