In conducting its business Boskalis is exposed to various kinds of non-operational financial risks. The most important of these are described in this section.

Political and credit risks

These include risks related to unrest or disruption due to political developments and violence, and the risk of non-payment by clients. Boskalis operates a strict acceptance and hedging policy with respect to political and payment risks. Other than in the case of very strong, credit-worthy clients with an undisputed credit history, all substantial credit risks are normally covered by means of credit insurance, bank guarantees and/or advance payments. Revenues and earnings are only recognized in the accounts where there is sufficient certainty that they will be realized. Extra attention is paid to identifying and managing credit risks in situations where the client is a special purpose vehicle.

Liquidity and funding risks

As is customary for a contractor Boskalis also has large amounts outstanding in the form of guarantees from banks and insurance companies, mainly in favor of clients. Given that the availability of sufficient credit and bank guarantee facilities is essential to the continuity of the business, Boskalis’ funding policy is aimed at maintaining a solid financial position. Solid balance sheet ratios and the use of diversified sources of funding provide for ample capacity to absorb liquidity risks and the constant creation of adequate borrowing capacity and guarantee facilities. The company has ample credit and bank guarantee facilities at its disposal and operates well within the agreed covenants under its financing agreements.

Currency risks

The functional currency of Boskalis is the euro. A number of business units, especially in Heavy Marine Transport, as well as several substantial associated companies (Smit Lamnalco, Keppel Smit Towage, Asian Lift, Saam Smit Towage) have a functional currency other than the euro. The most important of these is the US dollar, followed by the Singapore dollar. Most of the revenues and expenses of these entities are largely or entirely based on these same non-euro currencies. The holdings in these entities are viewed from a long-term perspective. Exchange rate risks related to these entities are not hedged as it is assumed that currency fluctuations and developments in interest rates and inflation will offset each other in the long term.

A large proportion of the activities of the group companies that have the euro as their functional currency are not contracted in euros. This particularly applies to the group companies that are involved in dredging and related projects. The costs of these entities, however, are largely based on the euro. Generally, the net cash flows in non-euro currencies within these entities are fully hedged straight away, usually by means of forward exchange contracts. The US dollar exchange rate in relation to the euro is particularly relevant in this context. A large proportion of the projects are contracted in US dollars or in currencies that are to a greater or lesser extent linked to the US dollar. Most of our major international competitors in the dredging industry also have cost structures largely based on the euro. This implies that exchange rate fluctuations have no major impact on our relative competitive position. In a number of market segments, in particular in Offshore Energy, there is competition from parties whose cost structures are not based on the euro, meaning that the competitive impact of currency fluctuations in these market segments is greater. On balance, exchange rate fluctuations only have a limited impact on the company’s competitive position in these activities.

Tax risks

Because of the (constantly changing) mix of project and operational results in a large number of countries and entities, various kinds of taxes, such as income tax, wage tax, VAT and import duties, are assessed and then paid in various countries. Profits are attributed to countries where value is created in accordance with national and international rules and standards, which can be extremely complex. Knowledge in this area along with related compliance and application are embedded in procedures within the Tax Affairs function. In cases where insufficient knowledge is available in-house, external advisors are used.

Interest rate risks

We have limited our exposure to interest rate fluctuations by fixing the interest rates on the largest part of our long-term financial liabilities, primarily by using interest rate swap arrangements.

Fuel price risks

In a substantial part of its activities, Boskalis is exposed to risks arising from changes in fuel prices. Fuel costs are hedged in a number of different ways. Where possible, contracts include fuel price variation clauses. It is also a regular occurrence for contracts to provide for fuel to be supplied by the client. In other cases where fuel price risks are substantial, exposure is usually hedged by means of financial instruments such as forward contracts.

Derivatives

Financial derivatives are only used to hedge underlying currency risks, fuel cost risks or other risks where there is a physical underlying transaction. There is, however, a risk of losses arising from the unwinding or settlement of such financial derivatives as a result of the cancellation or substantial downsizing of contracts.

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