Financial Risks

Currency and exchange rate risks

The currency exchange risks associated with foreign activities are limited. As a rule, income, expenditure and financing are in the same currency. The main foreign currency risk is known as the translation risk. This arises on conversion from Singapore dollars and US dollars to euros of the results on the one hand, and capital invested on the other.. The euro is the currency we use in our financial reporting.

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Sensitivity to exchange rate movements of the Singapore dollar (SGD) and the US dollar (USD) is as follows. A movement of 10 dollar cents in the USD exchange rate against the euro affects Vopak’s net profit by EUR 3.3 million. A movement of 10 dollar cents in the SGD exchange against the euro affects Vopak’s net profit by EUR 3.6 million. As required by IFRS 7, a sensitivity analysis has been performed on the balance sheet items. The results are set out on page 101 of the 2010 Annual Report. Each quarter, exchange rate risks relating to the translation of capital invested in foreign operations, comprising equity and internal financing, are established and the optimum hedging/financing strategy is reviewed and submitted to the Executive Board for approval. Net investment in foreign activities is generally hedged by loans in the same currency, supplemented where necessary with cross-currency interest rate swaps and forward exchange contracts, and hedge accounting is applied.

Interest rate risks

Vopak’s policy on interest rate risks aims to control the net finance costs resulting from fluctuations in market interest rates, taking into account the company’s long-term profile. The funds recently obtained from private placements mean that we have long-term funding at fixed interest rates.

Refinancing and liquidity risks

Vopak is a capital-intensive company. The focus of our strategic finance funding policy is to ensure flexible access to various capital markets and funding sources to support Vopak’s Growth Strategy, facilitating a continuous balanced and well-spread debt maturity profile at appropriate terms and conditions, matching Vopak’s solid credit quality.

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The development of our Net debt : EBITDA ratio is frequently monitored and discussed in the Executive Board, the Audit Committee and the Supervisory Board. Vopak seeks access to the capital markets so that funding capital is always available at a time of our choice at acceptable cost. Accordingly, we have a proactive financing policy so that we can act flexibly, irrespective of the prevailing financing climate. Sufficient funding was created during the past year by placing new private loans. Subsidiaries are funded centrally by the Corporate Treasury department, which acts as a type of in-house bank. Where possible, joint ventures are funded by debt on a non-recourse basis for Vopak. Liquidity requirements are monitored continuously. Long-term liquidity risks are established each quarter and ahead of every significant investment. Active cash management is a daily responsibility. As far as possible, derivatives and cash are spread evenly among a select group of financial institutions. Vopak applies daily limits on cash. The risks at each financial service provider are established regularly. Any action required is taken in line with Vopak’s treasury policy.

Credit risks

Vopak faces credit risks on outstanding receivables, derivatives and cash. Vopak is also dependent on the financial strength of suppliers, including construction companies. The danger of bad debts is generally limited, as the value of products we store for a customer usually exceeds the amount owed by that customer and Vopak can often seize those products, although other creditors may have preference in the event of a bankruptcy. Our credit management includes assessing our business partners’ financial position; this is a careful process but cannot prevent all credit risks. In view of the global financial crisis, Vopak has intensified its credit management and monitoring of outstanding receivables and stored products.

Management of pension risks

Vopak operates a large number of pension schemes, including defined benefit schemes. The liabilities and pension charges related to the defined benefit schemes are subject to risks regarding changes in discount rates, plan asset values and returns on these assets, future salary increases, inflation and life expectancy rates. Such changes can negatively influence the liabilities and necessitate additional future pension charges under IAS19. A sensitivity analysis with respect to the impact on pension charges of changes in the major assumptions is included in the 2011 Annual Report on page 114 of the Annual Report 2011. The Board of the Vopak pension fund manages the risks of market-related fluctuations in the value of plan assets through prudent investment strategies and close monitoring. Asset liability modeling, including stress-scenario testing, is part of their portfolio management. On a local basis, cash contributions may be needed if local funding levels deteriorate. These contributions are subject to local arrangements and legal requirements. Vopak aims to reduce the volatility in cash contributions as much as possible.

Our financial risks are considered in more detail on page 107 of the 2011 Annual Report.

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