28. Financial instruments

A discussion of the Group's objectives and policies with regard to risk management and the use of financial instruments can be found in the Operating and Financial Review. Financial instruments comprise net debt (see note 27) together with other instruments deemed to be financial instruments including long-term debtors and creditors and provisions for liabilities and charges.

a) Short–term debtors and creditors
Short–term debtors and creditors have been excluded from all the following disclosures other than the currency risk disclosures as relevant. The fair value of short-term debtors and creditors approximates to the carrying value because of their short maturity. In accordance with FRS 13 (Derivatives and Other Financial Instruments), deferred tax has been excluded from the following disclosures.

b) Interest rate risk profile of financial liabilities
The interest rate profile of the financial liabilities of the Group as at 31 December 2004 was:

	31 December 2004			31 December 2003
	Total financial liabilities £m	Floating rate financial liabilities £m	Fixed rate financial liabilities £m	Total financial liabilities £m	Floating rate financial liabilities £m	Fixed rate financial liabilities £m
Currency
Sterling	542	22	520	91	7	84
US dollar	1,171	706	465	767	128	639
Australian dollar	1,330	638	692	554	117	437
Euro	424	388	36	–	–	–
Czech koruna	52	12	40	46	9	37
Others	15	1	14	15	–	15
Total	3,534	1,767	1,767	1,473	261	1,212

All the Group's creditors falling due within one year (other than bank and other borrowings) are excluded from the above tables either due to the exclusion of short-term items or because they do not meet the definition of financial liabilities. There are no material financial liabilities on which interest is not paid.

The effect of the Group interest swaps was to classify £692 million of floating rate Australian dollar borrowings, £103 million of floating rate US dollar borrowings, £71 million of floating rate sterling borrowings, £40 million of floating rate Czech koruna borrowings and £36 million of floating rate Euro borrowings all at fixed rate in the above table.

In addition to the above, the Group's provisions are considered to be floating rate financial liabilities as, in establishing the provisions, the cash flows have been discounted.

The floating rate financial liabilities comprise bank borrowings bearing interest rates fixed in advance for various time periods up to 12 months by reference to LIBOR for that time period. The figures in the following tables take into account interest rate and currency swaps used to manage the interest rate and currency profile of financial liabilities and financial assets.

	31 December 2004 Fixed rate financial liabilities		31 December 2003 Fixed rate financial liabilities
	Weighted average interest rate %	Weighted average period for which rate is fixed Years	Weighted average interest rate %	Weighted average period for which rate is fixed Years
Currency
Sterling	8.74	15	7.09	5
US dollar	5.82	11	6.16	2
Australian dollar	7.92	4	8.01	6
Euro	6.82	3	–	–
Czech koruna	3.98	2	3.98	3
Others	7.25	2	7.25	3
Weighted average	7.49	9	6.84	4

c) Interest rate risk profile of financial assets
The Group had the following financial assets as at 31 December 2004:

	31 December 2004			31 December 2003
	Total £m	Floating rate financial assets £m	Fixed rate financial assets £m	Total £m	Floating rate financial assets £m	Fixed rate financial assets £m
Currency
Sterling	246	246	–	412	412	–
US dollar	139	139	–	147	147	–
Australian dollar	208	198	10	157	157	–
Euro	578	104	474	2	2	–
Czech koruna	4	4	–	21	21	–
Others	18	18	–	7	7	–
Total	1,193	709	484	746	746	–

The cash deposits comprise deposits placed in money market funds, and a variety of investments with maturities up to three months. All investments are in publicly quoted stocks or treasury instruments. Letters of credit totalling £97 million are supported on a cash collateral basis at 31 December 2004.

The above table includes finance lease receivables which are analysed as follows:

	31 December 2004 Fixed rate financial liabilities		31 December 2003 Fixed rate financial liabilities
	Weighted average interest rate %	Weighted average period for which rate is fixed Years	Weighted average interest rate %	Weighted average period for which rate is fixed Years
Australian dollar	7.15	3	–	–
Euro	7.89	14	–	–
Weighted average	7.87	14	–	–

d) Currency exposures
As explained in the Operating and Financial Review, the Group's objective in managing the currency exposures arising during the normal course of business (in other words, its structural currency exposures) is to fully hedge all known contractual currency exposures, where possible. As at 31 December 2004 and 31 December 2003, these exposures were not considered to be material.

Currency exposures comprise the monetary assets and monetary liabilities of the Group that are not denominated in the operating (or 'functional') currency of the operating unit involved, other than certain non–sterling borrowings treated as hedges of net investments in overseas operations. For major currencies, it is not Group policy to hedge currency translation through forward contracts or currency swaps.

e) Maturity of financial liabilities
The maturity profile of the Group's financial liabilities, other than short-term creditors and accruals, was as follows:

	31 December 2004 £m	31 December 2003 £m
In one year or less, or on demand	100	531
In more than one year but not more than two years	106	97
In more than two years but not more than five years	622	249
In more than five years	2,706	596
Total	3,534	1,473

f) Borrowing facilities
The Group has substantial borrowing facilities available to it. The undrawn committed facilities available at 31 December 2004 in respect of which all conditions precedent have been met at that date amount to £700 million.

	31 December 2004			31 December 2003
	Facility £m	Undrawn £m	Available £m	Undrawn £m	Available £m
US$450 million Corporate revolving credit facility (October 2006)1	234	78	78	129	129
US$50 million ANP Funding 1 revolving credit facility (May 2010)	26	18	18	50	–
US$40 million ANP Funding 1 bank support facility (cancelled)	–	–	–	22	–
Czk1,000 million EOP revolving credit facility (May 2007)	23	20	20	22	22
US$488 million Tihama term facility (December 2021)	254	181	181	–	–
AU$92 million Canunda facility (December 2014)	38	12	12	–	–
£30 million Corporate letter of credit facility2	30	11	11	1	1
£95 million subsidiary facilities in various currencies	95	66	66	7	3
Total	700	386	386	231	155

1. The drawn element of the US$450 million Corporate revolving credit facility relates to letters of credit issued.
2. These facilities include a £30 million letter of credit facility which becomes committed for any letters of credit that have been drawn. At 31 December 2004, £19 million of letters of credit had been drawn from this facility.

Uncommitted facilities available at 31 December 2004 were:

	31 December 2004			31 December 2003
	Total £m	Drawn £m	Undrawn £m	Total £m	Drawn £m	Undrawn £m
Facility
Bank borrowings and overdraft facilities	22	–	22	25	–	25
ANP Funding 1 working capital facility	31	–	31	–	–	–
£13 million subsidiary facilities in various currencies	13	3	10	5	–	5
	66	3	63	30	–	30

Bank borrowing facilities are normally reaffirmed by the banks annually although they can theoretically be withdrawn at any time.

g) Fair values of financial assets and liabilities
Set out below is a comparison by category of book values and fair values of all the Group's financial assets and liabilities as at 31 December 2004.

	31 December 2004		31 December 2003
	Book value £m	Fair value £m	Book value £m	Fair value £m
Primary financial instruments held or issued to finance the Group's operations
Short–term borrowings and current portion of long-term borrowings	(100)	(100)	(531)	(531)
Long–term borrowings	(3,434)	(3,465)	(953)	(953)
Cash deposits and current asset investments	1,193	1,193	746	746

	Year ended 31 December 2004					Year ended 31 December 2003
	Book value £m	Fair value £m	Gain/ Loss £m	Gross gain £m	Gross loss £m	Gross gain £m	Gross (loss) £m
Derivative financial instruments held tomanage the interest rate, currency profile and exposure to energy prices
Interest rate swaps and similar instruments	–	(38)	(38)	–	(38)	–	(38)
Energy derivatives	–	16	16	90	(74)	100	(63)

In addition to the above, the Group holds energy derivatives for trading purposes with a book value and fair value of £3 million (gross gain of £37 million, gross loss of £34 million).

The methods and assumptions used to estimate fair values of financial instruments are as follows:

1. For investments of up to three months, trade debtors, other debtors and prepayments, trade creditors, other current liabilities, long-term and short-term borrowings, the book value approximates to fair value because of their short maturity.
2. The fair value of investments maturing after three months has been estimated using quoted market prices.
3. The fair value of long-term borrowings and interest rate swaps has been calculated using market prices when available or the net present value of future cash flows arising.
4. The fair value of the Group's forward exchange contracts, foreign currency swaps and foreign currency options has been calculated using the market rates in effect at the balance sheet dates.
5. The fair value of energy derivatives is measured using value at risk and other methodologies that provide a consistent measure of risk across diverse energy products. Within the above fair values, only the financial assets and liabilities have been marked–to–market as defined by the requirements of the accounting standard.

h) Hedges
As explained in the Operating and Financial Review, the Group's policy is to hedge the following exposures:

1. Interest rate risk – using interest rate swaps, options and forward rate agreements.
2. Structural and transactional currency exposures – using currency borrowings, forward foreign currency contracts, currency options and swaps.
3. Currency exposures on future expected sales – using currency swaps, forward foreign currency contracts, currency options and swaps.
4. Energy price fluctuations – using physical hedges through the operation of energy supply and trading activities together with financial products.

Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised or expires. Unrecognised gains and losses on instruments used for hedging, and the movements therein, are as follows:

	Debt £m	Foreign exchange £m	Energy derivatives £m	Total net gain/(loss) £m
Unrecognised gains and (losses) on hedges at 1 January 2004	(38)	–	37	(1)
Gains and (losses) arising in previous years that were recognised in the year
ended 31 December 2004	(15)	–	33	18
Gains and (losses) arising in previous years that were not recognised in the year	(23)	–	4	(19)
ended 31 December 2004
Gains and (losses) arising in the year ended 31 December 2004 that were not
recognised in the year	(15)	–	12	(3)
Of which:
Gains and (losses) expected to be recognised in the year	(2)	–	16	14
ended 31 December 2005
Gains and (losses) expected to be recognised in the year	(36)	–	–	(36)
ended 31 December 2006 or later

The hedging of structural currency exposures associated with foreign currency net investments is recognised in the consolidated balance sheet.

Back to top