REG - ITV PLC - Annual Report and Accounts 2014 <Origin Href="QuoteRef">ITV.L</Origin> - Part 10
26/03/2015 10:31
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in the SDN and London Television Centre ('LTVC') pension funding partnerships
(explained below).
The levels of ongoing contributions to the Scheme are based on the current service costs (as assessed by the Scheme
Trustee) and the expected future cash flows of the Scheme. Normal employer contributions in 2015 for current service are
expected to be in the region of £11 million (2014: £10 million) assuming current contribution rates continue as agreed with
the Trustee.
The Group's deficit funding contributions to Sections A, B and C will be reviewed following the result of the 2014
triennial valuation, expected in Q2 2015. The 2015 deficit payments are not expected to exceed those made in 2014.
Under the SDN pension partnership, set up in 2010, the Group has agreed to make deficit payments of £11 million for 12
years from 2011. The LTVC partnership, established in March 2014, commits the Group to an annual deficit payment of £2
million in 2015, increasing by 5% per annum until 2038.
Section 4: Capital Structure and Financing Costs
In this section . . .
This section outlines how the Group manages its capital structure and related financing costs, including its balance sheet
liquidity and access to capital markets.
The Directors determine the appropriate capital structure of ITV, specifically, how much is raised from shareholders
(equity) and how much is borrowed from financial institutions (debt) in order to finance the Group's activities both now
and in the future. Maintaining capital discipline and balance sheet efficiency remains important to the Group, as seen
through the repurchase of the bilateral loan during the year. Any potential courses of action will take into account the
Group's liquidity needs, flexibility to invest in the business, pension deficit initiatives and impact on credit ratings.
The Directors consider the Group's capital structure and dividend policy at least twice a year ahead of announcing results
and do so in the context of its ability to continue as a going concern, to execute the strategy and to invest in
opportunities to grow the business and enhance shareholder value.
In 2014, a Tax and Treasury committee was established, acting under delegated authority from the Board, in order to approve
certain financial transactions and to monitor compliance with the Group's tax and treasury policies.
4.1 Net cash
Keeping it simple . . .
Net cash is the Group's key measure used to evaluate total cash resources net of the current outstanding debt.
Adjusted net debt is also monitored by the Group and more closely reflects how credit agencies see the Group's gearing. To
arrive at the adjusted net debt amount, we add our total expected contingent payments on acquisitions, our IAS 19 pension
deficit and our undiscounted operating lease commitments. A full analysis and discussion of adjusted net debt is included
in the Financial and Performance Review.
In defining total outstanding debt the Directors consider it appropriate to include the currency impact of swaps held
against specific debt instruments.
The tables below analyse movements in the components of net cash during the year:
1 January2014£m Net cash flowandacquisitions£m Currency andnon-cashmovements £m 31 December2014 £m
Cash 438 (199) (5) 234
Cash equivalents 80 (17) - 63
Total cash and cash equivalents 518 (216) (5) 297
Loans and facilities due within one year (41) 41 (78) (78)
Finance leases due within one year (21) 21 (7) (7)
Loans and facilities due after one year (301) 62 78 (161)
Finance leases due after one year (17) - 7 (10)
Total debt (380) 124 - (256)
Currency component of swaps held against euro denominated bonds 26 (26) - -
Net cash 164 (118) (5) 41
1 January2013£m Net cash flowandacquisitions Currency andnon-cashmovements£m 31 December2013£m
£m
Cash 602 (164) - 438
Cash equivalents 88 (8) - 80
Total cash and cash equivalents 690 (172) - 518
Held to maturity investments 145 (145) - -
Loans and facilities due within one year - - (41) (41)
Finance leases due within one year (7) 7 (21) (21)
Loans and facilities due after one year (594) 200 93 (301)
Finance leases due after one year (38) - 21 (17)
Total debt (639) 207 52 (380)
Currency component of swaps held against euro denominated bonds 25 - 1 26
Convertible bond equity component (22) 11 11 -
Amortised cost adjustment 7 - (7) -
Net cash 206 (99) 57 164
Cash and cash equivalents
Included within cash equivalents is £16 million (2013: £36 million), the use of which is restricted to meeting finance
lease commitments under programme sale and leasebacks (see note 4.2), and gilts of £39 million (2013: £36 million) in
respect of which a charging deed was executed on the unfunded pension commitments of four former Granada executives. Legal
action has commenced to try and remove the charge.
The Group operates an intra-group cash pool policy with certain 100% owned UK subsidiaries. The pool applies to bank
accounts where there is an unconditional right of set off and involves the daily closing cash position for participating
subsidiaries whether positive or negative, being cleared to nil via daily bank transfers to/from ITV plc.
Loans and facilities due within one year
The unsecured £78 million Eurobond, which has a coupon of 5.375% and a maturity of October 2015 was reclassified to current
borrowings.
In June 2014 the unsecured £41 million (E50 million) Eurobond matured, resulting in a net payment by the Group of £15
million, after settlement of the Group's related outstanding cross-currency interest rate swaps.
Loans and loan notes due after one year
The Group has one loan that is repayable between two and five years as at 31 December 2014. The unsecured £161 million
Eurobond matures in January 2017 and has a coupon of 6.125%.
In January 2014 the Group repurchased the remaining principal of £62 million on the 2019 bilateral loan for a cash cost of
£95 million. The repurchase is expected to result in future cash savings of £44 million. The loss arising on settlement of
£30 million has been included in net financing costs (note 4.4) but excluded from adjusted profit for the year.
In 2013 £138 million of the 2019 bilateral loan was repaid from cash and the held to maturity gilts secured against the
loan. The Group also settled a £135 million convertible bond, through a combination of repurchase and redemption. The
settlements resulted in a combined loss of £61 million in net financing costs, and a net loss attributable to the equity
component of the bond of £74 million.
4.2 Borrowings and finance leases
Keeping it simple . . .
The Group borrows money from financial institutions in the form of bonds, bank facilities and other financial instruments.
The interest payable on these instruments is shown in the net financing costs note in note 4.4.
There are Board-approved policies in place to manage the Group's financial risks. Macroeconomic market risks, which impact
currency transactions and interest rates, are discussed in note 4.3. Credit and liquidity risks are discussed below.
· Credit risk: the risk of financial loss to the Group if a customer or counterparty fails to meet its contractual
obligations; and
· Liquidity risk: the risk that the Group will not be able to meet its financial obligations as they fall due.
The Group is required to disclose the fair value of its debt instruments. Here, fair value is the amount the Group would
pay to transfer the liability. It is calculated based on the present value of future principal and interest cash flows,
discounted at the market rate of interest at the reporting date. This calculation of fair value is consistent with
instruments valued under level 2 in note 4.6.
Accounting policies
Borrowings
Borrowings are recognised initially at fair value less directly attributable transaction costs, with subsequent measurement
at amortised cost using the effective interest rate method. Under the amortised cost method the difference between the
amount initially recognised and the redemption value is recorded in the income statement over the period of the borrowing
on an effective interest basis.
Finance leases
Historically, ITV has entered into sale and leaseback agreements in relation to certain programme titles. Related
outstanding sale and leaseback obligations, which comprise the principal and accrued interest, are included within
borrowings. The finance related element of the agreement is charged to the income statement over the term of the lease on
an effective interest basis. Sale and leaseback obligations are secured against an equivalent cash balance held within cash
and cash equivalents.
Managing credit and liquidity risk
Credit risk
The Group's maximum exposure to credit risk is represented by the carrying amount of derivative financial assets (see note
4.3), trade receivables (see note 3.1.4), and cash and cash equivalents (note 4.1).
Trade and other receivables
The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer. The majority
of trade receivables relate to airtime sales contracts with advertising agencies and advertisers. Credit insurance has been
taken out against these companies to minimise the impact on the Group in the event of a possible default.
Cash
The Group operates investment guidelines with respect to surplus cash that emphasise preservation of capital. The
guidelines set out procedures and limits on counterparty risk and maturity profile of cash placed. Counterparty limits for
cash deposits are largely based upon long-term ratings published by the major credit rating agencies and perceived state
support. Deposits up to £50 million which are longer than 12 months require the approval of the Tax and Treasury Committee,
while greater amounts require approval of the Board.
Borrowings
ITV is rated as investment grade by Moody's and S&P. ITV's credit ratings, the cost of credit default swap hedging and the
absolute level of interest rates are key determinants in the cost of new borrowings for ITV. The cost of existing borrowing
remains fixed, except for the revolving credit facility which has floating rate conditions.
Liquidity risk
The Group's financing policy is to fund itself for the medium to long-term by using debt instruments with a range of
maturities and to ensure access to appropriate short-term bank facilities. Long-term funding comes from the UK and European
Capital markets, while any short to medium-term debt requirements are provided through bank credit facilities totalling
£775 million (see below). Management monitors rolling forecasts of the Group's liquidity reserve (comprising undrawn bank
facilities and cash and cash equivalents) on the basis of expected cash flows. This monitoring includes financial ratios to
assess possible future credit ratings and headroom and takes into account the accessibility of cash and cash equivalents.
In April 2014 the Group signed a new Revolving Credit Facility ('RCF') with a group of relationship banks, replacing the
previous RCF disclosed at 31 December 2013. The new RCF is a £525 million committed facility with leverage and interest
cover financial covenants, and matures in 2019. The arrangement fee was determined based on prevailing market rates when
the facility was signed. In addition, the Group has arranged £250 million of financial covenant free financing which runs
for three to seven years. All of these facilities were undrawn at 31 December 2014 (2013: no drawings).
Fair value versus book value
The tables below provide fair value information for the Group's borrowings:
Book value Fair value
Maturity 2014£m 2013£m 2014£m 2013£m
Loans due within one year
£78 million Eurobond Oct 2015 78 78 81 83
Loans due in more than one year
£161 million Eurobond Jan 2017 161 161 173 179
Loans settled or matured in the period
E50 million Eurobond June 2014 - 41 - 43
£62 million loan (previously £200 million loan) Mar 2019 - 62 - 95
239 342 254 400
Movements in book values of the 2014 Eurobond and 2019 bilateral loans are the result of buybacks and maturities in
the period.
Finance leases
The following table analyses when finance lease liabilities are due for payment:
Minimumlease payments£m Interest£m 2014Principal£m Minimumleasepayments Interest£m 2013Principal£m
£m
In one year or less 8 1 7 22 1 21
In more than one year but not more than five years 10 - 10 18 1 17
18 1 17 40 2 38
Finance leases principally comprise programmes under sale and leaseback arrangements. The net book value of tangible assets
held under finance leases at 31 December 2014 was £1 million (2013: £1 million).
4.3 Managing market risks: derivative financial instruments
Keeping it simple . . .
A derivative is a type of financial instrument typically used to manage risk. A derivative's value changes over time in
response to underlying variables such as exchange rates or interest rates and is entered into for a fixed period. A hedge
is where a derivative is used to manage an underlying exposure.
The Group is exposed to certain market risks, principally to changes in interest rates on its net borrowings and to changes
in foreign exchange rates on its foreign currency transactions, profits and net assets. In accordance with Board approved
policies, which are detailed in this note, the Group manages these risks by using derivative financial instruments to hedge
these underlying exposures.
The key market risks facing the Group are:
· Currency risk arising from:
i. translation risk, that is, the risk of adverse currency fluctuations in the translation of foreign currency profits,
assets and liabilities ('balance sheet risk') and non-functional currency monetary assets and liabilities into sterling
('income statement risk'); and
ii. transaction risk, that is, the risk that currency fluctuations will have a negative effect on the value of the
Group's trading cash flows in various currencies.
· Interest rate risk to the Group arises from significant changes in interest rates. Borrowings issued at or swapped to
floating rates expose the Group to interest rate risk.
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