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33. Financial risks
         
General
Wärtsilä has a centralised Group Treasury with two main objectives: 1) to arrange adequate funding for the Group’s underlying operations on competitive terms, 2) to identify and evaluate the financial risks within the Group and implement the hedges for the Group companies.
         
The objective is to hedge against unfavorable changes in the financial markets and to minimise the impact of foreign exchange, interest rate, credit and liquidity risks on the Group’s cash reserves, profits and shareholders’ equity.
         
The Financial Risk Policy is approved by the Board of Directors. The Treasury employs only such instruments whose market value and risk profile can be reliably monitored.
         
Foreign exchange risk
Foreign exchange exposures are monitored at the Business level and then netted and hedged at Group level. All fixed sales and purchase contracts are hedged. The estimated future commercial exposures are evaluated by the Businesses and the level of hedging is decided by the Board of Management. Hedge accounting in accordance with IFRS is applied to most of the hedges of these exposures. The hedges cover such time periods that both the prices and costs can be adjusted to new exchange rates. These periods vary among Group companies from one month to two years. The Group also hedges its position of the statement of financial position, which includes receivables and payables denominated in foreign currencies. The Group does not expect significant losses from foreign exchange rate changes in 2011. The cancellation of orders could lead to ineffective currency hedge. Approximately 70% of sales and 63% of operating costs in 2010 were denominated in euros. The Group’s profits and competitiveness are also indirectly affected by the home currencies of its main competitors: USD, GBP, JPY and KRW.
         
The instruments, their nominal values and currency distribution used to hedge the Group’s foreign exchange exposures are listed in Note 27.
         
Some Group companies in countries whose currencies are not fully convertible like Brazil and China have unhedged, intercompany loans nominated either in EUR or USD. Total amount of the loans is EUR 41 million.
 
Since Wärtsilä has subsidiaries outside the euro zone, the Group’s shareholders’ equity is sensitive to exchange rate fluctuations. At the end of 2010 the net asset value of Wärtsilä’s foreign subsidiaries outside the euro zone totalled EUR 447 million, of which EUR 407 million was hedged. The ineffective portion of the equity hedges was not significant.
         
IFRS hedge accounting has been applied to EUR 889 million currency forwards. 10% change in the exhange rates would cause from these currency forwards an approximately EUR 66 million after tax influence on the equity. In 2010 EUR 6 million fair value adjustments related to cash flow hedges were booked in equity. EUR 12 million of the fair value adjustments were transferred from equity to the statement of income as net sales or operating expenses during 2010. The result from ineffective portion of the cash flow hedges, EUR 4 million, has been booked in financial items.
         
Currency distribution 2010
% Net sales Operating costs Trade receivables Trade payables
EUR 70 63 72 74
USD 12 9 9 2
NOK 3 4 3 2
CHF 1 3 1 3
Other EU currencies 1 2 1 2
SGD 1 2 3 1
BRL 2 3 1 1
INR 1 2 2 1
CNY 2 2 1 1
JPY   3 1 2
Other currencies 7 9 5 9
  100 100 100 100
         
Interest rate risk
Wärtsilä is exposed to interest rate risk primarily through market value changes to the net debt portfolio (price risk) and also through changes in interest rates (re-fixing on roll-overs). Wärtsilä hedges interest rate exposure by using derivative instruments such as interest rate swaps, futures and options. Changes in the market value of these derivatives are booked directly to the statement of income. Interest rate risk is managed by constantly monitoring the market value of the financial instruments and by using sensitivity analysis.
 
Interest-bearing loan capital at the end of 2010 totalled EUR 628 (664) million. The average interest rate was 2.5% (2.3) and the average re-fixing time 22 (23) months. At the end of 2010 a one percentage point parallel decrease/increase of the yield curve would have resulted in a EUR 11 million increase/decrease in the value of the net debt portfolio, including derivatives.
 
Wärtsilä spreads its interest rate risk exposure by taking both fixed and floating rate loans. The share of floating rate loans as a proportion of the total debt can vary between 30–70%. At the end of 2010 the floating rate portion of total loans was 44% after adjustment for interest rate derivatives. A one percentage point change in the interest level would cause a EUR 2 million change in the following year’s interest expenses of the debt portfolio, including derivatives.
         
Additional information related to loans can be found in note 17 and 25.
         
Liquidity and refinancing risk
Wärtsilä ensures sufficient liquidity at all times by efficient cash management, and by maintaining sufficient committed and uncommitted credit lines available.
         
The existing funding programmes include:
• Committed Revolving Credit Facilities totalling EUR 560 million.
• Finnish Commercial Paper programmes totalling EUR 700 million.
 
The average maturity of the long-term loans is 46 months and the average maturity of the confirmed credit lines is 31 months. Additional information in Note 25.
         
Wärtsilä Group’s liquidity is strong. Wärtsilä had cash and cash equivalents totalling EUR 776 million at the year end as well as EUR 560 million non-utilised committed credit facilities and substantial Commercial Paper programmes. Wärtsilä minimises its refinancing risk by having a balanced and sufficiently long loan portfolio.
         
Revolving credit facilities
         
MEUR        
Year     Maturing Available
(end of period)
2010       560
2011     95 465
2012     35 430
2013     270 160
2014       160
2015     160  
         
Credit risk
The responsibility for managing the credit risks associated with ordinary commercial activities lies with the Businesses and the Group companies. Major trade and project finance credit risks are minimised by transferring risks to banks, insurance companies and export credit organisations. The company did not have long-term suppliers’ credits at the end of 2010. No losses were recorded on suppliers’ credits.
         
Credit risks related to the placement of liquid funds and to trading in financial instruments are minimised by setting explicit limits for the counterparties and by making agreements only with the most reputable domestic and international banks and financial institutions.
         
The Group companies deposit the maximum amount of their liquid financial assets with the centralised treasury (Wärtsilä Group Treasury) as local laws and central bank regulations allow it. The Group’s funds are placed in instruments with sufficient liquidity (short-term bank deposits or Finnish Commercial Papers) and rating (at least single-A rated instruments or other instruments approved by the Group’s CFO). These placements are constantly monitored by Wärtsilä Group Treasury and Wärtsilä does not expect any future defaults from the placements.
         
Aging of trade receivables
  2010 2009
MEUR Trade receivables of which impaired Trade receivables of which impaired
Not past due 568   613  
Past due 1-30 days 100   139  
Past due 31-180 days 121 1 180 2
Past due 181-360 days 42 5 78 3
Past due 1 year 81 45 58 33
Total 911 51 1 068 38
         
In 2010, EUR 16 million provisions for doubtful receivables has been recognised in the statement of income.
         
Equity price risk
Wärtsilä has investments in publicly quoted shares (Note 15). The market value of these shares at the end of 2010 was EUR 2 million. 10% strengthening or weakening in share price does not have any significant impact on Group’s equity after taxes.
 
Wärtsilä also has equity investments totalling EUR 9 million in power plants companies, most of which are located in developing countries and performing well according to expectations.
         
Capital risk management
Wärtsilä’s policy is to secure a strong capital base to keep the confidence of investors and creditors and for the future development of the business. The capital is defined as total equity including non-controlling interests and net interest-bearing debt. The target for Wärtsilä is to have a solvency ratio of 35–40% and to pay a dividend equivalent to 50% of operational earnings per share.

Wärtsilä redefined in January 2011 its long-term financial targets. Wärtsilä’s target is to maintain gearing below 50% and to pay a dividend equivalent to 50% of earnings.
         
MEUR   31.12.2010 31.12.2009
Equity and liabilities   4 696 4 655
Advances received   -616 -879
      4 080 3 777
Total equity   1 664 1 512
Solvency ratio,%   40.8 40.0
         
In the capital management Wärtsilä also follows the gearing development:
         
Interest-bearing liabilities, non-current   572 591
Interest-bearing liabilities, current   56 73
Cash and cash equivalents   -776 -244
      -148 420
Loan receivables   -17 -6
Net interest-bearing loan capital   -165 414
Gearing   -0.09 0.28