Final Results
National Grid PLC
17 May 2007
17 May 2007
National Grid plc
Results for the year ended 31 March 2007
HIGHLIGHTS
• Good full year performance
• Earnings per share, excluding US stranded cost recoveries, up 9%
• Full year dividend up 10%
• Average return on equity of 12.4% (Note A)
• Delivering on strategy
• UK and US Wireless infrastructure businesses sold in April for £2.7bn
• £1.8bn share buy-back from Wireless sale proceeds announced
• £2.3bn capital investment in 2006/07, over £14bn projected over six
years to March 2012
• Significant progress towards completion of the agreed acquisition
of KeySpan
FINANCIAL RESULTS FOR CONTINUING OPERATIONS
£ million, at actual exchange rate Year ended 31
March
2007 2006 % change
---------------------------------- -------- -------- ---------
Business performance (Note B) (excluding US stranded cost recoveries)
Operating profit 2,031 1,968 3
Pre-tax profit 1,486 1,369 9
Earnings 1,042 998 4
Earnings per share 38.3p 35.2p 9
---------------------------------- -------- -------- ---------
Earnings per share
(including US stranded cost recoveries) 47.7p 45.5p 5
---------------------------------- -------- -------- ---------
Statutory results (including US stranded cost recoveries)
Operating profit 2,513 2,374 6
Pre-tax profit 1,751 1,718 2
Earnings 1,308 1,181 11
Earnings per share 48.1p 41.6p 16
---------------------------------- -------- -------- ---------
Dividend per share 28.7p 26.1p 10
---------------------------------- -------- -------- ---------
Steve Holliday, Chief Executive, said:
'This is another set of good results and we are delivering on all fronts of our
strategy.
'We achieved an excellent sale price for our wireless businesses, enabling us to
return a further £1.8bn to shareholders. Our investment programme now totals
over £14bn, including two new projects which will help safeguard UK energy
supplies. We have reported new metrics that deliver on our commitment to improve
transparency on our returns. We are making significant progress towards the full
integration of our businesses and looking forward, we are ready for the
completion of the KeySpan deal.'
OUR STRATEGY
Our aim is to drive shareholder value with a simple and highly focused strategy,
centred on the ownership and operation of large scale asset intensive
businesses. We will:
• Focus on the electricity and gas sector
• Focus on our priority markets in the UK and US.
We will drive performance and value by fully integrating our operations,
deploying best practice and common processes across the organisation, and
maintaining our financial discipline. We will continue to focus on the provision
of a safe, reliable, efficient and responsible service to our customers.
Financing of our businesses will be consistent with maintaining an efficient
balance sheet. We will not hold surplus cash, either through assets or an
under-geared balance sheet, but will return this to shareholders.
OUR DELIVERY
We have made significant progress in implementing our strategy in the past year.
We have delivered a good financial performance, growing earnings per share and
the dividend, with an average return on equity of 12.4% over three years.
During the year we made significant progress towards the acquisition of KeySpan.
With five clearances or approvals achieved in 2006, we are pleased to have made
progress on two more key milestones in 2007. We announced in March that we had
reached agreement in principle with the Long Island Power Authority (LIPA) on
the renewal of contracts for the provision of electricity transmission and
distribution system management and operation services on Long Island. In April
we announced that we had reached agreement in principle with the New Hampshire
Public Utilities Commission staff and other parties on the transaction.
Commission hearings on the formal filing are scheduled for the end of this
month. Subject to that outcome, the remaining approval required for this
transaction is from the New York Public Service Commission (NYPSC). This process
is taking longer than we had originally expected. In March, we entered into
settlement discussions with the NYPSC staff. These have now concluded and we are
now working to an extended procedural schedule. We expect to complete the
transaction in the autumn.
In August, we completed our $575m acquisition of the Rhode Island assets of New
England Gas. This has added around 245,000 natural gas customers to our business
and made a positive contribution to earnings this year.
We sharpened our focus on our priority markets in April, with the sale of our UK
Wireless business for £2.5bn to Macquarie UK Broadcast Ventures Limited.
Following our announcement in November of our intent to demerge our Wireless
business, various parties approached us seeking to purchase that business. The
Board concluded, following a competitive process, that a sale represented the
most attractive and certain outcome for our shareholders. We have also agreed
the sale of our US Wireless business for $290m (around £150m) in cash to WGN
Acquisition LLC, a company jointly owned by M/C Venture Partners and Wachovia
Capital Partners.
The process of restructuring our activities into global lines of business for
Transmission, Gas Distribution, Electricity Distribution, and Non-Regulated
Businesses is now complete. We are today reporting on these business lines. The
Board is conducting a thorough selection process for an Executive Director for
Electricity Distribution, which is expected to conclude during the summer. In
addition, our Shared Service, Global IS and Global Finance organisations are now
substantially in place and are providing a common framework in support of our
asset based operations.
In each of our lines of business we are rolling out plans to integrate our
operations fully. A variety of change programmes in each line of business
provide a disciplined framework for deploying common systems and processes and
best practices across our geographies. These plans will benefit customers and
shareholders through improvements in customer service, reliability, safety,
environmental and financial performance. This framework provides an excellent
platform for the swift integration of KeySpan into our new lines of business and
we are well positioned to 'hit the ground running' at completion for delivery of
the $200m identified annual synergy savings.
LOOKING AHEAD
We aim to build on the success of the past year and make further progress in
delivering on our strategic objectives.
In November we announced our intention to sell Basslink, our electricity
interconnector in Australia, and have now started a competitive sale process
which we expect to complete in late summer 2007.
The announced return of £1.8bn following the sale of our UK Wireless business,
together with the planned return of the remaining US stranded asset cash flows
(estimated at $1.7bn over five years), demonstrates our commitment to continued
balance sheet optimisation. Following completion of the acquisition of KeySpan,
the sale of our Wireless businesses and the associated return of capital, and
the sale of Basslink, National Grid expects to have increased gearing with net
debt of around £18bn.
Investment in our existing businesses will remain a key focus. This year we
invested £2.3bn and in the six years to March 2012 we expect our investment in
electricity and gas infrastructure to total over £14bn. This investment will be
financed from internal cashflow and borrowings.
In the UK electricity and gas markets, our investment is driven by changes in
sources of gas supply, the development of the UK Government's energy policy and
the need for asset replacement. In Transmission, our UK investment for the five
years to 2012 has been agreed with Ofgem and will be remunerated under the
regulatory price control that came into effect on 1 April 2007. In Gas
Distribution we are currently in discussion with Ofgem on the regulatory price
control for the five years to March 2013, and one of the key topics will be our
gas distribution investment requirements. Ofgem is expected to publish final
proposals in December 2007. By March 2012 our investment in the UK is expected
to total around £11.7bn, including £1.8bn in non-regulated projects, and we
project that the value of our UK regulatory asset base will have grown by over
35%.
In the US electricity and gas markets, investment is being driven by demand
growth, customer additions, reliability, and the need for asset replacement. Our
investment reached a record annual level in 2006/07, and by March 2012 our
investment in our existing US operations is expected to total around £2.7bn. Our
New England electricity distribution and New York rate plans assume a base level
of investment, and while investment above this has the effect of suppressing our
returns in the short term, it is necessary to deliver the levels of reliability
and customer service required. We believe that this incremental investment will
be recognised in our rate base in future rate plan filings.
Today we are reporting a series of financial return metrics that give greater
transparency on National Grid's overall performance, and our performance against
our regulatory contracts. These are the metrics by which we will judge the
performance of our various businesses and we will report against them on an
annual basis. A description of how these returns are calculated can be found in
the Return Definitions section.
NATIONAL GRID AND CLIMATE CHANGE
Energy and climate change policy are high on the world agenda. In our view,
climate change represents both a challenge and opportunity for National Grid,
and society in general. We believe that utilities can help customers reduce
energy demand, while providing a reliable supply, and we see opportunities to
expand our business in ways that benefit the environment, our customers, and our
shareholders. Our approach is simple. We will:
• Adopt a low carbon business model
• Support the development of low carbon energy markets
• Advocate the benefits of a low carbon economy.
We have achieved a 35% reduction in our CO2 emissions (from our verified
baseline), having already met the Kyoto Agreement 2012 targets for the UK and
US. We are planning to use renewable sources of energy for all our own-use
electricity needs by 2010, and well before 2050 we aim to have reduced
greenhouse gas emissions from our processes, operations and offices by 60%.
We will work with regulators, policy makers and governments to reshape
regulatory frameworks in the electricity and gas markets in which we operate.
Our role at the centre of these markets allows us to support change that will
benefit our customers, our shareholders and the environment. In our operational
system statements in the UK and US we plan to include information on the
implications future energy demand will have for meeting climate change targets,
so that our customers and market participants are better able to respond to
these drivers, and we will seek to align our incentives and revenues with
actions that promote both energy efficiency and security of supply.
National Grid has for many years been rated as a leader in the field of
sustainable development and corporate responsibility. Dow Jones currently rates
National Grid as the most sustainable and responsible multi-utility in the
world. For the past four years, we have been the top utility in the UK Business
in the Community Corporate Responsibility Index and are rated as 'Platinum' and
a Top 10 Global Leader. In the US, the Department of Energy's National Renewable
Energy Laboratory has named our renewable energy programme in its Top 10 ranking
of utility green power programmes.
DIVIDEND AND SHARE BUY-BACK
The Board is recommending a final dividend of 17.8p per ordinary share ($1.7638
per American Depository share (ADS)), bringing the full-year dividend to 28.7p
per ordinary share ($2.7917 per American Depository share (ADS)). This is a 10%
increase on the prior year dividend, in sterling. The final dividend is to be
paid on 22 August 2007 to shareholders on the register as at 8 June 2007.
Under our US rate plans, cash flows from stranded assets in our Electricity
Distribution business are scheduled to end in 2011 and do not form part of our
core on-going business. We therefore exclude them from our dividend policy, and
in November we announced a share buy-back programme to return cash flows from
our US stranded assets. During the year we repurchased and cancelled 22m shares
at a cost of £169m. The balance of stranded asset cash flows through to 2011 is
estimated at around $1.7bn and of this, we expect to receive and return around
$300m through share buy-backs during 2007/08.
Our dividend for the year is covered 1.3 times by earnings per share from
continuing operations, excluding earnings from our US stranded assets.
During 2007/08 and the first part of 2008/09 our share buy-back programme will
be extended to return a further £1.8bn of proceeds from the sale of our Wireless
businesses.
We maintain our aim to increase dividends per ordinary share expressed in
sterling by 7% in each financial year through to 31 March 2008. We will be
announcing an update to our longer term policy later in the current financial
year.
FINANCIAL RESULTS PRESENTATION
Unless otherwise stated, all financial commentaries are given on a business
performance basis, at actual exchange rates. Business performance represents the
results for continuing operations before exceptional items and mark-to-market
remeasurements of commodity contracts and financial instruments that are held
for economic hedging purposes but did not achieve hedge accounting. Commentary
provided in respect of results after exceptional items and certain
mark-to-market remeasurements is described as 'statutory'.
REVIEW OF FINANCIAL RESULTS FOR CONTINUING OPERATIONS
Operating profit, excluding US stranded cost recoveries, was £2,031m, up 3% on
the prior year (up 5% on a constant currency basis (Note C)). This was primarily
driven by good results in our Transmission and Electricity Distribution
businesses, which more than offset lower operating profit in Gas Distribution.
Net finance costs decreased 9% on the prior year to £547m, mainly as a result of
favourable short-term cash investments and an increased pension credit. The
effective interest rate on net debt for the year was 5.6%, and 5.95% excluding
favourable short-term cash investments. Profit before tax, excluding US stranded
cost recoveries, was up 9% to £1,486m from £1,369m. The tax charge on profit,
excluding US stranded cost recoveries, was £442m, £73m higher than the prior
year. The effective tax rate for the year, after US stranded cost recoveries,
increased to 32%.
Earnings, excluding US stranded cost recoveries, were up 4% on the prior year at
£1,042m. On the same basis, earnings per share increased 9% from 35.2p last year
to 38.3p, reflecting the year-on-year impact of share consolidation following
the return of £2bn to shareholders in August 2005, and our share buyback
programme relating to US stranded asset cash flows.
US stranded cost recoveries added 9.4p to earnings per share, with an operating
profit contribution of £423m (£254m after tax). Including this contribution,
earnings per share for the year were 47.7p.
Exceptional items and remeasurements for continuing operations increased
earnings by £12m after tax. These comprised restructuring costs of £22m (£10m
after tax), a commodity remeasurement gain of £62m (£37m after tax), exceptional
finance charges of £45m (£31m after tax) and a net financial instrument
remeasurement loss of £153m (£16m gain after tax, including a £56m tax credit in
respect of prior years). After these items and minority interests, statutory
earnings for continuing operations attributable to shareholders were £1,308m.
Statutory basic earnings per share from continuing operations increased 16% to
48.1p, up from 41.6p in the prior year. Profit from discontinued operations was
£86m, leading to statutory basic earnings per share of 51.3p.
National Grid's operating cash flows from continuing operations, before
exceptional items and taxation, were £88m higher than the prior year at £3,176m.
Organic investment in our continuing businesses increased by 23% to £2.3bn,
primarily due to increased capital expenditure on new gas transmission
infrastructure in the UK.
Our net debt rose to £11.8bn at 31 March 2007 compared with £10.9bn at 31 March
2006, mainly due to the increased level of capital spend, the acquisition of the
Rhode Island assets of New England Gas and the return of £169m through our share
buyback programme.
Our average return on equity was 12.4% over a three year period, and 14.1%
in 2006/07.
REVIEW OF TRANSMISSION OPERATIONS
Summary results Year ended 31
March
(£m) 2007 2006 % change
---------------------------- ----------- ---------- -----------
Revenue and other operating income 3,091 3,020 2
Operating costs (1,644) (1,627) (1)
Depreciation and amortisation (393) (422) 7
Operating profit - actual exchange rate 1,054 971 9
Operating profit - constant currency 1,054 963 9
---------------------------- ----------- ---------- -----------
Operating profit by geographical segment Year ended 31
March
(£m, at constant currency) 2007 2006 % change
---------------------------- ----------- ---------- -----------
UK 946 844 12
US 108 119 (9)
Operating profit 1,054 963 9
---------------------------- ----------- ---------- -----------
Capital investment* Year ended 31
March
(£m, at actual FX) 2007 2006 % change
---------------------------- ----------- ---------- -----------
UK 1,235 849 45
US 108 91 19
Capital investment 1,343 940 43
---------------------------- ----------- ---------- -----------
* Excludes capital expenditure in relation to emissions trading in the UK.
Regulatory asset value and rate base Year ended 31
March
2007 2006 % change
---------------------------- ----------- ---------- -----------
UK - RAV (£m)
Electricity transmission 5,976 5,605 7
Gas transmission 3,337 2,749 21
US - rate base ($m)*
New England Power** 760 790 (4)
---------------------------- ----------- ---------- -----------
Returns Year ended 31
March
2007 2006
---------------------------- ----------- ----------
UK - operational return (real)
Electricity transmission 4.7% 4.5%
Gas transmission*** 7.8 % 6.3%
---------------------------- ----------- ----------
US - regulatory return on equity* (nominal)
New England Power** 12.8% 9.5%
---------------------------- ----------- ----------
* In New York, our electricity and gas, transmission and distribution activities
(including our US stranded cost recoveries) make a combined regulatory filing
each calendar year. The combined New York rate base and returns are reported in
our Electricity Distribution business line.
** Based on New England Power common equity excluding goodwill.
*** For the year ended 31 March 2006 gas transmission and distribution returns
in the UK are reported together as a single blended return.
Transmission delivered a good operational and financial performance in 2006/07.
Our electricity transmission operations in the UK saw the lowest number of loss
of supply incidents in the last five years and with over 99.999% of demand met
for the 16th consecutive year, our reliability performance remains among the
best in the world.
Operating profit increased to £1,054m, up 9%. This was primarily driven by a 9%
increase in electricity transmission allowed revenue in the UK. This followed
the one-year price control extension which came into effect on 1 April 2006 and
added £103m to operating profit. The impact of timing on the recovery of income
led to a year-on-year adverse effect of £64m, due to the combination of a £42m
over-recovery in 2005/06 and an under-recovery of £22m in 2006/07. As expected,
depreciation charges were lower than in the prior year by £27m, mainly as a
result of reduced early asset write-offs. Other items, mainly non-recurring
items, increased operating profit by a net £25m compared to the prior year.
Movement in exchange rates had a £8m year-on-year negative impact on operating
profit.
We measure the financial performance of our UK regulated businesses using an
operational return metric. This metric is comparable with that used by Ofgem to
define the allowed return in our regulated business (the 'vanilla' return),
which is currently 5.05%. In our electricity transmission business in the UK we
achieved a 4.7% operational return in 2006/07. In our gas transmission
business in the UK we achieved a 7.8% operational return in 2006/07.
In the US we measure our financial performance against the allowed regulatory
return on equity, the basis used by our regulators in the US for setting rates.
In New England Power we achieved a 12.8% regulatory return on equity in
2006/07. New York electricity transmission and distribution operate under a
single rate plan together with US stranded cost recoveries. Our New York rate
base and returns are reported in our Electricity Distribution business line.
Capital investment in Transmission increased by 43% during the year to £1,343m,
mainly driven by a more than doubling of investment in new gas transmission
infrastructure in the UK. Projects included:
• £352m on the Milford Haven to Aberdulais gas pipeline
• £290m on electricity asset replacement in the UK
• £232m on electricity demand connections and other load-related
infrastructure in the UK
• £108m in electricity transmission in the US in support of improving
reliability, accomodating load growth, changing demand patterns and meeting
regulatory requirements.
Other smaller projects together accounted for a further £361m of investment.
In December we accepted Ofgem's final proposals for the UK Transmission Owner
Price Controls for the five years from 1 April 2007. This agreement provides for
baseline investment of £4.4bn over the period which will increase our
Transmission UK Regulatory Asset Value (RAV) to over 40% above its 1 April 2006
level. Ofgem also recognised the potential for additional customer driven
load-related capital investment and provided for this through revenue drivers.
These mechanisms provide for the recovery of and return on incremental
investment through revenue adjustments in future periods, providing significant
upside potential above the baseline allowance. This regulatory contract
underpins our transmission revenues in the UK and overall will result in
baseline real revenue increases of:
• 7% in electricity transmission in 2007/08 and annual increases of
2% plus inflation to March 2012
• 17% in gas transmission in 2007/08 and annual inflation increases
to March 2012.
In March we awarded contracts for £2.5bn of this investment with our 14
transmission alliance partner organisations. These partnerships were established
as a direct transfer of best practice from our Gas Distribution business where
our mains replacement alliances have performed very successfully.
In the US, improving our electricity transmission reliability performance is a
significant driver of investment and, together with new customer connections and
additional load-related infrastructure investment, we expect capital expenditure
to total around £1bn in our New England and New York transmission networks by
March 2012. In New England, this investment is added to the rate base on a
monthly basis and under FERC regulations can earn a base return on equity of
10.9%.
As our asset base grows we will see an associated increase in depreciation
charges in the years ahead. Additionally, in the UK, we expect to see a rise in
operating costs, principally driven by higher workload, including 'quasi-capex',
the operating expenditure associated with the increased capital investment
programme. 'Quasi-capex' is explicitly recognised by Ofgem in the new price
control period and it is treated as investment for regulatory purposes and is
added to the regulatory asset base.
Over the last two years conditions in the UK electricity and gas supply markets
have driven unprecedented demand for French interconnector capacity and LNG
storage capacity and resulted in revenues more than double the historic normal
in those businesses. Capacity auction results this year have indicated that
these market conditions no longer prevail and looking ahead, we expect revenues
in those businesses to return closer to historic levels.
REVIEW OF GAS DISTRIBUTION OPERATIONS
Summary results Year ended 31
March
(£m) 2007 2006 % change
---------------------------- ----------- ---------- -----------
Revenue and other operating income 1,837 1,797 2
Operating costs (1,163) (1,087) (7)
Depreciation and amortisation (194) (180) (8)
Operating profit - actual exchange rate 480 530 (9)
Operating profit - constant currency 480 527 (9)
---------------------------- ----------- ---------- -----------
Operating profit by geographical segment Year ended 31
March
(£m, at constant currency) 2007 2006 % change
---------------------------- ----------- ---------- -----------
UK 409 483 (15)
US 71 44 61
Operating profit 480 527 (9)
---------------------------- ----------- ---------- -----------
Capital investment Year ended 31
March
(£m, at actual FX) 2007 2006 % change
---------------------------- ----------- ---------- -----------
UK capex 157 149 5
UK repex 333 295 13
US 36 25 44
Capital investment 526 469 12
---------------------------- ----------- ---------- -----------
Regulatory asset value and rate base* Year ended 31
March
2007 2006 % change
---------------------------- ----------- ---------- -----------
UK - RAV (£m)
Gas distribution 5,596 5,492 2
---------------------------- ----------- ---------- -----------
Returns* Year ended 31
March
2007 2006
---------------------------- ----------- ----------
UK - operational return (real)
Gas distribution** 4.4% 6.3%
---------------------------- ----------- ----------
* National Grid acquired the Rhode Island gas distribution assets of New England
Gas in August 2006. At this time, National Grid has not made any regulatory
filings for Rhode Island gas distribution and therefore returns and rate base
have not been reported this year. In New York, our electricity and gas,
transmission and distribution activities (including our US stranded cost
recoveries) make a combined regulatory filing each calendar year. The combined
New York rate base and returns are reported in our Electricity Distribution
business line.
** For the year ended 31 March 2006 gas transmission and gas distribution
returns in the UK are reported together as a single blended return.
Operating profit from Gas Distribution, at £480m, was down 9%.
Net formula income in the UK was up £4m, with the benefit of an average 9% price
increase in October largely offset by the impact of delivery volumes being
significantly lower than the prior year. The average winter temperature in the
UK was the second warmest since 1914, resulting in delivery volumes lower by
28TWh. This, together with weather adjusted underlying volumes lower by 16TWh,
led to an under-recovery of income of £42m in 2006/07 which, combined with a
£10m under-recovery in 2005/06, resulted in a net year-on-year adverse timing
effect on the recovery of income of £32m.
In August we completed our acquisition of the Rhode Island assets of New England
Gas. This has added around 245,000 natural gas customers to our business and
made a £17m contribution to operating profit.
The expected increase in depreciation charges in the UK further reduced
operating profit by £9m in 2006/07, following increased investment in the UK in
prior years. Pass-through costs, principally business rates, were £23m higher
year-on-year and workload related costs, as expected, were £16m higher, mainly
as a result of additional maintenance, service cut-offs and changes in metering
workload. Other items added a net £12m to operating profit. Movement in exchange
rates had a £3m year-on-year negative impact on operating profit.
During the year our gas distribution alliance partnerships in the UK have
continued to deliver our mains replacement programme, with 1,850km of mains
laid, some 5% higher than the previous year, resulting in total replacement
expenditure (repex) of £333m. We have also continued to invest in network
infrastructure projects in the UK and US, resulting in total capital expenditure
(including repex) of £526m.
We measure the financial performance of our UK regulated businesses using an
operational return metric. This metric is comparable with that used by Ofgem to
define the allowed return in our regulated business (the 'vanilla' return),
which is currently 5.05%. In our gas distribution business in the UK we achieved
a 4.4% operational return in 2006/07.
In December we accepted Ofgem's final proposals for the UK Gas Distribution
One-year Price Control to March 2008, this price control came into effect on 1
April 2007. The price control process reviewed our historic capital expenditure
above the level assumed when the control was set in 2001/02 and allowed 93% of
this additional investment to be added into the regulatory asset base, five
years after it was incurred. In addition, Ofgem made some positive changes to
the determination of our revenue allowance. In 2007/08 shrinkage gas costs,
which have historically impacted operating profit, will be principally treated
as a pass-through item. Also, in 2007/08 our revenue allowance will no longer be
dependent on delivery volumes, and our pricing formula now includes a reduced
delivery volume component - a move that will improve stability in our revenues.
Overall, this price control will result in an 11% increase in allowed revenue in
2007/08.
We are currently in discussion with Ofgem on the regulatory price control for
the five years to March 2013, and one of the key areas of discussion will be our
gas distribution investment requirements. Our submissions project a total
capital investment of around £3.4bn (including repex of around £2.3bn, 50% of
which is treated as operating expenditure for regulatory purposes, but is
capitalised under IFRS). We expect that this investment will raise our Gas
Distribution UK Regulatory Asset Value (RAV) to around 30% above its 1 April
2006 level. Ofgem is expected to publish initial proposals at the end of May
2007 and final proposals in December 2007.
Our Gas Distribution activities in Rhode Island currently operate under a
rolling rate plan.
REVIEW OF ELECTRICITY DISTRIBUTION OPERATIONS
Summary results Year ended 31
March
(£m) 2007 2006 % change
---------------------------- ----------- ---------- -----------
Revenue and other operating income 3,005 3,136 (4)
Operating costs (2,514) (2,693) 7
Depreciation and amortisation (127) (126) (1)
Operating profit - actual exchange rate 364 317 15
Operating profit - constant currency 364 297 23
---------------------------- ----------- ---------- -----------
Stranded cost recoveries - constant 423 457 (7)
currency ----------- ---------- -----------
----------------------------
Capital investment Year ended 31
March
(£m, at actual FX) 2007 2006 % change
---------------------------- ----------- ---------- -----------
Capital investment 218 219 (0)
---------------------------- ----------- ---------- -----------
Rate base Year ended 31
December
($m) 2006 2005 % change
---------------------------- ----------- ---------- -----------
Massachusetts 1,318 1,269 4
New York* 6,296 6,232 1
---------------------------- ----------- ---------- -----------
Regulatory return on equity (nominal) Year ended 31
December
2006 2005
---------------------------- ----------- ----------
Massachusetts 10.5% 12.3%
New York* 9.6% 11.0%
---------------------------- ----------- ----------
* In New York, our electricity and gas, transmission and distribution activities
(including our US stranded cost recoveries) make a combined regulatory filing
each calendar year. The combined New York rate base and returns are reported
here for the rate years ended 31 October.
Operating profit from Electricity Distribution increased by 15% to £364m in 2006
/07. Revenues, excluding pass-through commodity costs, increased by £91m
compared to the prior year, principally driven by the recovery of costs incurred
in previous periods through our New York deferral account. In addition, the
timing of rate adjustments for pass-through items has led to a year-on-year
benefit of £23m, mainly due to an over-recovery of commodity costs in Rhode
Island. Depreciation and amortisation charges were £9m higher than the prior
year. Higher operational expenditure driven by our reliability enhancement
programme, and an increase in bad debts due to higher commodity costs further
impacted operating profit by £19m. In 2006/07 we experienced one of the worst
years for storms in our US operational history, resulting in a £43m impact on
operating profit compared to the prior year. This was principally due to a major
snow storm in the Buffalo area in October and a major ice storm in the Albany
area in January. Our US rate plans have mechanisms under which we can recover
certain major storm costs and we expect to recover the majority of these costs
in future periods. Other items, mainly pensions related, resulted in a net £24m
increase in operating profit. Movement in exchange rates had a £20m year-on-year
negative impact on operating profit.
Our US stranded cost recoveries delivered £423m of operating profit. As
expected, this was lower than the prior year which included the settlement
benefit received from USGen New England Inc. following its bankruptcy filing.
Additionally, movement in exchange rates had a £32m year-on-year negative
impact. US stranded cost recoveries include certain contract settlements that
have no net impact on cashflow, and excluding these, post-tax cashflow was
£157m. This cashflow was returned to shareholders as part of our £169m share
buy-back.
In accordance with our New York rate plan we make biannual filings to recover
amounts recorded in the 'deferral account', and following the last filing in
2005 we received approval to recover $150m during 2007/08, the majority of which
is recovered in our Electricity Distribution line of business. In March the New
York Public Service Commission staff completed their audit of the deferral
account and confirmed a forecast balance of around $500m as at 31 December 2007.
We will make our next deferral account filing later this year, which will update
the forecast balance to 31 December 2009, reflecting the current approved
recoveries and actual deferrals for the period since our 2005 filing.
We measure our US financial performance against the allowed regulatory return on
equity (RoE), the basis used by our regulators in the US for setting rates.
These return measures are calculated on a US GAAP basis and so do not reflect
certain operating profit or cash flows as reported and measured under IFRS, for
instance recoveries from our New York deferral account.
In Massachusetts, the RoE for the calendar year ending 31 December 2006 was
10.5%; this rate plan is currently in the 'indexing' phase, which requires that
its delivery rates remain at 88% of an index of regional peers and as such,
there is no formal allowed RoE. The RoE declined compared to the prior year,
principally driven by increased bad debts combined with increased capital and
operational spending under our reliability enhancement programme. Year-on-year
delivery volumes were lower, due to less favourable weather reducing demand, and
slower regional growth.
In New York, the combined regulatory RoE includes electricity transmission,
electricity distribution, gas distribution and US stranded cost recoveries. For
the rate year ending 31 October 2006 this was 9.6%, lower than the allowed RoE
of 10.6%, principally as a result of an increase in the regulated equity base.
Capital expenditure was in line with the prior year at £218m, with investment
under our reliability enhancement programme up £19m year-on-year at £41m, offset
by completion of our Nantucket cable project which became operational in 2005/
06.
Over the next five years, our reliability enhancement programme will continue to
be a key factor in our Electricity Distribution performance. This programme
forms a significant element of our capital investment plans and also includes
increased maintenance and vegetation management spending. We aim to offset the
operating cost impact of increasing reliability spending through efficiency
improvements driven by our Electricity Distribution Business Review, supported
by our extended labour agreements in New York and New England.
Improving our reliability performance will continue to be a key driver on
capital expenditure, together with new customer connections and additional
load-related infrastructure investment. We expect capital expenditure in our
electricity distribution networks in New England and New York to total around
£1.4bn by March 2012. In both cases, our rate plans assume a base level of
investment and while investment above this has the effect of suppressing our
returns in the short term, it is necessary to deliver the levels of reliability
and customer service required. We believe that this incremental investment will
be recognised in our rate base in future rate plan filings.
REVIEW OF NON-REGULATED AND OTHER ACTIVITIES
Summary results Year ended 31
March
(£m) 2007 2006 % change
---------------------------- ----------- ----------- -----------
Revenue and other operating income 638 775 (18)
Operating costs (348) (465) 25
Depreciation and amortisation (157) (160) 2
Operating profit 133 150 (11)
---------------------------- ----------- ----------- -----------
Operating profit by principal activities Year ended 31
March
(£m) 2007 2006 % change
---------------------------- ----------- ----------- -----------
Metering 103 97 6
Grain LNG 9 6 50
Property 86 88 (2)
Other (65) (41) (59)
Operating profit 133 150 (11)
---------------------------- ----------- ----------- -----------
Capital investment Year ended 31
March
(£m, at actual FX) 2007 2006 % change
---------------------------- ----------- ----------- -----------
Metering 149 112 33
Grain LNG 94 136 (31)
Property 7 54 (87)
Other 8 (23) -
Capital investment 258 279 (8)
---------------------------- ----------- ----------- -----------
Operating profit from our Non-regulated and Other activities was lower than the
prior year at £133m. A good performance in our Metering and Grain LNG businesses
was more than offset by higher corporate costs and loss of income from
connections services.
Metering operating profit was up 6% at £103m. Growth in our competitive metering
business, particularly in the electricity market, continues to more than offset
a decline in regulated metering revenue, with 827,000 new meters installed in
2006/07, an increase of over 40% on the prior year. During the year capital
investment in our metering business increased to £149m, and as competition and
smart metering develop, we see attractive opportunities for investment going
forward.
In June 2005, Ofgem initiated an investigation under the Competition Act into
certain aspects of our domestic gas metering activities. Following this, in May
2006 Ofgem issued a Statement of Objections detailing why it believed our
conduct amounted to a breach under the Act. We presented a full rebuttal in
August 2006 and demonstrated there was no evidence relating to the original
allegations. We also showed that new entrants' share of the market for new and
replacement gas meters had developed at a remarkable rate. In April 2007, Ofgem
issued a further Statement of Objections. We are working to provide a full
response and believe it is in the interests of all that this is brought to a
swift and final conclusion.
Our Grain LNG business recorded its first full year contribution from Phase I
operations. Phase I provides an annual LNG import capacity of around 3 million
tonnes, and delivered an operating profit of £9m in 2006/07. Construction of our
Phase II capacity extension is on track, and is expected to be operational in
late 2008. Phase II adds three new LNG tanks, increasing our annual import
capacity to around 10 million tonnes. Today we are pleased to announce a further
expansion of the site, with investment of around £310m to add a further LNG tank
and a second unloading jetty. This Phase III is expected to complete in 2010 and
will increase the total annual LNG import capacity of the terminal to around 15
million tonnes, representing around 20% of total UK gas demand. These
investments are all underpinned by long-term, take or pay contracts.
Sales of land and property surplus to our operational requirements were in line
with the prior year, delivering an operating profit of £86m.
We are close to finalising negotiations with suppliers for BritNed, a 50/50
joint venture with TenneT, the Dutch electricity transmission owner, to
construct an electricity interconnector between the electricity transmission
systems in the UK and the Netherlands. Subject to receiving the required
exemption from our regulators, we will invest around £200m. BritNed will make a
significant contribution to the UK's security of electricity supply from
commissioning, expected in 2010.
Looking ahead, we will continue to focus on improving operational efficiency in
these businesses, and capital investment in these niche areas within the UK and
US electricity and gas markets will continue to be a key profit driver. In
total, capital investment in our non-regulated activities is expected to reach
around £1.8bn by March 2012.
BOARD CHANGES
In January 2006 we announced that Steve Holliday would take over as Chief
Executive on 1 January 2007, following the retirement of Roger Urwin.
During the year we announced three further Board changes. Mark Fairbairn was
appointed to the Board on 1 January 2007 as Executive Director responsible for
Gas Distribution. Mark was formerly Chief Operating Officer for Gas Distribution
in the UK. Linda Adamany joined the Board as a Non-executive Director on 1
November 2006. Linda is a Group Vice President of BP Refining and Marketing and
has over 25 years experience in the energy sector. Mike Jesanis stepped down
from the Board as Executive Director responsible for US Distribution, and left
the company on 31 December 2006.
Paul Joskow, one of our Non-executive Directors, has today announced his
intention to step down from the Board after the Annual General Meeting in July.
He has been a member of the Board since 2000 and his support and advice have
been greatly valued throughout this time.
RETURN DEFINITIONS
The financial returns we have reported today are designed to give greater
transparency on National Grid's relative performance, and our performance
against regulatory contracts. These are the metrics by which we will judge the
performance of our various businesses and we will report against them on an
annual basis.
NATIONAL GRID RETURN ON EQUITY (NOMINAL)
This metric captures the total operational and financial performance of the
company.
Calculation: IFRS adjusted profit after tax divided by the equity base
• IFRS adjusted profit after tax excludes US stranded cost recoveries, and is
adjusted for regulatory depreciation; capitalisation adjustment, mainly for
mains replacement (repex) in Gas Distribution in the UK; pensions; and
indexation on UK regulated asset value.
• Equity base is equal to total UK regulatory asset value; plus total
capital invested in our US businesses; plus net assets for our non-regulated and
other businesses; minus net debt as reported under IFRS.
UK OPERATIONAL RETURN (REAL)
(Electricity transmission - UK; Gas transmission - UK; Gas distribution - UK)
This metric is comparable to the 'vanilla return' used by Ofgem.
Calculation: (IFRS adjusted operating profit minus current tax) divided by
regulatory asset value
• IFRS adjusted operating profit is as reported on a Business
performance (Note B) basis, adjusted for regulatory depreciation; capitalisation
of mains replacement (repex) in Gas Distribution in the UK; and pensions.
• Current tax is the tax charge as reported on a regulatory basis.
US REGULATED RETURN ON EQUITY (NOMINAL)
(Electricity transmission - New England; Electricity distribution -
Massachusetts; Electricity transmission & distribution and gas distribution -
New York)
This metric is a US GAAP metric calculated annually (financial year to 31 March
for New England Power; calendar year to 31 December in Massachusetts; 12 month
period to 31 October in New York) and reported to our regulators for our US
distribution rate plans.
Calculation: Regulated net income divided by equity rate base
• Regulated net income is adjusted for earnined savings in New York.
• Equity rate base for our distribution rate plans is as reported to our
regulators. For New England Power the rate base applied is the common equity
excluding goodwill.
Worked examples will also be available at www.nationalgrid.com
CONTACTS
National Grid:
Investors
David Rees +44 (0)20 7004 3170 +44 (0)7901 511322(m)
Richard Smith +44 (0)20 7004 3172 +44 (0)7747 006321(m)
James Waite +44 (0)20 7004 3171 +44 (0)7977 440902(m)
Media
Clive Hawkins +44 (0)20 7004 3147 +44 (0)7836 357173(m)
Brunswick
Paul Scott +44 (0)20 7396 5333 +44 (0)7974 982333(m)
An analyst presentation will be held at The London Stock Exchange, 10
Paternoster Square, London EC4M 7LS at 9:15am (UK time) today.
Live telephone coverage of the analyst presentation - password National Grid
Dial in number +44 (0)20 7081 9429
US dial in number +1 866 43 27 186
Telephone replay of the analyst presentation (available until 31 May 2007)
Dial in number +44 (0)20 8196 1998
US dial in number +1 866 583 1035
Account number 869448
A live web cast of the presentation will also be available at
www.nationalgrid.com
Photographs are available on www.newscast.co.uk
CAUTIONARY STATEMENT
This announcement contains certain statements that are neither reported
financial results nor other historical information. These statements are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements include information with respect to our financial
condition, our results of operations and businesses, strategy, plans and
objectives. Words such as 'anticipates', 'expects', 'intends', 'plans',
'believes', 'seeks', 'estimates', 'may', 'will', 'continue', 'project' and
similar expressions, as well as statements in the future tense, identify
forward-looking statements. These forward-looking statements are not guarantees
of our future performance and are subject to assumptions, risks and
uncertainties that could cause actual future results to differ materially from
those expressed in or implied by such forward-looking statements. Many of these
assumptions, risks and uncertainties relate to factors that are beyond our
ability to control or estimate precisely, such as delays in obtaining, or
adverse conditions contained in, regulatory approvals and contractual consents,
including those required to complete the proposed acquisition of KeySpan when or
as planned, unseasonable weather affecting the demand for electricity and gas,
competition and industry restructuring, changes in economic conditions, currency
fluctuations, changes in interest and tax rates, changes in energy market
prices, changes in historical weather patterns, changes in laws, regulations or
regulatory policies, developments in legal or public policy doctrines, the
impact of changes to accounting standards and technological developments. Other
factors that could cause actual results to differ materially from those
described in this announcement include the ability to integrate the businesses
relating to announced acquisitions with our existing business to realise the
expected synergies from such integration, the availability of new acquisition
opportunities and the timing and success of future acquisition opportunities,
the timing and success or other impact of the sales of our non-core businesses,
the failure for any reason to achieve reductions in costs or to achieve
operational efficiencies, the failure to retain key management, the behaviour of
UK electricity market participants on system balancing, the timing of amendments
in prices to shippers in the UK gas market, the performance of our pension
schemes and the regulatory treatment of pension costs, and any adverse
consequences arising from outages on or otherwise affecting energy networks,
including gas pipelines, which we own or operate. For a more detailed
description of some of these assumptions, risks and uncertainties, together with
any other risk factors, please see our filings with and submissions to the US
Securities and Exchange Commission (the 'SEC') (and in particular the 'Risk
Factors' and 'Operating and Financial Review' sections in our most recent Annual
Report on Form 20-F). Except as may be required by law or regulation, National
Grid undertakes no obligation to update any of its forward-looking statements.
The effects of these factors are difficult to predict. New factors emerge from
time to time and we cannot assess the potential impact of any such factor on our
activities or the extent to which any factor, or combination of factors, may
cause results to differ materially from those contained in any forward-looking
statement.
2007 2006*
CONSOLIDATED INCOME STATEMENT
for the years ended 31 March
Notes £m £m
=========== ===========
Revenue 2a 8,695 8,868
Other operating income 83 80
Operating costs (6,265) (6,574)
--------------- ---------------
Operating profit
- Before exceptional items and
remeasurements 2b 2,454 2,457
- Exceptional items and
remeasurements 3 59 (83)
Total operating profit 2c 2,513 2,374
Interest income and similar
income 4 1,144 1,036
Interest expense and other finance costs
- Before exceptional items and
remeasurements (1,691) (1,638)
- Exceptional items and
remeasurements 3 (217) (57)
4 (1,908) (1,695)
Share of post-tax results of
joint ventures 2 3
--------------- ---------------
Profit before taxation
- Before exceptional items and
remeasurements 1,909 1,858
- Exceptional items and
remeasurements 3 (158) (140)
Total profit before taxation 1,751 1,718
Taxation
- Before exceptional items and
remeasurements 5 (611) (565)
- Exceptional items and
remeasurements 3 170 30
Total taxation (441) (535)
--------------- ---------------
Profit from continuing operations after
taxation
- Before exceptional items and
remeasurements 1,298 1,293
- Exceptional items and
remeasurements 12 (110)
Profit for the year from
continuing operations 1,310 1,183
Profit for the year from discontinued
operations
- Before exceptional items and
remeasurements 6 104 77
- Exceptional items and
remeasurements 6 (18) 2,590
86 2,667
--------------- ---------------
Profit for the year 1,396 3,850
=========== ===========
Attributable to:
- Equity shareholders of the
parent 1,394 3,848
- Minority interests 2 2
--------------- ---------------
1,396 3,850
=========== ===========
Earnings per share from continuing
operations
- Basic 7a 48.1p 41.6p
- Diluted 7b 47.8p 41.4p
Earnings per share
- Basic 7a 51.3p 135.6p
- Diluted 7b 50.9p 135.0p
=========== ===========
Dividends per ordinary share:
paid during the year 8 26.8p 25.4p
Dividends per ordinary share:
approved or proposed to be paid 28.7p 26.1p
=========== ===========
* Comparatives have been adjusted to reclassify amounts relating to discontinued
operations.
CONSOLIDATED BALANCE SHEET at
31 March 2007 2006
Note £m £m
=========== ===========
Non-current assets
Goodwill 1,480 2,142
Other intangible assets 144 321
Property, plant and equipment 18,895 18,935
Investments in joint ventures 5 12
Deferred tax assets - 159
Other receivables 73 38
Financial and other investments 132 148
Derivative financial assets 380 351
--------------- ---------------
Total non-current assets 21,109 22,106
--------------- ---------------
Current assets
Other intangible assets 2 41
Inventories 106 108
Trade and other receivables 1,236 1,519
Financial and other investments 2,098 384
Derivative financial assets 277 314
Cash and cash equivalents 1,593 1,452
--------------- ---------------
Total current assets 5,312 3,818
--------------- ---------------
Assets of businesses held for
sale 1,968 -
--------------- ---------------
Total assets 28,389 25,924
--------------- ---------------
Current liabilities
Bank overdrafts (6) (3)
Borrowings (1,025) (2,839)
Derivative financial
liabilities (235) (92)
Trade and other payables (1,852) (2,095)
Current tax liabilities (75) (419)
Provisions (167) (235)
--------------- ---------------
Total current liabilities (3,360) (5,683)
--------------- ---------------
Non-current liabilities
Borrowings (14,686) (10,287)
Derivative financial
liabilities (184) (130)
Other non-current liabilities (1,475) (1,719)
Deferred tax liabilities (2,389) (2,161)
Pensions and other
post-retirement benefit
obligations (1,282) (1,915)
Provisions (427) (536)
--------------- ---------------
Total non-current liabilities (20,443) (16,748)
--------------- ---------------
Liabilities of businesses held
for sale (450) -
--------------- ---------------
Total liabilities (24,253) (22,431)
--------------- ---------------
Net assets 4,136 3,493
=========== ===========
Equity
Called up share capital 308 310
Share premium account 1,332 1,316
Retained earnings 7,635 6,817
Other reserves (5,150) (4,961)
--------------- ---------------
Total parent company
shareholders' equity 4,125 3,482
Minority interests 11 11
--------------- ---------------
Total equity 4,136 3,493
=========== ===========
Net debt (net of related
derivative financial
instruments) included above 12 11,788 10,850
--------------- ---------------
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND
EXPENSE
for the years ended 31 March
2007 2006
£m £m
=========== ===========
Exchange adjustments (179) 141
Actuarial net gain 365 181
Net gains/(losses) taken to equity
in respect of cash flow hedges 47 (12)
Transferred to profit or loss on
cash flow hedges (45) (20)
Net (losses)/gains taken to equity
on available-for-sale investments (3) 4
Transferred to profit or loss on
sale of available-for-sale
investments (1) (1)
Tax on items taken directly to or
transferred from equity (81) (43)
--------------- ---------------
Net income recognised directly in
equity 103 250
Profit for the year 1,396 3,850
--------------- ---------------
Total recognised income and
expense for the year 1,499 4,100
=========== ===========
Attributable to:
- Equity shareholders of the parent 1,498 4,097
- Minority interests 1 3
--------------- ---------------
1,499 4,100
=========== ===========
Effect of change in accounting
policy - IAS 39 (i) - (43)
=========== ===========
(i) IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39
'Financial Instruments: Recognition and Measurement' were adopted prospectively
with effect from 1 April 2005, in accordance with the transition provisions of
IFRS1. The impact of IAS 39 attributable to minority interests was £nil.
CONSOLIDATED CASH FLOW STATEMENT 2007 2006*
for the years ended 31 March
£m £m
=========== ===========
Cash flows from operating activities
Total operating profit 2,513 2,374
Adjustments for:
Exceptional items and
remeasurements (59) 83
Depreciation and amortisation 871 888
Share-based payment charge 15 14
Changes in working capital 18 (206)
Changes in provisions (57) (25)
Changes in pensions and other
post-retirement benefit
obligations (125) (40)
Cash flows relating to exceptional
items (86) (115)
--------------- ---------------
Cash flows generated from
continuing operations 3,090 2,973
Cash flows relating to
discontinued operations 181 138
--------------- ---------------
Cash generated from operations 3,271 3,111
Tax paid - continuing operations (310) (103)
Tax paid - discontinued operations (3) (37)
--------------- ---------------
Net cash inflow from operating
activities 2,958 2,971
--------------- ---------------
Cash flows from investing activities
Acquisition of subsidiaries, net
of cash acquired (269) -
Sale of investments in joint
ventures and other investments 19 8
Purchases of intangible assets (33) (15)
Purchases of property, plant and
equipment (2,185) (1,657)
Disposals of property, plant and
equipment 21 18
Net movements in financial
investments (1,725) 25
Dividends received from joint
ventures - 2
--------------- ---------------
Cash flows used in continuing
operations - investing activities (4,172) (1,619)
Cash flows relating to discontinued operations
- disposal proceeds 27 5,750
- other investing activities and
acquisition of subsidiaries, net
of cash acquired (132) (209)
--------------- ---------------
Net cash flow (used in)/ from
investing activities (4,277) 3,922
--------------- ---------------
Cash flows from financing activities
Proceeds from issue of share
capital 16 54
Increase/(decrease) in borrowings
and related derivatives 3,045 (2,304)
Net interest paid (597) (704)
Exceptional finance costs on the
repayment of debt (45) (49)
Dividends paid to shareholders (730) (745)
Cash paid to shareholders under B
share scheme (26) (1,957)
Repurchase of share capital and
purchase of treasury shares (169) (7)
--------------- ---------------
Net cash flow from /(used in)
financing activities 1,494 (5,712)
--------------- ---------------
Net increase in cash and cash
equivalents 175 1,181
Exchange movements (14) 14
Amounts reclassified as assets of
businesses held for sale (23) -
Net cash and cash equivalents at
start of year (i) 1,449 254
--------------- ---------------
Net cash and cash equivalents at
end of year (i) 1,587 1,449
=========== ===========
*Comparatives have been adjusted to reclassify amounts relating to discontinued
operations.
i) Net of bank overdrafts.
NOTES TO THE PRELIMINARY ANNOUNCEMENT
1. Basis of preparation
The financial information contained in this announcement, which does not
constitute statutory accounts as defined in Section 240 of the Companies Act
1985, has been derived from the statutory accounts for the year ended 31 March
2007, which will be filed with the Registrar of Companies in due course.
Statutory accounts for the year ended 31 March 2006 have been filed with the
Registrar of Companies. The auditors' report on both these statutory accounts
was unqualified and did not contain a statement under Section 237(2) or (3) of
the Companies Act 1985.
The financial information included in this announcement has been prepared in
accordance with the accounting policies applicable for the year ended 31 March
2007 as set out in National Grid's Annual Report and Accounts for the year ended
31 March 2007. These accounting policies are consistent with those that applied
in the preparation of our accounts for the year ended 31 March 2006, as amended
for new standards and interpretations adopted during the year ended 31 March
2007.
The new standards and interpretations which have been adopted by National Grid
for the year ended 31 March 2007 were as follows:
• International Financial Reporting Interpretations Committee (IFRIC) 4
- Determining whether an arrangement contains a lease
• IFRIC 5 - Rights to Interests arising from Decommissioning,
Restoration and Environmental Rehabilitation Funds
• IFRIC 6 - Liabilities arising from participating in a specific market
- Waste electrical and electronic equipment
• IFRIC 7 - Applying the restatement approach under IAS 29, Financial
reporting in hyperinflationary economies
• Amendment to IAS 39 - Financial Instruments: Recognition and
Measurement: The Fair Value Option
• Amendment to IAS 39 - Financial Instruments: Recognition and
Measurement, and IFRS 4 Insurance Contracts: Financial Guarantee Contracts
• Amendment to IAS 21 - The Effects of Changes in Foreign Exchange
Rates
The adoption of new accounting standards and interpretations did not have a
material impact on the financial results or position of the Company and its
subsidiary undertakings for the year ended 31 March 2007.
The following interpretations have not been adopted for the year ended 31 March
2007: IFRS 8 - Operating segments, Amendment to IAS 23 - Borrowing costs, IFRIC
8 - Scope of IFRS 2, IFRIC 9 - Reassessment of Embedded Derivatives, IFRIC 10 -
Interim financial reporting and impairment, IFRIC 11 - IFRS2 Group and treasury
share transactions, and IFRIC 12 - Service concession arrangements.
During the year ended 31 March 2007 our wireless infrastructure business and our
Basslink Interconnector business in Australia met the criteria to be classified
as assets held for sale and have been presented as discontinued operations. The
comparative results have been adjusted accordingly.
This announcement was approved by the Board of Directors on 16 May 2007.
2. Segmental analysis
Segmental information is presented in accordance with the management
responsibilities and economic characteristics, including consideration of risks
and returns, of business activities. The Company assesses the performance of its
businesses principally on the basis of operating profit before exceptional items
and remeasurements. The primary reporting format is by business and the
secondary reporting format is by geographical area.
The following table describes the main activities for each business segment:
Transmission - UK High-voltage electricity transmission networks, the gas
transmission network in the UK,
the UK liquefied natural gas (LNG) storage activities and the
French electricity interconnector
Transmission - US High-voltage electricity transmission networks in New York and
New England
Gas Distribution Four of the eight regional networks of Great Britain's gas
- UK distribution system
Gas Distribution Gas distribution in New York and New England
- US
Electricity Electricity distribution in New York and New England
Distribution - US
US stranded cost The recovery of stranded costs from US electricity
recoveries distribution customers as permitted by regulatory agreements
---------------- ---------------------------------------
Other activities primarily relate to UK-based gas metering activities; UK
property management; a UK LNG import terminal; engineering consulting and
software; together with corporate activities, including business development.
Discontinued operations comprise broadcast and mobile telephone infrastructure
solutions in the UK and the US and an electricity interconnector in Australia.
The wireless infrastructure operations in the UK were sold on 3 April 2007.
Our segments have changed from that previously reported as a consequence of
changes in organisational and management structure; the classification of
wireless infrastructure (previously a segment) and our Australian interconnector
business as discontinued; and the acquisition from Southern Union Company of its
gas distribution network in Rhode Island on 24 August 2006. In particular, our
US electricity distribution and US gas distribution operations are now reported
as separate segments. The segment results for the year ended 31 March 2006 have
been re-presented to reflect these changes.
Discontinued operations also include the operations of the four UK gas
distribution networks that were sold on 1 June 2005. The results for
discontinued operations are disclosed in note 6.
Sales between businesses are priced having regard to the regulatory and legal
requirements to which the businesses are subject.
a) Revenue
Years ended 31 March 2007 2006
£m £m
=========== ===========
Business segments - continuing operations
Transmission - UK 2,816 2,710
Transmission - US 270 310
Gas Distribution - UK 1,193 1,222
Gas Distribution - US 638 571
Electricity Distribution - US 3,004 3,134
US stranded cost recoveries 426 517
Other activities 567 701
Sales between businesses (219) (297)
--------------- ---------------
Revenue 8,695 8,868
=========== ===========
Total excluding US stranded cost
recoveries 8,269 8,351
US stranded cost recoveries 426 517
--------------- ---------------
8,695 8,868
=========== ===========
Geographical segments
UK 4,397 4,374
US 4,298 4,494
--------------- ---------------
Revenue 8,695 8,868
=========== ===========
b) Operating profit - before exceptional items and remeasurements
Years ended 31 March 2007 2006
£m £m
=========== ===========
Business segments - continuing operations
Transmission - UK 946 844
Transmission - US 108 127
Gas Distribution - UK 409 483
Gas Distribution - US 71 47
Electricity Distribution - US 364 317
US stranded cost recoveries 423 489
Other activities 133 150
--------------- ---------------
Operating profit before
exceptional items and
remeasurements 2,454 2,457
=========== ===========
Total excluding US stranded cost
recoveries 2,031 1,968
US stranded cost recoveries 423 489
--------------- ---------------
2,454 2,457
=========== ===========
Geographical segments
UK 1,491 1,478
US 963 979
--------------- ---------------
Operating profit before
exceptional items and
remeasurements 2,454 2,457
=========== ===========
c) Operating profit - after exceptional items and remeasurements
Years ended 31 March 2007 2006
£m £m
=========== ===========
Business segments - continuing operations
Transmission - UK 936 843
Transmission - US 107 127
Gas Distribution - UK 412 432
Gas Distribution - US 67 47
Electricity Distribution - US 355 317
US stranded cost recoveries 504 440
Other activities 132 168
--------------- ---------------
Operating profit after exceptional
items and remeasurements 2,513 2,374
=========== ===========
Total excluding US stranded cost
recoveries 2,009 1,934
US stranded cost recoveries 504 440
--------------- ---------------
2,513 2,374
=========== ===========
Geographical segments
UK 1,482 1,423
US 1,031 930
Rest of the World - 21
--------------- ---------------
Operating profit after exceptional
items and remeasurements 2,513 2,374
=========== ===========
3. Exceptional items and remeasurements
Exceptional items and remeasurements are items of income and expenditure that,
in the judgment of management, should be disclosed separately on the basis that
they are material, either by their nature or their size, to an understanding of
our financial performance and significantly distort the comparability of
financial performance between periods. Items of income or expense that are
considered by management for designation as exceptional items include such items
as significant restructurings, write-downs or impairments of non-current assets,
material changes in environmental or decommissioning provisions, integration of
acquired businesses and gains or losses on disposals of businesses or
investments. Remeasurements comprise gains or losses recorded in the income
statement arising from changes in the fair value of commodity contracts and of
derivative financial instruments to the extent that hedge accounting is not
achieved or is not effective.
Years ended 31 March 2007 2006
£m £m
============ ============
Exceptional items -
restructuring costs (i) 22 55
Exceptional items - profit on
sale and reversal of
impairment (ii) - (21)
Remeasurements - commodity
contracts (iii) (81) 49
Total exceptional items and
remeasurements included within
operating profit (59) 83
Exceptional finance costs (iv) 45 49
Remeasurements - commodity
contracts (iii) 19 14
Remeasurements - net
losses/(gains) on derivative
financial instruments (v) 153 (6)
Total exceptional items and
remeasurements included within
finance costs 217 57
--------------- ---------------
Total exceptional items and
remeasurements before taxation 158 140
============ ============
Tax on restructuring costs (i) (12) (7)
Tax on commodity contract
remeasurements (iii) 25 (25)
Tax on exceptional finance
costs (iv) (14) (15)
Tax on derivative financial
instrument remeasurements (v) (169) 17
--------------- ---------------
Tax on exceptional items and
remeasurements (170) (30)
============ ============
Total exceptional items and
remeasurements (12) 110
============ ============
Total exceptional items after
taxation 41 61
Total commodity contract
remeasurements after taxation (37) 38
Total derivative financial
instrument remeasurements
after taxation (16) 11
--------------- ---------------
Total exceptional items and
remeasurements after taxation (12) 110
============ ============
i) Restructuring costs relate to planned cost reduction programmes in the
UK and US (2006: UK only) businesses. For the year ended 31 March 2007,
restructuring costs included pension related costs of £10m arising as a result
of redundancies (2006: £25m).
ii) Reversal of a prior year impairment of £13m related to National Grid's
investment in Copperbelt Energy Corporation (CEC) and a gain on disposal of an
investment in Energis Polska of £8m.
iii) Remeasurements - commodity contracts represent mark-to-market movements
on certain commodity contract obligations, primarily indexed-linked swap
contracts, in the US. Under the existing rate plans in the US, commodity costs
are fully recovered from customers, although the pattern of recovery may differ
from the pattern of costs incurred. These movements are comprised of those
impacting operating profit which are based on the change in the commodity
contract liability and those impacting finance costs as a result of changing
discount rates due to market fluctuations.
iv) Exceptional finance costs for the year ended 31 March 2007 represent debt
redemption costs related to the restructuring of our debt portfolio. For 2006
these related to costs incurred on the early redemption of debt following the
disposal of four gas distribution networks (£39m), together with issue costs
associated with the B share scheme (£10m).
v) Remeasurements - net losses/(gains) on derivative financial instruments
comprise losses and gains arising on derivative financial instruments reported
in the income statement. These exclude gains and losses for which hedge
accounting has been effective, which have been recognised directly in equity or
offset by adjustments to the carrying value of debt. These remeasurements
include a loss of £126m (2006: £nil) relating to pre-tax losses on investment
related derivative financial instruments that offset on a post-tax basis. The
tax credit includes a £56m adjustment in respect of prior years (2006: £nil).
4. Finance income and costs
Years ended 31 March 2007 2006
£m £m
=========== ===========
Pensions - expected return on
scheme assets 926 901
Interest income on financial
instruments 218 135
--------------- ---------------
Interest income and similar income 1,144 1,036
=========== ===========
Pensions - interest on scheme
liabilities (869) (889)
Interest expense on financial
liabilities (and related
derivatives) (871) (791)
Exceptional debt redemption and B
share issue costs (45) (49)
Unwinding of discounts on
provisions (21) (18)
Less: interest capitalised 70 60
--------------- ---------------
Interest expense (1,736) (1,687)
Net losses on derivative financial
instruments and commodity
contracts (172) (8)
--------------- ---------------
Interest expense and other finance
costs (1,908) (1,695)
=========== ===========
Net finance costs (764) (659)
=========== ===========
Comprising:
Net finance costs excluding
exceptional finance costs and
remeasurements (547) (602)
Exceptional items and
remeasurements (note 3) (217) (57)
--------------- ---------------
(764) (659)
=========== ===========
5. Taxation
Years ended 31 March 2007 2006
£m £m
=========== ===========
United Kingdom
Corporation tax at 30% 66 269
Adjustment in respect of prior
years (i) (28) (8)
Deferred tax (ii) 177 -
--------------- ---------------
215 261
=========== ===========
Overseas
Corporate tax 109 122
Adjustment in respect of prior
years (149) 23
Deferred tax (ii) 266 129
--------------- ---------------
226 274
=========== ===========
Taxation 441 535
=========== ===========
Comprising:
Taxation excluding exceptional
items and remeasurements 611 565
Taxation exceptional items and
remeasurements (note 3) (170) (30)
--------------- ---------------
441 535
=========== ===========
i) The UK corporation tax adjustment in respect of prior years includes £51m
(2006: £nil) that relates to exceptional items and remeasurements.
ii) Included within the deferred tax charge is an amount relating to prior years
of £73m (2006: £35m tax credit) before exceptional items and remeasurements and
£68m (2006: £35m tax credit) after exceptional items and remeasurements
respectively.
6. Discontinued operations
During the year, our wireless infrastructure operations in the UK and US and
Australian interconnector were reclassified as businesses held for sale in the
expectation that they will be disposed of during the year ending 31 March 2008.
The wireless infrastructure business in the UK was sold on 3 April 2007. During
the year ended 31 March 2006, holdings in four of the eight UK gas distribution
networks were disposed of.
Results of discontinued operations
Years ended 31 March 2007 2006
£m £m
=========== ===========
Revenue 383 493
Operating costs (321) (382)
--------------- ---------------
Operating profit before exceptional items 117 131
Exceptional items (i) (55) (20)
Total operating profit from
discontinued operations 62 111
Net finance costs before
remeasurement finance income (2) (4)
Remeasurement finance income (ii) 37 -
--------------- ---------------
Profit before tax from
discontinued operations 97 107
Taxation (11) (45)
--------------- ---------------
Profit after tax from discontinued
operations 86 62
--------------- ---------------
Gain on disposal of gas
distribution networks - 2,636
Taxation - (31)
--------------- ---------------
Gain on disposal of discontinued
operations - 2,605
--------------- ---------------
Total profit for the year from discontinued
operations
- Before exceptional items and
remeasurements 104 77
- Exceptional items and
remeasurements (18) 2,590
86 2,667
=========== ===========
i) The operating exceptional item for the year ended 31 March 2007 related
to an impairment of goodwill within US wireless infrastructure operations.
Operating exceptional items for the year ended 31 March 2006 related to a fine
(£15m) incurred in respect of a breach of health and safety laws in 1999 and to
restructuring costs (£5m).
ii) Remeasurement finance income for the year ended 31 March 2007 comprised
£24m relating to the recognition of gains on the termination of a hedging
arrangement and to £13m of subsequent mark-to-market gains.
7. Earnings per share
a) Basic earnings per share
Years ended 31
March 2007 2007 2006 2006
Earnings Earnings per Earnings Earnings
share £m per share
£m pence pence
========== ========== ========== ==========
Adjusted
earnings -
continuing
operations 1,296 47.7 1,291 45.5
Exceptional
items after
taxation (41) (1.5) (61) (2.2)
Commodity
contract
remeasurements
after taxation 37 1.3 (38) (1.3)
Derivative
financial
instrument
remeasurements
after taxation 16 0.6 (11) (0.4)
--------------- --------------- --------------- ---------------
Earnings -
continuing
operations 1,308 48.1 1,181 41.6
========== ========== ========== ==========
Adjusted
earnings -
discontinued
operations 104 3.8 77 2.7
Gain on
disposal of
gas
distribution
networks after
taxation - - 2,605 91.8
Other
exceptional
items after
taxation (18) (0.6) (15) (0.5)
--------------- --------------- --------------- ---------------
Earnings -
discontinued
operations 86 3.2 2,667 94.0
========== ========== ========== ==========
Basic earnings 1,394 51.3 3,848 135.6
========== ========== ========== ==========
millions millions
========== ==========
Weighted
average number
of shares -
basic 2,719 2,837
========== ==========
b) Diluted earnings per share
Years ended 31
March 2007 2007 2006 2006
Earnings Earnings per Earnings Earnings
share £m per share
£m pence pence
========== ========== ========== =========
Adjusted
diluted
earnings -
continuing
operations 1,296 47.4 1,291 45.3
Exceptional
items after
taxation (41) (1.5) (61) (2.2)
Commodity
contract
remeasurements
after taxation 37 1.3 (38) (1.3)
Derivative
financial
instrument
remeasurements
after taxation 16 0.6 (11) (0.4)
--------------- --------------- --------------- ---------------
Diluted
earnings -
continuing
operations 1,308 47.8 1,181 41.4
========== ========== ========== ==========
Adjusted
diluted
earnings -
discontinued
operations 104 3.8 77 2.7
Gain on
disposal of
gas
distribution
networks after
taxation - - 2,605 91.4
Other
exceptional
items after
taxation (18) (0.7) (15) (0.5)
--------------- --------------- --------------- ---------------
Diluted
earnings -
discontinued
operations 86 3.1 2,667 93.6
========== ========== ========== ==========
Diluted
earnings 1,394 50.9 3,848 135.0
========== ========== ========== ==========
millions millions
========== ==========
Weighted
average number
of shares -
diluted 2,737 2,851
========== =========
8. Dividends
The following table shows the dividends paid to equity shareholders:
Years ended 31
March 2007 2007 2006 2006
pence £m pence £m
(per ordinary (per ordinary
share) share)
=========== =========== =========== ===========
Ordinary
dividends
Interim
dividend for
the year ended
31 March 2007 10.9 297 - -
Final dividend
for the year
ended 31 March
2006 15.9 433 - -
Interim
dividend for
the year ended
31 March 2006 - - 10.2 276
Final dividend
for the year
ended 31 March
2005 - - 15.2 469
--------------- --------------- --------------- ---------------
26.8 730 25.4 745
=========== =========== =========== ===========
In addition, the Directors are proposing a final dividend for 2007 of 17.8p per
share that will absorb £481m of shareholders' equity. It will be paid on 22
August 2007 to shareholders who are on the register of members on 8 June 2007.
9. Acquisitions
On 24 August 2006, the acquisition from Southern Union Company of its Rhode
Island gas distribution network was completed for total consideration of £269m,
including acquisition costs of £3m. The goodwill arising on the acquisition was
£144m. Goodwill principally relates to synergies, cost improvements, market and
regulatory position, the assembled workforce and the potential for future
growth.
The acquired operations form part of the Gas Distribution business and are
presented within the Gas Distribution - US segment.
Fair value
£m
===========
Intangible assets 9
Property, plant and equipment 142
Inventories 19
Trade and other receivables 39
Deferred tax assets 11
Current liabilities (20)
Borrowings (48)
Pensions and other post-retirement benefit obligations (19)
Provisions (8)
---------------
Net assets acquired 125
Goodwill arising on acquisition 144
---------------
Total consideration 269
===========
In the consolidated income statement for the year ended 31 March 2007 the
operating profit of the Rhode Island gas distribution network was £17m
representing the post-acquisition results for the acquired business. If the
Rhode Island gas distribution network had been acquired on 1 April 2006, the
results would not have been materially different. The fair values at acquisition
have been updated from the provisional fair values reported in our half year
results announcement.
Other acquisitions that were carried out during the year ended 31 March 2007
were those of telecommunications tower operations in the US. The book value and
fair value of assets acquired was £72m compared with total cash consideration of
£85m, giving rise to goodwill of £13m. Following the decision by management to
exit our wireless infrastructure operations these acquisitions have been
reported within discontinued operations and are presented in the balance sheet
as businesses held for sale.
10. Reconciliation of movements in total equity
Years ended 31 March 2007 2006
£m £m
========== ==========
Opening total equity 3,493 2,078
Changes in total equity for the year
Net income recognised directly in
equity 103 250
Profit for the year 1,396 3,850
Equity dividends (730) (745)
Return of capital to shareholders
through B share scheme - (2,009)
Issue of ordinary share capital 16 28
Repurchase of shares (169) -
Other movements in minority interests (1) (2)
Movement in shares held in employee
share trusts - 19
Share-based payment 15 17
Tax on share-based payment 13 7
--------------- ---------------
Closing total equity 4,136 3,493
========== ==========
11. Reconciliation of net cash flow to movement in net debt
Years ended 31 March 2007 2006
£m £m
=========== ===========
Movement in cash and cash
equivalents 175 1,181
Increase/(decrease) in financial
investments 1,725 (25)
(Increase)/decrease in borrowings
and related derivatives (i) (3,045) 2,304
Cash paid to shareholders under B
share scheme 26 1,957
Net interest paid 597 704
--------------- ---------------
Change in net debt resulting from
cash flows (522) 6,121
Changes in fair value of financial
assets and liabilities and
exchange movements 331 (299)
Issue of B shares - (2,009)
Net interest charge (655) (660)
Acquisition of subsidiary
undertaking (48) -
Amounts reclassified to businesses
held for sale (42) -
Other non-cash movements (2) (17)
--------------- ---------------
Movement in net debt (net of
related derivative financial
instruments) in the year (938) 3,136
Net debt at start of year (10,850) (13,986)
--------------- ---------------
Net debt (net of related
derivative financial instruments)
at end of year (11,788) (10,850)
=========== ===========
i) Increase in borrowings and related derivatives for the year ended 31 March
2007 comprises proceeds from loans received of £5.5bn less payments to repay
loans of £2.3bn and net movement in short-term borrowings of £(0.2)bn.
12. Net debt
At 31 March 2007 2006
£m £m
=========== ===========
Cash and cash equivalents 1,593 1,452
Bank overdrafts (6) (3)
--------------- ---------------
Net cash and cash equivalents 1,587 1,449
Financial investments 2,098 384
Borrowings (15,711) (13,126)
--------------- ---------------
(12,026) (11,293)
Net debt related derivative
financial assets 657 665
Net debt related derivative
financial liabilities (419) (222)
--------------- ---------------
Net debt (net of related
derivative financial instruments) (11,788) (10,850)
=========== ===========
13. Commitments and contingencies
At 31 March 2007 2006
£m £m
=========== ===========
Future capital expenditure contracted for but not
provided 1,554 1,343
Commitments under non-cancellable operating leases 800 831
Obligations to purchase energy under long-term
contracts (i) 3,731 4,675
Guarantees (ii) 229 149
Other commitments and contingencies (iii) 308 185
=========== ===========
i) In addition, power commitments under commodity contracts recorded at fair
value and incorporated in Trade and other payables and other non-current
liabilities were £389m (2006: £778m).
ii) Details of the guarantees entered into by the Company or its subsidiary
undertakings at 31 March 2007 are shown below:
a) a guarantee of £50m of the obligations of a subsidiary undertaking to
make payments in respect of any liabilities under a meter operating contract
that runs until May 2008;
b) an uncapped guarantee, for which the maximum liability is estimated at
£40m, to The Crown Estates in support of the transfer of the interconnector
between France and England to National Grid Interconnectors Limited as part of
the Licence to Assign Lease. This is ongoing;
c) a guarantee in support of the payment obligations of a subsidiary
undertaking in respect of a combined heat and power plant which will increase to
approximately £40m in February 2010. This reduces following commissioning,
expected to be in February 2010, by £2m per annum until it expires in 2027;
d) guarantees of £20m relating to certain property obligations of
subsidiary undertakings. The bulk of these expire by December 2025;
e) guarantees in respect of a former associate amounting to £14m, the bulk
of which relates to its obligations to supply telecommunications services. These
are open-ended;
f) a guarantee of the payment obligations of a subsidiary undertaking in
respect of a power connection agreement amounting to a maximum potential payout
of £14m subject to a cap of £7m per annum. This runs until December 2024;
g) indemnities estimated to be up to a maximum of £14m given to the
trustees of a defined contribution pension scheme. These are open ended;
h) a guarantee of the payment obligations of a subsidiary undertaking in
respect of a nitrogen supply agreement amounting to a maximum potential payout
of £12m subject to a cap of £1m per annum. This runs until November 2019; and
i) other guarantees amounting to £25m arising in the normal course of
business and entered into on normal commercial terms. These guarantees run for
varying lengths of time.
Subsequent to 31 March 2007, we issued letters of support to third parties
currently amounting to approximately £193m in total relating to the Britned
project. In addition, we entered into a guarantee in favour of a third party of
approximately £260m with respect to the construction contract for Phase III of
the Grain LNG import terminal.
iii) Includes commitments largely relating to gas purchasing and property
remediation of £198m (2006: £114m). The value of other commitments and
contingencies relating to businesses held for sale was £62m.
KeySpan
We have agreed to purchase KeySpan Corporation, a US utility company for $7.3bn
(£3.7bn), conditional on regulatory approval.
Amounts receivable under sublease arrangements:
The total of future minimum sublease payments expected to be received under
non-cancellable subleases is £32m (2006:£26m).
Litigation and claims:
National Grid, together with the Environment Agency, sought judicial review to
clarify the legal position with regard to the remediation of a site in Bawtry,
Yorkshire, a former gas site which was not part of the assets that formed part
of the gas privatisation in 1986 and therefore had never been owned by National
Grid. On 17 May 2006, the High Court found in favour of the Environment Agency.
However, the judgement concluded that the matters raised in the proceedings were
of considerable general importance and permission to apply for leave to appeal
directly to the House of Lords was granted.
A hearing before the House of Lords has been set for 21 and 22 May 2007 and a
judgement is expected in the summer of 2007. We remain convinced of our case
that National Grid has no legal liability with respect to the site in Bawtry,
nor for other former UK gas sites which did not form part of the assets we
acquired at the time of privatisation, and believe that our position will be
upheld by the House of Lords. At this stage we are unable to reliably estimate
the impact of an adverse decision.
14. Subsequent event
On 3 April 2007, our wireless infrastructure operations in the UK were disposed
of for cash proceeds of £2.5bn.
In April 2007, we also agreed to the sale of our US wireless infrastructure
operations with completion expected in the summer of 2007 for proceeds of
approximately $290m.
15. Exchange rates
The consolidated results are affected by the exchange rates used to translate
the results of its US operations and US dollar transactions. The US dollar to
sterling exchange rates used were:
31 March 2007 2006
=========== ===========
Closing rate applied at year end 1.97 1.74
Average rate applied for the year 1.91 1.79
=========== ===========
16. Differences between IFRS and US generally accepted accounting principles
('US GAAP')
Summarised financial statements on a US GAAP basis and an explanation of the
differences between IFRS and US GAAP as applied in preparing the consolidated
accounts are set out in the Annual Report and Accounts. Details of the principal
differences between IFRS and US GAAP are shown below.
a) Reconciliation of profit from IFRS to US GAAP
The following is a summary of the material adjustments to net income that would
have been required if US GAAP had been applied instead of IFRS:
Years ended 31 March 2007 2006 (i)
£m £m
============ ============
Profit for the year attributable to equity
shareholders under IFRS 1,394 3,848
------------ ------------
Adjustments to conform with US GAAP
Purchase accounting (124) (127)
US regulatory accounting (474) (269)
Pensions and other post-retirement benefits (94) (56)
Financial instruments 160 (108)
Severance costs and onerous lease costs 2 (63)
Revenue recognition 5 (48)
Discounting of provisions 3 (14)
Sale and leaseback (19) -
Current tax 15 -
Deferred taxation 295 208
Other 15 (1)
Discontinued operations (32) (2,349)
Discontinued operations - deferred tax - 286
------------ ------------
(248) (2,541)
------------ ------------
Net income under US GAAP 1,146 1,307
============ ============
Basic earnings per share - US GAAP 42.2p 48.2p
Diluted earnings per share - US GAAP 41.9p 48.0p
============ ============
(i) Reclassified as a result of businesses qualifying as discontinued operations
in 2006/07.
b) Reconciliation of shareholders' equity from IFRS to US GAAP
The following is a summary of the material adjustments to shareholders' equity
that would have been required if US GAAP had been applied instead of IFRS:
At 31 March 2007 2006
£m £m
=========== ============
Total shareholders' equity under IFRS 4,125 3,482
------------ ------------
Adjustments to conform with US GAAP
Purchase accounting - property, plant and
equipment 2,038 2,162
Purchase accounting - goodwill 2,648 2,689
US regulatory accounting 2,209 2,702
Pensions and other post-retirement benefits - 886
Financial instruments 10 119
Revenue recognition (37) (42)
Intangible assets 26 28
Provisions (142) (154)
Non-reversal of impairments (23) (39)
Sale and leaseback (19) -
Deferred taxation (1,477) (2,090)
Other (28) 4
------------ ------------
5,205 6,265
------------ ------------
Shareholders' equity under US GAAP 9,330 9,747
=========== ============
--------------------------
(Note A) Average return over three years. A description of how this return is
calculated can be found in the Return Definitions section.
(Note B) Business performance results are the primary financial performance
measure used by National Grid, being the results for continuing operations
before exceptional items and remeasurements. Remeasurements are movements in the
carrying value of financial instruments and of commodity contracts that arise
from changes in mark-to-market values or in exchange rates and are reflected in
the income statement to the extent that hedge accounting is not achieved or is
not fully effective. Further details are provided in Note 3. A
reconciliation of Business performance (including US stranded cost recoveries of
£423m, £254m after tax) to Statutory results is provided in the consolidated
income statement.
(Note C) 'Constant currency basis' refers to the reporting of the actual results
against the prior period results which, in respect of any US$ currency
denominated activity, have been translated using the average US$ exchange rate
for the year ended 31 March 2007, which was $1.91 to £1.00. The average rate for
the year ended 31 March 2006 was $1.79 to £1.00.
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