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Financial Statements
5. Exceptional items and remeasurements
Exceptional items and remeasurements are items of income and expenditure that, in the judgement 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.
| 2007 £m |
2006* £m |
2005* £m |
|
|---|---|---|---|
| Exceptional items – restructuring costs (i) | 22 | 55 | 108 |
| Exceptional items – past service pension costs (ii) | – | – | 41 |
| Exceptional items – environmental related provisions (iii) | – | – | 101 |
| Exceptional items – profit on sale and reversal of impairment (iv) | – | (21) | – |
| Remeasurements – commodity contracts (v) | (81) | 49 | 38 |
| Total exceptional items and remeasurements included within operating profit | (59) | 83 | 288 |
| Exceptional finance costs (vi) | 45 | 49 | – |
| Remeasurements – commodity contracts (v) | 19 | 14 | – |
| Remeasurements – net losses/(gains) on derivative financial instruments (vii) | 153 | (6) | – |
| Total exceptional items and remeasurements included within finance costs | 217 | 57 | – |
| Total exceptional items and remeasurements before taxation | 158 | 140 | 288 |
| Tax on restructuring costs (i) | (12) | (7) | (34) |
| Tax on exceptional past service pension costs (ii) | – | – | (17) |
| Tax on environmental related provisions (iii) | – | – | (39) |
| Tax on commodity contract remeasurements (v) | 25 | (25) | (15) |
| Tax on exceptional finance costs (vi) | (14) | (15) | – |
| Tax on derivative financial instrument remeasurements (vii) | 169 | 17 | – |
| Other exceptional tax credits (viii) | – | – | (13) |
| Tax on exceptional items and remeasurements | (170) | (30) | (118) |
| Total exceptional items and remeasurements | (12) | 110 | 170 |
| Total exceptional items after taxation | 41 | 61 | 147 |
| Total commodity contract remeasurements after taxation | (37) | 38 | 23 |
| Total derivative financial instrument remeasurements after taxation | (16) | 11 | - |
| Total exceptional items and remeasurements after taxation | (12) | 110 | 170 |
*Comparatives have been adjusted to reclassify amounts relating to discontinued operations
(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; 2005: £22m).
(ii) Past service pension costs arose from the renegotiation of terms and conditions of service with certain employees in the US.
(iii) During the year ended 31 March 2005, a review of the environmental provisions was undertaken to take into account the impact of changes to UK regulations on waste disposal. This review, together with related revisions to the expected UK expenditure profile, resulted in a charge of £41m in 2005. Following a similar review in the US of environmental provisions, an additional exceptional charge of £60m was made for site restoration, which reflected experience of restoring similar sites.
(iv) 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.
(v) 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.
(vi) 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).
(vii) 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; 2005: £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; 2005: £nil).
(viii) The exceptional tax credit in 2005 includes: a credit of £22m associated with the prior period disposal of Energis, a former associate company; a £3m credit associated with the prior period write-down of investments; and a £12m charge relating to the settlement of the liabilities arising from operating National Grid's Qualifying Employee Share Ownership Trust.