Note 21 – Financial instruments

The Group’s Treasury policy includes details of the objectives, policies and strategies of the Group associated with financial instruments with off-balance sheet risk.

The Group’s counterparty exposure under foreign currency swaps and foreign exchange contracts at 31 March 2005 was £576m (2004: £442m) and under interest rate swaps and forward rate agreements was £95m (2004: £115m).

The Group had no significant exposure to either individual counterparties or geographical groups of counterparties at 31 March 2005.

Where permitted by FRS 13 ‘Derivatives and other Financial Instruments: Disclosures’, short-term debtors and creditors have been excluded from the following disclosures. It is assumed that because of short maturities, the fair value of short-term debtors and creditors approximates to their book value.

Currency and interest rate composition of financial liabilities

The currency and interest rate composition of the Group’s financial liabilities are shown in the table below after taking into account currency and interest rate swaps:

      Fixed rate liabilities
 
 
 
 
 
At 31 March 2005
 
 
 
 
Total
£m
 
 
 
Variable
rate
£m
   
 
 
 
Fixed rate
£m
 
 
Weighted
average
interest rate
%
Weighted
average
period
for which
rate is fixed
years
Sterling9,6396,656   2,9836.319.4
US dollars4,5801,814   2,7666.115.3
Borrowings14,2198,470   5,7496.217.4
Other financial liabilities (sterling)6161  
Other financial liabilities (US dollars)501479   224.11 – (i)
 14,7819,010   5,7716.207.4
At 31 March 2004        
Sterling8,9885,231   3,7576.098.7
US dollars4,2601,376   2,8847.034.9
Borrowings13,2486,607   6,6416.507.1
Other financial liabilities (sterling)4040  
Other financial liabilities (US dollars)602564   385.07– (i)
 13,8907,211   6,6796.497.1
(i) Excludes non-equity minority interests of £22m (2004: £38m) with no final repayment date.

At 31 March 2005 the weighted average interest rate on short-term borrowings of £3,256m (2004: £1,706m) was 4.6% (2004: 4.0%).

Foreign exchange forward deals held to manage the currency mix of the Group’s borrowings portfolio comprising a £463m (2004: £141m) forward sale of US dollars have not been adjusted in the table above.

Other sterling financial liabilities comprised onerous leases of £61m (2004: £40m).

Other US dollar financial liabilities comprised indexed-linked energy swap contracts of £327m (2004: £391m), purchased power obligations of £144m (2004: £149m), non-equity minority interests of £22m (2004: £38m), onerous leases of £6m (2004: £nil), forward currency contracts of £2m (2004: £nil), and interest rate swaps of £nil (2004: £24m) which are shown at fair value as they are no longer considered a hedge.

Substantially all the variable rate borrowings are subject to interest rates which fluctuate with LIBOR for the appropriate currency at differing premiums or, in the case of certain US companies, are based on the market rate for tax-exempt commercial paper.

In calculating the weighted average number of years for which interest rates are fixed, swaps which are cancellable at the option of the swap provider are assumed to have a life based on the earliest date at which they can be cancelled.

The maturity profile of the Group's financial liabilities are shown in the table below after taking into account currency and interest rate swaps:

 
Maturity of financial liabilities at 31 March
2005
£m
2004
£m
In one year or less3,328 1,848
In more than one year, but not more than two years2,171 1,029
In more than two years, but not more than three years618 2,189
In more than three years, but not more than four years1,316 589
In more than four years, but not more than five years1,316 1,598
In more than five years6,032 6,637
 14,781 13,890
Currency and interest rate composition of financial assets

The currency and interest rate composition of the Group’s financial assets are shown in the table below after taking into account currency and interest rate swaps:

          Fixed rate assets
 
 
 
 
 
At 31 March 2005
 
 
 
 
Total
£m
 
 
Non-
interest
bearing
£m
 
 
 
 
Variable rate
£m
   
 
 
 
Fixed rate
£m
 
 
Weighted
average
interest rate
%
Weighted
average
period
for which
rate is fixed
years
Sterling 455 455  
US dollars 189 189  
Other currencies 26 26  
Cash and investments 670 670  
Other financial assets (sterling) 41   41 11.50 4.1
Other financial assets (US dollars) 72 27 9   36 5.18 13.2
  783 27 679   77 8.54 8.4
At 31 March 2004              
Sterling 428 428  
US dollars 165 165  
Other currencies 23 23  
Cash and investments 616 616  
Other financial assets (sterling) 45   45 11.50 5.1
Other financial assets (US dollars) 34   34 5.08 13.8
  695 616   79 8.74 8.8

Cash and investments earned interest at local prevailing rates for maturity periods generally not exceeding 12 months, and included listed investments with a cost of £242m (2004: £241m) and market value of £245m (2004: £241m). Other financial assets at 31 March 2005 related to a net investment in a finance lease of £41m (2004: £45m), fixed asset investments of £36m (2004: £34m), forward foreign currency contracts of £9m (2004: £nil), equities of £16m (2004: £nil) and mutual funds of £11m (2004: £nil).

The maturity profile of the Group’s financial assets are shown in the table below after taking into account currency and interest rate swaps:

 
Maturity of financial assets at 31 March
2005
£m
2004
£m
In one year or less687 625
In more than one year, but not more than two years12 11
In more than two years, but not more than three years11 10
In more than three years, but not more than four years12 11
In more than four years, but not more than five years4 10
In more than five years57 28
 783 695
Fair values of financial instruments at 31 March
    2005   2004
 
 
  Book value
£m
Fair value
£m
  Book value
£m
Fair value
£m
Short-term debt   (3,264)(3,284)   (1,666)(1,678)
Long-term debt   (11,308)(12,291)   (11,767)(12,800)
Cash and investments   670670   616616
Other financial liabilities   (560)(560)   (642)(641)
Net investment in finance lease   4141   4545
Other financial assets   6373   3436
Financial instruments held to manage interest rate and currency profiles:          
Interest rate swaps   (46)   (42)
Forward foreign currency contracts and cross-currency swaps   360480   185331

Market values, where available, have been used to determine fair values. Where market values are not available, fair values have been calculated by discounting cash flows at prevailing interest rates.

The notional principal amounts relating to financial instruments held to manage interest rate and currency profiles for interest rate swaps and forward rate agreements, foreign currency contracts and cross-currency swaps at 31 March 2005 amounted to £7,420m (2004: £14,301m) and £8,017m (2004: £7,898m) respectively.

Gains and losses on hedges
 
 
 
 
Unrecognised
gains
£m
Unrecognised
losses
£m
Unrecognised
net gain
£m
Deferred
gains
£m
Deferred
losses
£m
Deferred
net (loss)/gain
£m
Gains/(losses) on hedges at
  1 April 2003
458(229)22939(88)(49)
(Gains)/losses arising in previous
 years recognised in the year
(50)18(32)(12)12
Gains/(losses) arising in previous
  years not recognised in the year
408(211)19727(76)(49)
Gains/(losses) arising in the year22(115)(93)104(6)98
Gains/(losses) on hedges at
 31 March 2004
430(326)104131(82)49
(Gains)/losses arising in previous
 years recognised in the year
(25)23(2)(19)10(9)
Gains/(losses) arising in previous
 years not recognised in the year
405(303)102112(72)40
Gains/(losses) arising in the year(64)36(28)36(8)28
Gains/(losses) on hedges at
 31 March 2005
341 (267) 74 148 (80) 68
Of which:
Gains/(losses) expected to be
 recognised within one year
12(7)525(14)11
Gains/(losses) expected to be
 recognised after one year
329(260)69123(66)57
Borrowing facilities

At 31 March 2005, the Group had bilateral committed credit facilities of £1,985m (2004: £1,823m), of which £1,985m (2004: £1,808m) were undrawn. The Group also had committed credit facilities from syndicates of banks of £1,437m at 31 March 2005 (2004: £1,313m), £1,237m (2004: £1,201m) of which were undrawn. An analysis of the maturity of these undrawn committed facilities is shown below:

Undrawn committed borrowing facilities
 
 
2005
£m
2004
£m
Expiring:  
In one year or less3,1652,269
In more than one year, but not more than two years57575
In more than two years165
 3,2223,009

Of the unused facilities at 31 March 2005 £2,805m (2004: £2,604m) was held as back-up to commercial paper and similar borrowings. The remainder was available as additional back-up to commercial paper and for other general corporate purposes.

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