Environmental Liability Estimation

Experts at Gnarus Advisors LLC were retained by National Grid to estimate its legacy environmental liabilities associated with its former manufactured gas plants (MGPs). The scope of this analysis included more than 140 former MGPs located throughout the Northeast, which were acquired by National Grid as a result of its merger with KeySpan.

The estimate of environmental liabilities was to be used for National Grid’s financial reporting. Gnarus experts had previously provided environmental liability estimates for KeySpan for its insurance recovery and financial reporting activities, using probabilistic cost analysis. These analyses evaluated the likelihood of potential remediation outcomes and their costs, including assessment of outcomes that could be considered probably, reasonably possible or even remote from a FASB financial reporting perspective.

One of the key objectives of this update was to transition the prior analyses from U.S. financial reporting standards IFASB) to international financial reporting standards (IFRS), as National Grid is a UK-based company. This transition involved identifying and quantifying differences between the two sets of standards; key differences included the use of expected value for financial reserving, the treatment of remote outcomes and the use of net present value.

Gnarus updated its prior analysis of the 140 sites to produce a comprehensive assessment of the environmental liabilities associated with the former KeySpan MGP sites. This update of environmental liabilities included a risk transfer expected value analysis (for insurance recovery or merger/acquisition transactions), a 75th probable cost analysis (for FASB financial reporting purposes), and fair value expected cost analysis (for IFRS reporting). While this transition from FASB to IFRS standards was at the time somewhat unique to National Grid given its merger with KeySpan, it is anticipated that this transition (and the need to understand the potential reporting implications) will become commonplace in the future as the United States moves toward the adoption of the IFRS.