National Grid 2014 Annual Report Download - page 146

Download and view the complete annual report

Please find page 146 of the 2014 National Grid annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 196

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164
  • 165
  • 166
  • 167
  • 168
  • 169
  • 170
  • 171
  • 172
  • 173
  • 174
  • 175
  • 176
  • 177
  • 178
  • 179
  • 180
  • 181
  • 182
  • 183
  • 184
  • 185
  • 186
  • 187
  • 188
  • 189
  • 190
  • 191
  • 192
  • 193
  • 194
  • 195
  • 196

30. Financial risk management continued
(g) Fair value analysis continued
Our level 3 derivative financial instruments include cross-currency swaps with an embedded call option, currency swaps where the
currency forward curve is illiquid and inflation linked swaps where the inflation curve is illiquid. In valuing these instruments a third-party
valuation is obtained to support each reported fair value.
Our level 3 commodity contracts primarily consist of our forward purchases of electricity and gas where pricing inputs are unobservable,
as well as other complex transactions. Complex transactions can introduce the need for internally developed models based on reasonable
assumptions. Industry standard valuation techniques such as the Black-Scholes pricing model and Monte Carlo simulation are used for
valuing such instruments. Level 3 is also applied in cases when optionality is present or where an extrapolated forward curve is considered
unobservable. All published forward curves are verified to market data; if forward curves differ from market data by 5% or more they are
considered unobservable.
The changes in value of our level 3 derivative financial instruments are as follows:
Derivative
financial instruments Commodity contracts Total
2014
Level 3
valuation
£m
2013
Level 3
valuation
£m
2014
Level 3
valuation
£m
2013
Level 3
valuation
£m
2014
Level 3
valuation
£m
2013
Level 3
valuation
£m
At 1 April (104) (180) (71) (140) (175) (320)
Net gains/(losses) for the year1,2 779 19 45 26 124
Purchases ––1(14) 1(14)
Settlements (3) (3) (7) 39 (10) 36
Reclassification out of level 3 –––(1) –(1)
At 31 March (100) (104) (58) (71) (158) (175)
1. Gain of £7m (2013: £79m gain) is attributable to derivative financial instruments held at the end of the reporting period.
2. Loss of £30m (2013: £51m gain) is attributable to commodity contract financial instruments held at the end of the reporting period.
In 2014 the transfers out of level 3 were immaterial.
The impacts on a post-tax basis of reasonably possible changes in significant level 3 assumptions are as follows:
Derivative
financial instruments Commodity contracts
2014
Income
statement
£m
2013
Income
statement
£m
2014
Income
statement
£m
2013
Income
statement
£m
10% increase in commodity prices1––33 40
10% decrease in commodity prices1––(15) (23)
Volume forecast uplift2––(2) (4)
Volume forecast reduction2––24
Forward curve extrapolation ––1–
+20 basis point change in LPI market curve3(54) (62) ––
–20 basis point change in LPI market curve353 60 ––
1. Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 33 on page 147.
2. Volumes were flexed using maximum and minimum historical averages, or by >10% where historical averages were not available.
3. A reasonably possible change in assumption of other level 3 derivative financial instruments is unlikely to result in a material change in fair values.
The impacts disclosed above were considered on a contract by contract basis with the most significant unobservable inputs identified.
Notes to the consolidated
financial statements continued
144 National Grid Annual Report and Accounts 2013/14