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Note 4 – Financial risk management

Note 4.1 – Financial risk factors

Through its business activities, the Group is exposed to a number of different financial risks related to trade receivables, trade payables and loans: market risk (comprising interest-rate risk and currency risk), credit risk and liquidity risk. The Group endeavours to minimise potential unfavourable effects on the Group’s financial results.

The objectives of the Group’s financial operations are to:

– ensure that the Group can meet its payment commitments,
– manage financial risks,
– secure access to necessary financing, and
– optimise the Group’s net financial items.

Credit risk is managed by Group Management. Only banks and credit institutions that have received the credit rating “A”, at a minimum, from independent assessors are accepted. If customers have their credit ratings assessed by independent assessors, such ratings are used. In the event that there is no independent credit assessment, a risk assessment is made of the customer’s credit rating, in which financial position, historical experience and other factors are taken into consideration. Since a significant proportion of the Group’s contracts are agreed fully or partly on the basis of advance payment or in other cases comprise customers with a strong financial position, the customer-related credit risk is considered to be limited.

Market risk

Currency risk

The Group operates internationally and is exposed to currency risk arising from various currency exposures, primarily in respect of EUR. Currency risk arises from payment flows in foreign currency – which is known as transaction exposure – and from the translation of balance-sheet items in foreign currency, as well as translation of foreign subsidiaries’ income statements and balance sheets into SEK, the Group’s reporting currency – known as translation exposure.

Currency risk arises when future business transactions or recognised assets or liabilities are expressed in a different currency to the entity’s functional currency. In Azelio, exchange-rate risk arises primarily through future business transactions, particularly in the Parent Company, where a significant portion of the transactions occurs in EUR. The Group is also exposed to exchange-rate risk related to government-financed projects, where the financing is primary received in EUR. There is no significant exchange-rate risk in the subsidiaries. The Group has no borrowing in foreign currencies. The exchange-rate risk associated with shareholders’ equity in connection with translation of the foreign subsidiary is not significant for the Group. The Group’s policy for managing exchange-rate risk is primarily focused on the operational terms and conditions of the business by ensuring that revenues and costs in currencies other than SEK match each other.

Sensitivity analysis – transaction exposure

The sensitivity of earnings to changes in exchange rates arises mainly in EUR. Significant balance-sheet items in foreign currency are found in trade receivables, contract liabilities, trade payables and accrued and prepaid central government contributions. Trade receivables in foreign currency amounted to kSEK 0 on 31 December 2019 (31 December 2018: kSEK 960, 1 January 2018: kSEK 1,503). Contract liabilities in foreign currency amounted to kSEK 0 on 31 December 2019 (31 December 2018: kSEK 0, 1 January 2018: kSEK: 0). Trade payables in foreign currency amounted to kSEK 3,487 on 31 December 2019 (31 December 2018: kSEK 346, 1 January 2018: kSEK: 167). Prepaid central government contributions in foreign currency amounted to kSEK 0 on 31 December 2019 (31 December 2018: kSEK 0, 1 January 2018: kSEK: 0 and accrued central government contributions amounted to kSEK 0 on 31 December 2019 (31 December 2018: kSEK 0, 1 January 2018: kSEK: 0).

If the SEK had weakened 10% in relation to EUR, all other variables being equal, the restated net profit for the 2019 financial year would have been kSEK 357 (kSEK 22) lower. This is largely due to losses arising from the restatement of trade payables.

Interest-rate risks associated with cash and cash equivalents and borrowing

Interest-rate risk relates to the risk of the Group’s exposure to changes in the market interest rate having a negative impact on net profit.

The Group does not have any significant borrowing from any credit institution; nor does it have surplus liquidity invested in inflation-indexed or government bonds. Accordingly, the impact of a change in the market interest rate is limited.

Sensitivity analysis – interest-rate exposure

A change in market interest rates by 100 basis points (one percentage point) would have changed the Group’s interest expense by approximately kSEK 201, with the discount rate for lease liabilities accounting for 80% of the change.

Credit risk

Credit risk arises through holdings of cash and cash equivalents, balances with banks and credit institutions and credit exposure with customers, including receivables outstanding. Credit risk is managed by Group Management. Only banks and credit institutions that have received the credit rating “A”, at a minimum, from independent assessors are accepted.

The Group has historically had low bad debt losses since, to a considerable extent, the customers comprise large-scale, well-known customers. If customers have their credit ratings assessed by independent assessors, such ratings are used. In the event that there is no independent credit assessment, a risk assessment is made of the customer’s credit rating, in which financial position, historical experience and other factors are taken into consideration. Individual risk limits are set based on internal and external ratings in accordance with limits set by the Board of Directors. Compliance with the credit limits is monitored regularly by Group Management.

31 December 2019Not past-due receivables > 30 days past-due> 60 days past-due> 120 days past-dueTotal
 32 170050

Liquidity risk

Through prudent liquidity management, the Group ensures that there is sufficient cash to meet the needs of operating activities. At the same time, it is ensured that the Group has sufficient scope in its cash and cash equivalents so that the payment of liabilities can be made when these fall due.

Group Management monitors rolling forecasts of the Group’s cash and cash equivalents on the basis of expected cash flows.

In the table below, the Group’s non-derivative financial liabilities that constitute financial liabilities are organised according to the term remaining on the balance sheet date until the contractual due date. The amounts stated in the table comprise contractual, undiscounted cash flows. Future cash flows in foreign currency that are related to variable interest rates have been calculated based on the exchange rate that applied on the balance sheet date. Repayment dates in respect of the loans from the Swedish Energy Agency are established based on assessments of when the projects will generate revenues.

At 1 January 2018<3 months3 months–1 year1–2 years2–5 years>5 yearsTotal contractual cash flowsCarrying amount
Financial liabilities       
Other financial liabilities01409525522,50022,99022,990
Liabilities, leases9262,8123,0328,73385316,35616,356
Trade payables5,30900005,3095,309
Total6,2342,9523,1278,98823,35344,65444,655
At 31 December 2018<3 months3 months–1 year1–2 years2–5 years>5 yearsTotal contractual cash flowsCarrying amount
Financial liabilities       
Other financial liabilities0958125522,41922,85022,850
Liabilities, leases9592,1142,8816,52628312,76412,764
Trade payables34,332000034,33234,332
Total35,2912,2092,9626,78122,70269,94669,946
At 31 December 2019<3 months3 months–1 year1–2 years2–5 years>5 yearsTotal contractual cash flowsCarrying amount
Financial liabilities       
Other financial liabilities0818525522,33422,75522,755
Liabilities, leases1,8015,5017,6186,26122721,40921,409
Trade payables37,018000037,01837,018
Total38,8195,5827,7036,51622,56181,18281,182

Note 4.2 – Management of capital

The Group’s target for its capital structure is to secure the Group’s ability to continue its operations so that it can continue to generate returns for shareholders and value for other stakeholders, and maintain an optimal capital structure for keeping the costs of capital down.

The Group assesses capital based on the debt/equity ratio. This key ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowing (comprising the items current borrowing and non-current borrowing in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as net indebtedness plus shareholders’ equity.

 31 December 201931 December 20181 January 2018
Total borrowing (Note 22)-22,755-22,850-22,990
Less: cash and cash equivalents55,634331,19618,020
Net debt32,879308,346-4,971
Total equity710,374561,717237,146
Total capital743,253870,063232,175