National Grid 2014 Annual Report Download - page 145

Strategic Report Corporate Governance Financial Statements Additional Information
30. Financial risk management continued
(f) Capital risk management continued
The majority of our regulated operating companies in the US and the UK (and one intermediate UK holding company), which are all
consolidated subsidiaries of National Grid, are subject to certain restrictions on the payment of dividends by administrative order (by
regulators relevant to the individual company), contract and/or licence. The types of restrictions that a company may have that would
prevent a dividend being declared or paid unless they are met include:
• dividends must be approved in advance by the relevant US state regulatory commission;
• the subsidiary must have at least two recognised rating agency credit ratings of at least investment grade;
• dividends must be limited to cumulative retained earnings, including pre-acquisition retained earnings;
• National Grid plc must maintain an investment grade credit rating and if that rating is the lowest investment grade bond rating
itcannot have a negative watch/review downgrade notice by a credit rating agency;
• the subsidiary must not carry on any activities other than those permitted by the licences;
• the subsidiary must not create any cross-default obligations or give or receive any intra-group cross-subsidies; and
• the percentage of equity compared with total capital of the subsidiary must remain above certain levels.
There is a further restriction relating only to the Narragansett Electric Company, which is required to maintain its consolidated net
worthabove certain levels.
These restrictions are subject to alteration in the US as and when a new rate case or rate plan is agreed with the relevant regulatory
bodies for each operating company and in the UK through the normal licence review process.
As most of our business is regulated, at 31 March 2014 the majority of our net assets are subject to some of the restrictions noted
above. These restrictions are not considered to be significantly onerous, nor do we currently expect they will prevent the planned
payment of dividends in future in line with our dividend policy.
Some of our regulatory and bank loan agreements additionally impose lower limits for the long-term credit ratings that certain companies
within the Group must hold. All the above requirements are monitored on a regular basis in order to ensure compliance. The Company
has complied with all externally imposed capital requirements to which it is subject.
(g) Fair value analysis
The financial instruments included on the statement of financial position are measured at fair value. These fair values can be categorised
into hierarchy levels that are representative of the inputs used in measuring the fair value. The best evidence of fair value is a quoted price
in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used.
2014 2013
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Assets
Available-for-sale investments 2,786 214 –3,000 4,510 209 –4,719
Derivative financial instruments –1,950 20 1,970 –2,197 48 2,245
Commodity contracts –34 53 87 –26 63 89
2,786 2,198 73 5,057 4,510 2,432 111 7, 0 5 3
Liabilities
Derivative financial instruments –(1,043) (120) (1,163) –(1,529) (152) (1,681)
Commodity contracts –(12) (111) (123) –(5) (134) (139)
–(1,055) (231) (1,286) –(1,534) (286) (1,820)
Total 2,786 1,143 (158) 3,771 4,510 898 (175) 5,233
Level 1: Financial instruments with quoted prices for identical instruments in active markets.
Level 2: Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in inactive markets and financial instruments valued using models where all significant inputs are based directly
orindirectly on observable market data.
Level 3: Financial instruments valued using valuation techniques where one or more significant inputs are based on unobservable
market data.
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