Derivative financial instruments

Derivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign exchange rates,

credit spreads, commodities, equities or other indices. In accordance with policies approved by the Board, derivatives are transacted generally

to manage exposures to fluctuations in interest rates, foreign exchange rates and commodity prices. Our derivatives balances comprise two

broad categories:

• financing derivatives – these are used to manage our exposure to interest rates and foreign exchange rates. Specifically, we use these

derivatives to manage our financing portfolio, holdings in foreign operations and contractual operational cash flows; and

• commodity contract derivatives – these are used to manage our US customers’ exposure to price and supply risks. Some forward contracts

for the purchase of commodities meet the definition of derivatives. We also enter into derivative financial instruments linked to commodity

prices, including options and swaps, which are used to manage market price volatility.

Derivatives are initially recognised at fair value and subsequently remeasured to fair value at each reporting date. Changes in fair values are recorded

in the period they arise, in either the consolidated income statement or other comprehensive income. Where the gains or losses recorded in the

income statement arise from changes in the fair value of derivatives to the extent that hedge accounting is not applied or is not fully effective, these

are recorded as remeasurements, detailed in notes 5 and 6. Where the fair value of a derivative is positive it is carried as a derivative asset, and

where negative as a derivative liability.

The fair value of derivative financial instruments is calculated by taking the present value of future cash flows, primarily incorporating market

observable inputs. The various inputs include foreign exchange spot and forward rates, yield curves of the respective currencies, currency basis

spreads between the respective currencies, interest rate and inflation curves, the forward rate curves of underlying commodities and, for those

positions that are not fully cash collateralised, the credit quality of the counterparties.

Certain clauses embedded in non-derivative financial instruments or other contracts are presented as derivatives because they impact the risk

profile of their host contracts and they are deemed to have risks or rewards not closely related to those host contracts.

Further information on how derivatives are valued and used for risk management purposes is presented in note 32. Information on commodity

contracts and other commitments not meeting the definition of derivatives is presented in note 30.

The fair values of derivatives by category are as follows:


	2024			2023
	Assets £m	Liabilities £m	Total £m	Assets £m	Liabilities £m	Total £m
Current	44	(335)	(291)	153	(222)	(69)
Non-current	324	(909)	(585)	276	(1,071)	(795)
	368	(1,244)	(876)	429	(1,293)	(864)

Financing derivatives	333	(1,126)	(793)	363	(1,119)	(756)
Commodity contract derivatives	35	(118)	(83)	66	(174)	(108)
	368	(1,244)	(876)	429	(1,293)	(864)

(a) Financing derivatives

The fair values of financing derivatives by type are as follows:


	2024			2023
	Assets £m	Liabilities £m	Total £m	Assets £m	Liabilities £m	Total £m
Interest rate swaps	43	(110)	(67)	49	(98)	(49)
Cross-currency interest rate swaps	234	(844)	(610)	192	(888)	(696)
Foreign exchange forward contracts¹	16	(68)	(52)	100	(11)	89
Inflation-linked swaps	40	(104)	(64)	22	(122)	(100)
	333	(1,126)	(793)	363	(1,119)	(756)

1.Included within the foreign exchange forward contracts balance are £36 million (2023: £4 million) of derivative liabilities in relation to the hedging of capital expenditure.

17. Derivative financial instruments continued

(a) Financing derivatives continued

The maturity profile of financing derivatives is as follows:


	2024			2023
	Assets £m	Liabilities £m	Total £m	Assets £m	Liabilities £m	Total £m
Current
Less than 1 year	18	(249)	(231)	100	(93)	7
	18	(249)	(231)	100	(93)	7
Non-current
In 1 to 2 years	6	(80)	(74)	13	(100)	(87)
In 2 to 3 years	31	(44)	(13)	15	(96)	(81)
In 3 to 4 years	32	(74)	(42)	32	(11)	21
In 4 to 5 years	49	(83)	(34)	14	(107)	(93)
More than 5 years	197	(596)	(399)	189	(712)	(523)
	315	(877)	(562)	263	(1,026)	(763)
	333	(1,126)	(793)	363	(1,119)	(756)

The notional contract amounts of financing derivatives by type are as follows:


	2024	2023
	£m	£m
Interest rate swaps	(2,175)	(1,727)
Cross-currency interest rate swaps	(15,602)	(15,025)
Foreign exchange forward contracts	(7,675)	(5,263)
Inflation-linked swaps	(3,190)	(2,387)
	(28,642)	(24,402)

(b) Commodity contract derivatives

The fair values of commodity contract derivatives by type are as follows:


	2024			2023
	Assets £m	Liabilities £m	Total £m	Assets £m	Liabilities £m	Total £m
Commodity purchase contracts accounted for as derivative contracts
Forward purchases of gas	—	(3)	(3)	2	(6)	(4)
Derivative financial instruments linked to commodity prices
Electricity capacity	—	—	—	1	—	1
Electricity swaps	33	(82)	(49)	53	(92)	(39)
Electricity options	—	(1)	(1)	—	(3)	(3)
Gas swaps	2	(22)	(20)	9	(42)	(33)
Gas options	—	(10)	(10)	1	(31)	(30)
	35	(118)	(83)	66	(174)	(108)

17. Derivative financial instruments continued

(b) Commodity contract derivatives continued

The maturity profile of commodity contract derivatives is as follows:


	2024			2023
	Assets £m	Liabilities £m	Total £m	Assets £m	Liabilities £m	Total £m
Current
Less than one year	26	(86)	(60)	53	(129)	(76)
	26	(86)	(60)	53	(129)	(76)
Non-current
In 1 to 2 years	3	(28)	(25)	11	(29)	(18)
In 2 to 3 years	5	(4)	1	2	(15)	(13)
In 3 to 4 years	1	—	1	—	(1)	(1)
	9	(32)	(23)	13	(45)	(32)
	35	(118)	(83)	66	(174)	(108)

The notional quantities of commodity contract derivatives by type are as follows:


	2024	2023
Forward purchases of gas1	38m Dth	22m Dth
Electricity swaps	14,128 GWh	14,076 GWh
Gas swaps	44m Dth	50m Dth
Gas options	78m Dth	57m Dth

1.Forward gas purchases have terms up to one year (2023: one year). The contractual obligations under these contracts are £14 million (2023: £24 million).