National Grid 2008 Annual Report Download - page 592

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 16329
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 70
Description: EXHIBIT 15.1
0/5266.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/266/5*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 16329
Name: NATIONAL GRID
Date: 17-JUN-2008 03:10:51.35Operator: BNY99999TPhone: [phone]Site: BOWNE OF NEW YORK
Y59930.SUB, DocName: EX-15.1, Doc: 16, Page: 70 Description: EXHIBIT 15.1
0/5266.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/266/5*
Table of Contents
78
Financial
p
osition and financial mana
g
ement continued
National Grid plc
The valuation techniques described above for interest rate
swaps and currency swaps are a standard market
methodology. These techniques do not take account of the
credit quality of either party but this is not considered to be a
significant factor unless there is a material deterioration in
the credit quality of either party.
In relation to swaptions, we only use swaptions for hedging
purposes with a European style exercise. As a consequence,
the Black’s variation of the Black-Scholes model is
considered to be sufficiently accurate for the purpose of
providing fair value information in relation to these types of
swaptions. More sophisticated valuation models exist but we
do not believe it is necessary to employ these models, given
the extent of our activities in this area.
For debt and derivative instruments held, we utilise a
sensitivity analysis technique to evaluate the effect that
chan
g
es in relevant rates or prices would have on the market
value of such instruments.
As described in note 33 to the consolidated financial
statements, movements in financial indices would have the
following estimated impact on the financial statements as a
consequence of changes in the value of financial
instruments. This analysis does not take account of the
change in value in our income stream or in the value of our
US operations that certain of these financial instruments are
being used to hedge.
Commodity contracts
We purchase electricity and gas in order to supply our
customers in the US and also to meet our own energy
requirements. We purchased
g
as and oil for our discontinued
Ravenswood generation station prior to 31 December 2007
when we entered into a tollin
g
arran
g
ement with a third
party. We also sell gas produced by our West Virginia gas
fields. Additionally, we buy back capacity rights already sold
in accordance with our UK gas transporter licences and
Uniform Network Code obligations as part of our
management of the gas transmission and distribution
networks in the UK.
In the US substantially all our costs of purchasing electricity
and gas for supply to customers are typically recoverable at
an amount equal to cost. The timing of recovery of these
costs can vary between financial periods leading to an
under- or over-recovery within any particular financial period.
The most significant gas purchases for our own use relate to
the operation of our gas transmission and gas distribution
networks, mainly in the UK, while we also purchase fuel for
our vehicle fleets in the UK and the US.
2007/08 2006/07
Other Other
Income equit
y
Income equity
statement reserves statement reserves
£m £m £m £m
UK retail
p
rice index
±
0.50% 16
–
13
–
UK interest rates
±
0.50% 46 57 35 43
US interest rates
±
0.50% 31 7 26 8
US dollar exchan
g
e rate
±
10% 18 590 36 194
Our Energy Procurement Risk Management Policy and
Delegations of Authority govern our US commodity trading
activities for energy transactions. The purpose of the policy
is to ensure that our US operating companies participate in
the physical and financial markets only for those
commodities to which we or our customers have a physical
market requirement, and will transact only within pre-defined
risk parameters approved by the Energy Procurement Risk
Management Committee.
In our UK
g
as transmission operation, we are obli
g
ed to offer
for sale, through a series of auctions (both short- and long-
term), a predetermined quantity of entry capacity for every
day in the year at predefined locations. Where, on the day,
the gas transmission system’s capability is constrained, such
that gas is prevented from entering the system for which
entry capacity rights have been sold, then UK gas
transmission is required to buy back those entry capacity
rights sold in excess of system capability. Forward and
option contracts are used to reduce the risk and exposure to
on-the-day entry capacity prices. Our UK electricity
transmission operations have also entered into electricity
options, pursuant to the requirement to stabilise the
electricity market in Great Britain throu
g
h the operation of the
British Electricity Trading and Transmission Arrangements
(BETTA). The options are for varying terms and have been
entered into so that we have the ability to deliver electricity
as required to meet our obligations under our UK electricity
transmission licence. We have not and do not expect to
enter into any significant derivatives in connection with our
BETTA role.
In the US, we also have a management contract with Merrill
Lynch Trading, under which we and Merrill Lynch Trading
share the responsibilities for managing upstream gas
distribution assets associated with our Massachusetts gas
distribution operations, as well as providing city-gate
delivered supply. This contract allows for both parties to
employ derivative instruments to maximize the profitability of
the portfolio of
g
as distribution assets. Profits associated with
these activities are shared between us, Merrill Lynch Tradin
g
and our customers in Massachusetts.
Energy purchase contracts
The majority of our energy purchase contracts are entered
into to meet our normal sale, purchase and usage
requirements and so are accounted for as ordinary sales or
purchase contracts. These included contractual
commitments to purchase energy under long-term contracts
amounting to £4,753 million as at 31 March 2008 (2007:
£3,731 million) of which £1,790 million is due within one year
(2007: £1,233 million). Further information is included in note
29 to the consolidated financial statements.
Commodity purchase contracts accounted for as
derivative contracts
Certain of our forward purchases of electricity, gas and
electricity capacity do not meet the normal purchase, sale or
usage exemption for accounting purposes and hence are
accounted for as derivatives. Mark-to-market changes in
these value contracts are reflected through earnings under
the headin
g
of commodit
y
remeasurements.