Financial Review

Financing

The Group’s financing requirements are managed by pre-funding cash flow requirements and maturing debt obligations, maintaining a diversity of funding sources with an appropriate mix of fixed, floating and inflation-linked borrowings and by spreading debt repayments over a range of maturities.

The Group’s core funding takes the form of term loans secured over property assets. Short-term funds are raised on the wholesale money markets. Contingent liquidity is maintained through a new £400 million five-year revolving credit facility, entered into in February 2007. As at 24 March 2007 there were £nil drawings under this facility (2006: £nil drawings under 2006 bank facility). The Group’s treasury policies are set out in note 29.

Capital expenditure

Capital expenditure increased in the year to £737 million (2006: £525 million). This included £308 million on new stores (2006: £203 million), of which £138 million (2006: £59 million) relates to acquisitions and freehold purchases and £368 million on extensions and refurbishments (2006: £233 million). Capital expenditure is forecast to be in the region of £750 million for the next financial year. This is an increase on previous guidance reflecting increased spend on the new store development pipeline, extensions and a larger refurbishment programme.

Balance sheet

Total equity as at 24 March 2007 was £4,349 million (2006: £3,965 million). Gearing reduced year on year to 32 per cent (2006: 36 per cent).

Freehold property valuation

The net book value of the Group’s freehold and long leasehold properties is £5.2 billion. The Group estimates the current market value to be around 65 per cent higher based on an investment basis valuation carried out by independent surveyors as at 24 March 2007, giving a total value of £8.6 billion. The Group has 292 freehold and long leasehold properties comprising 286 supermarkets, which account for 62 per cent of total supermarket space, and six depots.

Pensions

The defined benefit schemes were subject to a triennial valuation carried out by Watson Wyatt, the schemes’ independent actuaries at March 2006, on the projected unit basis. The results of this valuation are expected to be approved by the schemes’ trustees in June 2007. The retirement benefit obligations as at 24 March 2007 have been calculated, where appropriate, in line with this draft valuation.

As at 24 March 2007, the retirement benefit obligations less the fair value of plan assets were £103 million (2006: £658 million). The net deficit after tax was £55 million (2006: £431 million). The movement reflects the assumptions changes set out in note 31, £240 million of the £350 million one-off cash contributions (£110 million was paid in the prior financial year) and favourable market conditions.