National Grid 2008 Annual Report Download - page 593

BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 39625
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: 71
Description: EXHIBIT 15.1
0/6267.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/267/6*
BOWNE INTEGRATED TYPESETTING SYSTEM
CRC: 39625
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: 71 Description: EXHIBIT 15.1
0/6267.00.00.00Y59930BNY
[E/O] EDGAR 2 *Y59930/267/6*
Table of Contents
Annual Report and Accounts 2007/08
79
Commodity purchase contracts accounted for as derivatives
include contracts for the forward purchase of electricity that
reverted back to us as part of the settlement arising from
USGen’s bankruptcy in 2005, which were originally entered
into prior to the restructurin
g
of the electricity industry in New
England. The electricity purchased under these contracts is
not required for our normal activities and is sold in the
energy markets at prices which are currently significantly
below the amount we are required to pay. The fair value of
these contracts amounted to a £47 million liability at 31
March 2008 (2007: £132 million liability). We are also a party
to several other power purchase arrangements entered into
by the former generating business, the output of which is
sold to third parties through back-to-back arrangements. We
recover the costs incurred under the contracts, net of
proceeds received on sales, from customers as part of our
stranded cost recoveries.
Certain contracts for the forward purchases of gas and
forward purchases of electricity capacity are accounted for
as derivatives as we trade these contracts as part of our
energy management activities. The fair value of these
contracts include contracts with a positive value of
£116 million, recorded as assets in our balance sheet and
contracts with a negative value of £39 million recorded as
liabilities.
Derivative financial instruments linked to commodity
prices
We also enter into derivative financial instruments linked to
commodity prices, including index-linked swaps and futures
contracts. These derivative financial instruments are used to
reduce market price volatility and are principally used to
manage commodity prices associated with our gas and
electricity delivery operations in the US on behalf of our
customers.
Derivative financial instruments are carried at fair value in
the balance sheet and mark-to-market changes in the value
of these contracts are reflected through earnings with the
exception of electricity and gas futures contracts, and gas
sales swaps which are designated as cash flow hedges.
In addition, a number of power purchase agreements were
replaced in 1998 with index-linked swap contracts that expire
in June 2008. These index-linked swap contracts are the
subject of regulatory rulings that allow the gains and losses
to be passed on to customers. At 31 March 2008, there were
liabilities of £26 million (2007: £136 million) in respect of
these contracts. The fair value of the index-linked swap
contracts is based on the difference between projected
future market prices and projected contract prices as applied
to the notional quantities stated in the contracts and
discounted using a US Treasury Bill rate curve to the current
present value. Payments made under indexed swap
contracts are affected by the price of natural
g
as and we use
New York Mercantile Exchange (NYMEX) gas futures as
hedges to mitigate this impact. The futures contracts are
derivative commodity instruments with gains and losses
deferred as an offset to the corresponding increases and
decreases in the swap payments.
In addition we use NYMEX electricity and gas futures to
reduce the cash flow variability associated with the purchase
price for a portion of future electricity and natural gas
purchases associated with our electricity and
g
as distribution
operations in the US. These had a positive fair value of
£19 million as at 31 March 2008 (2007: not material).
We also utilise over-the-counter natural gas swaps in the US
to hedge the cash flow variability associated with forecasted
sales of a portion of natural gas production from our West
Virginia gas fields. We have hedge positions in place for
approximately 70% of our estimated 2008 and 2009 gas
production, net of gathering costs. We use forward prices
from a third party vendor to value these swap positions and
they are designated as cash flow hedges. We also use over-
the-counter natural gas swaps to hedge the cash flow
variability of gas purchases associated with certain large-
volume gas sales customers. These gas swaps are carried
at fair value on the balance sheet and their charges are
reflected through earnings. We use market quoted forward
prices to value these swap positions. The value of these
contracts was not material at 31 March 2008 (2007: not
applicable).
Sensitivity analysis
As described in note 34 to the consolidated financial
statements, movements in commodity prices would have the
following estimated impact on the financial statements as a
consequence of changes in the value of commodities. This
analysis does not take account of any change in our
commodity portfolio.
Commitments and contingencies
Commitments and contingencies outstanding at 31 March
2008 and 2007 are summarised in the table below:
Information regarding obligations under pension and other
post-retirement benefits is given on page 80 under the
heading ‘Retirement arrangements’.
The energy commitments shown in the commitments and
contingencies table above reflect obligations to purchase
energy under long-term contracts. These contracts are used
in respect of our normal sale and purchase requirements and
do not include commodity contracts carried at fair value as
described on page 78.
We propose to meet all of our commitments from existing
cash and investments, operating cash flows, existing credit
facilities, future facilities and other financing that we
reasonably expect to be able to secure in the future.
2007/08 2006/07
Other Other
Income equit
y
Income equity
statement reserves statement reserves
£m £m £m £m
10% increase in commodity
p
rices 25
(
1
)
10 -
10% decrease in commodity
p
rices
(
22
)
1
(
10
)
-
2008 2007
£m £m
Future capital expenditure contracted but not
p
rovided for 1,097 1,554
Total operating lease commitments 737 800
Power commitments 4,753 3,731
Other commitments, contin
g
encies and
g
uar ant ees 1,387 537