Ardagh Glass Finance plc - Irish Stock Exchange

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Financial assets and liabilities (Continued)
price of crude oil varying from $50 up to $100 per barrel. In addition to the increased cost of oil, the
price of electricity is also influenced by decreasing over-capacity in electricity production facilities and
the increasing influence of CO2 costs on electricity price.
Group policy is to purchase its natural gas requirements on the spot market and if economic by
entering into forward price fixing arrangements with its suppliers. In continental Europe fixed price or
index tracking contracts tend to be the norm while hedging strategies are little used. Whereas in the
United Kingdom fixed price and index tracking contracts are very rare. As a result of this and the
volatility of gas and electricity prices in the United Kingdom, Ardagh has developed an active hedging
strategy to fix a proportion of its energy costs through contractual arrangments directly with its
suppliers. Ardagh typically hedges in tranches of 10% of volumes. The remaining volumes can be left
unhedged in order to take advantage of spot market opportunities that could lead to an overall
reduction of energy costs.
Ardagh does not use commodity futures contracts to limit the fluctuations in prices paid and the
potential volatility in earnings and cash flows from future market price movements.
Credit Risk
Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and
deposits with banks and financial institutions, as well as credit exposures to the Group’s customers,
including outstanding receivables. Group policy is to place excess liquidity on deposit, only with
recognised and reputable financial institutions. For banks and financial institutions, only independently
rated parties with a minimum rating of ‘A’ are accepted Group policy is to extend credit to customers of
good credit standing. Credit risk is managed, on an on-going basis by dedicated credit controllers.
Provision is made, where deemed necessary by the directors for bad and doubtful accounts.
The Group’s 10 largest customers accounted for approximately 37% of glass container revenues for
the year ended 31 December 2007. These customers all have grade ‘B’ ratings or better.
Liquidity Risk
The Group is exposed to liquidity risk which arises primarily from the maturing of short-term and
long-term debt obligations and derivative transactions. The Group’s policy is to ensure that sufficient
resources are available either from cash balances, cash flows or undrawn committed bank facilities, to
ensure all obligations can be met as they fall due.
To achieve this objective, the Group:
• maintains cash balances and liquid investments with highly-rated counterparties;
• limits the maturity of cash balances; and
• borrows the bulk of its debt needs under committed bank lines or other term financing.
Capital Risk
One of the Group’s key metrics is the ratio of consolidated net borrowings as a multiple of
EBITDA (earnings before interest, taxation, depreciation and amortisation). At 31 December 2007 the
ratio for the Group was 4.7 times.
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