Finance and treasury

The Group is exposed to various types of financial risks through its operations. The term financial risk refers to fluctuations in the company’s profit/loss and cash flow resulting from changes in exchange rates, interest rates, raw materials prices, refinancing and credit risks as well as liquidity needs. Group finance and treasury is governed by the Finance Policy established by Peab’s Board of Directors. The policy is a framework of guidelines and regulations in the form of a risk mandate and limitations in finance and treasury. The Board has appointed a Finance Committee which is chaired by the Chairman of the Board. It is authorized to make decisions that follow the Finance Policy in between meetings of the Board. The Finance Committee must report any such decisions at the next meeting of the Board. The Group function Finance and Treasury and the Group’s internal bank Peab Finans AB manage coordination of Group finance and treasury. The overall target of the finance function is to provide cost-effective funding and to minimize the negative effects on Group profit/loss from financial risks.

Liquidity risk

The liquidity risk refers to the risk of Peab having difficulties in meeting its payment obligations as a result of a lack of liquidity or problems in converting or receiving new external loans. To ensure access to liquid funds binding credit facilities are contracted. The Group has a rolling one-month liquidity plan for all the units in the Group. Plans are updated each week. Group forecasts also comprise liquidity planning in the medium term. Liquidity planning is used to handle the liquidity risk and the cost of Group financing.

The objective is for the Group to be able to meet its financial obligations in favorable and unfavorable market conditions without running into significant unforeseen costs. Liquidity risks are managed centrally for the entire Group by the central Finance and Treasury function and the liquidity available at year-end is presented below.

Financing risk

Peab’s Finance Policy contains guidelines and regulations for managing Group interest-bearing liabilities. The Finance Policy does not, however, comprise regulations concerning interest-bearing liabilities in Swedish tenant-owner associations or leasing liabilities that Peab recognizes for leases that by the lessor are classified as operational leasing (IFRS 16, Additional leasing). Liabilities in Swedish tenant-​owner associations are approved in connection with handling start-up permission for tenant-​owner association projects, which is decided by the Group’s investment group for Housing Development. Utilization of operational leasing in Peab is managed according to Peab’s regulations for entering rental agreements and is decided by the Group’s investment group for Property Development. Mandates from the Board of Directors concerning investment groups are regulated in the Policy for Internal Control and Steering.

The Finance Policy dictates that Group net debt should mainly be covered by loan commitments that mature between 1 and 5 years. At the end of 2022, the average loan period for utilized credits was 62 months (58), for unutilized credits 20 months (32), and for all granted credits 44 months (45). Basic financing is a credit facility totaling SEK 7,400 million which matures in September 2024, after extension options have been utilized. A credit facility is refinanced no later than 1 year before maturity. This loan facility is supplemented by capital market financing, other kinds of current operations financing, project-related credits, financial leasing and installment financing. At the end of the year SEK 2,485 million (455) of the loan facility was utilized. The loan facility contains financial covenants in the form of interest coverage ratios and equity/assets ratios that the Group must meet, which is standard for this kind of loan. Peab exceeded the key ratios by a broad margin at the end of 2022.

Peab set up a lending program for commercial papers in 2004. Under the program, Peab can issue commercial papers for a maximum of SEK 3.5 billion. The borrower is Peab Finans AB and the guarantor is Peab AB. At the end of the year, Peab had outstanding commercial papers nominally worth EUR 15 million (118) corresponding to SEK 167 million (1,207).

Peab set up a MTN program in 2012 with a loan limit of SEK 5 billion. In 2022 new bond loans were issued with a nominal value of SEK 300 million (2,250) under the MTN program while bonds nominally worth SEK 300 million (1,750) matured during the year. At the end of the year 2022 Peab had outstanding bonds with a nominal value of SEK 2,750 million (2,750). Per December 31, 2022 Peab had issued SEK 1,500 million in bonds within the framework of green financing. The framework has been audited by the independent company CICERO Shades of Green which has classified it at level “medium green”. Funds from the green issue will be used to finance investments in green and energy efficient buildings, ECO-products and a more environmentally adapted production, green transportation and water and waste management.

Total credit commitments, excluding the unutilized part of the certificate program and the unutilized part of the MTN program, amounted to SEK 17,077 million (16,732) per December 31, 2022. Of the total credit commitments SEK 10,161 million (7,887) was utilized.

Interest rate risk

The interest rate risk is the risk that Peab’s cash flow or the value of financial instruments may vary with changes in market interest rates. The interest rate risk can result in changes in fair values and cash flows. A crucial factor affecting interest rate risk is the fixed interest period.

The Finance Policy dictates that the average fixed interest period on total borrowing (excluding additional leasing and liabilities in Swedish tenant-owner associations) may not exceed 24 months. Peab has chosen short fixed interest periods for outstanding credits. Per December 31, 2022 there were no interest rate swaps (250). In previous interest rate swaps Peab paid a fixed annual interest rate and received floating rates (Stibor 3 months). Swap agreements are recognized at fair value on balance sheet dates. Per December 31, 2022 the fair value for interest rate swaps was SEK – million (-2).

Interest-bearing liabilities excluding liabilities in Swedish tenant-owner associations and additional leasing according to IFRS 16 were per December 31, 2022 SEK 10,161 million (7,887). The interest-bearing credit facilities with a maturity of more than twelve months were SEK 8,462 million (4,230) and with a maturity of less than twelve months were SEK 1,700 million (3,657).

As the table below shows, the fixed interest period for SEK 10,099 million (7,545) of the Group’s utilized credit facilities is less than 1 year. Interest-​bearing asset items including liquid funds were SEK 3,123 million (4,501), of which SEK 1,865 million (3,055) have short fixed interest periods. Net utilized credit lines and interest-​bearing asset items with short fixed interest periods of less than 1 year were SEK 8,234 million (4,490). The net amount is therefore almost directly susceptible to changes in market interest rates. Since financial liabilities have a short maturity most of the interest rate risk is considered a cash flow risk. For further information regarding Peab’s risk sensitivity see the Sensitivity Analysis in the Board of Directors’ Report.

Interest rate risk in bank loans in Swedish tenant-owner associations

Interest on bank loans taken out by Swedish tenant-owner associations is included in the cost of ongoing work-in-progress in project and development property. A change in the interest rate on these liabilities would therefore not affect Peab’s net financial items.

Currency risks

The currency risk is the risk that fair values and cash flows of financial instruments may fluctuate with changes in the value of foreign currencies.

Financial exposure

Group borrowing is done in local currencies to reduce currency risks in operations. Assets and liabilities in foreign currency are translated at the rate on the balance sheet date. Borrowing in the interest-bearing liabilities per December 31, 2022, including leasing and liabilities in Swedish tenant-owner associations was allocated as follows:

Internal loans from Peab Finans AB are used to handle temporary liquidity needs in Peab’s foreign operations. Currency swaps are used to eliminate exchange risks. At the end of the year, there were no outstanding currency swaps relating to financial exposure. Exchange rate differences in net financials items from financial exposure were SEK -6 million (7) in 2022. Exchange rate differences primarily refer to claims on subsidiaries in Norway and Finland and have no cash flow effect. Exchange rate differences in operating profit were SEK -13 million (-1).

Exposure of net assets in foreign currency

The translation exposure arising from investments in foreign net assets can be hedged through loans in foreign currency or forward exchange contracts. At the end of 2022 and 2021 there were no hedges in forward exchange contracts for foreign net assets.

A change in the euro exchange rate as of December 31, 2022 by ten percent would entail a translation effect on equity of SEK 156 million (170). A corresponding change in the exchange rate for the Norwegian krone and Danish krone, respectively, would entail a translation effect on equity of SEK 195 million (230) and 1 million (0).

Translation differences in equity (net assets in foreign subsidiaries) for the year amounted to SEK 210 million (184).

Commercial exposure

Although international purchases and sales of goods and services in foreign currency are currently limited, they are expected to increase as the competition grows regarding purchasing goods and services. Contracted or forecasted currency flows can be hedged for 12 months from the date of the contract. At the end of 2022, there were exchange rate hedges related to forecasted currency flows of EUR 12 million (15) and of PLN 21 million (25). Peab did not apply hedge accounting on these hedges.

Raw materials risk

Electricity

Peab’s asphalt production is energy intense as are major construction projects. An energy shortage or high prices for it can entail a risk for our ability to operate. The energy risk is managed through fixed price contracts in Sweden, Norway and Finland.

Oil and gas

Peab purchases oil and gas for its operations. The price risk and availability of oil and gas are in part hedged via longer purchasing contracts and in part via derivative contracts with a maturity of up to 12 months. Peab did not apply hedge accounting on oil derivatives.

Bitumen

Bitumen is a binder in asphalt production and is the single highest cost in asphalt operations. Peab’s asphalt operations are exposed to changes in the price of bitumen, which has a direct effect on earnings and margins. The price of bitumen generally follows the specific oil price index HSFO. Some contracts with customers have sales price clauses that regulate changes in the price of bitumen.

Peab has two different kinds of bitumen exposures.

1. In fixed price sales there is a risk that the price of bitumen will rise before delivery, which raises the purchase price. The fixed price sales cannot be adjusted to cover additional costs. Therefore the project’s profit margin is not ensured. Peab handles the bitumen component price risk by hedging purchases through external derivatives.
2. Warehousing risk due to lead times. Peab stores bitumen in different depos during the off season. Peab handles the bitumen component price risk by hedging purchases through external derivatives.

The risk of fixed price sales and the warehousing risk are managed by Peab Finans via oil futures with HSFO as an underlying variable. As of October 2022 Peab is to a greater degree applying hedge accounting for oil futures. Exposure is presented in the table below.

Derivatives and hedge accounting

Hedge accounting is applied according to IFRS 9 on oil futures that hedge the bitumen price risk in USD. A financial relationship is assumed to exist in the Group’s hedging relationships since the hedge instruments’ and the hedged items’ terms correspond to each other and their values thereby are expected to develop in opposite directions when the underlying hedged risk changes. The hedged risk is the raw materials price risk in USD, where the price is hedged in the respective subsidiary’s functional currency. In the case of fixed price sales the anticipated cash flows for the purchase of bitumen are hedged and in the case of the warehouse risk the fair value of the bitumen stored is hedged. The effectiveness is firstly estimated according to critical terms (nominal volumes, maturity times, oil price index and currency). The credit risk is not expected to materially contribute to ineffectiveness since the derivative has a limited maturity and is entered into with banks with high creditworthiness. Another possible source of ineffectiveness is surplus hedging but since the exposure is not fully hedged the estimated risk of surplus hedging is minimal. The hedge ratio is 1:1.

Credit risk

Credit risk refers to the risk of losing money if a counterparty fails to meet its obligations.

Credit risks in financial instruments

Credit risks in financial instruments are very limited since Peab only deals with counterparties with high credit ratings. Counterparty risks are primarily associated with receivables to banks and other counterparties involved in the purchase of derivatives. The Finance Policy contains special counterparty regulations which specify the maximum credit exposure for various counterparties. The framework agreement of the International Swaps and Derivatives Association (ISDA) is used with all counterparties in derivative transactions. According to the agreement when a counterparty cannot settle its obligations in all transactions the agreement is discontinued and all outstanding dealings are then settled for a net amount. ISDA agreements do not meet the criteria for offsetting on the balance sheet. The information in the table below shows the financial instruments covered by ISDA agreements.

Peab did not suffer any financial instrument credit losses in 2022. Total counterparty exposure related to derivative trading calculated as a net receivable per counterparty amounted to SEK 10 million (5) at the end of 2022. The estimated gross exposure to counterparty risks related to liquid funds and current investments amounted to SEK 1,506 million (2,951). Most of the Group’s liquid funds are placed in banks with the credit rating AA- from Standard & Poor’s.

Credit risk in accounts receivable

The risk that Group customers cannot meet their obligations, i.e. payment is not received from customers, is a customer credit risk. Credit losses are relatively rare in the construction and civil engineering business since there are a great number of projects and customers that are invoiced at regular intervals during production. The Group’s customers undergo a credit rating control providing information on customers’ financial positions from various credit rating companies before a project is undertaken. The Group has an established Credit Policy for handling customer credit. For instance, it specifies where decisions regarding credit limits of various sizes are taken and how uncertain receivables should be handled. Bank guarantees or other collateral are required for customers with low credit ratings or insufficient credit history. The maximum exposure to credit risk is the recognized value on the Group balance sheet. Total bad debts in 2022 amounted to SEK 8 million (13). The credit quality in accounts receivable that are not yet due is considered good. Accounts receivable that are more than 90 days overdue, excluding loss provisions, amounted to SEK 1,923 million (1,554). Overdue accounts receivable are for the most part unclarities regarding contract terms relating to the customer about the final contract amount. Risks in accounts receivable have been taken into account in project forecasts or been handled as provisions.

The table below shows accounts receivable per customer category.

There are no mature receivables of significant amounts for other receivables.

Capital management

Peab strives to have a good capital structure and financial stability in order to provide a stable basis for continuing business activities, thereby enabling the company to keep existing owners and attract new ones. A good capital structure also promotes the development of good relations with the Group’s creditors in a manner which benefits all parties.

Capital is defined as Equity and refers to equity attributable to shareholders in the parent company.

Financial targets

As of 2021 Peab externally reports the performance of our business by monitoring nine targets, of which three are financial and based on segment reporting and six are non-​financial targets. We consider the external targets particularly important and they are a subset of our internal targets and action plans. Both the internal and external financial and non-​financial targets are categorized under the strategic targets; most satisfied customers, best workplace, most profitable company as well as the new, fourth strategic target, leader in social responsibility.

Our financial targets under the strategic target most profitable company are as follows and based on segment reporting:

• Operating margin > 6 %
• Net debt/equity ratio 0.3 – 0.7
• Dividend > 50 % of profit for the year

The target for the operating margin is that it will over time exceed six percent. Peab’s operating margin in 2022 was 4.3 percent (5.2). The lower operating margin is due to inflation and the weakened market. As a result of a reduced cash flow the net debt/equity ratio at the end of 2022 landed at 0.5 (0.2) which was in the middle of the target interval 0.3 – 0.7. During the year we continued to invest mainly in our capital intensive operations in Industry and Project Development. We also carried out a repurchasing program of our own shares for SEK 500 million. Peab’s target for dividends is to annually distribute at least 50 percent of profit for the year according to segment reporting to shareholders. The dividend must be in reasonable proportion to Peab’s profit development and consolidation needs. In addition to ordinary dividends the Board can propose extra cash dividends if it finds that funds exist which are not considered to be requisite for the Group’s development. Extra dividends may also be distributed in a form other than cash. In February 2023 Peab’s Board proposed an ordinary dividend of SEK 4.0 (5.0) per share for the calendar year 2022. Excluding the 8,597,984 shares held by Peab AB as of December 31, 2022 which do not entitle to a dividend, the proposed dividend entails a total dividend amount of SEK 1,150 million (1,475). Calculated as a share of recognized Group profit after tax the proposed dividend amounts to 56 percent (59).

Holdings of own shares

At the start of 2022 Peab’s holding of own shares amounted to 1,086,984 B shares, corresponding to 0.4 percent of the total number of shares. On May 5, 2022 Peab’s AGM authorized the Board of Directors to acquire shares in Peab AB up to an amount so that after acquisition Peab would hold a maximum of 10 percent of the registered shares in the company for the period until the next AGM. The purpose of the purchase of own shares is to improve the capital structure of the company. The shares were repurchased on Nasdaq Stockholm according to the Nordic Main Market Rulebook for Issuers of Shares – Nasdaq Stockholm (Supplement D) and EU Parliament’s and Council’s EU regulation no. 596/2014 on market abuse (MAR). According to the Board’s decision shares could be repurchased during the period for a maximum of SEK 500 million and a number of shares so that the company’s holding of its own shares after the repurchasing does not exceed one tenth of all shares in the company. The shares could only be repurchased at a price per share within the price interval registered at any given time on Nasdaq Stockholm, meaning the interval between the current highest buy price and the lowest sell price published by Nasdaq Stockholm. During the period up to December 31, 2022 a total of 7,511,000 B shares have been repurchased for a total of SEK 500 million. After this repurchasing Peab’s holding of own shares is 8,597,984 B shares corresponding to 2.9 percent of the total number of shares.