Financial Risk Management Policy
Financing for Swire Pacific subsidiaries in Hong Kong is provided primarily by Swire Pacific, which raises funds both directly and through wholly-owned finance subsidiaries. Certain working capital lines and overdraft facilities are arranged by individual subsidiaries. All areas of financial risk management activity are subject to policies, guidelines, exposure limits, and systematic authorisation and reporting. The group's listed associated companies, Cathay Pacific and HAECO, arrange their financial affairs on a stand-alone basis. Their financing activities are undertaken in a manner consistent with the overall financial policies of the group.

USE OF DERIVATIVES
In the normal course of business, Swire Pacific and Cathay Pacific use interest rate and currency swaps in connection with their borrowings. Such derivative transactions are entered into in order to manage exposure to fluctuations in foreign currency exchange rates and interest rates. In addition, Cathay Pacific is a party to forward contracts and options for the purchase of aviation fuel. It is the policy of the Swire Pacific group not to enter into derivative transactions for speculative purposes. The implementation of the hedging policy is only undertaken following approval from the Board.

Derivatives involve, to varying degrees, credit and market risk. With regard to credit risk, the group would be exposed to loss in the event of non-performance by a counterparty. The group controls credit risk through approved counterparty limits and monitoring procedures.

Market risk is the possibility that a movement in interest rates or currency rates will cause the value of a derivative to fluctuate or change the cost of settling the underlying obligations. Derivatives are used solely for management of an underlying risk and the group is not exposed to market risk since gains and losses on the derivatives are offset by losses and gains on the assets, liabilities or transactions being hedged. The group is not required by its counterparties to provide collateral or any other form of security against any change in the market value of a derivative.

Management of Currency Exposure
Exposure to movements in exchange rates on individual transactions in the Swire Pacific group is minimised using forward foreign exchange contracts where active markets for the relevant currencies exist. With the exception of the Perpetual Capital Securities, which have no scheduled maturity, all significant foreign currency borrowings are covered by appropriate currency hedges.

Translation exposure arising on consolidation of the group's overseas net assets is reduced, where practicable, by broadly matching assets with borrowings in the same currency. Substantial proportions of the revenues, costs, assets and liabilities of Swire Pacific and its subsidiary companies are denominated in Hong Kong dollars.

The long-term financial obligations of Cathay Pacific have been arranged primarily in currencies in which it has substantial positive operational cash flows, thus establishing a natural currency hedge. The policy adopted requires that anticipated surplus foreign currency earnings should be at least sufficient to meet the foreign currency interest and principal repayment commitments in any year.

Capital Resources & Liquidity
Swire Pacific's total shareholders' funds have increased to HK$76,064 million at the end of 2000 compared with HK$68,509 million at the end of 1999, mainly due to the upward revaluation of the group's investment property portfolio and retained earnings.

At 31st December 2000, the Swire Pacific group held cash deposits of HK$404 million whilst bank loans and other borrowings due within one year amounted to HK$2,142 million.

An analysis of the group's net borrowings by currency at 31st December 2000, including US$600 million (HK$4,642 million) of Perpetual Capital Securities, is shown below:

Sources of Finance
At 31st December 2000, committed loan facilities and other financing in place amounted to HK$18,356 million, of which 13% remained undrawn. In addition, there were uncommitted facilities undrawn at the year end amounting to HK$3,512 million. Sources of funds at the end of 2000 comprised:

Maturity Profile
It is group policy to secure adequate funding so as to match cash flows associated with both current and planned investments. The maturity profile of the group's gross borrowings at the end of each of the last five years is set out below:

Interest Rate Profile
In addition to raising funds on a fixed rate basis, the group uses interest rate swaps and other instruments where appropriate in the management of its interest rate profile. At 31st December 2000, 45.8% of the group's gross borrowings were on a floating rate basis and 54.2% were on a fixed rate basis.

Interest Cover and Gearing
The following graphs illustrate interest cover, cash interest cover and gearing ratios for each of the last five years. Interest cover for the year ended 31st December 2000 was 8.90 times while cash interest cover, calculated by reference to total interest charges including those capitalised, was 2.87 times. The gearing ratio was 0.21 at the end of 2000.

Capital Expenditure
Capital expenditure incurred by the group in 2000 was HK$6,595 million. The graph below illustrates capital expenditure by division over the last five years:



The major outgoings during 2000 in the Property Division related to expenditure on Cambridge House, the Cityplaza renovation and the provision in respect of the Taikoo Shing arbitration. Expenditure in the Beverages Division was mainly on property, production and distribution equipment, including the acquisition, during the year, of fixed assets relating to the Ogden franchise. Within the Marine Services Division, captial expenditure related principally to instalment payments on six new offshore support vessels for delivery from 2001 to 2003.

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