Tesco 2004 Annual Report Download - page 6

4TESCO PLC
OPERATING AND FINANCIAL REVIEW CONTINUED
JOINT VENTURES AND ASSOCIATES Our total share
of profit, before goodwill amortisation, from joint
ventures and associates was £99m compared to
£72m last year. Our share of Tesco Personal Finance
pre-tax profit, post minority interests has grown
significantly to £80m (2003  £48m).
FINANCIAL RISKS AND TREASURY MANAGEMENT The
treasury function is mandated by the Board to
manage the financial risks that arise in relation to
underlying business needs. The Board establishes
the functions policies and operating parameters
and routinely reviews its activities, which are also
subject to regular audit. The function does not
operate as a profit centre and the undertaking of
speculative transactions is not permitted.
The main financial risks faced by the Group relate
to the availability of funds to meet business needs,
the risk of default by counterparties to financial
transactions (credit risk), and fluctuations in interest
and foreign exchange rates. These risks are
managed as described below. The balance sheet
positions at 28 February 2004 are representative
of the positions throughout the year.
FUNDING AND LIQUIDITY The Group finances its
operations by a combination of retained profits,
long and medium-term debt capital market issues,
commercial paper, bank borrowings and leases. The
objective is to ensure continuity of funding. The
policy is to smooth the debt maturity profile, to
arrange funding ahead of requirements and to
maintain sufficient undrawn committed bank
facilities and a strong credit rating so that maturing
debt may be refinanced as it falls due.
The Groups long-term credit rating was confirmed
as stable during the year. Tesco Group is rated A1
by Moodys and A+ by Standard & Poors. New
funding of £621m was arranged during the year,
including a medium-term note of £98m maturing
in 2009 and crystallisation of interest swap profit
of £235m. A further £773m net proceeds was
raised through a share placing, which was used to
pay down debt. At the year end, net debt was
£4.1bn (2003  £4.7bn) and the average debt
maturity was nine years (2003  nine years).
Since the year end, we have conducted a property
deal with our joint venture partner Topland Group.
This provided £650m of competitive funding.
INTEREST RATE RISK MANAGEMENT The objective is
to limit our exposure to increases in interest rates.
Forward rate agreements, interest rate swaps, caps
and collars are used to achieve the desired mix
of fixed and floating rate debt. The policy is to fix
or cap a minimum of 40% of actual and projected
debt interest costs. Forward start interest rate
swaps are used to manage projected debt interest
costs where appropriate. At the year end £2.9bn,
71% of net debt, was in fixed rate form (2003 
£2.6bn, 55%) with a further £135m, 3% of net
debt, collared as detailed in note 21. Fixed rate
debt includes £441m of funding linked to the Retail
Price Index (2003  £427m). This debt reduces
interest risk by diversifying our funding portfolio.
The balance of our debt is in floating rate form.
The average rate of interest paid during the year
was 5.6% (2003  5.7%). A 1% movement in UK
interest rates would change profit before tax by
less than 1%. Changes in interest rates in other
currencies would have no significant impact on
Group profits.
FOREIGN CURRENCY RISK MANAGEMENT Our principal
objective is to reduce the risk to short-term profits
of exchange rate volatility. Transactional currency
exposures that could significantly impact the profit
and loss account are hedged, typically using forward
purchases or sales of foreign currencies and
currency options. We hedge the balance sheet by
borrowing (either directly or via foreign exchange
transactions) in matching currencies where this is
cost effective. Our objectives are to maintain a
low cost of borrowing and retain some potential
for currency-related appreciation while partially
hedging against currency depreciation.
During the year, currency movements had minimal
impact on profits and decreased the net value of
the Groups assets by £157m (2003  £22m
increase). At the year end, forward foreign currency
purchases equivalent to £240m were outstanding
(2003  £240m). See note 21.
NUMBER OF INTERNATIONAL
HYPERMARKETS
152
152
102
102
68
68
38
38
00 01 02 03
194
04
INTERNATIONAL
UNDERLYING OPERATING
PROFIT
£m
212
212
119
119
74
74
50
50
00 01 02 03
306
04
TESCO PERSONAL FINANCE
PRE-TAX PROFIT/(LOSS)
POST MINORITY INTEREST
£m
9696 4040 6 (8)
00 01 02 03
160
04