Financial position
Balance sheet
Our balance sheet at 31 March 2008 can be summarised as follows:
|
Assets £m |
Liabilities £m |
Net
assets £m |
|
|---|---|---|---|
| Property, plant & equipment and non-current intangible assets | 24,605 | – | 24,605 |
| Goodwill and non-current investments | 4,089 | – | 4,089 |
| Current assets and liabilities | 2,724 | (3,126) | (402) |
| Other non-current assets and liabilities | 255 | (2,664) | (2,409) |
| Post-retirement obligations | 846 | (1,746) | (900) | Deferred tax | – | (3,407) | (3,407) |
| Assets and liabilities held for sale | 1,508 | (63) | 1,445 |
| Total before net debt | 34,027 | (11,006) | 23,021 |
| Net debt | 3,795 | (21,436) | (17,641) |
| Total as at 31 March 2008 | 37,822 | (32,442) | 5,380 |
| Total as at 31 March 2007 | 28,389 | (24,253) | 4,136 |
The increase in net assets from £4,136 million at 31 March 2007 to £5,380 million at 31 March 2008 resulted from the profit from continuing operations of £1,581 million, the profit for the year from discontinued operations of £1,618 million, net income recognised directly in equity of £280 million and other changes in equity of £67 million, partially offset by repurchases of shares of £1,522 million and dividends paid of £780 million.
Net debt
Net debt increased by £5,853 million from £11,788 million at 31 March 2007 to £17,641 million at 31 March 2008 as a result of cash flows from operations of £3,165 million, disposal proceeds of £3,119 million exceeded by the combination of exchange gains and net increases in the values of derivatives of £133 million, capital expenditure of £2,877 million, cash paid for acquisitions of £3,762 million, net debt acquired (including cash) on acquisitions of £2,186 million, cash outflow on repurchases of shares of £1,498 million, dividends paid of £780 million and interest charge of £901 million.
At 31 March 2008, net debt comprised borrowings of £21,003 million (2007: £15,717 million) including bank overdrafts of £10 million (2007: £6 million), less cash and cash equivalents of £174 million (2007: £1,593 million), financial investments of £2,095 million (2007: £2,098 million) and derivative financial instruments with a net carrying value of £1,093 million (2007: £238 million).
Net debt at 31 March
£bn
The maturity of borrowings is provided in note 21 to the consolidated financial statements. At 31 March 2008 it can be summarised as follows:
Maturity of borrowings at 31 March 2008
£bn
Gearing and interest cover
Gearing at 31 March 2008 and 31 March 2007, calculated as net debt at that date expressed as a percentage of net debt plus net assets shown in the balance sheet, amounted to 77% and 74% respectively. We do not consider that this standard gearing ratio is an appropriate measure of our balance sheet efficiency as it does not reflect the economic value of the assets of our UK and US regulated businesses.
The principal measure of our balance sheet efficiency is our interest cover ratio as described under financial discipline. Interest cover for the year ended 31 March 2008 decreased to 3.2 from 3.8 for the year ended 31 March 2007. Our target long-term range for interest cover is between 3.0 and 3.5.
The decrease occurred as a result of the KeySpan acquisition completing in August 2007 and associated seasonal variations in earnings. KeySpan’s post acquisition period earnings are proportionally greater than pre acquisition period earnings due to seasonal weather impacts.
Equity shareholders’ funds
Equity shareholders’ funds rose from £4,125 million at 31 March 2007 to £5,362 million at 31 March 2008.
The increase was mainly explained by the retained profit for the year to March 2008 of £2,416 million, net other recognised income of £280 million, comprising net foreign exchange adjustments relating to the retranslation of US dollar denominated net assets and associated hedges, actuarial gains, net gains on hedges and available-for-sale investments and tax thereon, and £1,522 million of share repurchases.
Liquidity and treasury management
Cash flow
Cash flows from our operations are largely stable over a period of years, but they do depend on the timing of customer payments and exchange rate movements. Our electricity and gas transmission and distribution operations in the UK and US are subject to multi-year rate agreements with regulators. Significant changes in volumes, for example as a consequence of weather conditions, can affect cash inflows in particular, with abnormally mild or extreme weather driving volumes down or up respectively. Subject to this, we have essentially stable cash flows in the UK, while in the US, the regulatory mechanisms for recovering costs from customers can result in very significant cash flow swings from year to year.
Cash flow forecasting
Both short- and long-term cash flow forecasts are produced frequently to assist in identifying our liquidity requirements. These forecasts, supplemented by a financial headroom position, are supplied to the Finance Committee of the Board regularly to assess funding adequacy for at least a 12 month period. We also maintain committed facilities to support our liquidity requirements.
Credit facilities and unutilised Commercial Paper and Medium Term Note Programmes
At 31 March 2008, we had the following programmes:
| Programme | Amount | Status |
|---|---|---|
| National Grid plc | ||
| US commercial paper programme | $3.0 billion | Unutilised |
| Euro commercial paper programme | $1.5 billion | Unutilised |
| National Grid Electricity Transmission plc | ||
| US commercial paper programme | $1.0 billion | Unutilised | Euro commercial paper programme | $1.0 billion | Unutilised |
| National Grid plc and National Grid Electricity Transmission plc | ||
| Euro medium term note programme | €15.0 billion | €6.3 billion unissued |
| National Grid Gas plc | ||
| US commercial paper programme | $2.5 billion | Unutilised |
| Euro commercial paper programme | $1.25 billion | Unutilised |
| Euro medium term note programme | €10.0 billion | €5.3 billion unissued |
| National Grid USA | ||
| US commercial paper programme | $2.0 billion | $1.2 billion unissued |
| Euro medium term note programme | €4.0 billion | €3.9 billion unissued |
| KeySpan Corporation | ||
| US commercial paper programme | $1.5 billion | $1.2 billion unissued |
We have both committed and uncommitted borrowing facilities that are available for general corporate purposes. At 31 March 2008, we had the following committed and uncommitted facilities:
| Facility | Amount | Status |
|---|---|---|
| National Grid plc | ||
| Short-term committed facilities | $1.5 billion | Undrawn |
| National Grid Gas plc | ||
| Long-term committed facilities | £0.8 billion | Undrawn |
| National Grid Electricity Transmission plc | Long-term committed facilities | £0.4 billion | Undrawn |
| National Grid’s US subsidiaries | ||
| Committed facilities | $1.7 billion | Undrawn |
| National Grid plc and certain UK subsidiaries | ||
| Uncommitted borrowing facilities | £0.8 billion | Undrawn |
The short-term (364 day) committed facilities include an option to extend these facilities. The US committed facilities provide commercial paper back up for KeySpan Corporation and liquidity support for New England Power Company.
Note 35 to the consolidated financial statements shows the maturity profile of undrawn committed borrowing facilities in sterling as at 31 March 2008.
Regulatory restrictions
As part of our regulatory arrangements, our operations are subject to a number of restrictions on the way we can operate. These include regulatory ‘ring-fences’ that require us to maintain adequate financial resources within certain parts of our operating businesses and restrict our ability to transfer funds or levy charges between certain subsidiary companies.
Treasury policy
Funding and treasury risk management for National Grid is carried out under policies and guidelines approved by the Board. The Finance Committee, a committee of the Board (for further details see here) is responsible for regular review and monitoring of treasury activity and for approval of specific transactions, the authority for which may be delegated. There is a Treasury function that raises funding and manages interest rate and foreign exchange rate risk.
Financing programmes exist for each of the main companies within National Grid. The Finance Committee of the Board and the finance committee or board of the appropriate subsidiary undertaking approve all funding programmes.
The Treasury function is not operated as a profit centre. Debt and treasury positions are managed in a non-speculative manner, such that all transactions in financial instruments or products are matched to an underlying current or anticipated business requirement.
The use of derivative financial instruments is controlled by policy guidelines set by the Board. Derivatives entered into in respect of gas and electricity commodities are used in support of the business’s operational requirements and the policy regarding their use is explained here.
We had borrowings outstanding at 31 March 2008 amounting to £21,003 million (31 March 2007: £15,717 million).
We believe that maturing amounts in respect of contractual obligations as shown in ‘Commitments and Contingencies’ in note 29 to the consolidated financial statements can be met from existing cash and investments, operating cash flows and other financings that we reasonably expect to be able to secure in the future, together with the use of committed facilities if required. Our financial position and expected future operating cash flows are such that we can borrow on the wholesale capital and money markets and most of our borrowings are through public bonds and commercial paper.
We place surplus funds on the money markets, usually in the form of short-term fixed deposits and placements with money funds that are invested in highly liquid form with approved highly rated banks and counterparties. We believe this policy continues to provide appropriate liquidity and credit risk management particularly in light of the current global economic and credit situation. Details relating to cash, short-term investments and other financial assets at 31 March 2008 are shown in notes 15 and 20 to the consolidated financial statements.
As of 31 March 2008, the long-term senior unsecured debt and short-term debt credit ratings respectively provided by Moody’s, Standard & Poor’s and Fitch were as follows:
| Facility | Moody’s | S&P | Fitch |
|---|---|---|---|
| National Grid plc | Baa1/P2 | BBB+/A2 | BBB+/F2 |
| National Grid Holdings One plc | – | BBB+/A2 | – |
| National Grid Electricity Transmission plc | A3/P2 | A-/A2 | A/F2 |
| National Grid Gas plc | A3/P2 | A-/A2 | A/F2 |
| National Grid Gas Holdings plc | A3 | BBB+ | A | National Grid USA | A3/P2 | BBB+/A2 | – |
| Niagara Mohawk Power Corp. | A3 | BBB+/A2 | – |
| Massachusetts Electric Co. | A3/P2 | A-/A2 | – |
| New England Power Co. | A3/P2 | A-/A2 | – |
| The Narragansett Electric Co. | A3^ | A-*/A2 | – |
| KeySpan Corporation | Baa1/P2 | A-/A2 | A- |
| The Brooklyn Union Gas Company | – | A | A+ |
| KeySpan Gas East Corporation | A3 | A | A |
| Boston Gas Company | Baa1 | A- | – |
| Colonial Gas Company | A3 | A-* | – |
| National Grid Generation LLC | Baa1 | A-* | – |
*Corporate credit rating
^Issuer rating
The long-term credit ratings of most National Grid companies were reduced by one notch by Standard & Poor’s and Moody’s as a direct result of the KeySpan acquisition. Standard & Poor’s and Fitch have current outlooks of stable on all National Grid companies. Moody’s have a current outlook of negative on all National Grid companies.
The main risks arising from our financing activities are set out below, as are the policies for managing these risks, which are agreed and reviewed by the Board and the Finance Committee.
Refinancing risk management
The Board controls refinancing risk mainly by limiting the amount of financing obligations (both principal and interest) arising on borrowings in any financial year. This policy operates by placing a financial limit on the amounts of debt falling due for refinancing in any given time frame.
During the year, a mixture of short-term and long-term debt was issued.
Note 21 to the consolidated financial statements sets out the contractual maturities of our borrowings over the next 5 years, with the total contracted borrowings maturing over 48 years in compliance with our refinancing risk policy.
Interest rate risk management
Our interest rate exposure arising from borrowings and deposits is managed by the use of fixed-rate and floating-rate debt, interest rate swaps, swaptions and forward rate agreements. Our interest rate risk management policy is to seek to minimise total financing costs (being interest costs and changes in the market value of debt) subject to constraints so that, even with large movements in interest rates, neither the interest cost nor the total financing cost can exceed pre-set limits. Some of the bonds in issue from National Grid Electricity Transmission plc and National Grid Gas plc are index-linked, that is their cost is linked to changes in the UK Retail Price Index (RPI). We believe that these bonds provide a good hedge for revenues and our regulatory asset values that are also RPI linked under our price control formulae in the UK.
The performance of the Treasury function in interest rate risk management is measured by comparing the actual total financing costs of its debt with those of a passively-managed benchmark portfolio.
More information on the interest rate profile of our debt is included in note 33 to the consolidated financial statements.
Interest rate profile 31 March 2008
£bn
Foreign exchange risk management
We have a policy of hedging certain contractually committed foreign exchange transactions over a prescribed minimum size. This covers a minimum of 75% of such transactions expected to occur up to 6 months in advance and a minimum of 50% of transactions 6 to 12 months in advance. Cover generally takes the form of forward sale or purchase of foreign currencies and must always relate to underlying operational cash flows.
The principal foreign exchange risk to which we are exposed arises from assets and liabilities denominated in US dollars. In relation to these risks, the objective is to manage the ratio of US dollar financial liabilities to US dollar assets, by using debt and foreign exchange derivatives, so as to match those liabilities to the proportion of our cash flows that arise in US dollars and are available to service those liabilities.
In addition, we are exposed to currency exposures on borrowings in currencies other than sterling and the US dollar, principally the euro. This currency exposure is managed through the use of derivative financial instruments.
Currency profile 31 March 2008
£bn
The currency compositions of financial liabilities and assets are shown in note 33 to the consolidated financial statements.
Counterparty risk management
Counterparty risk arises from the investment of surplus funds and from the use of derivative instruments. The Finance Committee has agreed a policy for managing such risk, which is controlled through credit limits, approvals and monitoring procedures.
Further information is provided in note 33 to the consolidated financial statements. Where multiple transactions are entered into with a single counterparty, a master netting arrangement is usually put in place to reduce our exposure to credit risk of that counterparty. At the present time, we use standard International Swap Dealers Association (ISDA) documentation, which provides for netting in respect of all transactions governed by a specific ISDA agreement with a counterparty, when transacting interest rate and exchange rate derivatives.
Derivative financial instruments held for purposes other than trading
As part of our business operations, we are exposed to risks arising from fluctuations in interest rates and exchange rates. We use financial instruments, including derivatives, to manage exposures of this type and they are a useful tool in managing risk. Our policy is not to use derivatives for trading purposes. Derivative transactions can, to varying degrees, carry both counterparty and market risk.
We enter into interest rate swaps to manage the composition of floating- and fixed-rate debt and so hedge the exposure of borrowings to interest rate movements. In addition, we enter into bought and written option contracts on interest rate swaps. These contracts are known as swaptions. We also enter into foreign currency swaps to manage the currency composition of borrowings and so hedge the exposure to exchange rate movements. Certain agreements are combined foreign currency and interest rate swap transactions. Such agreements are known as cross-currency swaps.
We enter into forward rate agreements to hedge interest rate risk on short-term debt and money market investments. Forward rate agreements are commitments to fix an interest rate that is to be paid or received on a notional deposit of specified maturity, starting at a future specified date.
Cross-currency and foreign exchange contracts are used to manage the foreign exchange risk arising from the investment in non-sterling subsidiaries.
More details on derivative financial instruments are provided in note 33 to the consolidated financial statements.
Valuation and sensitivity analysis
We calculate the fair value of debt and derivative instruments by discounting all future cash flows by the market yield curve at the balance sheet date. The market yield curve for each currency is obtained from external sources for interest and foreign exchange rates. In the case of instruments that include options, the Black’s variation of the Black-Scholes model is used to calculate fair value.
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 changes 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.
| 2007/08 | 2006/07 | |||
|---|---|---|---|---|
|
Income statement |
Other equity reserves |
Income statement |
Other equity reserves |
|
| £m | £m | £m | £m | |
| UK retail price 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 exchange rate ±10% | 18 | 590 | 36 | 194 |
£37.8bn
Total assets
£5.4bn
Net assets
£17.6bn
Net debt
3.2
Interest cover
48 years
Longest maturity of our borrowings
62%
Proportion of net debt in US dollars
55%
Proportion of net debt at fixed rates
£17.3bn
Pension plan assets