ABB Annual Report 2012 PDF - ABB Group Annual Report 2012

Throughout 2012 and 2011, the investment strategy forcash (in excess of current business requirements) has beento predominantly invest in short-term time deposits withmaturities of less than 3 months, supplemented at times byinvestments in corporate commercial paper, AAA-ratedmoney market liquidity funds and U.S. government securities.Since late summer 2011, as credit risk concerns in the eurozoneeconomic area increased, we diversified out of eurozonebank exposures. As the crisis deepened and uncertaintygrew, we restricted the counterparties with whom we wereprepared to place cash, such that we reduced our depositswith banks in the eurozone. During 2012, these restrictionshave continued. We actively monitor credit risk in our investmentportfolio and hedging activities. Credit risk exposuresare controlled in accordance with policies approved by oursenior management to identify, measure, monitor and controlcredit risks. We closely monitor developments in the creditmarkets and make appropriate changes to our investmentpolicy as deemed necessary. The rating criteria we require forour counterparts have remained unchanged during 2012(compared to 2011) as follows – a minimum rating of A/A2 forour banking counterparts, while the minimum required ratingfor investments in short-term corporate paper is A-1/P-1.In addition to rating criteria, we have specific investmentparameters and approved instruments as well as restrictingthe types of investments we make. These parameters areclosely monitored on an ongoing basis and amended as weconsider necessary.We believe the cash flows generated from our business,supplemented, when necessary, through access to thecapital markets (including short-term commercial paper) andour credit facilities are sufficient to support business operations,capital expenditures, business acquisitions, the paymentof dividends to shareholders and contributions to pensionplans. Due to the nature of our operations, our cash flow fromoperations generally tends to be weaker in the first half ofthe year than in the second half of the year. Consequently, webelieve that our ability to obtain funding from these sourceswill continue to provide the cash flows necessary to satisfy ourworking capital and capital expenditure requirements, aswell as meet our debt repayments and other financial commitmentsfor the next 12 months. See “Disclosures about contractualobligations and commitments”.Debt and interest ratesTotal outstanding debt was as follows:December 31, ($ in millions) 2012 2011Short-term debt including current maturitiesof long-term debt (including bonds) 2,537 765Long-term debt:– bonds (excluding portion due withinone year) 7,380 3,059– other long-term debt 154 172Total debt 10,071 3,996The increase in short-term debt in 2012 was primarily due tothe reclassification to short-term debt of our EUR 700 million4.625% Instruments due 2013 and the increase in issuedcommercial paper ($1,019 million at December 31, 2012, comparedto $435 million outstanding at December 31, 2011).The increase in long-term debt in 2012 was primarily due tothe new bonds issued during 2012 and bonds assumed inthe Thomas & Betts acquisition (see “Note 12 Debt” to ourConsolidated Financial Statements).Our debt has been obtained in a range of currencies andmaturities and on various interest rate terms. We use derivativesto reduce the interest rate exposures arising on certain ofour debt. For example, we use interest rate swaps to effectivelyconvert fixed rate debt into floating rate lia bilities. After consideringthe effects of interest rate swaps, the effective averageinterest rate on our floating rate long-term debt (includingcurrent maturities) of $2,353 million and our fixed rate longtermdebt (including current maturities) of $6,187 million was1.6 percent and 3.1 percent, respectively. This compareswith an effective rate of 1.6 percent for floating rate long-termdebt of $1,875 million and 3.7 percent for fixed-rate longtermdebt of $1,432 million at December 31, 2011.For a discussion of our use of derivatives to modify theinterest characteristics of certain of our individual bondissuances, see “Note 12 Debt” to our Consolidated FinancialStatements.Credit facilityWe have a $2 billion multicurrency revolving credit facility,maturing in 2015. No amount was drawn under the credit facilityat December 31, 2012 and 2011. The facility is for generalcorporate purposes and serves as a back-stop facility toour commercial paper programs to the extent that we issuecommercial paper under the programs described below. Thefacility contains cross-default clauses whereby an eventof default would occur if we were to default on indebtedness,as defined in the facility, at or above a specified threshold.The credit facility does not contain significant covenantsthat would restrict our ability to pay dividends or raise additionalfunds in the capital markets. For further details of thecredit facility, see “Note 12 Debt” to our Consolidated FinancialStatements.Commercial paperWe have in place three commercial paper programs:– a $2 billion commercial paper program for the privateplacement of USD-denominated commercial paper in theUnited States (replacing the $1 billion program thatexisted at December 31, 2011),– a $1 billion Euro-commercial paper program for theissuance of commercial paper in a variety of currencies,and– a 5 billion Swedish krona program (equivalent to approximately$768 million, using December 31, 2012, exchangerates), allowing us to issue short-term commercial paperin either Swedish krona or euro.72 Financial review | ABB Annual Report 2012