Financial statements

NOTES TO THE FINANCIAL STATEMENTS

3. FINANCIAL RISK MANAGEMENT

(a) Financial risk factors

The Group's activities expose it to a variety of financial risks; market risk (interest rate risk), liquidity risk and credit risk. The Group receives treasury services from the treasury function of its parent, Pennon Group Plc, which seeks to ensure that sufficient funding is available to meet foreseeable needs, maintains reasonable headroom for contingencies and manages interest rate risk.

The principal financial risks faced by the Group relate to interest rate and counterparty risk.

Treasury operations are managed in accordance with policies established by the Pennon Group Plc board. Major transactions are individually approved by that board. Treasury activities are reported to that board and are subject to review by internal audit.

Financial instruments are used to raise finance and to manage risk. The Group and the parent company do not engage in speculative activity.

i) Market risk

The parent ensures that at least 50% of fixed term interest bearing borrowing available to the Group is at fixed rate.

The Group has no significant interest-bearing assets upon which the net return fluctuates from market risk. Deposit interest receivable is expected to fluctuate in line with interest payable on floating rate borrowings. Consequently its income and operating cash flows are substantially independent of changes in market interest rates.

For 2009/10 if interest rates on net borrowings had been 0.5% higher/lower with all other variables held constant, post-tax profit for the year would have decreased/increased by £2.4m (2009 £2.1m).

ii) Liquidity risk

The parent actively maintains a mixture of long-term and short-term committed facilities that are designed to ensure the Group has significant available funds for operations, planned expansions and facilities equivalent to at least one year's forecast requirements at all times.

Refinancing risk is managed under the Parent's policies.

Pennon Group Plc have entered into covenants with lenders which provides limits on gearing based on a number of factors which include a multiple of Viridor Limited's EBITDA. Measurement against these covenants is monitored on a regular basis by the parent and has been met throughout the year.

The Group has not entered into any direct covenants with lenders.

The Parent manages and determines the criteria for the Group's capital requirement.

Contractual undiscounted cash flows were:

Group

31 March 2010

	Due within 1 year £m	Due between 1 and 2 years £m	Due between 2 and 5 years £m	Over 5 years £m	Total £m
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities	95.1	84.1	252.6	-	431.8
Interest payments on borrowings	17.6	13.5	17.4	-	48.5
Finance lease liabilities	9.8	8.9	18.8	15.6	53.1

31 March 2009

Non-derivative financial liabilities
Borrowings excluding finance lease liabilities	143.6	67.9	203.4	-	414.9
Interest payments on borrowings	15.2	10.9	14.0	-	40.1
Finance lease liabilities	6.4	6.0	15.9	3.9	32.2

Company

31 March 2010

	Due within 1 year £m	Due between 1 and 2 years £m	Due between 2 and 5 years £m	Over 5 years £m	Total £m
Non-derivative financial liabilities
Borrowings excluding finance lease liabilities	47.8	41.9	125.7	-	215.4
Interest payments on borrowings	7.4	5.7	7.4	-	20.5

31 March 2009

Non-derivative financial liabilities
Borrowings excluding finance lease liabilities	40.9	40.9	122.7	-	204.5
Interest payments on borrowings	7.2	5.6	7.2	-	20.0

iii) Credit risk

Credit and counterparty risk arises from cash and cash deposits and deposits with bank and financial institutions, as well as exposure to customers, including outstanding receivables. Further information on the credit risk relating to trade receivables is given on the 'Trade and other receivables - current' page.

Counterparty risk arises from the investment of surplus funds which are pooled with certain other funds within other Pennon Group companies. The Group's surplus funds are pooled with other surplus funds of Pennon Group Plc and usually placed in short-term fixed interest deposits or the overnight money markets. The Board of Pennon Group Plc has agreed a policy for managing such risk which is controlled through credit limits, counterparty approvals, and rigorous monitoring procedures. Neither the Group or Pennon Group Plc has any other significant concentration of credit risk. Deposit counterparties must meet a credit rating threshold set by the Board of Pennon Group Plc of A1 (Moody's) or AA (Standard and Poor's).

(b) Capital risk management

The Parent's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for its shareholders and benefits for other stakeholders and to maintain an optimal capital structure to minimise the cost of capital. It achieves this objective by insuring that the Group has an optimum mix of debt and capital which is measured against EBITDA.

(c) Foreign exchange risk