John Lewis Partnership plc annual report and accounts 2013

22 Management of financial risks (continued)

Foreign currency risk

 The Partnership uses derivative financial instruments to manage exposures to movements in exchange rates arising from transactions with foreign suppliers. Foreign currency exposures are hedged primarily using forward foreign exchange contracts covering up to 100% of forecast exposures on a rolling basis. Forward foreign exchange contracts used to hedge forecast currency requirements are designated as cash flow hedges with fair value movements recognised in equity. Derivative financial instruments that were designated as cash flow hedges during the year were fully effective. At the balance sheet date, forward currency contracts of £163.0m (2012: £152.9m) had been entered into to hedge purchases in foreign currencies which will mature over the next 18 months.

Credit risk

 The Partnership has no significant exposure to customer credit risk due to transactions being principally of a high volume, low value and short maturity. Cash deposits and other financial instruments give rise to credit risk on the amounts due from counterparties. These risks are managed by restricting such transactions to counterparties with a credit rating not less than a Standard & Poor’s equivalent ‘A’ rating and designating appropriate limits to each counterparty.

The Partnership considers its maximum exposure to credit risk is as follows:

2013 £m - 2012 £m

Trade and other receivables 108.5 124.4

Cash and cash equivalents 534.4 550.8

Derivative financial instruments 4.2 2.7

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647.1 677.9

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Capital risk

 The Partnership’s objectives when managing capital (defined as net debt plus equity) are to safeguard its ability to continue as a going concern, provide returns for its Partners and to maintain a prudent level of debt funding. The Partnership is a long-term business, held in trust for the benefit of its Partners. The co-ownership model means that it is not able to raise equity externally.

The Partnership manages capital to ensure an appropriate balance between investing in Partner, customer and profit. The policy is to maintain a capital structure consistent with an investment grade credit rating. Although the Partnership does not have an external credit rating, it routinely monitors its capital and liquidity requirements using capital ratios commonly used by rating agencies to assess risk, whilst maintaining an appropriate level of debt headroom and a smooth debt maturity profile to ensure continuity of funding. The Partnership borrows centrally to meet the requirements of its divisions using a mix of funding including capital market issues and bank facilities. The Partnership further diversified its funding sources through the issue of a Partnership bond to its Partners and customers in April 2011. Other forms of borrowing include SIP shares as part of the BonusSave scheme and a small amount of cumulative preference stock.

Energy risk

 The Partnership operates risk management processes for the Partnership’s energy costs associated with its activities. The Partnership’s energy policy is reviewed by an energy committee which meets regularly to review pricing exposure to electricity and gas consumption and determines strategy for forward purchasing and hedging of energy costs using flexible purchase contracts.

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