New reporting standards to lift National Grid profits by a third

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Profits at National Grid Transco, the owner of the UK's gas and electricity transmission networks, will be inflated by more than one-third under new international financial reporting standards which take effect in April.

The company said yesterday that had the new standards been in force last financial year, then its reported pre-tax profits would have been £1.935bn - 39 per cent higher than those it recorded under UK GAAP reporting rules.

National Grid Transco will adopt the new standards when it reports its 2005-06 results. The main effect of the change will be to allow the company to capitalise maintenance spending on its gas network and then depreciate it rather than charge the expenditure to its profit and loss account. The new rules will also change the accounting treatment of its US electricity transmission and distribution businesses.

Together, these two changes would have added £450m to the company's reported profits in 2003-04. Other changes in the way pension benefits and property disposals are accounted for would have added a further £96m to reported profits.

Steve Lucas, National Grid Transco's finance director, stressed that the move to the new international financial reporting standards (IFRS) would not have any effect on the company's operations, cash flows and distributable reserves or on its regulated asset base, which is used by the industry regulator Ofgem to set financial returns for the business.

However, he said it would make it easier to compare the group against other UK and overseas utilities. UK water companies, for instance, already capitalise and then depreciate their maintenance spending. "We regard these changes as positive in that they will enhance comparability with other European companies in our sector, not least in relation to the biggest change which concerns the treatment of replacement expenditure," he added.

Maintenance spending on National Grid Transco's gas network rose from £388m last year to an estimated £450m this financial year and will increase again next year to about £500m. Had IFRS been in operation in 2003-04, then the change in accounting treatment of maintenance spending alone would have added £250m to the company's reported profits.