Financial performance
Profit, cash flow and dividends
If we achieve our objectives, we should be able to achieve continued improvements in financial performance, so that we deliver on our commitment to increase our dividend by 8% each year to 2012.
The key performance indicator we use to monitor our financial performance is adjusted earnings per share. Adjusted earnings per share is basic earnings per share before exceptional items, remeasurements and stranded cost recoveries.
We report our financial results and position in accordance with International Financial Reporting Standards (IFRS).
Dividends in respect of the financial year
Our target is to increase dividends by 8% each year until 31 March 2012.
Dividends per share
pence
| Dividends | 2009 pence |
2008 pence |
2007 pence |
2006 pence |
2005 pence |
|---|---|---|---|---|---|
| Interim | 12.64 | 11.70 | 10.90 | 10.20 | 8.50 |
| Final | 23.00 | 21.30 | 17.80 | 15.90 | 15.20 |
| Total | 35.64 | 33.00 | 28.70 | 26.10 | 23.70 |
| Dividends per ADS | $ | $ | $ | $ | $ |
| Interim | 0.95 | 1.21 | 1.03 | 0.88 | 0.79 |
| Final | 1.74 | 2.05 | 1.76 | 1.51 | 1.38 |
| Total | 2.69 | 3.26 | 2.79 | 2.39 | 2.17 |
The total ordinary dividend for 2008/09 (including the final proposed ordinary dividend of 23.00 pence) amounts to £867 million or 35.64 pence per ordinary share. This represents an increase of 8% over the previous year’s ordinary dividend per share of 33.00 pence. The above amounts exclude the return of £597 million, £1,516 million and £169 million to shareholders in 2008/09, 2007/08 and 2006/07 respectively through a share repurchase programme and the return of £2 billion to shareholders in 2005/06 through the B share scheme.
The total ordinary dividend per share was covered 1.4 times by adjusted earnings from continuing operations per ordinary share (2007/08 covered 1.4 times, 2006/07 covered 1.3 times) and covered 1.0 times by earnings per ordinary share from continuing operations (2007/08 covered 1.8 times, 2006/07 covered 1.7 times).
The dividend table shows the ordinary dividends paid or payable by National Grid for the past five financial years. These dividends do not include any associated UK tax credit in respect of such dividends.
Dividends expressed in US dollars per American Depositary Share (ADS) in the table reflect the amounts paid or payable to ADS holders, rounded to two decimal places.
In accordance with IFRS, the final dividend proposed in respect of each financial year is reported in the financial statements for the subsequent year. As a consequence, the final dividend proposed to shareholders for 2008/09 of 23.00 pence per share, amounting to approximately £560 million (assuming all dividends are settled in cash), will be reported in the financial statements for the year ending 31 March 2010. This year we are offering our shareholders the option of a scrip dividend (subject to shareholder approval), whereby they can elect to receive the final dividend in the form of new ordinary shares rather than cash.
Continuing and discontinued operations
The financial results of our businesses and segments and of our other activities, as described under principal operations, are presented within continuing operations.
The results of our Ravenswood generation station, KeySpan Communications and of the KeySpan engineering companies that were sold during or subsequent to the year ended 31 March 2009 are included in discontinued operations.
Our financial results incorporate activities acquired with KeySpan on 24 August 2007.
Our UK and US wireless infrastructure operations and the Basslink electricity interconnector in Australia that we sold during the year ended 31 March 2008 are included within discontinued operations for that year.
Measurement of financial performance and use of adjusted profit measures
In considering the financial performance of our businesses and segments, we analyse each of our primary financial measures of operating profit, profit before tax, profit for the year attributable to equity shareholders and earnings per share into two components. Firstly business performance, which excludes exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles. Secondly exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles. Exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles are excluded from the measures of business performance used by management to monitor financial performance as they are considered to distort the comparability of our reported financial performance from year to year.
Measures of business performance are referred to in this Annual Report and Accounts as adjusted profit measures in order to clearly distinguish them from the comparable total profit measures of which they are a component. Adjusted operating profit, adjusted profit before tax, adjusted earnings and adjusted earnings per share differ from total operating profit, profit before tax, profit for the year attributable to equity shareholders, and earnings per share respectively by the exclusion of exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles.
Exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles are items of income and expense that, in the judgement of management, should be disclosed separately on the basis that they are material, either by virtue of their nature or size, and are relevant to an understanding of our financial performance. 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, significant changes in environmental or decommissioning provisions, the 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 derivative financial instruments. These fair values increase or decrease as a consequence of changes in commodity and financial indices and prices over which we have no control. Stranded cost recoveries comprise income from additional charges that we are allowed to recover from certain of our US customers arising from the divestiture of generation activities in the late 1990s. This income is scheduled largely to cease by the end of calendar year 2011. Amortisation of acquisition-related intangibles arises from intangible assets, principally customer relationships, that are only recognised as a consequence of the accounting required for a business combination. Such amortisation distorts the comparison of the financial performance of acquired businesses compared with non-acquired businesses.
Adjusted profit measures are limited in their usefulness compared with the comparable total profit measures as they exclude important elements of our underlying financial performance, namely, exceptional items, remeasurements, stranded cost recoveries, and the amortisation of acquisition-related intangibles. We believe that in separately presenting our financial performance in two components it is easier to read and interpret financial performance between periods. Adjusted profit measures are more comparable by excluding the distorting effect of exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles. Exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles are more clearly understood if separately identified and analysed. The presentation of these two components of financial performance is additional to, and not a substitute for, the comparable total profit measures presented.
Management uses adjusted profit measures as the basis for monitoring financial performance and in communicating financial performance to investors in external presentations and announcements of financial results. Internal financial reports, budgets and forecasts are primarily prepared on the basis of adjusted profit measures, although planned exceptional items, such as significant restructurings, amortisation of acquisition-related intangibles and stranded cost recoveries are also reflected in budgets and forecasts. Management compensates for the limitations inherent in the use of adjusted profit measures through the separate monitoring and disclosure of exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles as a component of our overall financial performance.
Exchange rates
Our financial results are reported in sterling. Transactions for our US operations are denominated in US dollars and so the related amounts that are reported in sterling depend on the US dollar to sterling exchange rate. The average exchange rate in 2008/09 was $1.54: £1 compared with the average rate of $2.01: £1 in 2007/08. The same amount of revenue and other operating income (excluding stranded cost recoveries), adjusted operating profit and operating profit in US dollars earned in 2007/08 would have been reported as £1,947 million, £260 million and £398 million higher if earned in 2008/09. In 2006/07, the average rate was $1.91: £1. If the revenue and other operating income (excluding stranded cost recoveries), adjusted operating profit and operating profit in US dollars recognised in 2006/07 were earned in 2007/08, it would have been £193 million, £26 million and £51 million lower respectively.
However, the effect of movements in the US dollar exchange rate on adjusted operating profit and operating profit in 2008/09 was largely offset by the impact of interest and tax charges denominated in US dollars, when translated into sterling. This includes the effect of derivative financial instruments that swap debt raised in other currencies into US dollars as part of the financing of our US operations. As a result, adjusted profit for the year and profit for the year from continuing operations for 2007/08 would have been £49 million and £137 million higher respectively if translated at the 2008/09 average exchange rate of $1.54: £1 (2006/07: £4 million and £17 million lower respectively if translated at the 2007/08 average exchange rate of $2.01: £1).
The balance sheet at the end of the financial year has been translated at an exchange rate of $1.44: £1 at 31 March 2009 ($1.98: £1 at 31 March 2008).
Profit for the year from continuing operations
Profit for the year from continuing operations decreased from £1,575 million in 2007/08 to £922 million in 2008/09 (increased from £1,310 million in 2006/07 to £1,575 million in 2007/08) as a consequence of the changes in operating profit, net finance costs, exceptional finance costs and remeasurements, and taxation described in the following sections.
Details of the financial results of business segments and other activities are included in the business sections Transmission, Gas Distribution, Electricity Distribution & Generation and Non-regulated businesses and other.
Earnings and earnings per share from continuing operations
Adjusted earnings per share
pence
Earnings per share
pence
Adjusted earnings
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Adjusted operating profit | 2,915 | 2,595 | 2,031 |
| Net finance costs excluding exceptional items and remeasurements | (1,150) | (770) | (547) |
| Share of post-tax results of joint ventures | 5 | 4 | 2 |
| Adjusted profit before taxation | 1,770 | 1,829 | 1,486 |
| Taxation excluding tax on exceptional items, remeasurements and stranded cost recoveries | (517) | (579) | (442) |
| Adjusted profit from continuing operations | 1,253 | 1,250 | 1,044 |
| pence | pence | pence | |
| Adjusted earnings per share from continuing operations | 50.9 | 47.8 | 38.3 |
Earnings
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Operating profit | 2,623 | 2,964 | 2,513 |
| Net finance costs | (1,234) | (786) | (764) |
| Share of post-tax results of joint ventures | 5 | 4 | 2 |
| Profit before taxation | 1,394 | 2,182 | 1,751 |
| Taxation | (472) | (607) | (441) |
| Profit from continuing operations | 922 | 1,575 | 1,310 |
| pence | pence | pence | |
| Earnings per share from continuing operations | 37.4 | 60.3 | 48.1 |
Earnings per share from continuing operations
The following table sets out the adjusted earnings per share and earnings per share from continuing operations for 2008/09, 2007/08 and 2006/07 and reconciles the differences between them. Reconciling items are net of tax.
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 pence |
2008 pence |
2007 pence |
| Adjusted earnings per share | 50.9 | 47.8 | 38.3 |
| Exceptional items | (10.1) | (0.1) | (1.5) |
| Commodity cost remeasurements | (10.8) | 5.1 | 1.3 |
| Derivative financial instrument remeasurements | (3.0) | (1.3) | 0.6 |
| Stranded cost recoveries | 10.4 | 8.8 | 9.4 |
| Earnings per share – continuing operations | 37.4 | 60.3 | 48.1 |
Adjusted earnings per share for 2008/09 increased by 3.1 pence, an increase of 6% compared with 2007/08 (2007/08: increased by 9.5 pence, an increase of 25% compared with 2006/07). The reasons for this increase are our growth in adjusted profit and the share buyback programme during 2008/09.
Earnings per share from continuing operations decreased from 60.3 pence per share in 2007/08 to 37.4 pence per share in 2008/09 reflecting the increase in adjusted earnings per share, combined with the higher net exceptional items, remeasurements and stranded cost recoveries on a per share basis (2007/08: increase from 48.1 pence per share in 2006/07 to earnings of 60.3 pence per share).
Diluted earnings per share from continuing operations were 37.1 pence per share in 2008/09, 0.3 pence lower than basic earnings per share from continuing operations, compared with 59.9 pence per share in 2007/08 (0.4 pence lower) and 47.8 pence per share in 2006/07 (0.3 pence lower). The principal reason for the dilution in 2008/09, 2007/08 and 2006/07 relates to employee share plans.
Adjusted profit measures
The following tables reconcile the adjusted profit measure to the corresponding profit measure in accordance with IFRS.
a) Reconciliation of adjusted operating profit to operating profit
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Adjusted operating profit | 2,915 | 2,595 | 2,031 |
| Exceptional items | (275) | (242) | (22) |
| Commodity contract remeasurements | (443) | 232 | 81 |
| Stranded cost recoveries | 426 | 379 | 423 |
| Operating profit | 2,623 | 2,964 | 2,513 |
Adjusted operating profit is presented on the face of the income statement under the heading Operating profit before exceptional items, remeasurements and stranded cost recoveries.
b) Reconciliation of adjusted profit before taxation to profit before taxation
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Adjusted profit before taxation | 1,770 | 1,829 | 1,486 |
| Exceptional items | (275) | (242) | (67) |
| Commodity contract remeasurements | (445) | 223 | 62 |
| Derivative financial instrument remeasurements | (82) | (7) | (153) |
| Stranded cost recoveries | 426 | 379 | 423 |
| Profit before taxation | 1,394 | 2,182 | 1,751 |
Adjusted profit before taxation is presented on the face of the income statement under the heading Profit before taxation before exceptional items, remeasurements and stranded cost recoveries.
c) Reconciliation of adjusted earnings to earnings (profit for the year from continuing operations attributable to equity shareholders of the parent company)
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Adjusted earnings | 1,250 | 1,247 | 1,042 |
| Exceptional items | (247) | (2) | (41) |
| Commodity contract remeasurements | (266) | 133 | 37 |
| Derivative financial instrument remeasurements | (74) | (35) | 16 |
| Stranded cost recoveries | 256 | 229 | 254 |
| Earnings | 919 | 1,572 | 1,308 |
Adjusted earnings is presented in note 10 to the consolidated financial statements, under the heading Adjusted earnings – continuing operations.
Discontinued operations
During 2008/09, discontinued operations included the Ravenswood generation station, KeySpan Communications and KeySpan engineering companies, which were sold during the year or subsequent to it. As at 31 March 2008, all these operations were classified as held for sale on the balance sheet and their results included in discontinued operations from their acquisition under KeySpan on 24 August 2007 to 31 March 2008. In addition, during 2007/08, discontinued operations included our wireless infrastructure operations in the UK and the US and the Basslink electricity interconnector in Australia that we sold during 2007/08. The results of these operations are also included within discontinued operations for 2006/07. Details of the results of these operations are provided under discontinued operations.
We sold the Ravenswood generation station for $2.9 billion (£1.6 billion) on 26 August 2008.
Earnings per share from discontinued operations in 2008/09 were 1.1 pence per share (including 0.7 pence per share relating to gains on the businesses sold during the year) compared with 62.0 pence per share in 2007/08 (including 60.6 pence per share relating to gains on the businesses sold during the year) and 3.2 pence per share in 2006/07 with no gains from disposals.
Net profit and total earnings per share for the year
Net profit from both continuing and discontinued operations was £947 million in 2008/09, compared with £3,193 million in 2007/08 and £1,396 million in 2006/07.
Total earnings per share from both continuing and discontinued operations were 38.5 pence per share in 2008/09, 122.3 pence per share in 2007/08 and 51.3 pence per share in 2006/07.
Adjusted operating profit and operating profit
Adjusted operating profit
£m
Operating profit
£m
During 2008/09, KeySpan operations contributed £556 million ($855 million) and £203 million ($313 million) to adjusted operating profit and operating profit for continuing operations respectively. During the year ended 31 March 2008, KeySpan was acquired on 24 August 2007 and consequently only contributed seven months of results for that period. During 2007/08, KeySpan contributed £368 million ($740 million) and £453 million ($911 million) to the adjusted operating profit and operating profit for continuing operations respectively.
KeySpan’s operations are significantly affected by seasonality. Therefore, during 2007/08 the results of KeySpan that were consolidated from 24 August 2007 provide a larger contribution on a time apportioned basis compared with a full year’s contribution. Weather driven seasonality results in higher revenues and operating profit in the second half of the financial year. This seasonality is due to higher energy demands in the US during the colder winter period.
The following tables set out the consolidated revenue, adjusted operating profit and operating profit by business segment.
Revenue by business segment
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Transmission UK | 3,487 | 2,956 | 2,816 |
| Transmission US | 420 | 299 | 270 |
| Gas Distribution UK | 1,466 | 1,383 | 1,193 |
| Gas Distribution US | 4,786 | 2,845 | 638 |
| Electricity Distribution & Generation US | 4,972 | 3,508 | 3,430 |
| Other activities | 719 | 642 | 567 |
| Total segmental revenues | 15,850 | 11,633 | 8,914 |
| Less: sales between business segments | (226) | (210) | (219) |
| Total | 15,624 | 11,423 | 8,695 |
Segmental operating profit before exceptional items, remeasurements and stranded cost recoveries
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Transmission UK | 1,126 | 1,021 | 946 |
| Transmission US | 175 | 128 | 108 |
| Gas Distribution UK | 672 | 595 | 409 |
| Gas Distribution US | 612 | 392 | 71 |
| Electricity Distribution & Generation US | 265 | 330 | 364 |
| Other activities | 65 | 129 | 133 |
| Adjusted operating profit | 2,915 | 2,595 | 2,031 |
Segmental operating profit
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Transmission UK | 1,063 | 1,013 | 936 |
| Transmission US | 173 | 122 | 107 |
| Gas Distribution UK | 629 | 574 | 412 |
| Gas Distribution US | 226 | 487 | 67 |
| Electricity Distribution & Generation US | 531 | 696 | 859 |
| Other activities | 1 | 72 | 132 |
| Operating profit | 2,623 | 2,964 | 2,513 |
2008/09 compared with 2007/08
Changes in revenue and other operating income, operating costs and operating profit for 2008/09 compared with 2007/08 are summarised in the following table.
| Continuing operations | Revenue and other operating income £m |
Operating costs £m |
Operating profit £m |
|---|---|---|---|
| 2007/08 results | 11,498 | (8,534) | 2,964 |
| Add back exceptional items and remeasurements | – | 10 | 10 |
| Deduct stranded cost recoveries | (382) | 3 | (379) |
| 2007/08 adjusted results | 11,116 | (8,521) | 2,595 |
| Exchange movements | 1,947 | (1,687) | 260 |
| 2007/08 constant currency results | 13,063 | (10,208) | 2,855 |
| Transmission UK | 561 | (456) | 105 |
| Transmission US | 30 | (22) | 8 |
| Gas Distribution UK | 77 | – | 77 |
| Gas Distribution US | 1,068 | (968) | 100 |
| Electricity Distribution & Generation US | 454 | (620) | (166) |
| Other activities | 15 | (79) | (64) |
| Sales between businesses | (16) | 16 | – |
| 2008/09 adjusted results | 15,252 | (12,337) | 2,915 |
| Exceptional items and remeasurements | – | (718) | (718) |
| Stranded cost recoveries | 435 | (9) | 426 |
| 2008/09 results | 15,687 | (13,064) | 2,623 |
Revenue and other operating income excluding stranded cost recoveries was £4,136 million higher than in 2007/08. This primarily reflected a £1,947 million increase as a result of exchange movements on our US operations and the first full year contribution from KeySpan.
In addition, due to the pass-through nature of our commodity costs in the US, revenues have increased during 2008/09 due to a rise in average commodity costs during 2008/09 compared with 2007/08. This has not resulted in a significant increase in our operating profit.
There was a decrease of £12 million in other operating income, which primarily reflects a £49 million reduction in the sale of property by our property management business in the UK, partially offset by a £30 million increase in our Transmission UK business and a net £7 million increase from the other regulated and non-regulated businesses.
The increase in operating costs excluding exceptional items, remeasurements and stranded cost recoveries reflects a £1,687 million increase as a result of exchange movements, and the first full year contribution from KeySpan.
KeySpan operations contributed £4,635 million of revenue and £4,084 million of costs excluding exceptional items, remeasurements and stranded cost recoveries in 2008/09 compared with £3,262 million and £2,782 million respectively in 2007/08, on a constant currency basis.
Apart from the impact of a full year contribution from KeySpan and exchange movements, the other principal reasons for the increased revenue and operating costs were: in Transmission, higher UK regulated revenue and interconnector auction income; in Gas Distribution, increased allowed regulatory revenue and increased revenue due to colder weather partially offset by higher bad debt costs; and in Electricity Distribution & Generation, increased revenue, storm costs and depreciation.
Adjusted operating profit in 2008/09 was £320 million higher than 2007/08, comprising a £260 million increase as a result of exchange movements on US operations and a net increase of £60 million from the movements in revenue, other operating income and costs on a constant currency basis.
Net operating exceptional charges of £275 million in 2008/09 primarily related to restructuring costs incurred in the UK and US, and increases in environmental provisions resulting from significant movements in discount rates during the year. The majority of the restructuring costs related to the ongoing KeySpan integration programme, restructuring of our LNG storage facilities, and costs associated with initiatives related to the transformation of our operating model.
There were £443 million of operating remeasurement losses in 2008/09 compared with £232 million of gains in 2007/08. The losses relate to changes in the value of commodity contracts in the US carried in the balance sheet at fair value, primarily arising from movements in energy prices.
Stranded cost recoveries relate to the recovery of historical generation-related costs in the US that are no longer owned following divesture of generation assets. Such costs can be recovered from customers as permitted by regulatory agreements. Revenue and costs associated with stranded cost recoveries were £435 million and £9 million respectively (2007/08: £382 million and £3 million).
As a consequence of the increase in adjusted operating profit of £320 million, the net movement in operating exceptional items and remeasurements of £708 million and an increase in operating profit from stranded cost recoveries of £47 million, total operating profit decreased by £341 million in 2008/09 to £2,623 million compared with £2,964 million in 2007/08.
2007/08 compared with 2006/07
Changes in revenue and other operating income, operating costs and operating profit for 2007/08 compared with 2006/07 can be summarised as follows:
| Continuing operations | Revenue and other operating income £m |
Operating costs £m |
Operating profit £m |
|---|---|---|---|
| 2006/07 results | 8,778 | (6,265) | 2,513 |
| Add back exceptional items and remeasurements | – | (59) | (59) |
| Deduct stranded cost recoveries | (426) | 3 | (423) |
| 2006/07 adjusted results | 8,352 | (6,321) | 2,031 |
| Exchange movements | (193) | 167 | (26) |
| 2006/07 constant currency results | 8,159 | (6,154) | 2,005 |
| Transmission UK | 134 | (59) | 75 |
| Transmission US | 42 | (17) | 25 |
| Gas Distribution UK | 192 | (6) | 186 |
| Gas Distribution US | 2,239 | (1,915) | 324 |
| Electricity Distribution & Generation US | 272 | (288) | (16) |
| Other activities | 71 | (75) | (4) |
| Sales between businesses | 7 | (7) | – |
| 2007/08 adjusted results | 11,116 | (8,521) | 2,595 |
| Exceptional items and remeasurements | – | (10) | (10) |
| Stranded cost recoveries | 382 | (3) | 379 |
| 2007/08 results | 11,498 | (8,534) | 2,964 |
Revenue and other operating income excluding stranded cost recoveries was £2,764 million higher than in 2006/07, including a £193 million decrease as a result of exchange movements on US operations. KeySpan contributed £2,498 million to this increase in revenue. There was a decrease of £8 million in other operating income. Operating costs excluding exceptional items, remeasurements and stranded cost recoveries increased by £2,200 million including a £167 million decrease as a result of exchange movements on US operations. KeySpan contributed £2,130 million to this increase in operating costs.
Excluding the significant uplift in revenue and costs associated with KeySpan there was a £459 million increase in revenue and other operating income and a £237 million increase in costs on a constant currency basis. This primarily related to higher allowed revenues in Transmission UK, and from Gas Distribution US with the first full year of contribution from the Rhode Island gas business.
Adjusted operating profit in 2007/08 was £564 million higher than 2006/07, comprising a £26 million decrease as a result of exchange movements on US operations and an increase of £590 million from the movements in revenue, other operating income and costs on a constant currency basis, primarily due to the acquisition of KeySpan.
Net operating exceptional charges of £242 million in 2007/08 related to restructuring costs incurred in the UK and US and to increases in environmental provisions. The majority of the restructuring costs related to the integration programme following the KeySpan acquisition.
There was a £151 million increase in operating remeasurement gains to £232 million in 2007/08 compared with £81 million in 2006/07. The gains relate to changes in the value of commodity contracts in the US carried in the balance sheet at fair value, primarily arising from movements in energy prices.
Stranded cost recoveries relate to the recovery of historical generation-related costs in the US that are no longer owned following divesture of generation assets. Such costs can be recovered from customers as permitted by regulatory agreements. Revenue and costs associated with stranded cost recoveries were £382 million and £3 million respectively (2006/07: £426 million and £3 million).
As a consequence of the increase in adjusted operating profit of £564 million, the net movement in operating exceptional items and remeasurements of £69 million and the decrease in operating profit from stranded cost recoveries of £44 million, total operating profit increased by £451 million in 2007/08 to £2,964 million compared to £2,513 million in 2006/07.
Net finance costs
Net interest excluding exceptional items and remeasurements was £1,150 million in 2008/09, compared with £770 million in 2007/08. The increase was primarily due to higher average net debt balances during the year reflecting the KeySpan acquisition, exchange movements and increased pension interest, partially offset by a lower effective interest rate reflecting lower floating and RPI linked rates.
Net interest excluding exceptional items and remeasurements was £223 million higher in 2007/08 compared with £547 million in 2006/07. The increase was a consequence of higher average net debt balances following the KeySpan acquisition.
Exceptional finance costs and remeasurements
There were no exceptional finance costs in 2008/9 and in 2007/08. In 2006/07, there were £45 million of charges primarily relating to the early redemption of debt.
Financial remeasurements in 2008/09 relate to net losses on derivative financial instruments of £82 million (2007/08: £7 million, 2006/07: losses of £153 million) and the financial element of commodity contract revaluations, totalling £2 million (2007/08: £9 million, 2006/07: £19 million). Net losses on derivative financial instruments in 2008/09 includes £nil (2007/08: £3 million, 2006/07: £126 million) arising from a difference in the tax treatment of certain derivative instruments that offset on a post-tax basis.
Taxation
A net charge of £472 million arose in 2008/09 comprising £517 million on profit before tax excluding exceptional items, remeasurements and stranded cost recoveries, and a £45 million credit on exceptional items, remeasurements and stranded cost recoveries, compared with £607 million in 2007/08 (comprising £579 million and a £28 million expense respectively) and £441 million in 2006/07 (comprising £442 million and a credit of £1 million respectively).
In 2008/09, exceptional items, remeasurements and stranded cost recoveries included a £49 million expense for increased deferred tax liabilities due to a change in the UK industrial allowance regime. In 2007/08, it included an exceptional tax credit in 2007/08 of £170 million relating to the release of deferred tax provisions arising from the change in the UK corporation tax rate.
The effective tax rates before and after exceptional items, remeasurements and stranded cost recoveries were 29.2% and 33.9% respectively (2007/08: 31.7% and 27.8%, 2006/07: 29.7% and 25.2%).
Cash flows
Operating cash flows
£m
Cash flows from operating activities
Cash generated from continuing operations was £3,564 million in 2008/09, compared with £3,265 million in 2007/08 and £3,090 million in 2006/07. This included cash outflows for continuing operations relating to exceptional items of £131 million, £132 million and £86 million respectively and cash inflows from stranded cost recoveries of £359 million, compared with £278 million and £288 million respectively.
After reflecting cash flows relating to discontinued operations and tax paid, net cash inflow from operating activities was £3,413 million, compared with £3,165 million in 2007/08 and £2,958 million in 2006/07. This included net corporate tax payments amounting to £143 million in 2008/09, £110 million in 2007/08 and £313 million in 2006/07.
Cash flows from investing activities
Cash outflows from investing activities were £1,998 million in 2008/09, compared with an outflow of £3,023 million in 2007/08 and an outflow of £4,061 million in 2006/07. There were no payments in respect of business acquisitions in 2008/09, compared with £3,502 million spent on acquiring KeySpan in 2007/08 and £269 million on business acquisitions in 2006/07. Proceeds from sales of financial investments were £99 million (2007/08: net sales of £45 million, 2006/07: net purchases of £1,725 million). Proceeds from disposals of businesses in 2008/09 were £1,617 million (2007/08: £3,064 million, 2006/07: £27 million) and proceeds from sales of joint ventures and other investments were £nil (2007/08: £55 million, 2006/07: £19 million).
Excluding acquisitions, disposals and financial investments, cash outflows increased in 2008/09 compared with 2007/08 as a result of purchases of property, plant and equipment within continuing operations increasing to £3,107 million during the year (2007/08: £2,832 million, 2006/07: £2,185 million). Investing activities of discontinued operations in the period resulted in a cash inflow of £1,049 million in 2008/09 (2007/08: £3,050 million inflow, 2006/07: £105 million outflow).
Cash flows from financing activities
Net cash outflows from financing activities were £877 million in 2008/09, compared with £1,592 million in 2007/08 and a £1,278 million inflow in 2006/07. This reflected net inflows from borrowings of £1,641 million (2007/08: £1,589 million, 2006/07: £3,045 million) and £627 million of share repurchases (2007/08: £1,498 million, 2006/07: £169 million).
In both 2007/08 and 2006/07 £26 million was paid in respect of the B share £2 billion return of value to shareholders.
Payments to providers of finance, in the form of interest and dividends, totalled £1,899 million in 2008/09 compared with £1,680 million in 2007/08 and £1,588 million in 2006/07.
Net interest cash outflows increased from £694 million in 2007/08 to £976 million in 2008/09 (increased from £597 million in 2006/07 to £694 million in 2007/08). The increase in 2008/09 compared with 2007/08 reflected higher average net debt (primarily the full year impact of the acquisition of KeySpan and higher capital expenditure) and the impact of the stronger US dollar partially offset by lower effective interest rates on our debt due to lower floating and RPI rates. The increase in 2007/08 compared with 2006/07 reflected higher average net debt during the year, primarily as a consequence of the acquisition of KeySpan. This was partially offset by the beneficial impact of the weaker US dollar.