11. Reconciliation of operating profit to operating cash flows |
12. Management of liquid resources |
13. Net debt |
14. Tangible fixed assets |
15. Fixed asset investments |
16. Debtors |
17. Current asset investments |
18. Loans and other borrowings |
19. Financial instruments and risk management |
20. Other creditors |
Notes to the financial statements (1-10)
Notes to the financial statements (21-30)
| |
1998
|
1997
|
1996
|
|
11. Reconciliation of operating profit to operating cash flows
|
£m
|
£m
|
£m
|
 |
|
|
Operating profit, including share of results of associated undertakings
|
3,405
|
3,384
|
3,182
|
|
Depreciation
|
2,395
|
2,265
|
2,189
|
|
Share of losses (profits) of associated undertakings net of
|
|
|
|
|
dividends received £5m (1997 - £7m, 1996 - £5m)
|
257
|
(132)
|
(77)
|
|
Decrease in stocks
|
36
|
31
|
36
|
|
Increase in debtors
|
(29)
|
(168)
|
(335)
|
|
Increase in creditors
|
44
|
478
|
493
|
|
Increase (decrease) in provisions
|
(47)
|
321
|
309
|
|
Other
|
15
|
13
|
37
|
|
|
|
Net cash inflow from operating activities
|
6,076
|
6,192
|
5,834
|
|
|
| |
1998
|
1997
|
1996
|
|
12. Management of liquid resources
|
£m
|
£m
|
£m
|
|
|
|
Purchase of short-term investments and payments into short-term deposits
over 3 months
|
(1,103)
|
(2,242)
|
(2,520)
|
|
Sale of short-term investments and withdrawals from short-term deposits
over 3 months
|
1,334
|
2,790
|
1,996
|
|
Net movement of short-term investments and short-term deposits under
3 months not repayable on demand
|
2,016
|
(1,052)
|
(793)
|
|
|
|
Net cash inflow (outflow) from management of liquid resources
|
2,247
|
(504)
|
(1,317)
|
|
|
Movements in all short-term investments and deposits not repayable on demand
are reported under the heading of management of liquid resources.
| |
At
|
|
Other
|
|
At
|
| |
1 April
|
Cash
|
non-cash
|
Currency
|
31 March
|
| |
1997
|
flow
|
changes
|
movement
|
1998
|
|
13. Net debt
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
|
Analysis of net debt
|
|
|
|
|
|
|
Cash in hand and at bank
|
26
|
36
|
-
|
-
|
62
|
|
Overnight deposits
|
30
|
(16)
|
-
|
-
|
14
|
|
Bank overdrafts
|
(11)
|
(31)
|
-
|
-
|
(42)
|
|
|
|
|
|
|
|
|
45
|
(11)
|
-
|
-
|
34
|
|
Other current asset investments
|
2,944
|
(2,247)
|
(1)
|
21
|
717
|
|
|
|
|
|
|
|
Short-term investments and cash, less bank overdrafts
|
2,989
|
(2,258)
|
(1)
|
21
|
751
|
|
|
|
|
|
|
|
Debt due within one year, excluding bank overdrafts
|
(472)
|
(35)
|
(334)
|
2
|
(839)
|
|
Debt due after one year
|
(2,693)
|
(1,567)
|
315
|
56
|
(3,889)
|
|
|
|
|
|
|
|
Total debt, excluding bank overdrafts
|
(3,165)
|
(1,602)
|
(19)
|
58
|
(4,728)
|
|
|
|
|
|
|
|
Net debt
|
(176)
|
(3,860)
|
(20)
|
79
|
(3,977)
|
|
|
|
|
|
|
| |
1998
|
1997
|
1996
|
|
Reconciliation of net cash flow to movement in net debt
|
£m
|
£m
|
£m
|
|
|
|
Increase (decrease) in cash in the year
|
(11)
|
(90)
|
28
|
|
Cash (inflow) outflow from (increase) decrease in debt
|
(1,602)
|
435
|
(26)
|
|
Cash (inflow) outflow from (decrease) increase in liquid resources
|
(2,247)
|
504
|
1,317
|
|
|
|
Decrease (increase) in net debt resulting from cash flows
|
(3,860)
|
849
|
1,319
|
|
Currency and translation movements
|
79
|
(47)
|
(60)
|
|
Other non-cash movements
|
(20)
|
(30)
|
(54)
|
|
|
|
Decrease (increase) in net debt in the year
|
(3,801)
|
772
|
1,205
|
|
Net debt at 1 April
|
(176)
|
(948)
|
(2,153)
|
|
|
|
Net debt at 31 March
|
(3,977)
|
(176)
|
(948)
|
|
|
| 14.
Tangible fixed assets |
Land
and buildings(a)
£m |
Plant
and equipment
£m |
Assets
in course of construction
£m |
Total
£m |
|
|
|
|
|
|
Group
|
|
|
|
|
|
Cost
|
|
|
|
|
|
Balances at 1 April 1997
|
2,801
|
29,206
|
979
|
32,986
|
|
Acquisitions of subsidiary undertakings
|
-
|
5
|
-
|
5
|
|
Additions
|
24
|
1,058
|
1,964
|
3,046
|
|
Transfers
|
148
|
1,786
|
(1,934)
|
-
|
|
Disposals and adjustments
|
(111)
|
(3,376)
|
(35)
|
(3,522)
|
|
|
|
|
|
|
Total cost at 31 March 1998
|
2,862
|
28,679
|
974
|
32,515
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
Balances at 1 April 1997
|
1,316
|
14,952
|
-
|
16,268
|
|
Acquisitions of subsidiary undertakings
|
-
|
1
|
-
|
1
|
|
Charge for the year
|
95
|
2,300
|
-
|
2,395
|
|
Disposals and adjustments
|
(82)
|
(3,251)
|
-
|
(3,333)
|
|
|
|
|
|
|
Total depreciation at 31 March 1998
|
1,329
|
14,002
|
-
|
15,331
|
|
|
|
|
|
|
Net book value at 31 March 1998
|
1,533
|
14,677
|
974
|
17,184
|
|
Engineering stores
|
-
|
-
|
68
|
68
|
|
|
|
|
|
|
Total tangible fixed assets at 31 March 1998
|
1,533
|
14,677
|
1,042
|
17,252
|
|
|
|
|
|
|
Net book value at 31 March 1997
|
1,485
|
14,254
|
979
|
16,718
|
|
Engineering stores
|
-
|
-
|
84
|
84
|
|
|
|
|
|
|
Total tangible fixed assets at 31 March 1997
|
1,485
|
14,254
|
1,063
|
16,802
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
Cost
|
|
|
|
|
|
Balances at 1 April 1997
|
796
|
27,354
|
773
|
28,923
|
|
Additions
|
17
|
647
|
1,978
|
2,642
|
|
Transfers
|
102
|
1,782
|
(1,884)
|
-
|
|
Disposals and adjustments
|
(14)
|
(3,257)
|
(46)
|
(3,317)
|
|
|
|
|
|
|
Total cost at 31 March 1998
|
901
|
26,526
|
821
|
28,248
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
Balances at 1 April 1997
|
391
|
14,122
|
-
|
14,513
|
|
Charge for the year
|
23
|
2,087
|
-
|
2,110
|
|
Disposals and adjustments
|
(18)
|
(3,188)
|
-
|
(3,206)
|
|
|
|
|
|
|
Total depreciation at 31 March 1998
|
396
|
13,021
|
-
|
13,417
|
|
|
|
|
|
|
Net book value at 31 March 1998
|
505
|
13,505
|
821
|
14,831
|
|
Engineering stores
|
-
|
-
|
68
|
68
|
|
|
|
|
|
|
Total tangible fixed assets at 31 March 1998
|
505
|
13,505
|
889
|
14,899
|
|
|
|
|
|
|
Net book value at 31 March 1997
|
405
|
13,232
|
773
|
14,410
|
|
Engineering stores
|
-
|
-
|
83
|
83
|
|
|
|
|
|
|
Total tangible fixed assets at 31 March 1997
|
405
|
13,232
|
856
|
14,493
|
|
|
|
|
|
| |
|
Group
|
|
Company
|
|
|
|
| |
1998
|
1997
|
1998
|
1997
|
|
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
(a) The net book value of land and buildings comprised:
|
|
|
|
|
|
Freehold
|
1,281
|
1,317
|
312
|
239
|
|
Long leases (over 50 years unexpired)
|
92
|
53
|
73
|
53
|
|
Short leases
|
160
|
115
|
120
|
113
|
|
|
|
|
|
|
Total net book value of land and buildings
|
1,533
|
1,485
|
505
|
405
|
|
|
|
|
|
|
(b) Expenditure on tangible fixed assets comprised:
|
|
Group
|
|
|
| |
1998
|
1997
|
| |
£m
|
£m
|
|
|
|
|
Plant and equipment:
|
|
|
|
Transmission equipment
|
1,219
|
1,131
|
|
Exchange equipment
|
512
|
445
|
|
Other network equipment
|
502
|
503
|
|
Computers and office
equipment
|
372
|
350
|
|
Motor vehicles and other
|
230
|
175
|
|
Land and buildings
|
211
|
143
|
|
Decrease in engineering stores
|
(16)
|
(28)
|
|
|
|
|
Total expenditure on tangible fixed assets
|
3,030
|
2,719
|
|
|
|
| |
Interests
in associated undertakings (a) (c) |
|
|
|
|
| 15.
Fixed asset investments |
Shares
£m |
Loans
£m |
Share of post aquisition profits (losses)
£m |
Other participating interests
£m |
Other investments (d)
£m |
Total
£m |
|
|
|
|
|
|
|
|
Group
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
Balances at 1 April 1997
|
3,100
|
20
|
197
|
140
|
155
|
3,612
|
|
Additions
|
1,281
|
135
|
-
|
70
|
196
|
1,682
|
|
Transfer of investment in
|
|
|
|
|
|
|
|
MCI Communications Corporation (b)
|
(2,808)
|
-
|
(218)
|
-
|
3,026
|
-
|
|
Share of losses less retained profits for the year
|
-
|
-
|
(254)
|
-
|
-
|
(254)
|
|
Repayments, disposals and other transfers
|
22
|
1
|
(23)
|
(46)
|
24
|
(22)
|
|
Currency movements
|
(62)
|
(5)
|
12
|
-
|
(20)
|
(75)
|
|
|
|
|
|
|
|
|
Balances at 31 March 1998
|
1,533
|
151
|
(286)
|
164
|
3,381
|
4,943
|
|
|
|
|
|
|
|
|
Provisions and amounts written off
|
|
|
|
|
|
|
|
Balances at 1 April 1997
|
(2,333)
|
-
|
-
|
-
|
(6)
|
(2,339)
|
|
Goodwill
|
(928)
|
-
|
-
|
-
|
-
|
(928)
|
|
Transfer of investment in MCI Communications Corporation (b)
|
2,214
|
-
|
-
|
-
|
(2,214)
|
-
|
|
Decrease (increase) in the year
|
42
|
-
|
-
|
-
|
(10)
|
32
|
|
|
|
|
|
|
|
|
Balances at 31 March 1998
|
(1,005)
|
-
|
-
|
-
|
(2,230)
|
(3,235)
|
|
|
|
|
|
|
|
|
Net book value at 31 March 1998
|
528
|
151
|
(286)
|
164
|
1,151
|
1,708
|
|
|
|
|
|
|
|
|
Net book value at 31 March 1997
|
767
|
20
|
197
|
140
|
149
|
1,273
|
|
|
|
|
|
|
|
| |
Subsidiary undertakings (a)
|
|
|
|
|
|
|
|
| |
Shares
|
Loans
|
Associated undertakings (a)
|
Other participating interests
|
Other investments(d)
|
Total
|
| |
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
|
|
|
Company
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
|
Balances at 1 April 1997
|
4,140
|
11
|
2,723
|
140
|
176
|
7,190
|
|
Additions
|
2,586
|
-
|
18
|
70
|
31
|
2,705
|
|
Transfer of investment in
|
|
|
|
|
|
|
|
MCI Communications Corporation (b)
|
-
|
-
|
(2,613)
|
-
|
2,613
|
-
|
|
Repayments, disposals and other transfers
|
(68)
|
-
|
(16)
|
(46)
|
(1,212)
|
(1,342)
|
|
Currency movements
|
-
|
(1)
|
(80)
|
-
|
-
|
(81)
|
|
|
|
|
|
|
|
|
Balances at 31 March 1998
|
6,658
|
10
|
32
|
164
|
1,608
|
8,472
|
|
|
|
|
|
|
|
|
Provisions and amounts written off
|
|
|
|
|
|
|
|
Balances at 1 April 1997
|
(411)
|
-
|
(27)
|
-
|
(153)
|
(591)
|
|
Increase in the year
|
(64)
|
-
|
-
|
-
|
(10)
|
(74)
|
|
Disposals and transfers
|
-
|
-
|
12
|
-
|
(11)
|
1
|
|
|
|
|
|
|
|
|
Balances at 31 March 1998
|
(475)
|
-
|
(15)
|
-
|
(174)
|
(664)
|
|
|
|
|
|
|
|
|
Net book value at 31 March 1998
|
6,183
|
10
|
17
|
164
|
1,434
|
7,808
|
|
|
|
|
|
|
|
|
Net book value at 31 March 1997
|
3,729
|
11
|
2,696
|
140
|
23
|
6,599
|
|
|
|
|
|
|
|
(a) Subsidiary and associated
undertakings
Details of the principal operating subsidiary and associated undertakings are
set out below.
(b) MCI Communications Corporation
In September 1994, the company completed the acquisition of a 20% equity interest
in MCI (the second largest carrier of long-distance telecommunications services
in the USA) represented by a holding of 136 million Class A common shares, whereupon
MCI became the group's most significant associated undertaking. On 3 November
1996, the company entered into a merger agreement with MCI whereby the group
would acquire the entire share capital of MCI, not already owned. On 21 August
1997, the terms of the merger agreement were modified. On 1 October 1997,
WorldCom announced its intention to offer shares in its company to MCI
shareholders as an alternative to the proposed merger and, following an improved
offer from WorldCom on 9 November 1997, the company agreed that it would
support the proposed merger with WorldCom to which the MCI board had agreed
on the same day. On 11 March 1998, both MCI's and WorldCom's shareholders approved
their merger.
The company has agreed with WorldCom and MCI to sell the group's holding of
136 million unlisted Class A common shares in MCI to WorldCom for US$51
per share in cash at the time the MCI/WorldCom merger is completed. The potential
consideration of US$6,936m was equivalent to £4,137m at the exchange rate
ruling on 31 March 1998. The completion of the merger is subject to regulatory
clearance. The group also holds 0.7 million listed common shares in MCI, most
of which were purchased in November 1995. These shares will be exchanged
for WorldCom common shares on completion of the merger. If fully listed, the
market value of the MCI shares held by the group at 31 March 1998 would have
been £4,048m.
As a consequence of the termination of the company's merger agreement with
MCI and the company's agreement with WorldCom and MCI, the group ceased treating
MCI as an associate from 1 November 1997. The group's share of its associates'
results includes a loss before tax of £27m for its share of MCI's results up
to that date (1997 - £175m profit, 1996 - £101m profit).
At 31 March 1998, the group's investment in MCI is stated at £813m (1997 -
£834m). Goodwill amounting to £2,214m has been written off to group reserves
in prior years in respect of this investment and this goodwill will be accounted
for at the completion of the MCI/WorldCom merger in determining the profit on
the sale of the shares which the group will recognise.
In the period 1 April 1997 to 31 October 1997, the group's turnover with MCI
amounted to £108m (1997 - £134m, 1996 - £92m) and the group purchased £56m in
the same period (1997 - £87m, 1996 - £77m) in services and products from MCI.
(c) Cegetel
On 24 September 1997, the group completed its acquisition of a 26% interest
in Cegetel, a leading French telecommunications company. Of the cost of the
investment in the associated undertaking of £1,029m, goodwill arising of £862m
has been written off against reserves.
The acquisition of the interest in Cegetel comprised:
| |
£m
|
|
|
|
Group share of original book value of net assets
|
483
|
|
Fair value adjustment to achieve consistency of accounting policies
|
(316)
|
|
|
|
Fair value to the group
|
167
|
|
Goodwill
|
862
|
|
|
|
Total cost
|
1,029
|
|
|
(d) Other investments
Other investments include ordinary shares of the company, with a net book value
of £29m (1997 - £20m) and a market value of £68m (1997 - £28m), held in trust
for the Long Term Remuneration Plan and the Performance Share Plan (note
28). Also, in the group balance sheet at 31 March 1998, listed investments
were held with a book value of £117m (1997 - £72m) and a market value of
£154m (1997 - £61m).
(e) Subsidiary company acquisition
In February 1997, the group entered into an agreement to purchase from Banco
Santander SA its 50% holding in the share capital of BT Telecomunicaciones SA,
a joint venture between a wholly-owned subsidiary of the company and Banco Santander
SA, for the equivalent of £76m. The transaction was completed in July 1997.
(f) Other related party transactions with associates
In the year ended 31 March 1998, the group's turnover with its other associated
undertakings amounted to £74m (1997 - £23m) and the group purchased £9m
(1997 - £30m) in services and products from these undertakings.
| |
|
Group
|
|
Company
|
|
|
|
| |
1998
|
1997
|
1998
|
1997
|
|
16. Debtors
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
Trade debtors (a)
|
1,801
|
1,757
|
1,679
|
1,552
|
|
Amounts owed by subsidiary undertakings
|
-
|
-
|
1,649
|
438
|
|
Amounts owed by associated undertakings
|
118
|
72
|
57
|
29
|
|
Other debtors
|
249
|
304
|
201
|
190
|
|
Advance corporation tax recoverable (b)
|
-
|
456
|
116
|
651
|
|
Accrued income
|
1,046
|
1,084
|
1,014
|
1,055
|
|
Prepayments
|
173
|
134
|
202
|
98
|
|
|
|
|
Total debtors
|
3,387
|
3,807
|
4,918
|
4,013
|
|
|
|
|
Total debtors included amounts receivable after more than one year:
|
|
|
|
|
|
Advance corporation tax recoverable (b)
|
-
|
456
|
116
|
651
|
|
Accrued income
|
97
|
80
|
97
|
80
|
|
Prepayments
|
-
|
10
|
-
|
10
|
|
|
|
|
Total
|
97
|
546
|
213
|
741
|
|
|
|
(a) The group's trade debtors are stated after deducting £227m (1997 - £163m)
for doubtful debts. The amount charged to the group profit and loss account
for doubtful debts for the year ended 31 March 1998 was £218m (1997 - £188m,
1996 - £179m).
(b) Advance corporation tax recoverable
|
Advance corporation tax on proposed final dividend and, in 1997, on special
dividend
|
184
|
752
|
184
|
752
|
|
Amount offset against deferred tax provision (note
21)
|
(184)
|
(296)
|
(68)
|
(101)
|
|
|
|
|
Balance included within debtors
|
-
|
456
|
116
|
651
|
|
|
|
| |
|
Group
|
|
Company
|
|
|
|
| |
1998
|
1997
|
1998
|
1997
|
|
17. Current asset investments
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
Listed investments
|
150
|
115
|
5
|
16
|
|
Other short-term deposits and investments
|
581
|
2,859
|
10
|
2,893
|
|
|
|
|
Total current asset investments
|
731
|
2,974
|
15
|
2,909
|
|
|
|
|
Market value of listed investments
|
150
|
115
|
5
|
16
|
|
|
|
| |
Average effective interest rates (a) %
|
|
Group
|
|
Company
|
|
|
|
| |
1998
|
1997
|
1998
|
1997
|
|
18. Loans and other borrowings
|
£m
|
£m
|
£m
|
£m
|
|
|
|
|
|
US dollar 6 1/2% guaranteed notes 1997
|
7.7
|
-
|
230
|
-
|
-
|
|
US dollar 9 3/8% guaranteed bonds 1998
|
6.7
|
149
|
153
|
-
|
-
|
|
US dollar 9 3/8% guaranteed notes 1999
|
9.6
|
179
|
184
|
-
|
-
|
|
US dollar 8 3/4% guaranteed bonds 1999
|
8.8
|
119
|
123
|
-
|
-
|
|
Zero coupon bonds 2000
|
|
|
|
|
|
|
(less unamortised discount £38m (1997 - £55m))
|
|
162
|
145
|
162
|
145
|
|
US dollar 6 3/4% notes 2002 (less unamortised discount £9m)
|
7.1
|
886
|
-
|
886
|
-
|
|
121/4% bonds 2003
|
12.3
|
180
|
180
|
180
|
180
|
|
71/8% bonds 2003 (less unamortised discount £3m (1997 - £4m))
|
7.3
|
497
|
496
|
497
|
496
|
|
121/4% bonds 2006
|
12.3
|
229
|
229
|
229
|
229
|
|
US dollar 7% notes 2007 (less unamortised discount £3m)
|
7.1
|
593
|
-
|
593
|
-
|
|
US dollar 9 5/8% guaranteed debentures 2019
|
9.8
|
119
|
122
|
-
|
-
|
|
85/8% bonds 2020 (less unamortised discount £5m (1997 - £5m))
|
8.8
|
295
|
295
|
295
|
295
|
|
|
|
|
|
Total listed bonds, debentures and notes
|
|
3,408
|
2,157
|
2,842
|
1,345
|
|
Lease finance
|
|
10
|
2
|
2
|
2
|
|
Bank loans due 1999-2009
|
9.0
|
792
|
796
|
-
|
-
|
|
Other loans
|
11.0
|
10
|
-
|
-
|
-
|
|
Bank overdrafts and other short-term borrowings
|
7.1
|
74
|
11
|
1,237
|
1,597
|
|
Commercial paper
|
7.1
|
476
|
210
|
476
|
210
|
|
Loans from subsidiary undertakings
|
|
-
|
-
|
2,851
|
2,655
|
|
|
|
|
|
Total loans and other borrowings
|
|
4,770
|
3,176
|
7,408
|
5,809
|
|
|
|
|
Apart from the lease finance, all borrowings are unsecured. Lease finance is
repayable by instalments.
| |
|
Group
|
|
Company
|
|
|
|
| |
1998
|
1997
|
1998
|
1997
|
| |
£m
|
£m
|
£m
|
£m
|
|
|
|
|
Repayments fall due as follows:
|
|
|
|
|
|
Within one year, or on demand
|
881
|
483
|
3,282
|
2,316
|
| |
|
Between one and two years
|
459
|
338
|
432
|
331
|
|
Between two and three years
|
12
|
418
|
280
|
450
|
|
Between three and four years
|
2
|
-
|
1
|
774
|
|
Between four and five years
|
1,143
|
-
|
1,141
|
1
|
|
After five years
|
2,273
|
1,937
|
2,272
|
1,937
|
|
|
|
|
|
|
|
Total due for repayment after more than one year
|
3,889
|
2,693
|
4,126
|
3,493
|
|
|
|
|
Total loans and other borrowings
|
4,770
|
3,176
|
7,408
|
5,809
|
|
|
|
The group has an option to redeem the US dollar 9 5/8% guaranteed debentures
2019 exercisable from February 1999 at a maximum premium of 105%.
(a) Average effective interest rates
The average interest rates above take into account the effect of interest rate
swaps. The interest basis of interest rate swap agreements used, the notional
amounts, their average maturities and weighted average interest rates are shown
below:
|
Average
maturity |
Notional
amount
£m |
Averave
interest receivable rate
% |
Average
interest payable rate
% |
|
|
|
|
|
|
Pay fixed interest and receive variable interest
|
Over 5 years
|
1,124
|
6.2
|
8.5
|
|
Pay variable interest and receive fixed interest
|
Under 5 years
|
365
|
9.5
|
7.4
|
|
|
|
|
|
The rates of the variable rate portion of the swaps are based on quoted rates.
In calculating the average variable rates, the latest rates agreed with the
counterparty on each swap have been used. Changes in interest rates will affect
the variable-rate information disclosed above.
(b) Unused committed lines of credit for short-term financing available at
31 March 1998 totalled approximately £786m, which was in support of
a commercial paper programme or other borrowings. These lines of credit are normally available
for up to one year.
19. Financial instruments and risk management
The group uses derivative financial instruments primarily to manage its exposure
to market risks from changes in interest and foreign exchange rates. There has
been no change in the risk profile between the year end and the date of these
financial statements.
The notional amounts of derivatives summarised below do not necessarily represent
amounts exchanged by the parties and, thus, are not a measure of the exposure
of the group through its use of derivatives. The amounts exchanged are calculated
on the notional amounts and other terms of the derivatives which relate
to interest and exchange rates.
(a) Interest rate risk management
The group has entered into interest rate swap agreements with commercial banks
and other institutions to vary the amounts and periods for which interest
rates on borrowings are fixed. By swapping fixed rates on long-term borrowings
into floating rates, the group has obtained lower floating-rate borrowings
than those available if borrowing directly at a floating rate. Under interest
rate swaps, the group agrees with other parties to exchange, at specified intervals,
the difference between fixed rate and floating rate interest amounts calculated
by reference to an agreed notional principal amount.
At 31 March 1998, the group had outstanding interest rate swap agreements having
a total notional principal amount of £1,489m (1997 - £1,247m).
(b) Foreign exchange risk management
Cross currency swaps and forward foreign exchange contracts have been entered
into to reduce the foreign currency exposure on the group's operations
and the group's net assets. The group also enters into forward foreign exchange
contracts to hedge investments, interest expense and purchase and sale commitments
denominated in foreign currencies (principally US dollars). The terms of
the currency swaps are up to 20 years and the terms of currency forward exchange
contracts are typically less than one year. The purpose of the group's foreign
currency hedging activities is to protect the group from the risk that the eventual
net inflows and net outflows will be adversely affected by changes
in exchange rates.
At 31 March 1998, the group had outstanding foreign currency swap agreements
and forward exchange contracts having a total notional principal amount
of £4,476m (1997 - £2,541m).
The fair values of foreign currency contracts at 31 March 1998 were £3,037m
(1997 - £1,071m) for purchases of currency and £892m (1997 - £683m) for sales
of currency. These fair values have been estimated by calculating their present
values using the market discount rates, appropriate to the terms of the
contracts, in effect at the balance sheet dates.
At 31 March 1998, the group had deferred unrealised gains of £nil (1997 - £21m)
and losses of £36m (1997 - £7m), based on dealer-quoted prices, from hedging
purchase and sale commitments. At 31 March 1998, the group also had deferred
realised net losses of £12m (1997 - £36m net losses). These are included
in the profit and loss account as part of the purchase or sale transaction when
it is recognised, or as gains or losses when a hedged transaction is no longer
expected to occur.
(c) Concentrations of credit risk and credit exposures of financial instruments
The group considers that it is not exposed to major concentrations of credit
risk. The group, however, is exposed to credit- related losses in the event
of non-performance by counterparties to financial instruments, but does not
expect any counterparties to fail to meet their obligations. Based on interest
and exchange rates in effect at 31 March 1998, the group had a maximum
credit exposure of £118m (1997 - £113m) to one counterparty under foreign currency
and interest rate swap agreements. The group limits the amount of credit exposure
to any one counterparty. The group does not normally see the need to seek collateral
or other security.
(d) Fair value of financial instruments
The following table shows the carrying amounts and fair values of the group's
financial instruments at 31 March 1998 and 1997. The carrying amounts are included
in the group balance sheet under the indicated headings, with the exception
of derivative amounts related to borrowings, which are included in debtors or
other creditors as appropriate. The fair values of the financial instruments
are the amount at which the instruments could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.