Boskalis jaarverslagen 2011

27. Financial instruments

General

Pursuant to a financial policy maintained by the Board of Management, the Group and its Group companies use several financial instruments in the ordinary course of business. The policy with respect to financial instruments is disclosed in more detail in the Annual Report in the “Corporate Governance” chapter. The Group’s financial instruments are cash and cash equivalents, trade and other receivables, interest-bearing loans and bank overdrafts, trade and other payables and derivatives. The Group enters into derivative transactions, mainly foreign currency forward contracts and to a limited extent interest rate swaps, to hedge against the related risks as the Group’s policy is not to trade in derivatives.

27.1 Financial risk management

  • The Group has exposure to the following risks from its use of financial instruments:
  • Credit risk
  • Liquidity risk
  • Market risk, existing of: currency risk, interest rate risk and price risk

27.1.1 Credit risk

The Group has a strict acceptance and hedging policy for credit risks, resulting from payment and political risks. In principle, credit risks are covered by means of bank guarantees, insurance, advance payments, et cetera, except in the case of creditworthy, first class debtors. These procedures and the (geographical) diversification of the operations of the Group companies reduce the risk with regard to credit concentration.

Exposure to credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s trade and other receivables. The Group’s exposure to credit risk is mainly determined by the individual characteristics of each of the customers and the location of these customers. A large part of the Group’s projects in progress within the operational segments Dredging & Earthmoving and Maritime Infrastructure is directly or indirectly with state controlled authorities and (contractors of) oil and gas producers in various countries and geograhical areas.

Activities relating to harbor towage activities are often performed for major ship owing companies and harbor agents. Receivables relating to Transport, Terminal Services and Heavy Lift activities are generally outstaning with oil and gas producers, therefore a significant portion of the receivables relates to clients from these industries. Salvage receivables are mainly outstaning with shipping companies and their Protection & Indemnity Associations, or “P&I Clubs”. In general there is healthy diversification of receivables with different customers in several countries in which the Group is performing its activities. Ongoing credit evaluation is performed on the financial condition of accounts receivable. The credit history of the Group over the recent years indicates that bad debts incurred are insignificant compared to the level of activities. Therefore, management is of the opinion that credit risk is adequately controlled through the currently applicable procedures.

The maximum credit risk as per balance sheet date, without taking into account the aforementioned financial risk coverage instruments and policy, consists of the book values of the financial assets as stated below:

    31 december
    2011   2010
         
Non-current receivables   112,064   40,373
Trade receivables   518,164   550,080
Amounts due from associated companies   22,973   9,672
Other receivables and prepayments   408,034   233,587
Derivatives (receivable)   7,235   5,036
Income tax receivable   21,298   23,060
Cash and cash equivalents   397,957   357,744
    1,487,725   1,219,552

The maximum credit risk on trade debtors at reporting date by operational segment was as follows:

    2011   2010
         
Dredging & Earthmoving   316,468   398,082
Salvage, Transport & Heavy Lift   61,439   65,340
Harbour Towage   37,455   26,926
Terminal Services   41,397   41,781
Maritime Infrastructure   67,611   21,613
Holding   -6,206   -3,662
    518,164   550,080

The aging of trade debtors as at December 31 was as follows:

    2011   2010
    Gross   Impairment   Gross   Impairment
                 
Not past due   276,884     323,935  
Past due 0 - 90 days   102,340   4,872   148,690   2,806
Past due 90 - 180 days   27,407   8,448   23,577   4,504
Past due 180 - 360 days   24,419   3,672   13,382   2,416
More than 360 days   114,121   10,015   60,884   10,662
    545,171   27,007   570,468   20,388
                 
Impairment   -27,007       -20,388    
Trade receivables at book value   518,164       550,080    

With respect to the receivables that are neither impaired nor past due, there are no indications as of the reporting date that these will not be settled.

The movement in the allowance for impairment in respect of trade debtors during the year was as follows:

    2011   2010
         
Balance at January 1   20,388   4,435
         
Acquired through business combinations   1,508   15,555
In / (out) consolidation   -668  
Provisions made during the year   7,168   3,738
Provisions used during the year   -70   -4,058
Provisions released during the year   -1,459   -88
Exchange rate differences   140   806
    6,619   15,953
         
Balance at December 31   27,007   20,388

Concentration of credit risk

As at reporting date there is no concentration of credit risk with certain customers.

27.1.2 Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.

The Group’s approach to managing liquidity is to ensure that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions. Liquidity projections including available credit facilities are incorporated in the regular management information reviewed by the Board of Management. The focus of the liquidity review is on the net financing capacity, being free cash plus available credit facilities in relation to the financial liabilities. Furthermore, based on the Group’s financial ratios it can be concluded that the Group has significant debt capacity available under an (implied) “investment grade”-credit profile.

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

    Book value   Contractual cash flows   One year or less   1 - 5 years   More than 5 years
                     
As at December 31, 2011                    
Mortgage loans   -198,477   -244,316   -62,503   -110,501   -71,312
Other interest-bearing loans   -593,791   -717,241   -83,490   -251,617   -382,134
Bank overdrafts   -15,364   -15,364   -15,364    
Trade and other payables   -1,233,125   -1,233,125   -1,233,125    
Current tax payable   -149,816   -149,816   -149,816    
Derivatives   -31,315   -31,315   -20,853   2,202   -12,664
    -2,221,888   -2,391,177   -1,565,151   -359,916   -466,110

    Book value   Contractual cash flows   One year or less   1 - 5 years   More than 5 years
                     
As at December 31, 2010                    
Mortgage loans   -216,624   -265,515   -46,030   -152,931   -66,554
Other interest-bearing loans   -591,145   -738,900   -89,211   -238,570   -411,119
Bank overdrafts   -1,475   -1,564   -1,564    
Trade and other payables   -1,022,113   -1,022,113   -1,022,113    
Current tax payable   -163,107   -163,107   -163,107    
Derivatives   -44,707   -44,707   -23,213   -1,235   -20,259
    -2,039,171   -2,235,906   -1,345,238   -392,736   -497,932

27.1.3 Market risk

Market risk concerns the risk that group income or the value of investments in financial instruments is adversely affected by changes in market prices, such as exchange rates and interest rates. The objective of managing market risks is to keep the market risk position within acceptable boundaries while achieving the best possible return.

Currency risk

A significant proportion of the projects is denominated in foreign currencies. That means that reported financial results and cash flows are exposed to risks ensuing from changes in exchange rates. The Board of Management has established a detailed currency risk management policy stipulating as main principle that currency risk, arising from transactions, must be hedged as soon as they occur, usually with forward contracts. Financial derivatives are used exclusively insofar as there are underlying real transactions, mainly future cash flows from contracted projects. Hedge accounting is applied to the majority of these cash flow hedges.

Exposure to currency risk

The Group’s currency risk management policy was carried out during 2011 and resulted in a non-material sensitivity of the Group to currency transaction risk.

The following significant exchange rates applied during the year under review:

    Average rate   Reporting date spot rate
Euro   2011   2010   2011   2010
                 
US dollar   1.383   1.334   1.298   1.342
Arab Emirates dirham   5.091   4.901   4.768   4.928
Singapore dollar   1.738   1.814   1.680   1.720
South African rand   9.995   9.716   10.480   8.880
Australian dollar   1.339   1.450   1.270   1.310
Brazilian real   2.316   2.514   2.420   2.230

Currency translation risk

The currency translation risk as per year-end can be summarized as follows:

    2011   2010
         
Expected cash flows in US dollars   162,875   139,626
Expected cash flows in Australian dollars   2,835   39,061
Expected cash flows in Singapore dollars   -2,363   55,573
Expected cash flows in other currencies   72,435   97,243
Expected cash flows in foreign currencies   235,782   331,503
         
Cash flow hedges   223,716   325,970
         
Net position   12,066   5,533

Because of the relative linkage between the exchange rates of a number of currencies and the US dollars, these currencies are mainly hedged by means of US dollar cash flow hedges.

Currency translation risk and financing

The currency translation risk arises mainly from the net asset position of subsidiaries, associated companies and joint ventueres, whose functional currency is different form the presentiation currency of the Group. These investments are viewed from a long-term perspective. Currency risks associated with investments in these affiliated companies are not hedged, under the assumption that currency fluctuations and interest and inflation developments balance out in the long run. Items in the income statements of these subsidiaries are translated at average exchange rates. Currency translation differences are charged or credited directly to equity.

At reporting date the net asset positions of the main subsidiaries, associated companies and joint ventueres in main functional currencies other than the Euro were as follows:

Euro   2011   2010
         
US dollar   365,357   215,395
Singapore dollar   272,259   243,250
South African rand   30,174   39,644
Brazilian real   56,669   23,074
         
Total net equity   724,459   521,363

Furthermore a loan is issued of US dollar 206.2 million to Lamnalco. This loan is hedged through derivatives in euros.

Sensitivity analysis

The Group is mainly funded with a bank loan denominated in Euros and a US Private Placement expressed in US dollars en British Pound Sterling (see note 23). The financing arrangement mentioned above is swapped by means of cross currency swaps into Euros and as a result there is no currency sensitivity in the income statement. The SMIT activities in Brazil have for a part an underlying US dollar cash inflow which is locally hedged with a cash outflow on the US dollar financing (outstanding financing: USD 54.2 million). A 5% weakening of the US dollar against the Brazilian real results in a currency gain of € 2.1 million and vice versa assuming that the exchange rate with the Euro does not change. These currency translation differences are recognized in the income statement. The other US dollar loans are mainly used for financing property, plant and equipment in proportionally consolidated strategic joint ventures.

For the year 2011, profit before taxation, excluding the effect of non-effective cash flow hedges, would have been € 4.1 million higher (2010: € 2.6 million higher) if the corresponding functional currency had strengthened by 5% against the Euro with all other variables, in particular interest rates, held constant. This would have been mainly as a result of foreign exchange gains on translation of the US dollar-denominated result of the affiliates mentioned above. The total effect on the currency translation reserve amounts to about € 36 million (2010: about € 26 million).

A 5% weakening of the corresponding functional currency against the Euro at December 31 would have had the equal but opposite effect assuming that all other variables would remain constant.

Interest rate risk

The Group has both fixed and variable interest rate liabilities. In respect of controlling interest risks, the policy is that, in principle, interest rates for loans payable are primarily fixed for the entire maturity period. This is achieved by contracting loans that carry a fixed interest rate or by using derivatives such as interest rate swaps.

The effective interest rates and the maturity term profiles of interest-bearing loans, deposits and cash and cash equivalents are stated below:

    Effective interest rate   One year or less   1 - 5years   Over 5 years   Total
                     
As at December 31, 2011                    
                     
Cash and cash equivalents   0.46%   243,474       243,474
Short-term deposits   0.39%   154,483       154,483
Mortgage loans (euro)   4.28%   -6,543   -25,337   -9,447   -41,327
Mortgage loans (US$)   5.01%   -42,237   -48,622   -35,373   -126,232
Mortgage loans (other)   7.60%   -3,280   -13,404   -14,234   -30,918
Other interest-bearing loans (euro)   3.95%   -50,606   -177,248   -348,121   -575,975
Other interest-bearing loans (other)   1.27%   -9,906   -7,652   -258   -17,816
Bank overdrafts (euro)   4.00%   -7,041       -7,041
Bank overdrafts (US$)   3.30%   -8,094       -8,094
Bank overdrafts   3.96%   -229       -229
        270,021   -272,263   -407,433   -409,675

    Effective interest rate   One year or less   1 - 5years   Over 5 years   Total
                     
As at December 31, 2010                    
                     
Cash and cash equivalents   0.41%   200,018       200,018
Short-term deposits   0.60%   157,726       157,726
Mortgage loans (euro)   4.47%   -8,167   -29,459   -18,522   -56,148
Mortgage loans (US$)   4.80%   -25,480   -91,377   -25,216   -142,073
Mortgage loans (other)   8.30%   -1,526   -6,800   -10,077   -18,403
Other interest-bearing loans (euro)   3.72%   -66,071   -170,944   -333,969   -570,984
Other interest-bearing loans (US$)   1.87%   -1,522   -3,884   -14,755   -20,161
Bank overdrafts   6.00%   -1,475       -1,475
        253,503   -302,464   -402,539   -451,500

Cash, deposits and bank overdrafts and the other interest-bearing loans have no fixed interest rates.

Sensitivity analysis

In managing interest rate risks the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. In the long term, however, permanent changes in interest rates will have an impact on profit.

At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments taking into account the corresponding effective hedge instruments, was:

    2011   2010
         
Fixed rate instruments        
Financial assets   209,862   88,343
Financial liabilities   -651,253   -661,778
    -441,391   -573,435
         
Variable rate instruments        
Financial assets   267,517   269,401
Financial liabilities   -156,371   -147,466
    111,146   121,935

A decrease of 100 basis points in interest rates at December 31, 2011 would have decreased the Group’s profit before income tax by approximately € 1.1 million (2010: € 1.2 million), with all other variables, in particular currency exchange rates, held constant.

Price risks

Risks related to price developments on the purchasing side, such as amongst others increased wages, costs of materials, sub-contracting costs and fuel, which are usually for the Group’s account, are also taken into account when preparing cost price calculations and tenders. Wherever possible, especially on projects that extend over a long period of time, price index clauses are included in contracts.

With regard to fuel price risk, the Board of Management has established a fuel price risk management policy stipulating approved fuel price risk management instruments. These include: delivery of fuel by the client, price escalation clauses, fixed price supply contracts and financial derivatives (forward, future and swap contracts).

27.2 On-balance financial instruments and fair value

Financial instruments accounted for under assets and liabilities are financial fixed assets, cash and cash equivalents, receivables, and current and non-current liabilities. Derivatives are mainly future cash flows hedged by forward contracts to which hedge accounting is applied. Furthermore, strategic alliances currently hold a number of interest rate swaps. These are recognized under other derivatives.

The fair value of most of the financial instruments does not differ materialy from the book value, with the exception of, long term and short term, loans and other payables with a fixed rate. The fair value of these items exceeds the book value by € 15.0 million (2010: € 7.7 million).

Fair value hierarchy

For the fair value measurement of the recognized financial instruments a fair value hierarchy is defined in accordance with IFRS 7:

  • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
  • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
  • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The fair value of the derivatives, which is the only category of financial instruments that qualify for this approach, is measured using level 2 input (2010: level 2).

The fair value of the forward exchange contracts is based on their listed market price, as at the end of the year (unadjusted market prices in active markets for identical assets and liabilities). The fair value other financial instruments is based on the actual interest rate as at balance sheet date, taking into account terms and maturity. The effective interest does not differ materially from the current market interest. The fair value of non-interest bearing financial instruments with a maturity of twelve months or less is supposted to be equal to their book value.

Derivatives

The composition of outstanding derivatives at year-end is presented below.

2011   Within one year   After one year   Total
             
USD forward selling (in US$)   338,798   18,871   357,669
USD forward buying (in US$)   70,389     70,389
Forward selling of other currencies (average contract rates in euro)   81,355   10,818   92,173
Forward buying of other currencies (average contract rates in euro)   53,668     53,668
Fuel hedges (in US$)   -66   -115   -181
Interest Rate Swaps (in US$)   -763   -1,893   -2,656
Interest Rate Swaps (in Eur)   1,788   -5,311   -3,523

2011   Within one year   After one year   Total
             
USD forward selling (in US$)   223,418   30,069   253,487
USD forward buying (in US$)   43,136   2,450   45,586
Forward selling of other currencies (average contract rates in euro)   217,278   32,985   250,263
Forward buying of other currencies (average contract rates in euro)   87,232   10,415   97,647
Fuel hedges (in US$)   -2,690     -2,690
Other derivatives (in US$)   -58   -18   -76
Interest Rate Swaps (in US$)   -1,441   -4,550   -5,991
Interest Rate Swaps (in Eur)   -334   -17,020   -17,354

The remaining time to maturity of these derivatives has a direct relation to the remaining time to maturity of the relating underlying contracts in the order book.

Cash flows from forward currency buyings and sellings can be rolled forward at settlement date when they differ from the underlying cash flows.

The results on effective cash flow hedges are recognized in group equity as stated below:

    2011   2010
         
Opening balance Hedging reserve as at January 1   -2,354   8,262
         
Movement in fair value of effective cash flow hedges recognized in group equity   2,937   -4,380
Transferred to the income statement   3,137   -7,174
Total directly recognized in group equity   6,074   -11,554
Taxation   -921   938
Directly charged to the Hedging reserve (net of taxes)   5,153   -10,616
         
Balance Hedging reserve as at December 31   2,799   -2,354

The results on non-effective cash flow hedges are presented within the operational costs and amount to € 0.9 million negative over 2011 (2010: € 6.2 million negative).

27.3 Capital management

The Board of Management’s policy is to maintain a strong capital base so as to maintain customer, investor, creditor and market confidence and to support future development of the business. The Board of Management monitors the return on equity, which the Group defines as net operating income divided by total shareholders’ equity, excluding minority interests. The Board of Management also monitors the level of dividend to be paid to holders of ordinary shares. For the dividendpolicy reference is made to the Shareholdersinformation in the Annual Report.

The Board of Management seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the benefits of a sound capital position. The Group’s target is to achieve a long-term return on equity of at least 12%; in 2011 the return was 15.4% (2010: 21.7%).

Royal Boskalis Westminster N.V. does not have a defined share buy-back plan. 
There were no changes in the Group’s approach to capital management during the year. 
Neither the Group or any of its Group companies are subject to externally imposed capital requirements.

The Group’s net debt (€ 2,926 million; 2010: € 2,716 million) to Group equity (€ 1,747 million; 2010: € 1,599 million) at the reporting date amounts to 1.67 (2010: 1.70).

27.4 Other financial instruments

Pursuant to the decision of the General Meeting of Shareholders held on May 9, 2001, the Stichting Continuïteit KBW has acquired the right to take cumulative protective preference shares in Royal Boskalis Westminster N.V. for a nominal amount which shall be equal to the nominal amount of ordinary shares outstanding at the time of the issue. This right qualifies as a derivative financial liability, with the following important conditions. The cumulative protective preference shares are to be issued at par against a 25% cash contribution, the remainder after call-up by the Stichting in consultation with Royal Boskalis Westminster N.V. After the issue, Royal Boskalis Westminster N.V. has the obligation to buy or cancel the shares upon the Stichting’s request. The preferential dividend right amounts to Euribor increased by 4% at most. The interest and credit risk is limited. The fair value of the option right is nil.


Added to My report add to My report Source: Annual report 2011, page 100