27. 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 26) together with other instruments deemed to be financial instruments including long-term debtors, 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 2003 was:

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 £437 million of floating rate Australian dollar borrowings as fixed rate, £438 million of floating rate US dollar borrowings as fixed rate, £84 million of floating rate sterling borrowings as fixed rate and £37 million of floating rate Czech koruna borrowings as 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.

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 £132 million are supported on a cash collateral basis at 31 December 2003.

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 2003 and 31 December 2002, 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. 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:

1. The drawn element of the US$450 million Corporate revolving credit facility relates to letters of credit issued.
2. As disclosed in note 18, the Group is in discussions with bank groups in relation to non-recourse debt for ANP Funding 1. The undrawn portion of this facility has therefore been shown as unavailable in the above table, and will become substantially available when these issues have been formally resolved and documented.
3. 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 2003, £29 million of letters of credit had been drawn from this facility.

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 2003.

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 market based methodologies that provide a consistent measure 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.

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.