National Grid 2015 Annual Report Download - page 150

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Financial Statements
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
2015
£m
2014
£m
2015
£m
2014
£m
2015
£m
2014
£m
At 1 April (100) (104) (58) (71) (158) (175)
Net gains/(losses) for the year1,2 (63) 7(53) 19 (116) 26
Purchases ––38 138 1
Settlements (3) (3) 28 (7) 25 (10)
Reclassification/transfers out of level 3 ––3–3–
At 31 March (166) (100) (42) (58) (208) (158)
1. Loss of £63m (2014: £7m gain) is attributable to derivative financial instruments held at the end of the reporting period and has been recognised in finance costs in the income statement.
2. Loss of £48m (2014: £30m loss) is attributable to commodity contract financial instruments held at the end of the reporting period.
The impacts on a post-tax basis of reasonably possible changes in significant level 3 assumptions are as follows:
Derivative
financial instruments Commodity contracts
2015
Income
statement
£m
2014
Income
statement
£m
2015
Income
statement
£m
2014
Income
statement
£m
10% increase in commodity prices1––433
10% decrease in commodity prices1––(3) (15)
Volume forecast uplift2––(2) (2)
Volume forecast reduction2––22
Forward curve extrapolation –––1
+10% market area price change ––(4) –
–10% market area price change ––4–
+20 basis point change in Limited Price Inflation (LPI) market curve3(77) (54) ––
–20 basis points change in LPI market curve375 53 ––
1. Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 33.
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.
– supplementary information continued
Notes to the consolidated financial statements
148