EirGrid plc Annual Report 2011

EirGrid plc Annual Report & Accounts 2011
Principal Risks and Uncertainties
Risk Management
The Group has in place an appropriate risk
management programme that identifies the critical
risks to which it is exposed and ensures that
appropriate risk mitigation measures are taken.
The Group’s internal audit function continually
reviews the internal controls and systems
throughout the business, makes recommendations
for improvement and reports to the Audit Committee.
Financial Risk Management
The main financial risks faced by the Group relate
to liquidity risk, foreign exchange rate movements,
interest rate movements, cash flow risk and credit
risk. Policies to protect the Group from these risks
are regularly reviewed, revised and approved by the
Board as appropriate.
The Group’s principal financial risk is that there is
inadequate liquidity in the event of a significant
regulatory under-recovery. Adequate banking lines
are in place to enable it to fund such a requirement,
pending recovery in a subsequent regulatory pricing
period.
The Group discharges its Market Operator
obligations through a contractual joint venture.
Under the terms of the Trading and Settlement
Code for the Single Electricity Market (SEM) each
participant is required to provide credit cover
at a level notified to it by the Market Operator.
Such credit cover can be provided by means of an
irrevocable standby letter of credit or a cash deposit
held in a SEM collateral reserve account (security
accounts held in the name of market participants).
Any bad debt arising in the SEM, to the extent that
it exceeds the available credit cover, is shared by
generators and is not borne by the Market Operator.
Appropriate arrangements are also in place to
effectively manage the Group’s credit risk arising
from its Transmission System Operator activities.
As a regulated business, operating in Ireland,
the Company’s Transmission System Operator
activities do not involve any significant pricing or
foreign exchange risks. However, the Group derives
approximately 14% of its revenues from the UK and
hence has an exposure to Euro/Sterling currency
fluctuations. This risk is partially mitigated by
the majority of both revenue and expenditure
from UK operations being denominated in Sterling.
The Group has sought to further reduce this
exposure by funding UK operations using Sterling
borrowings.
The Group funds some of its operations using
borrowings and uses interest rate instruments
to manage interest rate risks that arise from its
operational and financial activity. The Group has
entered into interest rate swap agreements to
fix interest rates on current and future East-West
Interconnector project debt. All transactions in
financial instruments are non-speculative.
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 Group’s policy and practice is to settle invoices
promptly according to terms and conditions agreed
with suppliers.
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