Note 35 Financial risks

Financial risks

The Group’s financial risks are mainly managed by Vattenfall Treasury AB, which houses the Group’s internal bank and finance function. These finance operations are intended to provide cost-effective management of the Group’s financial risks.

The Group’s funding, investments and currency trading are mainly carried out by Vattenfall Treasury AB and, to a lesser extent, by Vattenfall Europe AG. The agreements related to the group’s funding contain standard representations as for example the status of the companies, powers and authority, legal validity, pari-passu ranking, etc. The agreements regarding Vattenfall’s issuance of public debt instruments also contain negative pledge clauses stating that the Group generally may not create any pledge for financial indebtedness, and it is Vattenfall’s policy to avoid so-called “MAC clauses”. The Group’s liquidity is centralised using so-called Group cash pool systems. Speculative investments are made to a limited extent within fixed risk limits.

Liquidity risk

Liquidity risk is minimised through a debt portfolio with an even maturity profile and a long average remaining term. The maturity profile of Vattenfall’s debt is shown in the diagram. On 31 December 2008, the average maturity was 6.5 years (6.5) excluding Capital Securities and loans from minority owners and associated companies. The aim is for it to exceed 5 years. Including Capital Securities the average maturity was 6.5 years (6.7).

To safeguard the availability of funds and maintain flexibility, the Group has several types of debt issuance programmes. At present, there are two commercial paper programmes, two medium term note (MTN) programmes. In addition, Vattenfall has approximately SEK 15.4 billion (9.6) in committed credit facilities.

The Group’s target for short-term liquidity is always to have no less than 10% of the Group’s sales and at least the equivalent of the next 90 days’ maturities in the form of liquid assets or committed credit facilities. Vattenfall’s credit rating for long-term and short-term borrowing respectively is A-/A-2 from Standard & Poor’s and A2/P-1 from Moody’s. Vattenfall’s goal with regard to credit rating is to maintain a rating in the Single A category.

Maturity profile in debt portfolio¹

 

Borrowing programmes and credit facilities

	Maximum aggregated amount	Currency	Maturity	Used proportion %	Reported external liability
Borrowing programmes
Commercial Paper	15,000	SEK		-	-
Euro Commercial Paper1	2,000	USD		48	-
Medium Term Note	10,000	SEK		-	-
Euro Medium Term Note	6,000	EUR		92	62,253
Committed credit facilities
Revolving Credit Facility2	1,000	EUR	2013	-	-
364-Day Credit Facility2	400	EUR	2009	-	-
Bank overdraft facilities	100	SEK		-	-
Other credit facilities
Bank overdraft facilities and other lines of credit	13,513	SEK		-	-
Total					62,253

1) Utilised for intra-Group purposes (centralisation of liquidity from Vattenfall Poland).

2) Back-up-facility for short-term borrowing.

Benchmark bonds

Type	Currency	Amount	Coupon, %	Maturity
Euro Medium Term Note	EUR	650	6.000	2009
Euro Medium Term Note	EUR	500	6.000	2010
Euro Medium Term Note	EUR	850	5.750	2013
Euro Medium Term Note	EUR	500	5.000	2018
Euro Medium Term Note	EUR	650	6.750	2019
Euro Medium Term Note	EUR	500	5.375	2024

Interest rate risk

Interest rate risk in the Group’s debt portfolio is measured in terms of duration, which at year-end was 2.4 years (2.6) excluding Capital Securities and loans from minority owners and associated companies. The duration is permitted to vary from a norm of 2.5 years by up to 12 months either way. Including Capital Securities the duration was 2.9 years (3.3). To adjust the duration of borrowing, interest rate swaps, interest rate forwards and options, among other things, are used.

Remaining fixed rate term in loan portfolio

Excluding Capital Securities and loans from minority owners and associated companies. Nominal amounts.

	SEK	EUR	Other	Total
< 3 months	-2,456	12,633	14	10,191
3 months-1 year	9,076	14,221	841	24,138
1 year-5 years	13,000	9,414	743	23,157
> 5 years	3,421	5,783	-	9,204
Total	23,041	42,051	1,598	66,690
Average financing rate, %	6.4	5.6	4.7	5.8

Remaining fixed rate term in loan portfolio

Excluding Capital Securities and loans from minority owners and associated companies. Nominal amounts.

	Debt	Derivatives	Total
< 3 months	6,077	4,114	10,191
3 months-1 year	11,922	12,216	24,138
1 year-5 years	26,735	-3,578	23,157
> 5 years	25,095	-15,891	9,204
Total	69,829	-3,139	66,690

Currency risk

Currency risk is the risk of negative effects on Vattenfall’s earnings and balance sheet caused by exchange rate fluctuations. Vattenfall is exposed to currency risk through exchange rate fluctuations attributable to future cash flows (transaction exposure) and in the revaluation of net assets in non-Swedish subsidiaries (translation exposure).

Interest rate sensitivity, excluding Capital Securities and loans from minority owners and associated companies.

The diagram shows how changes in interest rates affect the Group’s interest expenses over a 12-month period based on the Group’s present fixed rate structure.

The Group’s goal in managing currency risk is to minimise foreign exchange losses while taking into account hedging costs and tax aspects. Currency exposure in borrowing is eliminated using interest currency swaps for the purpose of avoiding the effect of exchange rate differences on earnings.

Loan portfolio, breakdown per currency

Including loans from minority owners and associated companies but excl Capital Securities. Nominal amounts.

Original currency	Debt	Derivatives	Total
CHF	1,469	-1,469	-
DKK	1,477	-	1,477
EUR	70,200	-11,220	58,980
GBP	107	-	107
JPY	4,524	-4,524	-
NOK	386	-386	-
PLN	14	-	14
SEK	15,229	14,460	29,689
Total	93,406	-3,139	90,267

The Group has limited transaction exposure, as the greater part of energy generation, distribution and sales is made in each company’s local market. In the Nordic operations, most transaction exposure is in EUR in conjunction with the hedging of electricity prices, primarily in Nord Pool. This currency exposure is hedged with forward exchange contracts. In the German subsidiaries, transaction exposure arises primarily in USD in conjunction with the purchase of fuel. This currency exposure is also hedged with forward exchange contracts.

Consolidated operating revenues/expenses per currency, %

Currency	Revenues	Expenses
EUR	64	69
SEK	25	18
PLN	7	7
DKK	3	4
Other	1	2
Total	100	100

The amounts are calculated from a statistical compilation of external operating revenues/expenses. Changes in inventories and investments are not included in the compilation.

The Group’s units shall hedge contracted transaction exposure when it exceeds the equivalent of SEK 10 million. Hedges shall be made through Vattenfall Treasury AB, where currency risks are managed within established risk limits for interest rates and currencies.

As regards translation exposure, a change in exchange rates of 5% would affect consolidated equity by approximately SEK 3,320 million (3,190). The reporting principles of translation exposure are described in Note 2 to the consolidated accounts under the headings Derivative instruments and Hedging, respectively.

Translation exposure

Currency	Equity	Hedging after tax	Net exposure after tax
EUR	96,399	50,769	45,630
PLN	14,517	2,830	11,687
DKK	14,145	6,490	7,655
Other	1,574	215	1,359
Total	126,635	60,304	66,331

Credit risk

The Group is exposed to credit risks when trading in electricity, making investments and trading in derivative contracts. The Group’s policy is to primarily use liquid assets to repay loans. Remaining liquidity is invested in part in the short term (to manage daily variations in the Group’s liquidity flows) and in part in the long term. The Group’s long-term investment portfolio is intended to secure legal requirements regarding capital availability for nuclear power operations in Germany. Investments are made in accordance with established investment rules with counterparties with low credit risk. The proportion of equities in the long-term investment portfolio may not exceed 30% of assets.
As of 31 December 2008, the proportion of equities was 14% (20%).
The average interest rate was 4.0% (4.1%) while the average duration was 3.8 years (3.8).

Credit risks are managed within the framework of established limits based on external ratings or internal credit assessments. Individual limits are established for each counterparty, and counterparties are reassessed on a regular basis. Exposures are monitored in relation to credit limits on a daily basis.

Prior to entering into a long-term agreement, a general master agreement, such as an ISDA, FEMA or EFET, is required. In the Nordic countries, most financial electricity contracts are settled via Nord Pool and most credit risk that arises is in the marketplace. In Germany, prices are hedged in a similar manner against EEX, even if OTC trade between bilateral counterparties is also common.

Credit risks

Type of instrument	Exposure
Electricity derivatives, positive fair values	8,170
Electricity derivatives, settlement risk	6,029
Interest and currency derivatives, positive fair values	3,477
Interest-bearing investments including larger bank balances	26,455
Shares	619
Total	44,750

Total exposure in electricity derivatives taking into account netting under agreements amounted to SEK 10,921 million.

Exposure in interest and currency derivatives adjusted for netting under ISDA agreements or the equivalent amounts to SEK 3,477 million (1,007). This calculation takes into account margin security requirements under CSA agreements, totalling SEK 1,843 million. Without adjustment for ISDA and CSA agreements, the exposure amounts to SEK 12,125 million (2,293).