Annual Report 2016 - Page 77

Annual Report 2016 Notes to the Financial Statements Financial Risks The Group’s activities result in it being subject to a limited number of financial risks, principally credit risk as the Group has financial assets receivable from third parties. Management of financial risks focuses on reducing the likely impact of risks to a level that is considered acceptable. The Group has formal principles for overall risk management as well as specific procedures to manage individual risks. 1) Interest rate risk Interest rate risk arises from borrowings issued at floating rates, including those linked to LIBOR and the Retail Price Index (RPI), that expose the Group’s cash flows to changes in LIBOR and RPI. Risks of increases in LIBOR are managed by limiting the value and proportion of Group borrowings that are linked to this variable rate and by entering into an appropriate value of floating to fixed interest rate swap contracts. Risks associated with increases in RPI are effectively managed by hedging against the revenues and the Regulatory Asset Value of South Staffs Water, both of which are also linked to RPI. 2) Credit risk As is market practice, the Group grants certain customers credit on amounts due for the services it supplies, leading to limited risk over the recovery of amounts receivable from these customers. Full details of the way this risk is managed are provided below. Credit risk also includes the risk over recovery of loans receivable. This risk is managed by ensuring that loans are only made to entities with sufficient financial resources to service the interest due on the loans. The total carrying value of financial assets subject to credit risk, net of provisions, at 31 March 2016 was £139,262,000 (2015: £142,465,000). 3) Liquidity risk Liquidity risk represents the risk of the Group having insufficient liquid resources to meet its obligations as they fall due. The Group manages this risk by regularly monitoring the maturity of credit facilities, actual and forecast cash flows and ensuring that the payment of its obligations are matched with cash inflows and availability of free cash and adequate credit facilities. The table above details the undrawn committed borrowing facilities available to the Group to manage this risk. Security Over Assets Obligations under finance leases and hire purchase contracts are secured on the assets to which they relate. Index-linked debt, debenture stock and bank debt issued by South Staffordshire Water PLC, is not secured on any assets. The Company’s bank loans and its private placement loan notes are secured against the shares of the Company and certain subsidiaries. Sensitivity Analysis The following analysis is intended to illustrate the sensitivity to reasonably possible movements in variables affecting financial liabilities being LIBOR and the long-term forecast for the UK Retail Price Index (RPI) on the pre-tax profit and loss account of the Group during the year. There is no impact on reserves other than the impact on the profit and loss account after tax. 2016 £’000 2015 £’000 RPI + 0.25% (494) (476) RPI - 0.25% 494 476 LIBOR +1.00% (484) (531) LIBOR -1.00% 484 531 The impact on the pre-tax profit and loss account for the year to 31 March 2016 detailed above has been calculated by assuming that the illustrated changes to the variables occurred on 1 April 2015 and remained different to the actual variables recorded by the stated amount during the year with all other variables remaining at the actual amounts. The comparative figures have been calculated using the same methodology assuming the stated change to the variables occurred on 1 April 2014. Maturity of Financial Assets and Liabilities The maturity profile of the Group’s financial liabilities recorded at repayment value, not book value, was as follows: 2016 2015 (as restated) £’000 £’000 Borrowings In one year or less, or on demand In more than one year, but not more than two In more than two years, but not more than five In more than five years, but not more than twenty In more than twenty years 8,592 20,000 130,763 — 194,358 27,080 45 120,765 — 192,290 353,713 340,180 Other financial liabilities In one year or less, or on demand 83,654 79,799 In more than one year but not more than two 702 679 In more than two years but not more than five 3,318 3,155 In more than five years but n [ܙH[[BBBBBL BB MB[BBBM L ͂M ̋ B