Vodafone 2005 Annual Report Download - page 52

Operating and Financial Review and Prospects continued
50 |Performance
shares to a newly formed 50:50 joint venture. This is expected to complete in the first
half of the 2006 financial year. As part of the transaction, Telecom Egypt was granted
a put option over its entire 25.5% interest in Vodafone Egypt, giving Telecom Egypt the
right to put its shares back to the Group at fair market value. This right remains for as
long as the Group owns in excess of 20% of Vodafone Egypt.
On 12 January 2005, the Group completed the acquisition of the remaining 7.2%
shareholding in Vodafone Hungary from Antenna Hungaria RT (“Antenna”). Antenna’s
contractual put option in respect of its interest in Vodafone Hungary lapsed as a result
of the acquisition.
On 29 November 2004, an option granted to France Telecom that gave it the right, but
not the obligation, to buy shares in Vodafone Greece, expired, unexercised.
Off-balance sheet arrangements
The Group does not use off-balance sheet arrangements as a source of liquidity, capital
resources, market risk support, credit risk support or for other financing purposes or
benefits. Please refer to notes 26 and 27 to the Consolidated Financial Statements for
a discussion of the Group’s off-balance sheet arrangements.
Quantitative and Qualitative Disclosures about
Market Risk
The Group’s treasury function provides a centralised service to the Group for funding,
foreign exchange, interest rate management and counterparty risk management.
Treasury operations are conducted within a framework of policies and guidelines
authorised and reviewed annually by the Company’s Board of directors, most recently
on 18 January 2005. A Treasury Risk Committee, comprising of the Group’s Financial
Director, Group General Counsel and Company Secretary, Group Treasurer, Group
Financial Controller and Director of Financial Reporting, meets quarterly to review
treasury activities and management information relating to treasury activities. In
accordance with the Group treasury policy, a quorum for meetings is four members
and either the Group Financial Director or Group General Counsel and Company
Secretary must be present at each meeting. The Group accounting function, which
does not report to the Group Treasurer, provides regular update reports of treasury
activity to the Board of directors. The Group uses a number of derivative instruments
that are transacted, for risk management purposes only, by specialist treasury
personnel. The Group’s internal auditors review the internal control environment
regularly. There has been no significant change during the financial year, or since the
end of the year, to the types of financial risks faced by the Group or the Group’s
approach to the management of those risks.
Funding and liquidity
The Group’s policy is to borrow centrally, using a mixture of long term and short term
capital market issues and borrowing facilities, to meet anticipated funding
requirements. These borrowings, together with cash generated from operations, are
on-lent or contributed as equity to certain subsidiaries. The Board of directors has
approved three debt protection ratios, being: net interest to operating cash flow (plus
dividends from associated undertakings); retained cash flow (operating cash flow plus
dividends from associated undertakings less interest, tax, dividends to minorities and
equity dividends) to net debt; and operating cash flow (plus dividends from associates
of undertakings) to net debt.
These internal ratios establish levels of debt that the Group should not exceed other
than for relatively short periods of time and are shared with the Group’s debt rating
agencies, being Moody’s, Fitch Ratings and Standard & Poor’s.
Interest rate management
The Group’s main interest rate exposures are to euro and yen and, to a lesser extent,
US dollar and sterling interest rates. Under the Group’s interest rate management
policy, interest rates on monetary assets and liabilities are maintained on a floating rate
basis, unless the forecast interest charge for the next eighteen months is material in
relation to forecast results, in which case interest rates are fixed. In addition, fixing is
required to be undertaken for longer periods when interest rates are statistically low.
The amount on which interest rates are fixed is managed within limits approved by the
Board, using derivative financial instruments such as swaps, futures, options and
forward rate agreements.
At the end of the year, 31% (2004: 20%) of the Group’s gross borrowings were fixed
for a period of at least one year. Under UK GAAP, a one hundred basis point rise in
market interest rates for all currencies in which the Group had borrowings at 31 March
2005 would adversely affect loss before taxation by approximately £39 million. Under
IFRS, the same movement would positively affect profit before taxation by
approximately £17 million, as mark to market valuations of interest rate and other
derivatives would be included in the determination of profit before taxation. The
interest rate management policy has remained unaffected by the acquisitions
completed during the financial year. Note 19 to the Consolidated Financial Statements
contains analysis of the Group’s currency and interest profile of financial liabilities.
Foreign exchange management
As Vodafone’s primary listing is on the London Stock Exchange, its share price is
quoted in sterling. Since the sterling share price represents the value of its future
multi-currency cashflows, principally in euro, yen, sterling and US dollars, the Group
has a policy to hedge external foreign exchange risks on transactions denominated in
other currencies above certain de minimis levels.
The Group also maintains the currency of debt and interest charges in proportion with
its expected future principal multi-currency cash flows. As such, at 31 March 2005,
122% of net debt was denominated in currencies other than sterling (72% euro, 47%
yen and 3% US dollar), whilst 20% of net debt had been purchased forward in sterling
in anticipation of sterling denominated shareholder returns via share purchases and
dividends and 2% of net debt had been purchased forward in other currencies. This
allows debt to be serviced in proportion to expected future cashflows and, therefore,
provides a partial hedge against profit and loss account translation exposure, as
interest costs will be denominated in foreign currencies. A relative strengthening in the
value of sterling against certain currencies in which the Group maintains debt has
resulted in a reduction in net debt of £143 million (2004: £144 million) from currency
translation differences.
When the Group’s international net earnings for 2005 are retranslated using a 10%
strengthening of sterling against all exchange rates, the 2005 financial year total Group
operating loss would be reduced by £413 million (2004: £451 million), and would be
increased by £505 million (2004: £564 million) using a 10% weakening of sterling.
Counterparty risk management
Cash deposits and other financial instrument transactions give rise to credit risks on
the amounts due from counterparties. The Group regularly monitors these risks and
the credit ratings of its counterparties and, by policy, limits the aggregate credit and
settlement risk it may have with one counterparty. While these counterparties may
expose the Group to credit losses in the event of non-performance, it considers the
possibility of material loss to be acceptable because of these control procedures.
Trend Information and Outlook
Trend Information
The growth in the mobile telecommunications industry in terms of customers, turnover
and cash flows has been substantial over the past decade. Vodafone believes that the
mobile industry will continue to experience growth, although as the markets in which
the Group operates mature, the rate of growth will depend on the demand for
enhanced voice and data products and services and the amount of voice and data