National Grid delivers fair value snub

Steve Lucas, FD of National Grid

Unwanted burden: Steve Lucas

The energy giant stripped out the valuations from its preliminary accounts
last week. Steve Lucas said calculating the effects put an unwanted burden on
the finance function.

‘It’s a lot of work and there is no economic benefit. Whether shareholders
find the information more useful [when fair value is taken into account] I
really don’t know.’

The company took a hit of £16m as fair value bit into the worth of its
derivatives contracts, but disclosed the change as an exceptional item.

National Grid
made a point of flagging up the ‘complex nature of hedge accounting under IAS
39’ in its latest annual report, warning shareholders that some derivatives may
not qualify for hedge accounting under the rules.

The company enters into derivative deals in order to manage its interest rate
and foreign currency exposures. The main derivatives used include interest rate
swaps, currency swaps and commodity contracts.

The fair values move with the strength of the capital markets, which can
generate volatility in its numbers.

The energy giant reported a strong set of preliminary results as operating
profit rose by up 29% to almost £2.6bn. Profit before tax went up by 24% and
earnings per share rose by a quarter, but these numbers were presented
independent of fair value changes.

National Grid said in its results: ‘This presentation is based on continuing
business performance, so it excludes exceptional items and remeasurements.’

‘[The swings] that arise from changes in mark-to-market values or exchange
rates and are reflected in the income statement to the extent that hedge
accounting is not achieved, or is not fully effective,’ the company said.

The company is also listed in the US where it conducts half of its business
and Lucas said convergence between IFRS and US GAAP could not come quick enough
in terms of reporting demands.

‘At the moment, we’re juggling both requirements and talking in two languages
and it’s not easy being bilingual.’

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