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We report our financial results and position in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union. A summary of the effects of implementing IFRS and the principal differences from our results for the year ended 31 March 2005 previously reported under UK GAAP is given in Accounting policies – Adoption of IFRS.
The financial results of our business segments (as described in About National Grid – Businesses and segments) and of other activities are presented within continuing operations.
The results of the four gas distribution networks sold on 1 June 2005 are no longer included within the UK gas distribution segment, but are instead presented as discontinued operations.
We separately disclose items of income and expenditure that are material, either by their nature or their size, and are relevant to an understanding of the Group’s financial performance. These include exceptional income or charges that do not relate to the underlying financial performance of the Group and remeasurement gains or losses arising from changes in the value of commodity contracts and of derivative financial instruments, recorded at fair value in the balance sheet.
In considering the financial performance of our businesses and segments, we use ‘business performance’ or ‘adjusted’ profit measures. References to ‘adjusted operating profit’, ‘adjusted profit before taxation’, ‘adjusted earnings’ and ‘adjusted earnings per share’ are stated before exceptional items and mark-to-market remeasurements of financial instruments and commodity contracts.
The Directors believe that the use of these adjusted measures best illustrates the underlying business performance of the Group. Excluding exceptional items and mark-to-market remeasurements of derivative financial instruments and commodity contracts removes their distorting impact in order to provide a clearer comparison from year to year.
Remeasurements arise on commodity contracts (other than normal sale and purchase contracts) and on financial instruments as these are recorded in the balance sheet at their fair values. Remeasurements included in operating profit relate to changes in the fair value of those commodity contracts resulting from movements in electricity and gas prices. Financial remeasurements relate to changes in the fair values of derivative financial instruments and in the fair value of commodity contracts resulting from changes in interest rates.
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005
£m |
|---|---|---|
| Revenue | 9,193 | 7,382 |
| Other operating income | 80 | 70 |
| Operating costs excluding exceptional items and remeasurements | (6,746) | (5,009) |
| Adjusted operating profit | 2,527 | 2,443 |
| Exceptional items | (39) | (263) |
| Remeasurements | (49) | (38) |
| Total operating profit | 2,439 | 2,142 |
The following tables set out the revenue, adjusted operating profit and operating profit of the Group by business segment.
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005 £m |
|---|---|---|
| UK electricity and gas transmission | 2,710 | 1,995 |
| US electricity transmission | 310 | 284 |
| UK gas distribution | 1,222 | 1,113 |
| US electricity and gas distribution | 3,711 | 3,087 |
| US stranded cost recoveries | 511 | 409 |
| Wireless infrastructure | 325 | 208 |
| Other activities | 701 | 734 |
| Total segmental revenues | 9,490 | 7,830 |
| Less: sales between business segments | (297) | (448) |
| Revenue | 9,139 | 7,382 |
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005 £m |
|---|---|---|
| UK electricity and gas transmission | 844 | 859 |
| US electricity transmission | 127 | 126 |
| UK gas distribution | 483 | 424 |
| US electricity and gas distribution | 364 | 375 |
| US stranded cost recoveries | 489 | 465 |
| Wireless infrastructure | 75 | 42 |
| Other activities | 145 | 152 |
| Adjusted operating profit | 2,527 | 2,443 |
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005 £m |
|---|---|---|
| UK electricity and gas transmission | 843 | 857 |
| US electricity transmission | 127 | 119 |
| UK gas distribution | 432 | 333 |
| US electricity and gas distribution | 364 | 258 |
| US stranded cost recoveries | 440 | 427 |
| Wireless infrastructure | 70 | 29 |
| Other activities | 163 | 119 |
| Operating profit | 2,439 | 2,142 |
Details of the financial performance of business segments, including information on exceptional items and remeasurements, are included in the business segment reviews.
The movements in the year in revenue and other operating income, operating costs and operating profit can be summarised as follows:
| Revenue
and other
operating
income
£m |
Operating
costs
£m |
Operating
profit
£m |
|
|---|---|---|---|
| 2004/05 results | 7,452 | (5,310) | 2,142 |
| Add back 2004/05 exceptional items and remeasurements | - | 301 | 301 |
| 2004/05 adjusted results | 7,452 | (5,009) | 2,443 |
| Exchange on US operations | 169 | (125) | 44 |
| 2004/05 constant currency results | 7,621 | (5,134) | 2,487 |
| UK electricity and gas transmission | 715 | (730) | (15) |
| US electricity transmission | 13 | (18) | (5) |
| UK gas distribution | 113 | (54) | 59 |
| US electricity and gas distribution | 488 | (516) | (28) |
| US stranded cost recoveries | 84 | (81) | 3 |
| Wireless infastructure | 114 | (81) | 33 |
| Other activities | (26) | 19 | (7) |
| Sales between businesses | 151 | (151) | - |
| 2005/06 adjusted results | 9,273 | (6,746) | 2,527 |
| 2005/06 exceptional items and remeasurements | - | (88) | (88) |
| 2005/06 results | 9,273 | (6,834) | 2,439 |
The increases in revenue, operating costs and operating profit from 2004/05 to 2005/06 from exchange on US operations reflected the movement in the average US dollar to sterling exchange rate from $1.87:£1 in 2004/05 to $1.79:£1 in 2005/06.
Other operating income relates primarily to gains on the sales of property, which were £10 million higher in 2005/06 than in 2004/05.
The most significant increases in revenue and operating costs arose in UK electricity and gas transmission, including increased revenues and operating costs in respect of operating the Scottish electricity transmission networks following the introduction of the British Electricity Trading and Transmission Arrangements (BETTA), increased pass-through costs in US electricity and gas distribution and US stranded cost recoveries, and a full-year contribution from the Wireless infrastructure business. Revenue and costs also increased in UK gas distribution, with savings in controllable costs resulting in increased operating profit.
Adjusted operating profit increased by £40 million on a constant currency basis. This was driven by favourable results from UK capacity auctions in LNG storage and the French Interconnector, a continued focus on efficiencies, particularly in UK gas distribution, sustained volume growth in the US and a full-year contribution from the enlarged and growing Wireless infrastructure business.
These factors more than offset an increase in depreciation charges in UK electricity and gas transmission, lower system operator incentive profits also in UK electricity and gas transmission and the timing of the recovery of certain pass-through costs in the US.
Net operating exceptional charges of £39 million for 2005/06 consisted of £60 million of restructuring costs, primarily cost reduction programmes in UK gas distribution, and £21 million of gains relating to the disposals of joint venture investments. This compared with £263 million in 2004/05, comprising £121 million in restructuring costs (£82 million in UK gas distribution, £23 million in our US businesses and £16 million in other businesses), £41 million in exceptional pension charges in the US and £101 million of increases in environmental provisions.
Operating remeasurements of £49 million (2004/05: £38 million) relate to changes in the value of commodity contracts in the US carried in the balance sheet at fair value arising from movements in energy prices.
Total operating profit rose by £297 million from 2004/05 to 2005/06, resulting from an increase in adjusted operating profit of £84 million and a decrease in operating exceptional charges and remeasurements of £213 million as compared with 2004/05.
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005 £m |
|---|---|---|
| Adjusted operating profit | 2,527 | 2,443 |
| Net finance costs excluding exceptional items and remeasurements | (606) | (706) |
| Share of post-tax results of joint ventures | 3 | 3 |
| Adjusted profit before taxation | 1,924 | 1,740 |
| Taxation excluding tax on exceptional items and remeasurements | (597) | (437) |
| Adjusted profit from continuing operations | 1,327 | 1,303 |
| Adjusted earnings per share from continuing operations | 46.7p | 42.3p |
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005 £m |
|---|---|---|
| Total operating profit | 2,439 | 2,142 |
| Net finance costs | (663) | (706) |
| Share of post-tax results of joint ventures | 3 | 3 |
| Profit before taxation | 1,779 | 1,439 |
| Taxation | (562) | (319) |
| Profit from continuing operations | 1,217 | 1,120 |
| Earnings per share from continuing operations | 42.8p | 36.3p |
Net interest excluding exceptional finance costs and remeasurements decreased by £100 million from 2004/05 to 2005/06. This was primarily explained by the reduction in our net debt following the sales of the four UK gas distribution networks and a reduction in the interest charge related to pensions. This decrease is partially offset by the impact of a stronger US dollar.
Exceptional finance costs of £49 million in 2005/06 related to £39 million on the early repayment of debt and £10 million relating to the issue of B shares, as part of the return of capital to shareholders. The issue of the B shares was accounted for as debt, and the associated issue costs recorded as an exceptional finance cost.
Financial remeasurements of £8 million relate to net gains on derivative financial instruments and the financial element of commodity contract revaluations.
A net charge of £562 million arose in 2005/06, compared with £319 million in 2004/05. This reflects net tax credits amounting to £35 million and £118 million in respect of exceptional items and remeasurements in 2005/06 and 2004/05 respectively. The effective tax rate was 32% for 2005/06 and 22% for 2004/05.
Excluding the effect of net tax credits on exceptional items and remeasurements, the effective tax rate for 2005/06 and 2004/05 was 31% and 25% respectively, compared with a standard UK corporation tax rate of 30% for both years.
A reconciliation of the main components giving rise to the difference between the relevant effective tax rate and the UK standard corporation tax rate is shown in note 11 to the accounts.
The weighted average exchange rate used to translate all US dollar results into sterling for 2005/06 and 2004/05, being $1.79:£1 and $1.87:£1 for each year respectively. The balance sheets at 31 March 2006 and 31 March 2005 have been translated at $1.74:£1 and $1.89:£1 respectively.
Exchange rate movements impacted the translation of US dollar denominated adjusted operating profit and operating profit for 2005/06 compared with 2004/05. If 2004/05 was translated on a comparable basis, using the 2005/06 average exchange rate of $1.79:£1, adjusted operating profit and operating profit for 2004/05 would have been £44 million and £37 million higher respectively.
The effect of movements in the US dollar exchange rate on adjusted operating profit and operating profit was largely offset by the increased sterling cost of US dollar debt taken out to finance US dollar denominated investments and the reduced sterling cost of US taxes. As a result, adjusted profit for the year and profit for the year from continuing operations for 2004/05 would have been £23 million and £19 million higher respectively if translated at the 2005/06 average exchange rate of $1.79:£1.
Profit for the year from continuing operations increased from £1,120 million in 2004/05 to £1,217 million in 2005/06 as a consequence of the changes in operating profit, net finance costs and taxation.
The following tables reconcile the adjusted profit measure to the corresponding total profit measure in accordance with IFRS.
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005
£m |
|---|---|---|
| Adjusted operating profit | 2,527 | 2,443 |
| Exceptional operating items | (39) | (263) |
| Operating remeasurements | (49) | (38) |
| Total operating profit | 2,439 | 2,142 |
Adjusted operating profit is presented on the face of the income statement under the heading ‘Operating profit – before exceptional items and remeasurements’.
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005
£m |
|---|---|---|
| Adjusted profit before taxation | 1,924 | 1,740 |
| Exceptional operating items | (39) | (263) |
| Operating remeasurements | (49) | (38) |
| Exceptional finance costs | (49) | - |
| Financial remeasurements | (8) | - |
| Total profit before taxation | 1,779 | 1,439 |
Adjusted profit before taxation is presented in note 11 to the accounts under the heading ‘Profit before taxation before exceptional items and remeasurements’.
| Years ended 31 March | ||
| Continuing operations | 2006 £m |
2005
£m |
|---|---|---|
| Adjusted earnings | 1,327 | 1,303 |
| Exceptional operating items | (39) | (263) |
| Operating remeasurements | (49) | (38) |
| Exceptional finance costs | (49) | - |
| Financial remeasurements | (8) | - |
| Tax on exceptional items and remeasurements | 35 | 118 |
| Earnings | 1,217 | 1,120 |
Adjusted earnings is presented on the face of the income statement under the heading ‘Profit from continuing operations after taxation before exceptional items and remeasurements’.
The following table sets out the adjusted basic earnings per share and basic earnings per share from continuing operations for 2005/06 and 2004/05 and reconciles the differences between them.
| Years ended 31 March | ||
| Continuing operations | 2006 pence |
2005 pence |
|---|---|---|
| Adjusted basic earnings per share | 46.7 | 42.3 |
| Exceptional operating items | (1.4) | (8.5) |
| Exceptional finance costs | (1.7) | - |
| Tax on exceptional items | 0.9 | 3.3 |
| Remeasurements | (2.0) | (1.2) |
| Tax on remeasurements | 0.3 | 0.4 |
| Earnings per share | 42.8 | 36.3 |
Adjusted basic earnings per share for 2005/06 increased by 4.4 pence, an increase of 10% compared with 2004/05. This reflected the increase in adjusted profit for the year from continuing operations and the share consolidation in August 2005 following the £2 billion return of value to shareholders.
Earnings per share from continuing operations increased from 36.3 pence in 2004/05 to 42.8 pence in 2005/06, reflecting the increase in adjusted earnings, combined with lower exceptional items and remeasurements, and the impact of the share consolidation.
Diluted earnings per share from continuing operations was 42.6 pence in 2005/06, 0.2 pence lower than basic earnings per share, compared with 36.2 pence per share in 2004/05 (0.1 pence lower). The principal reason for the dilution in 2005/06 and 2004/05 relates to employee share option schemes.