Market risks and treasury policies

We manage the commercial risks faced by the Group in accordance with policies approved by the Board.

Commodity risk

We are exposed to the effect of fluctuations in commodity prices, particularly the price of electricity, the price of coal (and other fuels) and the price of CO2 emissions allowances.

Price variations and market cycles have historically influenced our financial results and are expected to continue to do so.

We have a policy of making forward sales of power when profitable compared to marginal costs of fuel and CO2 emissions allowances.

We purchase coal under either fixed or variable priced contracts with different maturities from a variety of domestic and international sources. We purchase CO2 emissions allowances under fixed price contracts with different maturity dates from a variety of domestic and international sources.

Counterparty risk

As we rely on third party suppliers for the delivery of coal and other goods and services, we are exposed to the risk of non-performance by these third party suppliers.

We purchase a significant portion of our coal requirement under contracts with a number of UK suppliers. There is a risk that if a large supplier falls into financial difficulty and/or fails to deliver against the contracts, there would be additional costs associated with securing coal from other suppliers.

We enter into fixed price and fixed margin contracts for the sale of electricity to a number of counterparties. The failure of one or more of these counterparties to perform their contractual obligations may cause us financial distress or increase our risk profile.

The investment of surplus cash is undertaken to maximise the return within Board approved policies. These policies set out minimum rating requirements, maximum investment with any one counterparty and the maturity profile.

Interest rate risk

We are exposed to interest rate risk principally in relation to our outstanding bank debt. In particular, we are exposed to changes in the LIBOR interest rate of sterling denominated debt, as substantially all of our debt is both denominated in sterling and has a variable LIBOR rate. We mitigate this risk with interest rate hedges on a proportion of our debt facilities.

Foreign currency risk

Foreign currency exchange contracts are principally entered into to hedge substantially all of our fixed price international coal purchases in US dollars, and our CO2 emissions allowances purchases in euros.