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National Grid Electricity Transmission plc Annual Report and Accounts 2006/07
19. Financial risk factors (continued)
(d) Sensitivity analysis
Financial instruments affected by market risk include borrowings, deposits and derivative financial instruments. The following analysis, required by IFRS 7,
is intended to illustrate the sensitivity to changes in market variables, being UK interest rates and the UK retail prices index.
The analysis excludes the impact of movements in market variables on the carrying value of pension obligations and provisions.
The sensitivity analysis has been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio
and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31 March 2007 and
31 March 2006 respectively. As a consequence, this sensitivity analysis relates to the position at those dates and is not representative of the years then ended,
as all of these varied.
The following assumptions were made in calculating the sensitivity analysis:
- the balance sheet sensitivity to interest rates relates only to derivative financial instruments, as debt and deposits are carried at amortised cost and so their
carrying value does not change as interest rates move;
- the sensitivity of accrued interest to movements in interest rates is calculated on net floating rate exposures on debt, deposits and derivative instruments with no
sensitivity assumed for RPI-linked debt;
- changes in the carrying value of derivatives from movements in interest rates designated as cash flow hedges are assumed to be recorded fully within equity;
- changes in the carrying value of derivative financial instruments not in hedging relationships only affect the income statement;
- all other changes in the carrying value of derivative financial instruments designated as hedges are fully effective with no impact on the income statement;
- debt with a maturity below one year is floating rate for the accrued interest part of the calculation;
- the floating leg of any swap or any floating rate debt is treated as not having any interest rate already set, therefore a change in interest rates affects a full twelve
month period for the accrued interest portion of the sensitivity calculations; and
- sensitivity to the retail price index does not take into account any changes to revenue or operating costs that are affected by the retail price index or inflation
generally.
Using the above assumptions, the following table shows the illustrative effect on the income statement and items that are recognised directly in equity that would
result from reasonably possible movements in changes in the UK retail price index and UK interest rates, before the effects of tax.
Income
Income
statement
Equity
statement
Equity
+/- £m
+/- £m
+/- £m
+/- £m
UK retail price index +/- 0.50%
8
-
5
-
UK interest rates +/- 0.50%
2
3
2
2
- 60 -
2006
2007