Page 113 - EVRY Annual Report 2012

Annual Accounts Group 113
The group hedges future receipts and payments denominated in foreign currency where the amount is greater
than the equivalent of NOK 50 million by entering into forward contracts that mature on the settlement day for the
pay­ment.
ii) Translation risk represents the risk that assets or liabilities may be exposed to changes on currency conversion as
the result of changes in exchange rates.
Since the group has a significant scale of activities in Sweden, it arranges for part of its borrowings to be denomi­
nated in Swedish kroner (net investment).
iii) Strategic risk is a concept used to describe the long-term effects of changes in exchange rate, such as establish-
ing business operations in low-cost countries, importing from countries with low commodity prices and other
exposure to currency risk in relation to strategic decisions.
EVRY has established subsidiary companies in India and Ukraine. The group’s exposure to currency risk relates
principally to Swedish kroner (SEK), Euro (EUR), US dollar (USD) and pound sterling (GBP).
See also Note 23 Financial instruments for more information on the group’s exposure to currency risk.
1.c Price risk/Energy contracts
The group purchases energy in the spot market, and hedges prices for part of its energy requirements by using pric­
ing contracts in the forward market. The objective of this strategy is to reduce the risk of fluctuation in the cost of
energy purchases, and thereby provide greater certainty for cash flow.
Energy contracts work in such a way that the group pays the spot price for its actual power consumption, but pays
the difference when the value of the contract is higher than the spot price and receives the difference when the
con­tract value is lower than the spot price.
The price of the electric power actually consumed is determined on the basis of the local area price, hence the com­
pany is exposed at all times to local area risk. The prices used for hedging contracts are determined on the basis of
the national grid price (average price calculated by Nord Pool).
The group applies hedging accounting to determine the value of the energy contracts the company purchases.
Changes in fair value are divided between an effective hedging element and an ineffective hedging element, with
changes in the value of the effective hedging element applied directly to equity. In order for hedging to be deemed
effective, the hedge effective­ness must be in the range 80% - 125%. The efficiency of hedging the price of energy is
measured by comparing changes in the fair value of the derivative (the financial contract) against the physical sup-
ply of electricity (spot price).
When hedging anticipated purchases of energy, the effectiveness may fall outside the range 80% - 120%. The reason
for this is that the price of the financial contract is calculated against the national grid price, while the physical spot
price is calculated against the price for the area of delivery. In order to measure and document hedging effectiveness,
regression analysis is carried out of the volume weighted area price and the national grid price, with the volume-
weighted area price based on EVRY’s actual consumption. The prices used are 36 months of rolling weekly prices.
The group has entered into an energy management agreement with Bergen Energi.
All energy contracts are denominated in Euro, hence the NOK/EUR exchange rate will also affect the risk exposure
arising from energy purchases.
See also Note 23 Financial instruments for more information on the group’s energy contracts.
2. Credit risk
Credit risk relates to the risk that the group’s counterparties fail to make the payments to which they are com­
mitted, causing the group to suffer a financial loss. The responsibility for credit control and collection of overdue
amounts is centralised in a separate unit within the group.
No significant provisions were required in 2012 for losses on receivables from customers.