Risk management

The board is responsible for treasury strategy and governance, which is reviewed on an annual basis.

The treasury committee, a subcommittee of the board, has responsibility for setting and monitoring the group's adherence to treasury policies, along with oversight in relation to the activities of the treasury function.

Treasury policies cover the key financial risks: liquidity risk, credit risk, market risk (inflation, interest rate, electricity price and currency) and capital risk. These policies are reviewed by the treasury committee for approval on at least an annual basis, or following any major changes in treasury operations and/or financial market conditions.

Day-to-day responsibility for operational compliance with the treasury policies rests with the treasurer. An operational compliance report is provided monthly to the treasury committee, which details the status of the group's compliance with the treasury policies and highlights the level of risk against the appropriate risk limits in place.

The group's treasury function does not act as a profit centre and does not undertake any speculative trading activity.

Liquidity risk

The group looks to manage its liquidity risk by maintaining liquidity within a board-approved duration range. Liquidity is actively monitored by the group's treasury function and is reported monthly to the treasury committee through the operational compliance report.

At 31 March 2020, the group had £1,208.1 million (2019: £1,039.3 million) of available liquidity, which comprised £528.1 million (2019: £339.3 million) of cash and short-term deposits and £680.0 million (2019: £700.0 million) of undrawn committed borrowing facilities.

The group had available committed borrowing facilities as follows:

Group2020
£m
2019
£m
Expiring within one year50.0100.0
Expiring after one year but in less than two years100.050.0
Expiring after more than two years650.0650.0
Total borrowing facilities800.0800.0
Facilities drawn(1)(120.0)(100.0)
Undrawn borrowing facilities680.0700.0

Note:

  1. Facilities expiring after more than two years.

These facilities are arranged on a bilateral rather than a syndicated basis, which spreads the maturities more evenly over a longer time period, thereby reducing the refinancing risk by providing several renewal points rather than a large single refinancing point.

Company

The company did not have any committed facilities available at 31 March 2020 or 31 March 2019.

Maturity analysis

Concentrations of risk may arise if large cash flows are concentrated within particular time periods. The maturity profile in the following table represents the forecast future contractual principal and interest cash flows in relation to the group's financial liabilities on an undiscounted basis. Derivative cash flows have been shown net where there is a contractual agreement to settle on a net basis; otherwise the cash flows are shown gross. This table does not include the impact of lease liabilities for which the maturity profile on an undiscounted basis has been disclosed in note 18.

Group
At 31 March 2020
Total(1)
£m
Adjust-
ment(2)
£m
1 year or less
£m
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
More than 5 years
£m
Bonds10,685.2144.3520.4124.9126.0577.29,192.4
Bank and other term borrowings2,894.9884.9122.0352.1122.7255.81,157.4
Adjustment to carrying value(2)(5,274.6)(5,274.6)
Borrowings8,305.5(5,274.6)1,029.2642.4477.0248.7833.010,349.8
Derivatives:
Payable952.767.445.741.838.235.4724.2
Receivable(1,508.6)(105.7)(90.2)(116.9)(82.6)(165.3)(947.9)
Adjustment to carrying value(2)82.382.3
Derivatives – net assets(473.6)82.3(38.3)(44.5)(75.1)(44.4)(129.9)(223.7)
Group
At 31 March 2019
Total(1)
£m
Adjust-
ment(2)
£m
1 year or less
£m
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
More than 5 years
£m
Bonds10,174.4583.4129.1504.9109.2110.18,737.7
Bank and other term borrowings3,008.0293.3680.4125.1356.1125.41,427.7
Adjustment to carrying value(2)(5,366.6)(5,366.6)
Borrowings7,815.8(5,366.6)876.7809.5630.0465.3235.510,165.4
Derivatives:
Payable1,389.0510.243.736.632.630.1735.8
Receivable(1,825.0)(607.0)(71.5)(70.2)(93.8)(64.7)(917.8)
Adjustment to carrying value(2)26.826.8
Derivatives – net assets(409.2)26.8(96.8)(27.8)(33.6)(61.2)(34.6)(182.0)

Notes:

  1. Forecast future cash flows are calculated, where applicable, using forward interest rates based on the interest environment at year end and are therefore susceptible to changes in market conditions. For index-linked debt it has been assumed that RPI will be 3 per cent and CPI will be 2 per cent over the life of each instrument.
  2. The carrying value of debt is calculated following various methods in accordance with IFRS 9 'Financial Instruments' and therefore this adjustment reconciles the undiscounted forecast future cash flows to the carrying value of debt in the statement of financial position, excluding £57.6 million (2019: £nil) of lease liabilities.

Company

The company has total borrowings of £0.8 million (2019: £0.5 million), which are payable within one year, and £1,752.0 million (2019: £1,718.4 million), which are payable within one to two years.

Credit risk

Credit risk arises principally from trading (the supply of services to customers) and treasury activities (the depositing of cash and holding of derivative instruments). While the opening of the non-household retail market to competition from 1 April 2017 has impacted on the profile of the group's concentration of credit risk, as discussed further below, the group does not believe it is exposed to any material concentrations that could have an impact on its ability to continue as a going concern or its longer-term viability.

The group manages its risk from trading through the effective management of customer relationships. Concentrations of credit risk with respect to trade receivables from household customers are limited due to the customer base being comprised of a large number of unrelated households. However, collection can be challenging as the Water Industry Act 1991 (as amended by the Water Industry Act 1999) prohibits the disconnection of a water supply and the limiting of supply with the intention of enforcing payment for certain premises, including domestic dwellings.

Following the non-household retail market opening to competition, credit risk in this area is now concentrated in a small number of retailers to whom the group provides wholesale water and wastewater services. Retailers are licensed and monitored by Ofwat and as part of the regulations they must demonstrate that they have adequate resources available to supply services. The credit terms for the group's retail customers are set out in market codes. In reaction to the impact of the COVID-19 pandemic, changes have been made to the payment terms set out within the market codes. These changes provide the option for extended credit terms for retailers. As at 31 March 2020, Water Plus was the group's single largest debtor, with amounts outstanding in relation to wholesale services of £52.7 million (2019: £39.1 million). During the year, sales to Water Plus in relation to wholesale services were £438.3 million (2019: £454.8 million). Details of transactions with Water Plus can be found in note A6.

Under the group's revenue recognition policy, revenue is only recognised when collection of the resulting receivable is reasonably assured. Considering the above, the directors believe there is no further credit risk provision required in excess of the allowance for doubtful receivables (see note 15).

The group manages its credit risk from treasury activities by establishing a total credit limit by counterparty, which comprises a counterparty credit limit and an additional settlement limit to cover intra-day gross settlement of cash flows. In addition, potential derivative exposure limits are established to take account of potential future exposure which may arise under derivative transactions. These limits are calculated by reference to a measure of capital and credit ratings of the individual counterparties and are subject to a maximum single counterparty limit.

Credit limits are refreshed annually and reviewed in the event of any credit rating action. Additionally, a control mechanism to trigger a review of specific counterparty limits, irrespective of credit rating action, is in place. This entails daily monitoring of counterparty credit default swap levels and/or share price volatility. Credit exposure is monitored daily by the group's treasury function and is reported monthly to the treasury committee through the operational compliance report.

At 31 March 2020 and 31 March 2019, the maximum exposure to credit risk for the group and company is represented by the carrying amount of each financial asset in the statement of financial position:

GroupCompany
2020
£m
2019
£m
2020
£m
2019
£m
Cash and short-term deposits (see note 16)528.1339.3
Trade and other receivables (see note 15)*342.9397.681.382.2
Investments (see note 13)0.111.5
Derivative financial instruments617.9489.1
1,489.01,237.581.382.2

* Included within trade and other receivables is £95.0 million of amounts owed by joint ventures in respect of borrowings, further details of which are disclosed in note A6.

The credit exposure on derivatives is disclosed gross of any collateral held. At 31 March 2020, the group held £72.2 million (2019: £52.0 million) as collateral in relation to derivative financial instruments (included within short-term bank borrowings – fixed in note A3).

Market risk

The group's exposure to market risk primarily results from its financing arrangements and the economic return which it is allowed on the regulatory capital value (RCV).

The group uses a variety of financial instruments, including derivatives, in order to manage the exposure to these risks.

Inflation risk

The group earns an economic return on its RCV, comprising a real return through revenues and an inflation return as an uplift to its RCV.

In the year to 31 March 2020, the group's regulatory assets were linked to RPI inflation; however, for the 2020–25 regulatory period, from 1 April 2020 the group's RCV will be 50 per cent linked to RPI inflation and 50 per cent linked to CPIH inflation, with any new additions being added to the CPIH portion of the RCV.

The group's inflation hedging policy aims to have around half of the group's net debt in index-linked form (where it is economic to do so), by issuing index-linked debt and/or swapping a portion of nominal debt. This is expected to remain weighted towards RPl-linked form until CPI and/or CPIH debt and swaps become available in sufficient size at an economic cost.

The group believes this is an appropriate inflation hedging policy taking into account a balanced assessment of the following factors: economic hedge of United Utilities Water Limited's (UUW) RCV and revenues; cash flow timing mismatch between allowed cost of debt and the group's incurred cost of debt; the inflation risk premium that is generally incorporated into nominal debt costs; income statement volatility; hedging costs; debt maturity profile mismatch risk; and index-linked hedging positioning relative to the water sector.

As a result of the evaluation of the above factors, the group will continue to identify opportunities to maintain around 50 per cent of the group's net debt being hedged for inflation, which can be evidenced by issuing of CPI index-linked debt since 2017 and the swapping of both nominal and RPI-linked debt to CPI since 2018. Inflation risk is reported monthly to the treasury committee in the operational compliance report.

The carrying value of index-linked debt held by the group, including the carrying value of the nominal debt swapped to CPI, was £4,082.2 million at 31 March 2020 (2019: £3,775.8 million).

Sensitivity analysis

The following table details the sensitivity of profit before tax to changes in the RPI and CPI on the group's index-linked borrowings. The sensitivity analysis has been based on the amount of index-linked debt held at the reporting date and, as such, is not indicative of the years then ended. In addition, it excludes the impact of inflation on revenues and other income statement costs as well as the hedging aspect of the group's regulatory assets and post-retirement obligations.

Increase/(decrease) in profit before tax and equity2020
£m
2019
£m
1% increase in RPI/CPI(39.6)(38.2)
1% decrease in RPI/CPI39.638.2

The sensitivity analysis assumes a 1 per cent change in RPI and CPI having a corresponding 1 per cent impact on this position over a 12-month period. It should be noted, however, that there is a time lag by which current RPI and CPI changes impact on the income statement, and the analysis does not incorporate this factor. The portfolio of index-linked debt is calculated on either a three- or eight-month lag basis. Therefore, at the reporting date the index-linked interest and principal adjustments impacting the income statement are fixed and based on the annual RPI or CPI change either three or eight months earlier.

Company

The company had no material exposure to inflation risk at 31 March 2020 or 31 March 2019.

Interest rate risk

The group's policy is to structure debt in a way that best matches its underlying assets and cash flows. The group currently earns an economic return on its RCV, comprising a real return through revenues, determined by the real cost of capital fixed by the regulator for each five-year regulatory pricing period, and an inflation return as an uplift to its RCV (see inflation risk section for changes being introduced by Ofwat to inflation indexation from 2020).

From 1 April 2020 for the regulatory period to 2025, Ofwat has continued to set a fixed real cost of debt in relation to embedded debt (80 per cent of net debt), but has introduced a debt indexation mechanism in relation to new debt (20 per cent of net debt), where the allowed rate on new debt will vary in line with specific debt indices. The debt indexation mechanism will be settled as an end of regulatory period adjustment.

Therefore, sterling index-linked debt is left unswapped at inception, in accordance with our inflation hedging policy goal to maintain around half of the group's net debt in index-linked form. Conventional nominal debt is hedged as set out below.

Where conventional long-term debt is raised in a fixed-rate form, to manage exposure to long-term interest rates, the debt is generally swapped at inception to create a floating rate liability for the term of the liability through the use of interest rate swaps. These instruments are typically designated within a fair value accounting hedge.

To manage the exposure to medium-term interest rates, the group fixes underlying interest rates on nominal debt out to 10 years in advance on a reducing balance basis. As such, at the start of each regulatory period, a proportion of the projected nominal net debt representing new debt for that regulatory period, will remain floating until it is fixed via the above 10-year reducing balance basis, which should approximate Ofwat's new debt indexation mechanism.

This interest rate hedging policy dovetails with our revised inflation hedging policy should we need to swap a portion of nominal debt to real rate form to maintain our desired mix of nominal and index-linked debt.

The group seeks to manage its risk by maintaining its interest rate exposure within a board-approved range. Interest rate risk is reported to the treasury committee through the operational compliance report.

Sensitivity analysis

The following table details the sensitivity of the group's profit before tax and equity to changes in interest rates. The sensitivity analysis has been based on the amount of net debt and the interest rate hedge positions in place at the reporting date and, as such, is not indicative of the years then ended.

GroupCompany
Increase/(decrease) in profit before tax and equity2020
£m
2019
£m
2020
£m
2019
£m
1% increase in interest rate122.7130.2(17.5)(17.2)
1% decrease in interest rate(131.0)(141.3)17.517.2

The sensitivity analysis assumes that both fair value hedges and borrowings designated at fair value through profit or loss are effectively hedged and it excludes the impact on post-retirement obligations. The exposure largely relates to fair value movements on the group's fixed interest rate swaps which manage the exposure to medium-term interest rates. Those swaps are not included in hedge relationships.

Hedge accounting

Details regarding the interest rate swaps designated as hedging instruments to manage interest rate risk are summarised below:

1 year or less1 to 2 years2 to 5 yearsOver 5 years
Notional principal amount £m375.0450.0900.0
Average contracted fixed interest rate %1.981.362.49

This table represents the derivatives that are held in fair value hedging relationships, with only the weighted average for the fixed interest elements of the swaps disclosed.

Further detail on the fair value hedging relationships is provided below:

Risk exposureNominal amount of the hedging instruments
£m
Carrying amount of the hedging instruments
£m
Accumulated fair value (gains)/losses on hedged items
£m
Fair value (gains)/losses
used for calculating hedge
ineffectiveness for the year
ended 31 March 2020(1)
Hedge ineffective-ness recognised in the income statement
£m
Nominal amount of hedging instruments
directly impacted by IBOR reform
£m
Hedged items
£m
Hedging instruments £m
Interest rate risk on borrowings1,725.0285.6287.450.6(50.1)0.51,675.0

Note:

  1. The change in fair value of the hedging instruments used to measure hedge ineffectiveness exclude interest accruals and changes in credit spread adjustments. The full impact of fair value movements on the income statement is disclosed in note 6.

Currency risk

Currency exposure principally arises in respect of funding raised in foreign currencies. To manage exposure to currency rates, foreign currency debt is hedged into sterling through the use of cross-currency swaps and these are often designated within a fair value accounting hedge. The group seeks to manage its risk by maintaining currency exposure within board-approved limits. Currency risk in relation to foreign currency denominated financial instruments is reported monthly to the treasury committee through the operational compliance report. The group and company have no material net exposure to movements in currency rates.

Hedge accounting

Details regarding the cross-currency interest rate swaps designated as hedging instruments to manage currency and interest rate risk are summarised below:

1 year or less1 to 2 years2 to 5 yearsOver 5 years
Notional principal amount £m442.8
Average contracted fixed interest rate %2.46

This table represents the derivatives that are held in fair value hedging relationships, with only the weighted average for the fixed interest rate elements of the swap disclosed.

Further detail on the fair value hedging relationships is provided below:

Risk exposureNominal amount of the hedging instruments
£m
Carrying amount of the hedging instruments
£m
Accumulated fair value (gains)/losses on hedged items
£m
Fair value (gains)/losses*
used for calculating hedge
ineffectiveness for the year
ended 31 March 2020(1)
Hedge ineffective-ness recognised in the income statement
£m
Nominal amount of hedging instruments
directly impacted by IBOR reform
£m
Hedged items
£m
Hedging instruments £m
Foreign currency and interest rate risk on borrowings442.8125.8132.8(36.5)35.61.0442.8

Note:

  1. The change in fair value of the hedging instruments used to measure hedge ineffectiveness exclude interest accruals and changes in credit spread adjustments. The full impact of fair value movements on the income statement is disclosed in note 6.

Interest rate benchmark reform

Globally, financial regulators are requiring that market participants cease using certain financial market benchmark reference rates (i.e. interbank offered rates, IBORs), and transition to the use of alternative nearly risk-free rate such as the Sterling Overnight Index Average (SONIA). The IASB have amended IFRS 9 'Financial Instruments', providing temporary exceptions from applying specific hedge accounting requirements in cases where hedging relationships are directly impacted by the IBOR reform. The temporary exception allows the group to assume that the economic relationship between the hedged debt and hedging derivatives remains in place, despite the uncertainties around this process. Uncertainties include whether market wide mechanisms will be available to replace references to IBORs with relevant alternative reference rates plus a spread adjustment (e.g. the expected ISDA protocol for derivatives) or whether bilateral amendments to financial instruments will need to be negotiated with each counterparty, the timing of when the IBORs will be replaced with alternative benchmark rates and how and when the spread adjustment between the IBORs and the alternative rate will be determined. This exception will be applied until the uncertainty surrounding the IBOR reform has ended, and we have judged that this uncertainty remains in place at 31 March 2020.

The London Inter-bank Offered Rate (LIBOR) is the interest rate benchmark to which the group's hedging relationships are significantly exposed. The majority of fair value hedging relationships, mitigating interest rate risk and/or currency risk, are directly affected by the reform. The amount of debt held as hedged items in these relationships is £1,675 million of fixed rate debt and £443 million of cross-currency fixed rate debt. Further detail on how the group manages these risks can be found in the interest rate risk sections of this note.

In calculating the fair value attributable to the hedged risk for the fixed rate debt, the group has assumed that once the hedging instruments transition to the alternative risk-free rate, the alternative risk-free rate plus spread will be economically equivalent to the pre-transition LIBOR currently included in the hedging instruments, and no other changes to the terms of the hedging instrument will occur.

A transition project is being undertaken to manage and respond to all aspects of IBOR reform across the business. This will encompass:

  • the amendment of existing financial instrument contracts that reference IBORs, including swaps, European Investment Bank floating rate debt, bilateral loan agreements, intercompany borrowings and committed lending facilities
  • the adoption of alternative reference rates for new financial instruments;
  • the accounting impact, covering the amendment of hedge documentation, enhanced disclosure requirements and the valuation of financial instruments; and
  • ensuring appropriate system capabilities are developed and implemented.

The group proactively monitors market developments and announcements relating to IBOR reform, and will seek to ensure that the risk of the group being economically disadvantaged by the proposed changes is minimised by ensuring that appropriate actions are taken on a timely basis. During the year ending 31 March 2020, the group has entered into a number of financial instruments that reference alternative reference rates (SONIA).

The IASB published an exposure draft relating to phase 2 of the proposed IFRS Standards amendments in April 2020. These proposed amendments aim to address issues affecting financial statements when changes are made to contractual cash flows and hedging relationships as a result of the reform. The group is actively considering the amendments proposed.

Repricing analysis

The following tables categorise the group's borrowings, derivatives and cash deposits on the basis of when they reprice or, if earlier, mature. The repricing analysis demonstrates the group's exposure to floating interest rate risk.

Our largest concentration of floating interest rate risk is with index-linked instruments. This has been classified as repricing in one year or less due to the refixing of the interest charge with changes in RPI and CPI.

Group
At 31 March 2020
Total
£m
1 year or less
£m
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
More than 5 years
£m
Borrowings in fair value hedge relationships
Fixed rate instruments2,590.5399.4468.51,722.6
Effect of swaps2,590.5(399.4)(468.5)(1,722.6)
2,590.52,590.5
Borrowings designated at fair value through profit or loss
Fixed rate instruments397.5397.5
Effect of swaps397.5(397.5)
397.5397.5
Borrowings measured at amortised cost
Fixed rate instruments770.3193.21.01.10.70.8573.5
Floating rate instruments686.9686.9
Index-linked instruments3,917.93,917.9
5,375.14,798.01.01.10.70.8573.5
Effect of fixed interest rate swaps(2,382.3)50.0164.5575.0350.01,242.8
Total borrowings8,363.15,403.751.0165.6575.7350.81,816.3
Cash and short-term deposits(528.1)(528.1)
Net borrowings7,835.04,875.651.0165.6575.7350.81,816.3
At 31 March 2019Total
£m
1 year or less
£m
1–2 years
£m
2–3 years
£m
3–4 years
£m
4–5 years
£m
More than 5 years
£m
Borrowings in fair value hedge relationships
Fixed rate instruments2,765.8441.9406.21,917.7
Effect of swaps2,323.9(406.2)(1,917.7)
2,765.82,765.8
Borrowings designated at fair value through profit or loss
Fixed rate instruments373.9373.9
Effect of swaps373.9(373.9)
373.9373.9
Borrowings measured at amortised cost
Fixed rate instruments179.4152.60.60.70.70.724.1
Floating rate instruments720.9720.9
Index-linked instruments3,775.83,775.8
4,676.14,649.30.60.70.70.724.1
Effect of fixed interest rate swaps(2,330.9)148.550.0164.5575.01,392.9
Total borrowings7,815.85,458.1149.150.7165.2575.71,417.0
Cash and short-term deposits(339.3)(339.3)
Net borrowings7,476.55,118.8149.150.7165.2575.71,417.0
CompanyTotal
£m
2020
1 year or less
£m
Total
£m
2019 1 year or less
£m
Borrowings measured at amortised cost
Floating rate instruments1,752.01,752.01,718.41,718.4
Total borrowings1,752.01,752.01,718.41,718.4

Electricity price risk

The group is allowed a fixed amount of revenue by the regulator, in real terms, to cover electricity costs for each five-year regulatory pricing period. To the extent that electricity prices remain floating over this period, this exposes the group to volatility in its operating cash flows. The group's policy, therefore, is to manage this risk by fixing a proportion of electricity commodity prices in a cost-effective manner.
The group has fixed the price on a proportion of its anticipated net electricity usage out to the end of the regulatory period from 2020 to 2025, partially through entering into electricity swap contracts.

Hedge accounting

Electricity swaps have been designated in cash flow hedge relationships. This means that only the impact of any hedging ineffectiveness is recognised through fair value in the income statement, with movements in the effective portion of the hedge being recognised in other comprehensive income.

Details of electricity swaps that have been designated in cash flow hedging relationships are summarised below:

Risk exposureNominal amount of the hedging instrument
£m
Carrying amount of the hedging instrument
£m
Fair value (gains)/losses used for calculating hedge ineffectiveness for the year ended 31 March 2020
£m
Hedge ineffectiveness recognised in the income statement
£m
Cash flow hedge reserve
£m
Amount reclassified from the cash flow hedge reserve to the income statement
£m
Electricity price risk44.9(2.2)2.0(1.3)5.6

Due to the relative low value of the electricity swaps in comparison to that of the derivative portfolio, no maturity profile and fixed price breakdown has been disclosed.

Capital risk management

The group's objective when managing capital is to maintain efficient access to debt capital markets throughout the economic cycle. The board therefore believes that it is appropriate to maintain RCV gearing, measured as group consolidated net debt (including derivatives) to regulatory capital value (RCV) of UUW, within a target range of 55 per cent to 65 per cent. As at 31 March 2020, RCV gearing was within the range at 62 per cent (2019: 61 per cent).

Assuming no significant changes to existing rating agencies' methodologies or sector risk assessments, the group aims to maintain long-term issuer credit ratings for UUW of at least A3 with Moody's Investors Service (Moody's) and BBB+ with S&P Global (S&P) and a senior unsecured debt rating for UUW of at least A- with Fitch Ratings (Fitch). Debt issued by UUW's financing subsidiary, United Utilities Water Finance PLC, is guaranteed by UUW and is therefore rated in line with UUW.

In order to maintain its targeted credit ratings, the group needs to manage its capital structure with reference to the ratings methodology and measures used by Moody's, S&P and Fitch. The ratings methodology is normally based on a number of key ratios (such as RCV gearing, adjusted interest cover, post maintenance interest cover (PMICR) and Funds from Operations (FFO) to debt) and threshold levels as updated and published from time to time by Moody's, S&P and Fitch. The group looks to manage its risk by maintaining the relevant key financial ratios used by the credit ratings agencies to determine a corporate's credit rating, within the thresholds approved by the board. Capital risk is reported monthly to the treasury committee through the operational compliance report.

Further detail on the precise measures and methodologies used to assess water companies' credit ratings can be found in the methodology papers published by the rating agencies.

Fair values

The table below sets out the valuation basis of financial instruments held at fair value and financial instruments where fair value has been separately disclosed in the notes as the carrying value is not a reasonable approximation of fair value.

Group
2020
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Financial assets at fair value through profit or loss
Derivative financial assets – fair value hedge395.7395.7
Derivative financial assets – held for trading(1)222.0222.0
Derivative financial assets – cash flow hedge0.20.2
Investments0.10.1
Financial liabilities at fair value through profit or loss
Derivative financial liabilities – fair value hedge
Derivative financial liabilities –held for trading(1)(141.9)(141.9)
Derivative financial liabilities – cash flow hedge(2.4)(2.4)
Financial liabilities designated as fair value through profit or loss(397.5)(397.5)
Financial instruments for which fair value has been disclosed
Financial liabilities in fair value hedge relationships(1,981.5)(458.5)(2,440.0)
Other financial liabilities at amortised cost(199.9)(5,796.1)(5,996.0)
(2,181.4)(6,178.4)(8,359.8)
2019Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Financial assets at fair value through profit or loss
Derivative financial assets – fair value hedge329.4329.4
Derivative financial assets – held for trading(1)158.5158.5
Derivative financial assets – cash flow hedge1.21.2
Investments11.511.5
Financial liabilities at fair value through profit or loss
Derivative financial liabilities – fair value hedge(2.3)(2.3)
Derivative financial liabilities –held for trading(1)(75.9)(75.9)
Derivative financial liabilities – cash flow hedge(1.7)(1.7)
Financial liabilities designated as fair value through profit or loss(373.9)(373.9)
Financial instruments for which fair value has been disclosed
Financial liabilities in fair value hedge relationships(2,316.9)(432.4)(2,749.3)
Other financial liabilities at amortised cost(680.9)(5,101.0)(5,781.9)
(2,997.8)(5,486.6)(8,484.4)

Note:

  1. These derivatives form economic hedges and, as such, management intends to hold these through to maturity. Derivatives forming an economic hedge of the currency exposure on borrowings included in these balances were £221.9 million (2019: £151.3 million)
    • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
    • Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
    • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable).

The group has calculated fair values using quoted prices where an active market exists, which has resulted in £2,181.4 million (2019: £2,997.8 million) of 'level 1' fair value measurements. In the absence of an appropriate quoted price, the group has applied discounted cash flow valuation models utilising market available data in line with prior years. The £816.4 million decrease (2019: £1,620.2 million decrease) in 'level 1' fair value measurements is largely due to a decrease in the number of observable quoted bond prices in active markets at 31 March 2020.

During the year, changes in the fair value of financial liabilities designated at fair value through profit or loss resulted in a £23.6 million gain (2019: £26.2 million loss). Included within this was a £34.2 million gain (2019: £6.6 million gain) attributable to changes in own credit risk, recognised in other comprehensive income. The cumulative amount due to changes in credit spread was £79.0 million profit (2019: £44.8 million profit). The carrying amount is £171.4 million (2019: £147.8 million) higher than the amount contracted to settle on maturity.

Company

The company does not hold any financial instruments that are measured subsequent to initial recognition at fair value or where fair value has been separately disclosed in the notes as the carrying value is not a reasonable approximation of fair value.