In its business operations, Lemminkäinen Group is exposed to financial risks, mainly interest rate, foreign exchange rate, funding, liquidity and credit risks. The aim of the Group's financial risk management is to reduce uncertainty concerning the possible impacts that changes in fair values on the financial markets could have on the Group's result, cash flow and value. The management of financial risks is based on principles approved by the Board of Directors. The treasury policy defines the principles and division of responsibilities with regard to financial activities and the management of financial risk. The policy is reviewed and if necessary updated at least annually.

Execution of the treasury policy is the responsibility of the Group Treasury, which is mainly responsible for the management of financial risks and handles the Group's treasury activities on a centralised basis. The Group's treasury policy defines the division of responsibilities between the Group Treasury and business units in each subarea. The Group companies are responsible for providing the Group Treasury with up-to-date and accurate information on treasury-related matters concerning their business operations. The Group Treasury serves as an internal bank and co-ordinates, directs and supports the Group companies in treasury matters such that the Group's financial needs are met and its financial risks are managed effectively in line with the treasury policy.

Interest rate risk

The aim of Lemminkäinen Group's interest rate risk management is to minimise changes affecting the result, cash flows and value of the Group due to interest rate fluctuations. The Group Treasury manages and monitors the interest rate position. The Group's interest rate risk primarily comprises fixed-rate and variable-rate loan and leasing agreements, interest-bearing financial receivables and interest rate derivatives. Interest rate changes affect items in the income statement and balance sheet.

The interest rate risk is decreased by setting the Group's average period of interest rate fixation to the same as the interest rate sensitivity of its business. The interest rate sensitivity position of the Group's business is estimated to be about 15 months. The treasury policy thus defines the Group's average period of interest rate fixation as 12–18 months. The Group aims to keep 40–65 per cent of its liabilities per currency hedged.

The Group can have both variable- and fixed-rate long-term borrowings. The ratio of fixed- and variable-rate borrowings can be changed by using interest rate derivatives. In 2013, the Group has used interest rate swaps for managing interest rate risks. Part of the interest rate swaps are used for hedge accounting and a hedging result of those derivatives will have impact on interest expenses until the year 2014. There was no ineffectiveness to be recorded from hedge accounting during the financial year.

Interest rate fluctuations in 2013 did not have any unusual effect on the Group's business, but a significant rise in the level of interest rates may have a detrimental effect on the demand for housing.

Sensitivity analysis of interest rate risk

The following assumptions are made when calculating the sensitivity caused by a change in the level of interest rates:
-the interest rate change is assumed to be 1 percentage point
-the position includes variable-rate financial liabilities, variable-rate financial receivables and interest rate derivatives
-all factors other than the change in interest rates remain constant
-taxes have not been taken into account when calculating sensitivity

EUR 1,000 Interest rate risk position Impact on profit or loss (+1%) Impact on profit or loss (-1%) Impact on other comprehensive income (+1 %) Impact on other comprehensive income (-1%)
31 Dec 2013

Variable-rate liabilities -172,028 -1,720 1,720

Variable-rate receivables 81,845 818 -818

Interest rate derivatives 47,180 1,606 -1,699 9 -9

-43,003 704 -798 9 -9

EUR 1,000 Interest rate risk position Impact on profit or loss (+1%) Impact on profit or loss (-1%) Impact on other comprehensive income (+1 %) Impact on other comprehensive income (-1 %)
31 Dec 2012

Variable-rate liabilities -180,210 -1,802 1,802

Variable-rate receivables 34,926 349 -349

Interest rate derivatives 61,460 2,051 -2,189 116 -119

-83,825 598 -736 116 -119

Foreign exchange rate risk

The aim of foreign exchange rate risk management is to reduce uncertainty concerning the possible impacts that changes in exchange rates could have on the future values of cash flows, business receivables and liabilities, and other balance sheet items. Exchange rate risk mainly consists of transaction risk and translation risk.

Translation risk consists of foreign exchange rate differences arising from the translation of the income statements and balance sheets of foreign group companies into the Group's functional currency. In practice, the Group's reportable translation risk is caused by equity investments in foreign entities and their retained earnings, the effects of which are recorded under translation differences in shareholders' equity. Lemminkäinen Group has foreign net investments in several currencies. In accordance with the treasury policy, Lemminkäinen Group protects itself from translation risks primarily by keeping equity investments in foreign entities at an appropriately low level, and thus does not use financial instruments to hedge the translation risks.

Transaction risk consists of cash flows in foreign currencies from operational and financial activities. The Group seeks to hedge business currency risks primarily by operative means. The remaining transaction risk is hedged by using instruments such as foreign currency loans and foreign currency derivatives. The group companies are responsible for identifying, reporting, forecasting and hedging their transaction risk positions internally. The Group Treasury is responsible for hedging the Group's risk positions as external transactions in accordance with the treasury policy. The general rule is that the major net positions forecasted for the 12 months following the review date are hedged, with a hedging ratio ranging from 25–100 per cent and emphasising the first six months.

The key currencies in which the Group was exposed to transaction risk in 2013 were Swedish krona and Russian rouble (in 2012 US-dollar and Russian rouble). These transaction risk positions were mainly due to sales, procurements, receivables and liabilities. In 2013 the Group did not apply hedge accounting to transaction risk hedging.

Sensitivity analysis of transaction risk

The following assumptions have been made when calculating the sensitivity caused by changes in exchange rates:
- the exchange rate change is assumed to be +/–10%
- the position includes financial assets and liabilities denominated in roubles and kronas (in 2012 denominated in dollars and roubles)
- the position does not include forecasted future cash flows
- taxes are excluded in sensitivity analysis

EUR 1,000 Transaction position +/- 10% impact on profit or loss
31 Dec 2013

EUR/SEK -2,432 +221 / -270
EUR/RUB -6,432 +585 / -715

EUR 1,000 Transaction position +/- 10% impact on profit or loss
31 Dec 2012

EUR/USD 6,160 -560 / +684
EUR/RUB 22,813 -2,074 / +2,535

Funding and liquidity risk

The Group seeks to optimise the use of liquid assets in funding its business operations and to minimise interest and other finance costs. The Group Treasury is responsible for managing the Group's overall liquidity and ensuring that adequate credit lines and a sufficient number of different funding sources are available. It also ensures that the maturity profile of the Group's loans and credit facilities is spread sufficiently evenly over coming years as set out in the treasury policy. At the end of the accounting period, the maturity schedule of the Group's interest-bearing liabilities was front-loaded. The primary reasons for this are the EUR 60 million bond that matures in October 2014, and the maturing pension loans with instalment plans. Current interest-bearing liabilities also include borrowings of housing companies under construction, totalling EUR 73.1 million. These borrowings will be transferred to the buyers of the co-op shares when the units are handed over. Regarding unsold housing units, the Group will bear the liability by paying financial consideration for the units in question. The Group's available financing sources and liquid assets are sufficient to cover the obligations arising from current interest-bearing liabilities.

According to the treasury policy, the Group's liquidity reserve shall at all times match the Group's total liquidity requirement, and it must be accessible within five banking days without any additional charges being incurred. The Group's total liquidity requirement consists of the liquidity requirement of day-to-day operations, risk premium needs and the strategic liquidity requirement. The Group's liquidity management is based on monthly forecasts of funding requirements and daily cash flow forecasting. The Group's excess liquidity is managed by means of internal transactions and cash pools.

Due to the nature of the Group's business operations, seasonal borrowing is of great importance. The effect of seasonal variation on short-term liquidity is controlled by using a commercial paper programme, committed credit limits and bank overdraft facilities. The total amount of the Group's commercial paper programme is EUR 300 million (EUR 300 mill.), of which EUR 150.2 million (EUR 86.8 mill.) was in use at 31 December 2013. In March 2013, Lemminkäinen agreed on financial arrangements totalling EUR 255 million. Arrangements comprised a EUR 185 million, three-year syndicated revolving credit facility and a EUR 70 million, two year syndicated term facility. The credit facilities are binding and unsecured. Arrangements replaced EUR 160 million bilateral credit facilities which were originally set to mature in December 2013. In December, Lemminkäinen terminated the EUR 70 million credit facility mentioned above. At the end of the year, the Group had unused committed credit facilities amounting to EUR 175.0 million (EUR 139.6 mill.) and overdraft limits amounting to EUR 44.0 million (54.1). The amount of liquid assets at 31 December 2013 was EUR 81.1 million (EUR 93.9 mill.).

Contractual cash flows of financial liabilities and derivative instruments

EUR 1,000 2014 2015 2016 2017 2018 2019- Total
31 Dec 2013

Interest-bearing liabilities 352,436 18,912 23,433 8,972 5,656 7,535 416,945
Interest rate derivatives 346 247 248 247 118 1,206
Forward foreign exchange contracts

Cash flows payable 106,015 106,015

Cash flows receivable -106,552 -106,552
Commodity derivatives

Cash flows payable 593 97 321 1,011

Cash flows receivable -14 -9 -23
Other financial liabilities 245,861 2,279 535 248,675
Trade payables 139,568 139,568
Financial guarantees given 17,413 1,519 254 19,186

755,664 21,526 26,056 9,219 5,774 7,790 826,029

EUR 1,000 2013 2014 2015 2016 2017 2018- Total
31 Dec 2012

Interest-bearing liabilities 239,393 107,025 13,160 11,027 6,673 8,022 385,300
Interest rate derivatives 915 374 274 275 274 141 2,252
Forward foreign exchange contracts

Cash flows payable 93,428 93,428

Cash flows receivable -92,930 -92,930
Commodity derivatives

Cash flows payable 421 161 162 134 878

Cash flows receivable -272 -272
Other financial liabilities 183,653 6,245 1,380 191,278
Trade payables 110,931 110,931
Financial guarantees given 11,190 254 11,444

546,729 113,805 14,975 11,437 6,948 8,416 702,309

Credit risk

Credit risks arise when a counterparty is unable to meet its contractual obligations, casusing the other party to suffer a financial loss. Lemminkäinen has defined a credit policy for customer receivables that aims to boost profitable sales by identifying credit risks in advance and controlling them. Most of the Group's business is based on established and trustworthy customer relationships and on contractual terms generally observed in the industry. The credit policy sets the minimum requirements concerning trade credit and collections for Lemminkäinen Group. The Group's credit control function defines credit risks and the business units are responsible for managing them.

The Group is exposed to credit risk through the Group's trade receivables and receivables associated with deposits and receivables. The maximum amount of credit risk is the combined total of the balance sheet values of the aforementioned items. The amounts and due dates of the Group's trade receivables are presented in the table below. The Group does not have any significant credit risk concentrations as trade receivables are distributed among many different customers in a number of market areas. The business unit that made the contract actively monitors the receivables situation. If the business units renegotiate the terms of the receivables, they must do so in accordance with the requirements of the Group's credit policy. The risk of credit losses can be reduced by means of guarantees, mainly bank guarantees and bank deposits. Lemminkäinen's credit losses have been minimal in relation to the scale of its operations. The main risks are associated with business in Russia. As a general rule, construction projects in Russia are only undertaken against receipt of advance payments. If, in exceptional situations, a credit risk is taken, the amount permitted is always proportional to the expected margin on the project in question. Receiveables transferred for legally enforceable collection are recognised as credit losses.

The Group Treasury is responsible for the management of the Group's counterparty and credit risks related to cash, financial investments and financial transactions. The Group is exposed to counterparty risk when investing liquid assets and using derivative instruments. Liquid assets are invested in short-term bank deposits, certificates of deposit issued by solvent partner banks, and commercial papers issued by corporations with a good credit rating. The treasury policy specifies the approved counterparties and their criteria. At the end of 2013, the counterparty risk was considered to be low.

Ageing analysis of trade receivables

EUR 1,000

31 Dec 2013 31 Dec 2012
Not due

Past due 1–30 days

Past due 31–60 days

Past due 61–90 days

Past due over 90 days



Commodity price risk

The Group's paving operations are exposed to bitumen price risk. The price of bitumen is determined by the world market price of oil. The Group protects itself against the bitumen price risk with fixed purchase prices, price clauses in sales agreements and derivatives for which hedge accounting is not applied. By the closing date, the group companies had used bitumen derivatives to hedge, in total, 58,933 MT (40,000 MT) of bitumen purchases.

Management of capital and the capital structure

Capital means the equity and interest-bearing liabilities shown on Lemminkäinen's consolidated balance sheet. Lemminkäinen Group's capital management ensures cost-effectively that all of the Group's business sectors maintain their business viability at a competitive level in all cyclical conditions, that risk-carrying capacity is adequate, for example, in construction contracts, and that the Company is able to pay a good dividend and service its borrowings.

The amount of the Group's interest-bearing liabilities is affected by factors such as scale of operations, seasonal changes in production, acquisitions, and investments in or the sale of production equipment, buildings and land. The Company continuously monitors especially the amount of debt, the ratio of net debt to EBITDA, and the equity ratio.

Some of the Group's financial arrangements include two financial covenants, the ratio of net debt to EBITDA and the equity ratio, which are monitored quarterly and calculated as an average of four previous quarters. In March 2013, Lemminkäinen and the other contracting parties agreed that potential damages related to the claimed asphalt cartel will be ignored in the calculation model of financial covenants. Furthermore, before the end of the financial period, the company reached an agreement with other parties on changes in the net debt to EBITDA covenant terms for Q4/2013 and Q1/2014.

The Group's equity includes a EUR 70 million Hybrid bond which was issued in 2012. The Hybrid bond is classified as equity instrument but the bond holders do not have any rights of a shareholders, and the bond does not dilute shareholders' ownership in the company. The Hybrid bond is unsecured and junior to all other borrowings of the company. The bond has no maturity date but company has the right to redeem it at it's own discretion after four years of the issuance date.

The Company also follows the development of equity by means of the return on investment. A long-term average in excess of 18 per cent is regarded as a good return. The return on investment in 2013 was -9.4 per cent (10.8%).

EUR 1,000

31 Dec 2013
31 Dec 2012
Interest-bearing liabilities

Liquid assets

Interest-bearing net debt

Equity, total

Equity ratio, %

Gearing, %

Return on investment, %