Financial performance
We aim to continue to improve our financial performance, to deliver returns appropriate to our risk profile and to be financially disciplined. We also aim to ensure that the value that we create is reflected in our share price.
Profit and cash flow |
If we achieve our objectives we should be able to deliver continued improvements in financial performance, so that we deliver on our commitment to growing our dividend each year. |
The principal measures we use to monitor our financial performance are adjusted operating profit, adjusted earnings per share and operating cash flows. Adjusted operating profit and adjusted earnings per share are operating profit and basic earnings per share before exceptional items, remeasurements and stranded cost recoveries.
In addition, we monitor the amount of synergy savings we generate following an acquisition.
We report our financial results and position in accordance with International Financial Reporting Standards (IFRS).
Continuing and discontinued operations
The financial results of our businesses and segments and of our other activities (as described here) are presented within continuing operations.
Our financial results incorporate activities acquired with KeySpan subsequent to 24 August 2007. In accordance with the requirements of IFRS we also present, in note 28 to the financial statements, illustrative pro forma financial performance information as if we had acquired KeySpan on 1 April 2007. The purpose of these pro forma financial results is to illustrate the impact on our financial results that might have occurred had we owned KeySpan for a full year instead of the seven and a quarter months included in our actual reported results. However, as we have been required to make a number of assumptions in preparing the pro forma results, they do not necessarily reflect the actual results that would have occurred had we actually acquired KeySpan on 1 April 2007, nor are they necessarily indicative of the future results of the enlarged National Grid.
The results of 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.
Discontinued operations also include the results of the Ravenswood generation station, KeySpan Communications and KeySpan Engineering Associates from 24 August 2007 onwards, being businesses acquired with KeySpan that we expect to sell within one year of the acquisition. On 31 March 2008 we agreed to sell the Ravenswood generation station for $2.9 billion (£1.4 billion). The sale is subject to approval from the various regulatory bodies concerned, with completion expected by summer 2008.
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, comprising firstly business performance, which excludes exceptional items, remeasurements, stranded cost recoveries, and amortisation of acquisition-related intangibles, and 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 expenditure 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, 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. 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 to cease largely 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. In particular, 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 amortisation of acquisition-related intangibles. We believe that in separately presenting financial performance in two components it is easier to read and interpret financial performance between periods, as adjusted profit measures are more comparable by excluding the distorting effect of exceptional items, remeasurements, stranded cost recoveries and amortisation of acquisition-related intangibles, and 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. As the average rate of $2.01:£1 in 2007/08 was weaker than the average rate of $1.91:£1 in 2006/07 (which was in turn weaker than the average rate of $1.79:£1 in 2005/06), the same amount of revenue, adjusted operating profit and operating profit in US dollars earned in 2006/07 would have been reported as £193 million, £26 million and £51 million lower if earned in 2007/08 (£250 million, £31 million and £58 million lower for 2005/06 if earned in 2006/07).
However, the effect of movements in the US dollar exchange rate on adjusted operating profit and operating profit in 2007/08 was largely offset by the impact of interest and tax charges denominated in US dollars, when translated into sterling. This reflects 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 2006/07 would have been £4 million and £17 million lower respectively if translated at the 2007/08 average exchange rate of $2.01:£1 (2005/06: £10 million and £27 million higher respectively if translated at the 2006/07 average exchange rate of $1.91:£1).
The balance sheet at the end of the financial year has been translated at an exchange rate of $1.98:£1 at 31 March 2008 ($1.97:£1 at 31 March 2007).
Operating financial performance
Adjusted operating profit
£m
Operating profit
£m
Details of the financial results of business segments and other activities are included in the business reviews starting here.
KeySpan contributed £368 million and £453 million to the adjusted operating profit and operating profit for continuing operations respectively. On a pro forma basis, assuming we acquired KeySpan on 1 April 2007 our adjusted operating profit and operating profit for continuing operations would have been £2,625 million and £2,901 million respectively.
Our actual financial performance compared to the pro forma performance illustrates the seasonality effect reflected in the timing of the KeySpan acquisition. The actual results of KeySpan that have been consolidated from 24 August 2007 provide a larger contribution on a time apportioned basis compared to a full year 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 during the colder winter period.
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Revenue | 11,423 | 8,695 | 8,868 |
| Other operating income | 75 | 83 | 80 |
| Operating costs | (8,534) | (6,265) | (6,574) |
| Total operating profit | 2,964 | 2,513 | 2,374 |
| Analysed as: | |||
| Adjusted operating profit | 2,595 | 2,031 | 1,968 |
| Exceptional items | (242) | (22) | (34) |
| Remeasurements | 232 | 81 | (49) |
| Stranded cost recoveries | 379 | 423 | 489 |
| Total operating profit | 2,964 | 2,513 | 2,374 |
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 | 2008 £m |
2007 £m |
2006 £m |
| Transmission UK | 2,956 | 2,816 | 2,710 |
| Transmission US | 299 | 270 | 310 |
| Gas Distribution UK | 1,383 | 1,193 | 1,222 |
| Gas Distribution US | 2,845 | 638 | 571 |
| Electricity Distribution & Generation US | 3,508 | 3,430 | 3,651 |
| Other activities | 642 | 567 | 701 |
| Total segmental revenues | 11,633 | 8,914 | 9,165 |
| Less: sales between business segments | (210) | (219) | (297) |
| Total | 11,423 | 8,695 | 8,868 |
Segmental operating profit before exceptional items, remeasurements and stranded cost recoveries
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Transmission UK | 1,021 | 946 | 844 |
| Transmission US | 128 | 108 | 127 |
| Gas Distribution UK | 595 | 409 | 483 |
| Gas Distribution US | 392 | 71 | 47 |
| Electricity Distribution & Generation US | 330 | 364 | 317 |
| Other activities | 129 | 133 | 150 |
| Adjusted operating profit | 2,595 | 2,031 | 1,968 |
Segmental total operating profit
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Transmission UK | 1,013 | 936 | 843 |
| Transmission US | 122 | 107 | 127 |
| Gas Distribution UK | 574 | 412 | 432 |
| Gas Distribution US | 487 | 67 | 47 |
| Electricity Distribution & Generation US | 696 | 859 | 757 |
| Other activities | 72 | 132 | 168 |
| Total operating profit | 2,964 | 2,513 | 2,374 |
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:
| 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 on US operations | (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 |
| 2007/08 exceptional items and remeasurements | – | (10) | (10) |
| 2007/08 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, reflecting a £193 million decrease as a result of exchange movements on US operations and a £2,957 million increase in revenue and other operating income on a constant currency basis. KeySpan contributed £2,498 million to this increase in revenue. There was a decrease of £8 million in other operating income, which primarily relates to reduced gains on the sales of property by our property management business in the UK. Operating costs excluding exceptional items, remeasurements and stranded cost recoveries increased by £2,200 million, reflecting a £167 million decrease as a result of exchange movements on US operations and a £2,367 million increase in operating costs on a constant currency basis. 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 on US operations and an increase of £590 million from the movements in revenue, other operating income and costs on a constant currency basis.
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, also in the UK and the US. The majority of the restructuring costs related to the current integration programme underway following the KeySpan acquisition.
There was a £151 million increase in operating remeasurement gains to £232 million in 2007/08 compared to £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. Stranded cost recoveries revenue and costs were £382 million and £3 million respectively (2006/07: £426 million and £3 million, 2005/06: £517 million and £28 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 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.
2006/07 compared to 2005/06
Changes in revenue and other operating income, operating costs and operating profit for 2006/07 compared with 2005/06 can be summarised as follows:
| Revenue and other operating income £m |
Operating Costs £m |
Operating Profit £m |
|
|---|---|---|---|
| 2005/06 results | 8,948 | (6,574) | 2,374 |
| Add back exceptional items and remeasurements | – | 83 | 83 |
| Deduct stranded cost recoveries | (517) | 28 | (489) |
| 2005/06 adjusted results | 8,431 | (6,463) | 1,968 |
| Exchange on US operations | (250) | 219 | (31) |
| 2005/06 constant currency results | 8,181 | (6,244) | 1,937 |
| Transmission UK | 112 | (10) | 102 |
| Transmission US | (21) | 10 | (11) |
| Gas Distribution UK | (27) | (47) | (74) |
| Gas Distribution US | 103 | (76) | 27 |
| Electricity Distribution & Generation US | 65 | 2 | 67 |
| Other activities | (137) | 120 | (17) |
| Sales between businesses | 76 | (76) | – |
| 2006/07 adjusted results | 8,352 | (6,321) | 2,031 |
| 2006/07 exceptional items and remeasurements | – | 59 | 59 |
| 2006/07 stranded cost recoveries | 426 | (3) | 423 |
| 2006/07 results | 8,778 | (6,265) | 2,513 |
Revenue and other operating income excluding stranded cost recoveries was £79 million lower than in 2005/06, reflecting a £250 million decrease as a result of exchange movements on US operations and a £171 million increase in operating revenues on a constant currency basis. Operating costs excluding exceptional items, remeasurements and stranded cost recoveries decreased by £142 million, reflecting a £219 million decrease as a result of exchange movements on US operations and a £77 million increase in operating costs on a constant currency basis.
Significant movements in operating revenues and costs relate to higher allowed revenues in Transmission in the UK, reduced volumes in Gas Distribution in the UK as a result of warmer weather, revenues and costs from the acquired gas distribution network in Rhode Island, higher commodity costs in Electricity Distribution in the US passed through to customers and lower connections revenues and costs in other activities relating to the regional gas distribution networks sold in 2005/06. There was an increase of £3 million in other operating income, which primarily relates to gains on the sales of property by our property management business in the UK. As a consequence, adjusted operating profit in 2006/07 was £63 million higher than 2005/06, comprising a £31 million decrease as a result of exchange on US operations and an increase of £94 million from operations on a constant currency basis.
Net operating exceptional charges of £22 million in 2006/07 related to restructuring costs incurred in the UK and US, including the establishment of a UK shared services function, the business process review undertaken in Transmission and the integration of the acquired Rhode Island gas distribution network into our Gas Distribution business.
Operating remeasurement gains of £81 million (2005/06: losses of £49 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.
Stranded cost recoveries revenue and operating profit in 2006/07 of £426 million (2005/06: £517 million) and £423 million (2005/06: £489 million) respectively related 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.
As a consequence of the increase in adjusted operating profit of £63 million and the movement in operating exceptional items and remeasurements of £142 million and decrease in operating profit from stranded cost recoveries of £66 million total operating profit rose by £139 million from £2,374 million in 2005/06 to £2,513 million in 2006/07.
Net finance costs
Net interest excluding exceptional items and remeasurements was £760 million in 2007/08 compared to £547 million in 2006/07. The increase was a consequence of higher average debt balances following the KeySpan acquisition.
Net interest excluding exceptional finance costs and remeasurements in 2006/07 decreased by £55 million compared with 2005/06, primarily as a consequence of lower average debt balances, a reduction in the interest charge related to pensions and the weaker US dollar in 2006/07.
Exceptional finance costs and remeasurements
There were no exceptional finance costs in 2007/08. This compares with exceptional finance costs of £45 million in 2006/07 and £49 million in 2005/06 primarily relating to the early repayment of debt.
Financial remeasurements relate to net losses on derivative financial instruments of £7 million (2006/07: £153 million, 2005/06: gains of £6 million) and the financial element of commodity contract revaluations, totalling £9 million (2006/07: £19 million, 2005/06: £14 million). Net losses on derivative financial instruments in 2007/08 includes £3 million (2006/07: £126 million, 2005/06: £nil) arising from a difference in the tax treatment of certain derivative instruments that offset on a post-tax basis.
Taxation
A net charge of £611 million arose in 2007/08 comprising £583 million on profit before tax excluding exceptional items, remeasurements and stranded cost recoveries and £28 million on exceptional items, remeasurements and stranded cost recoveries, compared with £441 million in 2006/07 (comprising £442 million and a credit of £1 million respectively) and £535 million in 2005/06 (comprising £369 million and £166 million respectively). This reflected 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 from 30% to 28% enacted during the year and which takes effect from 1 April 2008.
The effective tax rate before and after exceptional items, remeasurements and stranded cost recoveries was 31.7% and 27.9% respectively (2006/07: 29.7% and 25.2%, 2005/06: 27.0% and 31.1%).
Profit for the year from continuing operations
Profit for the year from continuing operations increased from £1,310 million in 2006/07 to £1,581 million in 2007/08 (from £1,183 million in 2005/06 to £1,310 million in 2006/07) as a consequence of the above changes.
Earnings from continuing operations
Adjusted earnings per share
pence
Earnings per share from continuing operations
pence
Adjusted earnings
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Adjusted operating profit | 2,595 | 2,031 | 1,968 |
| Net finance costs excluding exceptional items and remeasurements | (760) | (547) | (602) |
| Share of post-tax results of joint ventures | 4 | 2 | 3 |
| Adjusted profit before taxation | 1,839 | 1,486 | 1,369 |
| Taxation excluding tax on exceptional items, remeasurements and stranded cost recoveries | (583) | (442) | (369) |
| Adjusted profit from continuing operations | 1,256 | 1,044 | 1,000 |
| pence | pence | pence | |
| Adjusted earnings per share from continuing operations | 48.0 | 38.3 | 35.2 |
Earnings
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Total operating profit | 2,964 | 2,513 | 2,374 |
| Net finance costs | (776) | (764) | (659) |
| Share of post-tax results of joint ventures | 4 | 2 | 3 |
| Profit before taxation | 2,192 | 1,751 | 1,718 |
| Taxation | (611) | (441) | (535) |
| Profit from continuing operations | 1,581 | 1,310 | 1,183 |
| pence | pence | pence | |
| Earnings per share from continuing operations | 60.5 | 48.1 | 41.6 |
Earnings per share from continuing operations
The following table sets out the adjusted earnings per share and earnings per share from continuing operations for 2007/08, 2006/07 and 2005/06 and reconciles the differences between them. Reconciling items are net of tax.
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 pence |
2007 pence |
2006 pence |
| Adjusted earnings per share | 48.0 | 38.3 | 35.2 |
| Exceptional items | (0.1) | (1.5) | (2.2) |
| Commodity cost remeasurements | 5.1 | 1.3 | (1.3) |
| Derivative financial instruments remeasurements | (1.3) | 0.6 | (0.4) |
| Stranded cost recoveries | 8.8 | 9.4 | 10.3 |
| Earnings per share – continuing operations | 60.5 | 48.1 | 41.6 |
Adjusted earnings per share for 2007/08 increased by 9.7 pence, an increase of 25% compared with 2006/07 (2006/07: increased by 3.1 pence, an increase of 9% compared with 2005/06).
This reflected the increase in adjusted profit for the year from continuing operations, the effects of the share repurchase programme that returned £1.5 billion of value to shareholders (2006/07: the increase in adjusted profit for the year from continuing operations and the share consolidation in August 2005).
Earnings per share from continuing operations increased from 48.1 pence per share in 2006/07 to 60.5 pence per share in 2007/08 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 (2006/07: increase from 41.6 pence per share in 2005/06 to earnings of 48.1 pence per share).
Diluted earnings per share from continuing operations were 60.1 pence per share in 2007/08, 0.4 pence lower than basic earnings per share, compared with 47.8 pence per share in 2006/07 (0.3 pence lower) and 41.4 pence per share in 2005/06 (0.2 pence lower). The principal reason for the dilution in 2007/08, 2006/07 and 2005/06 relates to employee share plans.
Adjusted profit measures
The following tables reconcile the adjusted profit measure to the corresponding total profit measure in accordance with IFRS.
a) Reconciliation of adjusted operating profit to total operating profit
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Adjusted operating profit | 2,595 | 2,031 | 1,968 |
| Exceptional items | (242) | (22) | (34) |
| Commodity contract remeasurements | 232 | 81 | (49) |
| Stranded cost recoveries | 379 | 423 | 489 |
| Total operating profit | 2,964 | 2,513 | 2,374 |
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 | 2008 £m |
2007 £m |
2006 £m |
| Adjusted profit before taxation | 1,839 | 1,486 | 1,369 |
| Exceptional items | (242) | (67) | (83) |
| Commodity contract remeasurements | 223 | 62 | (63) |
| Derivative financial remeasurements | (7) | (153) | 6 |
| Stranded cost recoveries | 379 | 423 | 489 |
| Total profit before taxation | 2,192 | 1,751 | 1,718 |
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)
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Adjusted earnings | 1,253 | 1,042 | 998 |
| Exceptional items | (2) | (41) | (61) |
| Commodity contract remeasurements | 133 | 37 | (38) |
| Derivative financial remeasurements | (35) | 16 | (11) |
| Stranded cost recoveries | 229 | 254 | 293 |
| Earnings | 1,578 | 1,308 | 1,181 |
Adjusted earnings is presented in note 10 to the consolidated financial statements, under the heading ‘Adjusted earnings – continuing operations’.
Discontinued operations
| Years ended 31 March | |||
|---|---|---|---|
| Discontinued operations | 2008 £m |
2007 £m |
2006 £m |
| Revenue | 201 | 383 | 493 |
| Operating costs before exceptional items | (166) | (266) | (362) |
| Adjusted operating profit | 35 | 117 | 131 |
| Exceptional items | – | (55) | (20) |
| Operating profit | 35 | 62 | 111 |
| Remeasurement finance income | 8 | 37 | – |
| Net finance costs | – | (2) | (4) |
| Profit from discontinued operations before tax | 43 | 97 | 107 |
| Taxation | (7) | (11) | (45) |
| Profit from discontinued operations | 36 | 86 | 62 |
| Gain on disposal of discontinued operations | 1,582 | – | 2,605 |
| Profit for the year | 1,618 | 86 | 2,667 |
Discontinued operations at 31 March 2008 comprised the Ravenswood generation station, KeySpan Communications and KeySpan Engineering Associates, all of which were acquired with KeySpan on 24 August 2007 and are classified as businesses held for sale. During 2007/08, discontinued operations also included our wireless infrastructure operations in the UK and the US that we sold on 3 April 2007 and 15 August 2007 respectively and the electricity interconnector in Australia that we sold on 31 August 2007, as a consequence the results of these operations for 2006/07 and 2005/06 have also been included within discontinued operations. Further information on the results of these operations is included here.
On 31 March 2008 we agreed to sell the Ravenswood generation station for $2.9 billion (£1.4 billion). The sale is subject to approval from the various regulatory bodies and completion is expected by summer 2008.
The results of discontinued operations for 2005/06 also includes two months of trading for the four regional gas distribution networks that we sold on 1 June 2005. The exceptional charge of £20 million in 2005/06 arose from the payment of a £15 million fine relating to one of the sold networks and £5 million of restructuring costs.
The gain on disposal of discontinued operations in 2005/06 relates to the sales of gas distribution networks.
Earnings per share from discontinued operations in 2007/08 was 62.0 pence per share, including 60.6 pence per share relating to gains on the businesses sold during the year, compared with 3.2 pence per share in 2006/07 with no gains from disposals, and 94.0 pence per share in 2005/06 of which 91.8 pence per share related to the disposal of the four regional gas distribution networks.
Net profit and total earnings per share for the year
Net profit from both continuing and discontinued operations was £3,199 million in 2007/08, compared with £1,396 million in 2006/07 and £3,850 million in 2005/06.
Total earnings per share from both continuing and discontinued operations were 122.5 pence per share in 2007/08, 51.3 pence per share in 2006/07 and 135.6 pence per share in 2005/06.
Cash flows
Operating cash flows
£m
Cash flows from operating activities
Cash generated from continuing operations was £3,265 million in 2007/08, compared with £3,090 million in 2006/07 and £2,973 million in 2005/06. This reflected cash outflows of continuing operations relating to exceptional items of £132 million, £86 million and £115 million respectively and cash inflows from stranded cost recoveries of £278 million, compared with £288 million and £432 million respectively.
After reflecting cash flows relating to discontinued operations and tax paid, net cash inflow from operating activities was £3,165 million, compared with £2,958 million in 2006/07 and £2,971 million in 2005/06.
This included net corporate tax payments amounting to £110 million in 2007/08, £313 million in 2006/07 and £140 million in 2005/06.
Cash flows from investing activities
Cash outflows from investing activities were £3,023 million in 2007/08, compared with an outflow of £4,061 million in 2006/07 and an inflow of £4,052 million in 2005/06. This reflected £3,502 million spent on acquiring KeySpan in 2007/08 net of cash acquired, compared with £269 million spent on acquiring businesses in 2006/07 and £nil in 2005/06, partially offset by net sales of financial investments of £45 million (2006/07: net purchases of £1,725 million, 2005/06: net sales of £25 million). Proceeds from disposals of businesses in 2007/08 were £3,064 million (2006/07: £27 million, 2005/06: £5,750 million) and sales of joint ventures and other investments of £55 million (2006/07: £19 million, 2005/06: £8 million).
Excluding acquisitions, disposals and financial investments, cash outflows increased in 2007/08 compared with 2006/07 as a result of purchases of property, plant and equipment within continuing operations increasing to £2,832 million during the year (2006/07: £2,185 million, 2005/06: £1,657 million). Investing activities of discontinued operations in the period resulted in a cash outflow of £14 million in 2007/08 (2006/07: £47 million, 2005/06: £209 million).
Cash flows from financing activities
Net cash outflows from financing activities were £1,592 million in 2007/08, compared with a £1,278 million inflow in 2006/07 and a £5,842 million outflow in 2005/06. This reflected net inflows from borrowings of £1,589 million (2006/07: £3,045 million, 2005/06: net outflow of £2,304 million) and £1,498 million of share repurchases (2006/07: £169 million, 2005/06: £7 million).
In addition, £26 million was incurred in respect of the final amounts payable under the B share £2 billion return of value to shareholders (2006/07: £26 million, 2005/06: £1,957 million).
Payments to providers of finance, in the form of net interest and dividends, totalled £1,680 million in 2007/08 compared with £1,588 million in 2006/07 and £1,628 million in 2005/06.
Net interest cash outflows increased from £597 million in 2006/07 to £694 million in 2007/08 (decreased from £704 million in 2005/06 to £597 million in 2006/07). 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. The decrease in 2006/07 reflected lower average net debt during the year, the weaker US dollar and the beneficial impact of refinancing debt.
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Returns on our investments
We aim to generate value from our investments by improving the operating performance of our networks, by selecting investments that will provide the best return or, in the case of acquisitions, by selecting businesses where we can obtain synergies for the benefit of our customers and our shareholders.
Measures we use to monitor the value we generate from our investments include the returns generated by our regulated businesses and our consolidated return on equity.
Our return on equity measure allows us to monitor our performance in generating value from our businesses and from the investments we make. For 2007/08, our return on equity is 12.2%, down from 13.5% in 2006/07. The decrease is primarily driven by lower average UK retail price inflation in 2007/08 that reduced the inflation uplift on the regulatory asset value recognised in our return. In addition, the reduction reflects the disposal of our UK wireless communications business in the year which, being a non-regulated business, produced higher levels of return. This is partially offset by an improvement in the performance of our continuing businesses.
The average return on equity over the past three years was 11.8% (2006/07: 12.0% three year average).
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Financial discipline
In order to deliver sustainable growth we must be disciplined in the way we manage our balance sheet. This means that we will return cash to shareholders to the extent it is not required for our investment objectives.
The principal measure we use to monitor financial discipline is interest cover, being the ratio between the profits we generate and the net interest cost of servicing our borrowings. We also measure our progress against our promise to return cash to shareholders.
Our long-term target range for interest cover is between 3.0 and 3.5. Interest cover for the year ended 31 March 2008 decreased to 3.2 from 3.8 for the year ended 31 March 2007.
In 2006 we committed to return approximately $1.9 billion cash between calendar years 2006 and 2011 to shareholders through a share repurchase programme based on the after-tax cash flows generated from the recovery of stranded costs in the US. In addition, following the successful disposal of our UK wireless infrastructure operations in the UK for £2.5 billion on 3 April 2007, we announced the return of a further £1.8 billion to shareholders.
During the year to 31 March 2008 we repurchased £1.5 billion of our shares, which together with the £169 million repurchased in 2006/07 totals £1.7 billion on share repurchases.
This followed the return of £2.0 billion to shareholders in 2005/06 through a B share scheme, following the successful completions of the sales of four regional gas distribution networks.
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Shareholder returns
We aim to increase our dividend each year to ensure shareholders receive an appropriate level of return on their investment in us. We also endeavour to communicate with investors so that as much as possible of the value that we create is reflected in our share price to the benefit of shareholders.
We measure our overall performance through dividend growth and through total shareholder return, being the increase in our share price over the course of the financial year, assuming dividends are reinvested.
Our target until 31 March 2008 was to increase dividends by 7% each year. Following an increase of 15% for 2007/08, our target until 31 March 2012 is to increase dividends by 8% each year.
Dividend growth chart
%
Total shareholder return
% cumulative three year growth
Over the past five years, dividends have grown by a cumulative 92% and cumulative total shareholder return between 1 April 2003 and 31 March 2008 has been 117%.
Dividends in respect of the financial year
Dividends per share
pence
| Dividends | 2008 pence |
2007 pence |
2006 pence |
2005 pence |
2004 pence |
|---|---|---|---|---|---|
| Interim | 11.7 | 10.9 | 10.2 | 8.5 | 7.91 |
| Final | 21.3 | 17.8 | 15.9 | 15.2 | 11.87 |
| Total | 33.0 | 28.7 | 26.1 | 23.7 | 19.78 |
Dividends per ADS |
$ | $ | $ | $ | $ |
| Interim | 1.21 | 1.03 | 0.88 | 0.79 | 0.67 |
| Final | 2.05 | 1.76 | 1.51 | 1.38 | 1.05 |
| Total | 3.26 | 2.79 | 2.39 | 2.17 | 1.72 |
The proposed total ordinary dividend for 2007/08 amounts to £831 million or 33.0 pence per ordinary share. This represents an increase of 15% over the previous year’s ordinary dividend per share of 28.7 pence. The above amounts exclude the return of £1,516 million and £169 million to shareholders in 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 1.5 times by adjusted earnings from continuing operations per ordinary share (2006/07 covered 1.3 times, 2005/06 covered 1.3 times) and covered 1.8 times by earnings per ordinary share from continuing operations (2006/07 covered 1.7 times, 2005/06 covered 1.6 times).
The table above 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 above 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 2007/08 of 21.3 pence per share, amounting to approximately £531 million, will be reported in the financial statements for the year ending 31 March 2009.
48.0p
Adjusted earnings
per share
60.5p
Earnings per share
15%
Growth in ordinary
dividends
11.8%
Return on equity average over three years