EirGrid plc Annual Report 2011

EirGrid plc Annual Report & Accounts 2011
25. Derivative Financial Instruments and Financial Risk Management
Capital management
The Company, on vesting of the transmission system operator, had capital introduced under the Transfer
Scheme dated 1 July 2006. This capital forms the core capital of the Company. There have been no changes to
the core capital of the Company during the year. Any changes to the capital structure are subject to approval
of the Department of Communications, Energy and Natural Resources.
The Company is funded on an ongoing basis through the regulatory tariff regime. The Company has put in
place bank facilities to manage liquidity and cash flow to allow for timing mismatches between regulatory
tariff receipts and working capital requirements. During the year, the Company extended its existing working
capital borrowing facilities in response to a shortfall between imperfections tariffs and associated constraint
costs.
Significant capital expenditure projects are funded through external borrowings and subject to approval by
the Department. The Company’s borrowing powers are set through legislation and individual borrowings are
subject to approval by the Department. On 14 March 2008, the Electricity Regulation (Amendment) (EirGrid)
Act 2008 was signed into Irish Law. Primarily this Act empowered the Company to construct the East-West
Interconnector and also increased the borrowing powers of the Company to a limit of €750m.
The Company’s policy is to secure a low, stable, acceptable cost of funds over time, subject to acceptable
levels of risk. The Company also maintains a balanced maturity profile in relation to its core borrowing
portfolio so as to avoid peaked repayments and refinancing risk.
Further details of the borrowing facilities and the related hedging strategies are set out below.
Overview of financial risk management
The Group’s funding, liquidity and exposure to interest and foreign exchange rate risks are managed by the
Group’s treasury and accounting department. Policies to protect the Group from these and other risks are
regularly reviewed and approved by the Board.
The key financial risks to which the Group is exposed relate to liquidity and capital risk both arising from day
to day operations and from key capital expenditure projects.
The Group manages its liquidity and capital risk for day to day operations through the regulatory process
for establishing tariffs with the Commission for Energy Regulation (CER) and the Utility Regulator Northern
Ireland (URegNI) and through internal budgeting and monitoring of variances. The Group has negotiated
stand-by facilities with various banks to support cash flow projections and requirements.
For capital expenditure, the Group has in place key expenditure approval and project management processes.
Credit risk management
The Group is exposed to credit risk from the counterparties with whom it holds its bank accounts. The Group
mitigates its exposure by spreading funds across a number of financial institutions which have a sovereign
guarantee on customer deposits or have a credit rating consistent with the treasury policy approved by the
Board. The Group is also exposed to counterparty risk on undrawn facilities and interest rate swap
instruments. The Group deals only with counterparties with high credit ratings to mitigate this risk.
The maximum exposure to credit risk is represented by the carrying amounts in the Balance Sheet.
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