National Grid 2014 Annual Report Download - page 171

Strategic Report Corporate Governance Financial Statements Additional Information
Risk factors
Operating costs may increase faster than revenues.
Income under our price controls in the UK is linked to the RPI.
Our operating costs may increase without a corresponding
increase in the RPI and therefore without a corresponding
increase in UK revenues. Our income under our rate plans
intheUS is not typically linked to inflation.
In periods of inflation in the US, our operating costs may
increaseby more than our revenues. In both the UK and US
suchincreased costs may materially adversely affect the results
ofour operations.
We may be required to make significant contributions
tofund pension and other post-retirement benefits.
We participate in a number of pension schemes that together
cover substantially all our employees. In both the UK and US,
theprincipal schemes are DB schemes where the scheme
assets are held independently of our own financial resources.
Inthe US, we also have other post-retirement benefit schemes.
Estimates of the amount and timing of future funding for the
UKand US schemes are based on actuarial assumptions
and other factors including: the actual and projected market
performance of the scheme assets, future long-term bond yields,
average life expectancies and relevant legal requirements.
Actual performance of scheme assets may be affected by volatility
in debt and equity markets. Changes in these assumptions or other
factors may require us to make additional contributions to these
pension schemes which, to the extent they are not recoverable
under our price controls or state rate plans, could materially
adversely affect the results of our operations and financial condition.
Financing and liquidity
An inability to access capital markets at commercially
acceptable interest rates could affect how we maintain
andgrow our businesses.
Our businesses are financed through cash generated from our
ongoing operations, bank lending facilities and the capital
markets, particularly the long-term debt capital markets. Some of
the debt we issue is rated by credit rating agencies and changes
to these ratings may affect both our borrowing capacity and
borrowing costs. In addition, restrictions imposed by regulators
may also limit how we service the financial requirements of our
current businesses or the financing of newly acquired or
developing businesses.
Financial markets can be subject to periods of volatility and
shortages of liquidity. If we were unable to access the capital
markets or other sources of finance at competitive rates for
aprolonged period, our cost of financing may increase, the
discretionary and uncommitted elements of our proposed
capitalinvestment programme may need to be reconsidered
andthe manner in which we implement our strategy may need
tobe reassessed.
Such events could have a material adverse impact on our
business, results of operations and prospects.
Some of our regulatory agreements impose lower limits for the
long-term senior unsecured debt credit ratings that certain
companies within the Group must hold or the amount of equity
within their capital structures. One of the principal limits requires
National Grid plc to hold an investment grade long-term senior
unsecured debt credit rating. In addition, some of our regulatory
arrangements impose restrictions on the way we can operate.
These include regulatory requirements for us to maintain
adequate financial resources within certain parts of our operating
businesses and may restrict the ability of National Grid plc and
some of our subsidiaries to engage in certain transactions,
including paying dividends, lending cash and levying charges.
The inability to meet such requirements or the occurrence of
anysuch restrictions may have a material adverse impact on
ourbusiness and financial condition.
Due to control weaknesses in our US business, we may be
unable to provide accurate financial information to our debt
investors in a timely manner. Our debt agreements and banking
facilities contain covenants, including those relating to the
periodic and timely provision of financial information by the
issuing entity and financial covenants, such as restrictions on the
level of subsidiary indebtedness. Failure to comply with these
covenants, or to obtain waivers of those requirements, could in
some cases trigger a right, at the lender’s discretion, to require
repayment of some of our debt andmay restrict our ability to
draw upon our facilities or access the capital markets.
Customers and counterparties
Customers and counterparties may not perform
their obligations.
Our operations are exposed to the risk that customers, suppliers,
banks and other financial institutions and others with whom we
do business will not satisfy their obligations, which could
materially adversely affect our financial position.
This risk is significant where our subsidiaries have concentrations
of receivables from gas and electricity utilities and their affiliates,
as well as industrial customers and other purchasers, and may
also arise where customers are unable to pay us as a result of
increasing commodity prices or adverse economic conditions.
There is also a risk to us where we invest excess cash, enter into
derivatives and other financial contracts with banks or other
financial institutions. Banks who provide us with credit facilities
may also fail to perform under those contracts.
Employees and others
We may fail to attract, develop and retain employees with
the competencies, including leadership and business
capabilities, values and behaviours required to deliver our
strategy and vision and ensure they are engaged to act in
our best interests.
Our ability to implement our strategy depends on the capabilities
and performance of our employees and leadership at all levels
ofthe business. Our ability to implement our strategy and vision
may be negatively affected by the loss of key personnel or an
inability to attract, integrate, engage and retain appropriately
qualified personnel, or if significant disputes arise with our
employees. As a result, there may be a material adverse effect
on our business, financial condition, results of operations
and prospects.
There is a risk that an employee or someone acting on our
behalfmay breach our internal controls or internal governance
framework or may contravene applicable laws and regulations.
This could have an impact on the results of our operations,
ourreputation and our relationship with our regulators and
otherstakeholders.
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