Liquidity risk, the risk that the Group will have insufficient funds to meet its liabilities, is managed by the Group’s Treasury function. The Group can have significant movements in its liquidity position due to movement in commodity price, working capital requirements, the seasonal nature of the business and phasing of its capital reduction programme.
Treasury is responsible for managing the banking and liquidity requirements of the Group, risk management relating to interest rate and foreign exchange exposures, and for managing the credit risk relating to the banking counterparties with which it transacts. Short term liquidity is reviewed daily by Treasury while the longer term liquidity position is reviewed on a regular basis by the Board. The department’s operations are governed by policies determined by the Board and any breaches of these policies are reported to the Risk Committee and Audit Committee.
In relation to the Group’s liquidity risk, the Group’s policy is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.
The Group’s approach to managing liquidity is to seek to ensure that the Group has available committed borrowings and facilities equal to at least 105% of forecast borrowings over a rolling 12 month period. This test was relaxed during the year to March 2009 as a result of the deteriorating conditions in the capital and banking markets in the latter half of 2008. However as a result of £4.8bn of funds and facilities raised since July 2008 this test is back in place and being adhered to.
The Group uses a cash flow forecast to monitor its ongoing borrowing requirements. Typically, the Group will fund any short term borrowing positions by issuing commercial paper or borrowing from uncommitted bank lines and will invest in money market funds when it has a cash surplus. In addition to the borrowing facilities listed at note 22, the Group has £20m of uncommitted bank lines and a £20m overdraft facility.
During the year, the Group entered into a new £900m revolving credit facility which will mature in June 2012 along with a £100m bilateral facility (on the same terms as the revolving credit facility) which also matures in June 2012. The Group also entered into a £400m loan facility with the European Investment Bank which can be utilised over a one year period and can be drawn on a fixed or floating basis with a term of up to 10 years. At the time of signing the accounts, these facilities were all undrawn.
Under the going concern principle, the Group expects to issue medium to long term debt during the year ended 31 March 2011. In addition, liquidity in the commercial paper market and the availability of undrawn committed bank facilities has enabled the Directors to conclude that the Group has sufficient headroom to continue as a going concern. In coming to this conclusion the Directors have taken into account the successful issuance of £2.9bn of medium to long term debt since July 2008, the Group’s credit rating, the successful renewal and increase of committed bank facilities and current market conditions. The statement of going concern is included in the Directors’ Corporate Governance report on page 75.
Treasury also manage the Group’s interaction with its relationship banks (defined as those banks that support the Company’s financing activities through their ongoing participation in the committed lending facilities that are maintained by the Group). These are each allocated financial limits, subject to the maintenance of a minimum credit rating of ‘A’ or equivalent allocated by a recognised major ratings group. In respect of short-term cash management, counterparties are subject to review and approval according to defined criteria.
The movement in commodity prices during the year has resulted in a small decrease in the cash amount being posted in respect of mark-to-market related margin calls on exchange traded positions. As at 31 March 2010, the value of outstanding cash collateral posted totalled £71.2m (2009 – £86.9m), representing a net cash inflow during the year of £15.7m.
The contractual cash flows shown in the following tables are the contractual undiscounted cashflows under the relevant financial instruments. Where the contractual cashflows are variable based on a price, foreign exchange rate or index in the future, the contractual cashflows in the following tables have been determined with reference to the relevant price, foreign exchange rate, interest rate or index as at the balance sheet date. In determining the interest element of contractual cashflows in cases where the Group has a choice as to the length of interest calculation periods and the interest rate that applies varies with the period selected, the contractual cashflows have been calculated assuming the Group selects the shortest available interest calculation periods. Where the holder of an instrument has a choice of when to redeem, the amounts in the following tables are on the assumption the holder redeems at the earliest opportunity.
The numbers in the following tables have been included in the Group’s cashflow forecasts for the purposes of considering Liquidity Risk as noted above.
The following are the undiscounted contractual maturities of financial liabilities, including interest and excluding the impact of netting agreements:
Liquidity risk
2010 2010 2010 2010 2010 2010 2009 2009 2009 2009 2009 2009
Carrying Contractual 0-12 1-2 2-5 > 5 Carrying Contractual 0-12 1-2 2-5 > 5
value cash flows months years years years value cash flows months years years years
£m £m £m £m £m £m £m £m £m £m £m £m
financial liabilities Loans and borrowings
Bank overdrafts 9.2 (9.2) (9.2) – – – 2.3 (2.3) (2.3) – – –
Commercial paper and
cash advances 745.6 (745.6) (745.6) – – – 900.8 (904.2) (904.2) – – –
Bank loans – floating 281.6 (296.0) (72.4) (2.8) (220.8) – 220.0 (238.1) (5.9) (74.3) (132.7) (25.2) Bank loans – fixed 530.9 (851.5) (62.0) (60.2) (407.7) (321.6) 520.0 (622.9) (117.8) (57.4) (447.7) – Unsecured bonds – fixed 3,639.9 (6,956.7) (215.2) (215.2) (1,807.4) (4,718.9) 3,263.7 (6,780.4) (195.8) (195.9) (1,843.7) (4,545.0)
Convertible bond – – – – – – 15.6 (16.5) (16.5) – – –
Non-recourse funding 484.1 (648.9) (53.6) (51.0) (145.7) (398.6) 506.7 (689.8) (74.5) (56.0) (154.2) (405.1)
Fair value adjustment (28.7) – – – – – (33.4) – – – – –
5,662.6 (9,507.9) (1,158.0) (329.2) (2,581.6) (5,439.1) 5,395.7 (9,254.2) (1,317.0) (383.6) (2,578.3) (4,975.3)
Finance lease
obligations 384.4 (796.2) (52.8) (52.0) (153.7) (537.7) 0.5 (0.8) (0.1) (0.1) (0.3) (0.3)
6,047.0 (10,304.1) (1,210.8) (381.2) (2,735.3) (5,976.8) 5,396.2 (9,255.0) (1,317.1) (383.7) (2,578.6) (4,975.6) Derivative financial liabilities
Operating derivatives
designated at fair value 2,738.1 (11,514.2) (8,421.2) (1,870.1) (1,174.8) (48.1) 3,218.4 (2,892.4) (2,497.0) (158.3) (226.0) (11.1) Interest rate swaps
used for hedging 74.2 (74.3) (15.9) (14.8) (26.2) (17.4) 79.3 (79.3) (16.1) (13.1) (31.1) (19.0) Interest rate swaps
designated at fair value 101.6 (101.6) (8.0) (6.1) (11.9) (75.6) 112.3 (112.3) (5.3) (5.3) (14.3) (87.4) Forward exchange contracts held for hedging 1.1 (3.3) (2.0) (1.2) (0.1) – 0.3 (21.9) (20.6) (0.6) (0.7) – Forward exchange contracts designated at fair value 4.7 (198.0) (179.4) (58.2) 39.6 – 0.2 (16.5) (16.5) – – – 2,919.7 (11,891.4) (8,626.5) (1,950.4) (1,173.4) (141.1) 3,410.5 (3,122.4) (2,555.5) (177.3) (272.1) (117.5) Other financial liabilities
Trade payables 2,161.6 (2,161.6) (2,161.6) – – – 2,603.6 (2,603.6) (2,603.6) – – –
2,161.6 (2,161.6) (2,161.6) – – – 2,603.6 (2,603.6) (2,603.6) – – –
Total 11,128.3 (24,357.1)(11,998.9) (2,331.6) (3,908.7) (6,117.9) 11,410.3 (14,981.0) (6,476.2) (561.0) (2,850.7) (5,093.1) Derivative financial assets
Financing derivatives (106.8) (1,466.4) (1,149.8) (280.6) (18.5) (17.5) (178.1) (550.6) (447.3) (24.4) (45.6) (33.3) Operating derivatives
designated at fair value (1,827.8) 8,200.6 6,930.1 1,175.5 119.2 (24.2) (1,808.8) (1,394.0) (371.8) (833.9) (181.8) (6.5)
(1,934.6) 6,734.2 5,780.3 894.9 100.7 (41.7) (1,986.9) (1,944.6) (819.1) (858.3) (227.4) (39.8) Net total (i) 9,193.7 (17,622.9) (6,218.6) (1,436.7) (3,808.0) (6,159.6) 9,423.4 (16,925.6) (7,295.3) (1,419.3) (3,078.1) (5,132.9)
(i) The Group believes the liquidity risk associated with out-of-the-money operating derivative contracts needs to be considered in conjunction with the profile of payments or receipts arising from derivative financial assets. It should be noted that cash flows associated with future energy sales and commodity contracts which are not IAS 39 financial instruments are not included in this analysis, which is prepared in accordance with IFRS 7.
28. fiNANCiAL iNSTRuMENTS AND RiSK (continued)