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REC Annual Report 2011
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funding, reduce refinancing risk, hedge currency risk related to expected
future net cash flows and manage interest rate risk. REC’s finance policy
sets the framework and limits for hedging activities in the REC Group.
It defines risk management objectives, responsibilities and operational
requirements. The REC Group finance policy was revised in December
2011 with limited changes from2010.
All hedging transactions are undertaken in order to reduce negative
impacts of changes in financial markets on net cash flow.
Please also refer to the consolidated financial statements for more
information, particularly notes 3 and 30.
Currency risk
REC operates internationally and is exposed to currency risk. The Group
is primarily exposed to fluctuations in US Dollar (USD), Euro (EUR),
Singapore Dollar (SGD) and Norwegian Krone (NOK), arising from
commercial transactions in currencies other than the entities’ functional
currencies, recognized assets and liabilities, and net investments in
foreign operations.
REC’s primary focus is currency hedging of the forecasted external net
cash flow of the Group. NOK is the functional currency of the parent
company REC ASA and the reporting currency for the REC Group. Net
cash flow is defined as the consolidated cash flows from operations,
finance costs and capital expenditure. The REC Group’s policy is to hedge
currency risk between 50 and 100 percent of the forecasted
consolidated net cash flow on a 24month rolling basis.
Tomanage currency risk arising fromcommercial transactions, REC
entities use various forward contracts or options. In addition REC swap
currency exposure of interest bearing debt fromNOK to EUR andUSD by
using currency derivative contracts. RECASAmanages the currency risk
on an overall RECGroup level and establishes external foreign exchange
rate contracts with banks. However, entering into currency derivative
contracts increase currency risk on financial instruments related to the
financial statement even if the purpose is to hedge the currency risk of
estimated future cash flows in relation to NOK. By entering into currency
derivative contracts REC establish financial instruments and consequently
expose itself for changes in the fair value of currency derivatives in the
financial statements. In addition, recognized financial assets and liabilities,
especially internal receivables and payables and external interest bearing
liabilities, in currencies other than the separate entities functional
currencies are affected by changes in currency rates. In 2010 and
2011, REC has not used hedge accounting according to IAS 39
Financial
Instruments: Recognition andMeasurement
for currency hedges.
Credit risk
REC has historically realized limited losses on trade receivables, but has
in 2011 increased provisions for loss on trade receivables and realized
these losses in 2011.
At year-end 2011 the REC Group, based on individual evaluation of the
customers and the amounts receivables outstanding, has recognized
limited provisions for losses on receivables. However, the REC Group
has experienced that an increasing part of the customers are overdue in
settling the amounts owed. Many companies in the solar industry are
struggling with their liquidity due to the difficult market conditions.
The management evaluates that the credit risk is increased at
December 31, 2011 compared to December 31, 2010.
Policies are in place to ensure that sales of products are made to
customers with an acceptable credit history, and the company also
applies requirements for various payment guarantees or prepayments,
and to some extent credit insurance. The difficult market conditions in
2011 have increased credit risks related to counterparties. REC has
experienced some disputes when it has been necessary to call on bank
guarantees from customers. Credit risk may also increase by abrupt
changes in market conditions by changes in government incentives.
Due to close down of parts of RECWafer’s production capacity, and
termination of-long-termwafer sales contracts, REC Silicon and
RECWafer aremore exposed to spot sales. Thismay increase the credit risk.
Generally a more challenging and competitive market environment
may increase credit risk through sales to financially weaker customers,
extended payment terms and sales into new and immature markets.
RECSilicon and RECSolar have during 2011 increased the number of
customers, and thereby reduced somewhat the risk related to
concentration of a limited number of customers. However, the customers
are to a large extent exposed to the same industry. In 2011, no single
customer exceeded ten percent of revenues or trade receivables but some
of the customers are relatively large. At year-end 2011, the seven largest
trade receivables constituted 44 percent of total trade receivables.
Interest rate risk
Changes inmarket interest rates affect the fair valueof assets and liabilities
or the variability in cash payments. TheRECGroup is exposed to interest
rate risk through funding and cashmanagement activities, primarily in
RECASA. Approximately61percent of REC’s debt (excluding thefinance
leases) has variable interest rates (interest periods shorter than12months)
while39percent hasfixed interest rates (longer than12months).
Interest hedging instruments may be used to control and minimize the
company’s interest cost and risk related to fluctuations in interest rates
within the framework defined in the finance policy. The risk towards
fluctuations in interest rates is measured by modified duration, see note
3 for further description. The modified duration at year end 2011 was
1.6 years (excluding finance lease debt).
Financing and liquidity risk
REC shall strive to maintain access to various sources of funding. Due to
the dynamic nature of the underlying businesses, REC aims to maintain
a high degree of financial flexibility by keeping sufficient cash and cash
equivalents or committed credit facilities available.
RECshall at all times strive tohavesufficient equity capital to implement the
business strategies andhavefinancial flexibility in relation topossiblenew
investments.Taking intoaccount themarket volatilityand the risk related
to futurecashflowfromtheREC’sproduction facilities, RECshall aimto
maintaina long termcapital structurecorresponding toan “Investment
Grade” rating. Short termdeviations fromthis long termambitionmayoccur.
The liquidity risk has increased in the second half of 2011, due to the
difficult financial market and the future market uncertainty and risk
related to REC’s products.
Report from the Board of Directors