National Grid’s Global Tax and Treasury Director, Malcolm Cooper, on bank deposits, corporate debt and why he feels he has the best treasury job in the UK.

National Grid plc is a British multinational electricity and gas utility company, with headquarters in London. It is best known in the UK for owning and operating the high-voltage electricity transmission system that delivers power across the nation, but it also operates the network that delivers the country’s natural gas. In recent years it has spread its wings across the Atlantic and now operates in the north eastern states of the US, providing power directly to around eight million customers. In total, it employs more than 25,000 people. National Grid plc has its primary listing on the London Stock Exchange and is part of the prestigious FTSE 100 Index. It has a secondary listing on the New York Stock Exchange.

“I usually tell people I’ve got the second best finance job in the company,” says National Grid’s Global Tax and Treasury Director, Malcolm Cooper. “I get involved in just about everything that’s interesting and exciting from a finance perspective.”

Cooper remains more than a little upbeat about his current situation within this £25 billion, FTSE 100 power-house. In fact, engaged as he is with a very hands-on operational remit, Cooper believes that his role is likely “a lot more interesting” than that of his CFO and is even drawn to upgrade his status to that of having “probably the best treasury job in the UK”.

Broad remit

It is quite a claim and one which Treasury Today readers are welcome to try to unseat. But Cooper certainly sounds fulfilled in his duties, looking after a rather broader sweep of financial activities than many others in the trade. In his position as Global Tax Director, he tackles the full gamut of functions, from corporation tax to VAT. As Treasury Director, predominantly the role is about funding the group, a demand which currently stands at around £3 billion per year. This sum is largely for infrastructure investment, with National Grid needing “north of £20 billion” over the next five or so years.

Despite this sizeable requirement, Cooper says he has never been tempted by the kind of “jumbo bond deals” that some MNCs opt for which is why funding is a perpetual issue for him. He does not relent, declaring that a jumbo deal is highly unlikely “because the pricing is critical” – in his view, bond issuers simply will never get the best pricing on a jumbo deal. Multiple deals may demand more work, “but the pricing improvement you’ll see makes the effort worthwhile”.

Managing the group’s vast pension funds is also in the Cooper remit. This is a major responsibility because National Grid, being a former state-owned operation (it was privatised in 1990), runs two of the old UK public sector defined benefit (DB) pension schemes. Liabilities total around £18 billion, with another £6 billion or so in liabilities in the US. The old DB schemes have been closed to new entrants for a number of years now; a defined contribution (DC) scheme is available for new employees. Cooper is confident that the group will meet all of its obligations under the rules of each scheme.

And there is more: Cooper also assumes responsibility for group insurance – basically provisional coverage for the whole company. This is facilitated via two captive insurance companies which are operated by outsourced service provider insurance (one in the Isle of Man, the other in Dublin). These write the policies for most of the company, but there is an additional consolidated risk management overlay for the entire group. And so, with an additional corporate finance hat to add to the pile (and covering aspects such as business planning, financial analysis and M&A) and with the less favoured elements of accounting and equity investor relations out of the equation, Cooper feels justified in claiming domain over “all of the interesting aspects” of National Grid’s finance division.

Team work

Not that he has it all to himself; a remit of this order demands “a pretty big team” as treasury operations go. In total, Cooper heads up around 120 FTEs: around 15 each in UK and US treasury; around 40 in total in tax; corporate finance accounts for around ten; there are 15 in total for insurance (excluding the captives); and pensions employs about 50 staff (managing a payroll of more than 70,000 pensioners). The day-to-day treasury activities of National Grid, such as cash management, are looked after by Cooper’s assistant treasurer, Mark Flawn. “I only tend to get involved in that side when there’s an issue, which is rare, or when we are doing something major like changing systems (such as when it opted for SWIFT connectivity via a service bureau).”

The title of Tax and Treasury Director is not uncommon in industry, the two disciplines making for comfortable bedfellows. But Cooper sees his added pensions remit as making a completely logical fit with treasury too. Whereas ten or 15 years ago this may have been a full-on HR function, covering benefits improvements and the like, “it’s all about financial risk management these days”. Given the size of the funds, it demands a level of understanding of asset management techniques and hedging to the extent that the fit with treasury is obvious. Likewise insurance, says Cooper. “With insurance, it’s all about financial risk management, making an assessment of the risk and deciding what mitigation and hedging you want to put in place.”

Corporate finance, however, may be slightly left-field for most treasurers, but in National Grid’s case it had a ready, willing and able candidate in Cooper: before he was Treasurer he was the group’s Director of Corporate Finance. Of course, National Grid has a head of strategy who takes the key decisions regarding M&A, for example, but alongside his team, Cooper carries out all the financial aspects of due diligence, deal processing and so on.

The path to the top

Cooper alighted at National Grid’s London treasury HQ via a circuitous route. His first appearance with any connection to today’s business dates back to 1989 when he arrived at British Gas on an 18-month contract. This was only meant to be a stop-gap, with Cooper still “looking for a proper job” having just departed from the consultancy wing of Arthur Andersen, one of the UK’s so-called Big Five accounting firms (Andersen having since morphed into Accenture).

His tenure at Arthur Andersen betrays Cooper’s initial professional training as an accountant. But having done work at the edges of M&A with the British Gas contract, he then moved into the line finance role for a while before slipping into the position of financial controller (by deed, if not title) for the company’s oil and gas division (now BG Group). From here, he moved back into corporate finance in 1997 when British Gas was in the process of de-merging a company called Centrica (which is now a major UK gas supply company). At this point, Cooper adopts a very English self-deprecating honesty when describing much of his professional progress to date (and clearly there have been no backward moves here) as “a random walk”. However, the randomness stopped dead when he got to his first true treasury position.

First treasury role

“I was sitting as Director of Corporate Finance and we’d just de-merged Centrica and were in the process of separating BG Group from the gas pipeline company (which is now part of National Grid). But I didn’t really know where to go from there.” It was then that Cooper had something of an epiphany, looking at the role of the treasurer and realising that this was something he wanted to get involved in.

In his own time, he undertook study with the UK Association of Corporate Treasurers. Although as a qualified accountant he was exempted from some papers, it was still “challenging” he admits. “I didn’t expect to go back into studying in my late thirties.” But study he did, taking and passing both ACT and MCT examinations in one sitting each. Although Cooper now had qualified treasurer status, he still needed to find a suitable job. And then in 2000 he secured the required position at the gas pipeline firm, Lattice. This position held up for two years, giving him valuable hands-on experience.

Then Lattice was acquired by National Grid. “I must be honest, I assumed my days were numbered because National Grid had a treasurer,” admits Cooper. But luck was on his side. The old guard was on the move and Cooper was able to take the ‘second best’ finance spot. Some 23 years on, he feels it is now safe to assume that his search for a ‘proper job’ has been successful. And second best or not, he firmly believes that it is “one of the biggest treasury jobs in Britain”. These figures go some way to supporting such a claim: National Grid currently has around £23 billion in gross debt, making it the most indebted corporate in the UK, excluding the banks and financial players, and one of the top 20 in the world.

Technology changes

Despite these numbers, National Grid is not in fact a massively complex business in treasury terms so when it comes to technology, Cooper’s description of the level of process automation on the transaction side as “not bad” comes as no surprise. However, he is quick to qualify this statement, adding that “we’re not a huge cash factory and we don’t have vast inter-company accounts that need reconciling”. The group is certainly not devoid of IT and as well as being on its third TMS (the current incumbent is Reval, covering accounting, risk management and analytics), Cooper’s team also uses the SWIFT network (via the Bottomline service bureau) as its main payments system.

“Yes, we’ve got spreadsheets,” says Cooper, “but I spend my life trying to get rid of them”. He’s not the only treasurer trying to wave farewell to Excel hell, admitting, mostly with tongue embedded in cheek, that if he were to be fired from his job it would most likely be through someone making a mistake in a spreadsheet. “I do whatever I can to reduce the use of spreadsheets, but I’m afraid it is impossible because they are so useful and so often you need that ad hoc piece of analysis that a TMS or anything else will not do.”

So, whilst technology has its place within Team Cooper, clearly it is not a panacea and he strongly believes that the treasurer’s professional instinct should be kept alive. The area where you always have to ask twice if the analysis is right, he argues, is risk management. For example, National Grid has a relatively high proportion of floating rate debt and whilst the Reval system handles much of this automatically, sometimes he has to go with a ‘gut-feeling’ and question whether the numbers make sense. “With the levels of debt required to sustain this business, if you get your cost of debt wrong by ten basis points it can make a very material impact on your financial results.” Cruising on auto-pilot, he warns, is not an option.

Debt structure

The debt structure of National Grid has a few twists put in by the nature of its business. In general financial terms, running a utility is a low-risk business, but it is also very low margin. As such, major players will tend to have a high proportion of debt (up to 70% of the balance sheet in National Grid’s case). Most of the group’s debt is actually issued as corporate bonds, with a small amount of bank debt. “For most companies, but particularly for utilities, actually having fixed rate debt is not the minimum risk position because if rates go down, you lose money,” observes Cooper. In fact, National Grid owns possibly the largest single index-linked asset in the UK (taking both the electricity and gas system together the economic value is around £24 billion). From a UK regulatory perspective this is seen as an RPI-linked asset, rendering the inflation component extremely important. This is why National Grid issues as much RPI-linked debt as it can (it has about £6 billion currently outstanding); the only reason it doesn’t do more is simply down to the limits of demand, explains Cooper.

“There are so few corporates that issue index-linked debt – it’s basically a handful of utilities – that we represent an enormous part of the index and so some managers put limits on it, which in turn puts limits on how much we can practically issue.” If it is not possible to issue index-linked debt, floating rate debt is a “very good proxy” for it, he says, adding that there is “a lot of empirical evidence that says in the long run this is the cheapest form of debt” – the last couple of years are an exception, but historically it has been pretty well correlated to inflation (Cooper citing a circa 80% correlation between floating rates and inflation).

When it comes to banking, National Grid has a large relationship group but just a few simple demands. “The main thing we ask of our banks is the provision of committed facilities,” says Cooper. “These are our liquidity backup and remain undrawn and it would be a last resort if we ever did draw on them.” This is no idle statement: in 2008 the group was issuing debt at a higher cost than it would be to draw on its committed facilities. When a couple of Board members asked why he wasn’t drawing on the facility, Cooper responded that it would change the dynamics of the relationship between bank and client enormously (in the banks’ favour, of course). These relationships are reviewed “from time to time”, but generally Cooper sees “no rationale to change” right now.

Even so, the downgrading of the credit status of some major banks by the ratings agencies does impinge on National Grid’s counterparty risk policy. Although the team looks at other metrics (such as CDS levels), these ratings are still important. As credit quality has reduced, some treasurers have simply increased all their limits, which is not something Cooper has done “because we’re managing in our old limits”. However, this approach has seen a small number of its banks hit that limit, forcing Cooper’s team to mitigate that risk by, for example, putting a credit support annex (CSA) in place.

Corporate cash

Another ongoing banking concern right now for all treasurers is where to put funds on deposit. Like many corporates, the general market turmoil has seen National Grid in possession of more cash now than it would have had before the crisis. “Finding a home for that cash is tricky,” Cooper admits. “For us, protection is the key factor and then yield follows, but if you look at bank deposits they offer questionable credit quality and very little yield.” Still, overnight money is placed on bank deposit “because it’s the easiest option”, but cash can find its way into AAA funds and there was a period when National Grid bought quality commercial paper, Cooper recognising that a 30-day CP with a major international corporate “is probably better credit quality than a 30-day deposit with many banks”. The only reason buying CP has slowed is its limited availability: most good quality corporates are sitting on so much cash right now that they’re just not issuing it. Even gilt yields are “really not very attractive” at the moment because of the weak economy and, in the UK at least, maybe as an effect of quantitative easing.

Whilst a bank change is probably unlikely, Cooper sees no reason at all to change his job. “If you’d asked me about ten years ago, I would have said I would be heartbroken if I didn’t make CFO somewhere, someday. But the honest answer now is that although I might be paid more as CFO, my job is a lot more interesting.” It is, he declares, “a great role”.