18th May 2006 07:02
National Grid PLC18 May 2006 National Grid plc Results for the year ended 31 March 2006 Strong performance. Positive outlook. £12bn five year investment programme o Earnings per share up 10%o Strong operational performance o 35% UK gas distribution controllable cost reduction target achieved one year early o £2.1bn investment in existing businesseso Significant strategic achievements o Successful completion of gas network sales and £2bn return of value o Agreed acquisitions of KeySpan and Rhode Island gas distribution assetso 10% increase in full year dividend Financial highlights - £million Years ended(except where indicated) 31 March 2006 2005 % changeBusiness performance (Note A)Operating profit - actual exchange rate 2,527 2,443 3Operating profit - constant currency basis (Note B) 2,527 2,487 2Pre-tax profit 1,924 1,740 11Earnings per share 46.7p 42.3p 10 Statutory resultsOperating profit from continuing operations 2,439 2,142 14Pre-tax profit from continuing operations 1,779 1,439 24Earnings per share from continuing operations 42.8p 36.3p 18 Profit from discontinued operations 2,633 304 * Dividend per share 26.1p 23.7p 10 * Not meaningful. Sir John Parker, Chairman, said: "National Grid has again delivered a strong operational and financialperformance which has been accompanied by our continued focus on safety andreliability of delivery. "Our projection for future investment in our existing businesses now amounts tomore than £12bn over the next five years. This major investment programme,together with our announced strategic acquisitions, will continue to reshape andexpand our growth platform. "These developments reinforce our confidence of delivering significant value forshareholders. The Board is pleased to recommend a 10% increase in the full yeardividend, delivering growth of over 60% in the last four years. We also retainour 7% per year dividend growth target through to March 2008." Note A: Business performance results are the primary financial performancemeasure used by National Grid, being the results for continuing operationsbefore exceptional items and certain non-cash mark-to-market remeasurements ofcommodity contracts and financial instruments that are held for economic hedgingpurposes but which did not achieve hedge accounting. Further details areprovided in Note 3 on page 17. A reconciliation of Business performance toStatutory results is provided in the Group Income Statement on page 10. Note B: 'Constant currency basis' refers to the reporting of the actual resultsagainst the prior year results which, in respect of any US$ currency denominatedactivity, have been translated using the average US$ exchange rate for the yearended 31 March 2006, which was $1.79 to £1.00. The average rate for the yearended 31 March 2005 was $1.87 to £1.00. FINANCIAL RESULTS PRESENTATION National Grid is reporting its 2005/06 full year results under IFRS. Thecomparative results for the year ended 31 March 2005 have also been presented onan IFRS basis and therefore differ from the UK GAAP results previouslypublished. Unless otherwise stated, all financial commentaries are given on abusiness performance basis. Business performance represents the results forcontinuing operations before exceptional items and certain non-cashmark-to-market remeasurements of commodity contracts and financial instrumentsthat are held for economic hedging purposes but did not achieve hedgeaccounting. Commentary provided in respect of results after exceptional itemsand certain non-cash mark-to-market remeasurements is described as 'statutory'. OVERVIEW AND OUTLOOK National Grid has delivered strong operational and financial performance thisyear. We have significantly increased the level of investment across ourbusinesses and taken key strategic steps which we expect will create new valuefor shareholders and strengthen our growth platform. This year we delivered 11%growth in pre-tax profit, 10% growth in earnings per share and returned £2bn ofvalue to shareholders. We are well positioned to continue to deliver strong growth in our existingbusinesses through continued operational performance and investment. Theoperational highlight this year was UK gas distribution, which reducedcontrollable costs by 17% in real terms, achieved our 35% cost reduction targetone year early and delivered a 14% increase in operating profit. UK transmissionsecured favourable results in the French interconnector and LNG storage capacityauctions and we expect a similar performance in 2006/07. National Grid Wirelessdelivered 23% growth in operating profit compared to the prior year(1), meetingits target of £18m annualised cash savings from synergies and growing theunderlying business by 13%. Operationally and strategically, US distribution had a good year. Underlyingresidential deliveries were up for the fifth consecutive year and excluding theincrease in bad debts related to commodity price rises, we delivered a modestreduction in controllable costs. Regulatory agreements reached during the yearare expected to increase revenue by $150m in 2006/07 and $150m in 2007/08. The agreements to acquire KeySpan for $7.3bn cash (and the assumption of $4.5bnof debt), and Southern Union Company's gas distribution assets in Rhode Islandfor $498m cash (and the assumption of $77m of debt), were both announced inFebruary. These acquisitions are an excellent strategic and operational fit withour existing business. They will increase our US gas customer base to 3.4million, around five times the current level, and add to our electricitytransmission and distribution operations. We expect these acquisitions toenhance earnings and cash flow in the first full year after completion and,through investment opportunities in gas distribution, gas pipelines and storage,create additional value for shareholders. Investment in our existing businesses will also be a significant contributor tofuture growth. We have increased investment this year by 36% to £2.1bn and nowproject(2) a further rise to around £2.5bn per annum, totalling around £12bnover the five years to March 2011. £9bn of this investment is expected to be inUK regulated infrastructure, primarily in response to changes in UK energyinfrastructure requirements with the decline of North Sea gas production, the UKGovernment's renewable energy policy and the need for asset replacement. Duringthe same period, our UK regulatory asset base is projected to grow by almost40%, with annual increases of over £1bn. Reflecting our results this year, and our continued confidence in NationalGrid's future prospects, the Board has reaffirmed our strongly progressivedividend policy. The Board is recommending a 10% increase in the full yeardividend which, for the third consecutive year, is ahead of our aim ofincreasing dividends per share by 7% per annum. (1) Pro forma operating profit comparison for National Grid Wireless refers toannualisation of the 7 month contribution to 2004/05 operating profit from CrownCastle UK following its acquisition in August 2005. (2) National Grid is currently working with Ofgem on the Transmission PriceControl Review for 2007 - 2012. The UK transmission regulated element of theprojections set out above are central to the review with respect to assumptionsabout the level of capital investment and how capital investment will bedepreciated for regulatory purposes. REVIEW OF GROUP RESULTS Revenue from continuing activities was £9.2bn, up £1.8bn. Operating profit increased by 3% to £2,527m, up £84m. This was primarily drivenby a continued achievement of efficiencies, particularly in UK gas distribution,favourable results from UK capacity auctions in LNG storage and the Frenchinterconnector, a full-year contribution from the growing Wirelessinfrastructure business and sustained volume growth in the US. Strongoperational performance across the Group more than offset an increase indepreciation charges in UK transmission, a loss on the UK electricity BalancingServices Incentive Scheme and the impact of timing of recoveries of pass-throughcosts in the US. Net finance costs decreased 14% from £706m to £606m. This was primarily theresult of a decrease in average net borrowings following the gas distributionnetwork sales, which were completed in June. Profit before tax was up 11% to £1,924m from £1,740m. The tax charge on profit for the year was £597m, £160m higher than the prioryear due to increased profit before tax and a higher effective tax rate of 31%.This rate reflected a reduction in prior year tax credits, an increase inprofits and changes in UK tax legislation. Earnings increased 2% on the prior year to £1,325m from £1,303m, while earningsper share increased 10% from 42.3p last year to 46.7p. Exceptional items and remeasurements for continuing operations amounted to £110mafter tax. These comprised restructuring costs of £60m (£48m after tax),commodity remeasurement impacts of £63m (£38m after tax), exceptional financecharges of £49m (£34m after tax), net financial instrument remeasurement gainsof £6m (£11m loss after tax) and profit on sale and reversal of impairment ofnon-core Group businesses of £21m (£21m after tax). After these items andminority interests, statutory earnings for continuing operations were £1,215m.Statutory basic earnings per share from continuing operations increased 18% to42.8p, up from 36.3p last year. National Grid's cash flows grew strongly, with operating cash flow up 8% to£3.1bn. Investment in our existing businesses increased by 36% to £2.1bn, primarily dueto increases in new UK gas and electricity transmission infrastructure and UKelectricity transmission asset replacement. Investment during the year included: o £280m on UK electricity asset replacement, particularly overhead lineso £203m on UK electricity demand connections and other load-related infrastructureo £124m on the Milford Haven project to deliver new gas transmission entry capacity in South Wales; this represents around 15% of the total projected investment through to 2008o £77m on projects in support of new UK gas transmission entry capacity at Easingtono £295m on UK gas distribution replacement expenditureo £136m on the Isle of Grain LNG importation terminal. Phase I of the terminal was commissioned in July 2005; Phase II investment to increase capacity is well underwayo £71m on the Basslink interconnector, which commenced operations in April. Other smaller projects across the UK and US together account for a further £876mof investment. Group net debt fell to £10.9bn at 31 March 2006 compared with £14.0bn at 1 April2005. This reduction primarily reflected the receipt of £5.8bn upon completionof the gas distribution network sales in June 2005, less the £2.0bn return ofvalue to shareholders in August 2005 and the impact of increased capitalinvestment. A final dividend of 15.9p per ordinary share ($1.5115 per American Depositoryshare (ADS)) is to be paid on 23 August 2006 to shareholders on the register asat 9 June 2006. REVIEW OF OPERATIONS TRANSMISSION Year ended 31 March 2006 (£m) 2005 (£m) % Change Operating profitUK electricity transmission 492 559 (12)UK gas transmission 250 268 (7)Other * 102 32 219 ------------------------UK electricity and gas transmission 844 859 (2) US electricity transmission - actual exchange rate 127 126 1 - constant currency basis 127 132 (4) * Other includes LNG storage and the French interconnector in both periods. The Scottish interconnector is included in 'UK electricity transmission' in both periods. UK electricity and gas transmission operating profit was down 2% at £844mcompared with £859m last year. Increased demand for capacity on the Frenchinterconnector and in LNG storage led to a £70m increase in operating profit;the results of recent capacity auctions indicate that these businesses will alsodeliver similar results in 2006/07. However this was more than offset by TOdepreciation charges which were £83m higher year-on-year. This increasecomprised a one-off benefit of £15m in the prior year, £58m of charges relatedto early asset write-off and a £10m increase in core depreciation. Timing on the collection of income benefited operating profit by £40m. This wasoffset by other one-off charges totalling £21m, for which we are pursuingregulatory recovery, and a £10m loss under the electricity Balancing ServicesIncentive Scheme, resulting in an adverse operating profit movement of £21myear-on-year. Higher energy prices, together with tougher regulatory targets,have resulted in higher electricity system balancing costs. In March 2006 wechose not to accept Ofgem's proposal for an incentivised scheme for 2006/07.Instead we opted for a cost pass-through scheme, with no up-side incentive ordown-side loss, which we will deliver against our licence obligations to operatethe electricity system in an economic and efficient manner. In January, we accepted Ofgem's final proposals for the one-year extension ofthe UK electricity transmission price control to 31 March 2007. In thisextension, Ofgem moved to a post-tax allowed return of 4.4% which, after aNational Grid Electricity Transmission specific tax allowance of £104m, isequivalent to a 7% pre-tax real return. This will result in a 9% increase inrevenue for 2006/07. We are currently working with Ofgem on a five-year UKelectricity and gas transmission price control and have set out our projectionsfor necessary and efficient investment in asset replacement and newinfrastructure. For the five years to March 2011, we project a total investmentof over £6bn. On the basis of these projections, if agreed by Ofgem, we expect the combined UKelectricity and gas transmission regulatory asset base to grow by more than 50%from its March 2006 value over the next five years. Ofgem's initial proposalsare expected in June. US transmission operating profit at £127m was broadly flat year-on-year. Higherreturns in New England and the benefit of the stronger US dollar were offset bya one-time write-off of interconnection related costs, generally higher costs toaddress reliability issues and the cessation of Grid America. UK GAS DISTRIBUTION Year ended 31 March 2006 (£m) 2005 (£m) % Change Operating profit 483 424 14 Operating profit from UK gas distribution continuing operations was up 14% at£483m compared with £424m last year, despite high gas prices driving shrinkagegas costs up £17m. This year, through the Way Ahead programme, we delivered a very strongperformance, reducing operating expenditure by £52m. Controllable costs,excluding increases in ongoing pension costs and shrinkage gas commodity prices,have decreased by 17% in real terms this year, and by 35% in real terms sinceMarch 2002. This represents cumulative savings of around £375m. UK gas distribution results are also affected by changes in volumes, includingweather-related effects. Underlying volumes were down by 3%, partly as a resultof reduced gas usage in the second half of the year as energy prices rose. Thiswas more than offset by weather effects, as 2005/06 was close to seasonal normand, on average, colder than the prior year. Taken together, the effects ofweather and volumes added £12m to operating profit during 2005/06. During the year, we consolidated our UK gas distribution activities into threekey sites at Warwick, Hinckley and Northampton. This will enable the business tomove to the next stage in improving some of its cross-functional processes andsystems. Our Alliance initiative has continued to deliver the growing mainsreplacement programme, with over 1,700km of mains replaced during 2005/06, 18%more than the previous year resulting in total replacement expenditure (repex)of £295m. Mains replacement is expected to increase to over 1,800km in 2006/07.We have also continued to invest in network infrastructure projects, resultingin total capital expenditure (including repex) of £444m. We are currently working with Ofgem on a one-year extension of the UK gasdistribution price control to March 2008. In December, Ofgem published itsinitial consultation. A second consultation is expected in July and initialproposals from Ofgem are expected in September. Following this one-year review,we will work with Ofgem on a five-year UK gas distribution price control. Inthis five-year review Ofgem may consider using comparative regulation, similarto the models used in electricity and water distribution price control reviews,and we believe that the controllable cost reductions we have achieved will placeour four gas networks in a strong position. US DISTRIBUTION Year ended 31 March 2006 (£m) 2005 (£m) % Change Operating profit (actual exchange rate)US electricity and gas distribution 364 375 (3)US stranded cost recoveries 489 465 5 ------------------------ 853 840 2 Operating profit (constant currency basis)US electricity and gas distribution 364 392 (7)US stranded cost recoveries 489 486 1 ------------------------ 853 878 (3) Operating profit from US gas and electricity distribution was £364m, down 3%.This was primarily due to a £23m increase in pension costs, the majority ofwhich will be recovered from 2006/07 onwards, and timing on the recovery ofcommodity costs, partially offset by the stronger US dollar. Excluding theseitems US distribution operating profit was flat year-on-year. Growth, with weather normalised residential volumes up 1.7%, was offset byhigher depreciation and amortisation as capital projects, including new ITsystems, went into service. The strong focus on managing bad debts resulted inonly a £2m increase despite significantly higher gas and electric prices, whichwere up 45% on average and increased accounts receivable by over $150m.Excluding the increase in bad debts relating to commodity price rises, weachieved a modest reduction in controllable costs. In accordance with our New York rate plan, US distribution makes biannualregulatory filings to recover amounts in the 'deferral account'. Following thelatest filing, we received approval to recover $150m during 2006/07 and $150mduring 2007/08. A regulatory audit of the deferral account is ongoing. In March2006, the Massachusetts rate plan entered its index-linked phase. Until 2010,rates in Massachusetts will be linked to an index of regional peers whichrequires that its delivery rates remain at 88% of the peer group index.Implementing this mechanism resulted in a 4% delivery rate increase, which willincrease revenues by $20m, with effect from March 2006. US distribution is alsoincentivised under service quality standards and, in 2006/07, we expect toincrease spending in our reliability enhancement programme to improveperformance. US stranded cost recoveries delivered £489m of operating profit. This comprisedthe ongoing recovery of and return on the stranded cost base amounting to £337m,and £152m primarily related to the recovery of contract settlements made undercertain long-term purchased power arrangements. WIRELESS INFRASTRUCTURE Year ended 31 March 2006 (£m) 2005 (£m) % Change Operating profit 75 42 23* * Operating profit growth compared to pro forma 2004/05 operating profit with Crown Castle UK 7 month contribution annualised over 12 months. Operating profit for Wireless infrastructure was £75m, up from £42m in the prioryear. This reflected a full year contribution from the enlarged business,delivery of 23% growth in operating profit, including achievement of our targetof £18m annualised cash synergy savings. Excluding these savings we delivered13% growth in operating profit, as compared to the prior year on a pro formabasis. This business is well positioned for continued double digit profit growth. Inmobile, demand for additional tenancies was good. In November, we successfullyextended our contract with the BBC to deliver analogue television and radioservices through to 2012 for television and 2013 for AM and FM radio. Over thesix years to 2012, we expect to invest over £200m in new common digitaltelevision broadcast infrastructure, and around £50m in our own digitalbroadcast transmission assets. We have also bid to provide managed transmissionservices to the BBC for digital television and radio. We also own digital broadcast channel capacity and during the year exploitedcontinuing advances in digital compression technology to create capacity forthree additional channels. These were successfully purchased by ITV and Channel4. OTHER ACTIVITIES Year ended 31 March 2006 (£m) 2005 (£m) % Change Operating profit 145 152 (5) Operating profit from our Other Activities was down 5% at £145m, compared with£152m in the prior year, reflecting the fluctuation of Property profits. Phase I at the Isle of Grain LNG terminal was commissioned in July and with workon Phase II well under way, this business contributed £6m to operating profit.The total expected £500m investment is underpinned by 20-year capacity contractswith BP, Sonatrach, Centrica and Gaz de France, and when Phase II is complete inlate 2008, will have the capacity to deliver around 13% of current UK gasdemand. We are evaluating market demand for a third phase that would offerfurther capacity to the market. National Grid Metering has delivered strong performance, with operating profitup £28m. We made good progress in driving operational efficiency, which togetherwith growth in our competitive metering business, more than offset a decline inregulated metering revenue. In June, Ofgem initiated an investigation under theCompetition Act into certain aspects of our domestic gas metering business. On17th May 2006, Ofgem issued a Statement of Objections detailing, for the firsttime, why it believes that National Grid's conduct in relation to this businessamounts to a breach of the Competition Act. We are now considering our response. Land and buildings surplus to our operational requirements are remediated asnecessary and sold by our property business. By their nature, property sales canvary from period to period depending on the number and mix of properties sold.At £88m, operating profit was £14m lower this year. Our Basslink interconnector, linking Tasmania to the energy market insoutheastern Australia, was successfully commissioned and entered intooperational service in April. This investment is supported by a long-termcontract with Hydro Tasmania and is the longest sub-sea interconnector in theworld. DIVIDEND The Board has recommended a final dividend of 15.9p per ordinary share ($1.5115per American Depository share (ADS)), representing a 10% increase in thefull-year dividend. This increase delivers dividend growth of more than 60%since March 2002. The final dividend is to be paid on 23 August 2006 to shareholders on theregister as at 9 June 2006. We aim to continue to increase dividends per ordinary share expressed insterling by 7% in each financial year through to 31 March 2008. KEYSPAN AND NEW ENGLAND GAS ACQUISITIONS We are making good progress on both the KeySpan and Rhode Island gasdistribution acquisitions. Key personnel have been appointed to the integrationteams. With respect to the Rhode Island acquisition, National Grid and Southern UnionCompany have filed for regulatory approvals at the Federal and State level andwe expect the transaction to complete during the summer. Together with KeySpan we continue to meet with stakeholders regularly and, aspart of this process, are in discussions with Long Island Power Authority as itevaluates the benefits of the transaction to Long Island electricity customers.We are also working on the Federal and State regulatory filings and theshareholder approvals processes and expect the transaction to complete in early2007. BOARD CHANGES In January, we announced that Roger Urwin will retire as Group Chief Executivetowards the end of 2006. Following a thorough evaluation of internal andexternal candidates, the Board was pleased to appoint Steve Holliday as DeputyGroup Chief Executive with effect from 1 April 2006. Steve will assume the roleof Group Chief Executive upon Roger's retirement. In February we also announced the retirement of John Grant as a Non-executiveDirector with effect from 31 July 2006. CONTACT DETAILS National Grid: InvestorsDavid Campbell +44 (0)20 7004 3170 +44 (0)7799 131783(m)Richard Smith +44 (0)20 7004 3172 +44 (0)7747 006321(m)James Waite +44 (0)20 7004 3171 +44 (0)7977 440902(m) MediaClive Hawkins +44 (0)20 7004 3147 +44 (0)7836 357173(m) Citigate Dewe Rogerson +44 (0)20 7638 9571Anthony Carlisle +44 (0)7973 611888(m) An analyst presentation will be held at London Stock Exchange, 10 PaternosterSquare, London EC4M 7LS at 9:00am (UK time) today. Live telephone coverage of the analyst presentation - password National Grid Dial in number +44 (0)20 7081 9429US dial in number +1 866 43 27 186 Telephone replay of the analyst presentation (available until 2 June 2006) Dial in number +44 (0)20 8196 1998US dial in number +1 866 583 1035Account number 869448 A live web cast of the presentation will also be available atwww.nationalgrid.com Photographs are available on www.newscast.co.uk Cautionary statement This announcement contains certain statements that are neither reportedfinancial results nor other historical information. These statements areforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Because these forward-looking statements are subject to assumptions,risks and uncertainties, actual future results may differ materially from thoseexpressed in or implied by such statements. Many of these assumptions, risks anduncertainties relate to factors that are beyond National Grid's ability tocontrol or estimate precisely, such as delays in obtaining, or adverseconditions contained in, regulatory and shareholder approvals and contractualconsents, including those required in connection with the announced USacquisitions, unseasonable weather and changes in historical weather patternsaffecting demand for electricity and gas, competition and industryrestructuring, changes in economic conditions, currency fluctuations, changes ininterest and tax rates, changes in energy market prices, changes in laws,regulations or regulatory policies, developments in legal or public policydoctrines, the impact of changes to accounting standards and technologicaldevelopments. Other factors that could cause actual results to differ materiallyfrom those described in this announcement include the ability to complete theannounced US acquisitions when or as planned and to integrate the businessesrelating to such acquisitions with the Group and realise the expected synergiesfrom such integration, the availability of new acquisition opportunities and thetiming and success of future acquisition opportunities, the impact of the salesof businesses by the Group, the failure for any reason to achieve reductions incosts or to achieve operational efficiencies, the failure to retain keymanagement, the behaviour of UK electricity market participants on systembalancing, the timing of amendments in prices to shippers in the UK gas market,the performance of National Grid's pension schemes and the regulatory treatmentof pension costs, and any adverse consequences arising from outages on orotherwise affecting energy networks, including gas pipelines, owned or operatedby National Grid. For a more detailed description of some of these assumptions,risks and uncertainties, together with any other risk factors, please seeNational Grid's filings with and submissions to the US Securities and ExchangeCommission (and in particular the "Risk Factors" and "Operating and FinancialReview" sections in its most recent Annual Report on Form 20-F). Recipients arecautioned not to place undue reliance on these forward-looking statements, whichspeak only as of the date of this announcement. Except as required by law orregulation, National Grid does not undertake any obligation to release publiclyany revisions to these forward-looking statements to reflect events orcircumstances after the date of this announcement. GROUP INCOME STATEMENT for the years ended 31 March 2006 2005(i) Notes £m £m =========== ===========Group revenue 2a 9,193 7,382Other operating income 80 70Operating costs (6,834) (5,310) ----------- -----------Operating profit - Before exceptional items and remeasurements 2b 2,527 2,443 - Exceptional items and remeasurements 3 (88) (301)Total operating profit 2c 2,439 2,142 Interest income and similar income 4 1,038 946 Interest expense and other financecosts - Before exceptional items and remeasurements 4 (1,644) (1,652) - Exceptional items and remeasurements 3 (57) - 4 (1,701) (1,652) Share of post-tax results ofjoint ventures 3 3 ----------- ----------- Profit before taxation - Before exceptional items and remeasurements 1,924 1,740 - Exceptional items and remeasurements (145) (301)Total profit before taxation 1,779 1,439Taxation - Before exceptional items and remeasurements 5 (597) (437) - Exceptional items and remeasurements 3 35 118Total taxation (562) (319) ----------- ----------- Profit from continuing operationsafter taxation - Before exceptional items and remeasurements 1,327 1,303 - Exceptional items and remeasurements (110) (183)Profit for the year fromcontinuing operations 1,217 1,120 Profit for the year from discontinuedoperations - Before exceptional items 6 43 352 - Exceptional items 6 2,590 (48) 2,633 304 ----------- -----------Profit for the year 3,850 1,424 =========== ===========Attributable to: - Equity shareholders of the parent 3,848 1,424 - Minority interests 2 - ----------- ----------- 3,850 1,424 =========== =========== Earnings per share - Basic 7a 135.6p 46.2p - Diluted 7b 135.0p 46.0pEarnings per share from continuingoperations - Basic 7a 42.8p 36.3p - Diluted 7b 42.6p 36.2p =========== ===========Dividends per ordinaryshare: paid during the year 8 25.4p 20.4pDividends per ordinaryshare: approved or proposedto be paid 26.1p 23.7p =========== =========== i) Refer to note 1 for the basis of preparation of the comparatives presented under International Financial Reporting Standards. GROUP BALANCE SHEET at 31 March 2006 2005(i) Note £m £m =========== ===========Non-current assetsGoodwill 2,142 2,031Other intangible assets 321 358Property, plant andequipment 18,935 22,645Investments in jointventures 12 17Deferred tax assets 159 318Other receivables 38 96Financial investments 148 131Derivative financial assets 351 - ----------- -----------Total non-current assets 22,106 25,596 ----------- -----------Current assetsOther intangible assets 41 -Inventories 108 101Trade and other receivables 1,519 1,193Financial investments 384 398Derivative financial assets 314 -Cash and cash equivalents 1,452 272 ----------- -----------Total current assets 3,818 1,964 ----------- -----------Total assets 25,924 27,560 ----------- -----------Current liabilitiesBank overdrafts (3) (18)Borrowings (2,839) (3,243)Derivative financialliabilities (92) -Trade and other payables (2,095) (2,337)Current tax liabilities (419) (103)Provisions (235) (273) ----------- -----------Total current liabilities (5,683) (5,974) ----------- -----------Non-current liabilitiesBorrowings (10,287) (11,047)Derivative financialliabilities (130) -Other non-currentliabilities (1,719) (2,429)Deferred tax liabilities (2,161) (3,189)Pensions and otherpost-retirement benefitobligations (1,915) (2,282)Provisions (536) (518) ----------- -----------Total non-currentliabilities (16,748) (19,465) ----------- -----------Total liabilities (22,431) (25,439) ----------- -----------Net assets 3,493 2,121 =========== ===========EquityCalled up share capital 310 309Share premium account 1,316 1,289Retained earnings 6,817 5,650Other reserves (4,961) (5,137) ----------- -----------Total shareholders' equity 3,482 2,111Minority interests 11 10 ----------- -----------Total equity 3,493 2,121 =========== =========== Net debt (net of relatedderivative financialinstruments) included above 9 10,850 13,638 ----------- ----------- i) Refer to note 1 for the basis of preparation of the comparatives presented under International Financial Reporting Standards. Net debt at 31 March 2005 has not been adjusted to reflect the impact of IAS 39,which has been adopted from 1 April 2005 onwards. GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the years ended 31 March 2006 2005(i) £m £m =========== ===========Exchange adjustments 141 (6)Actuarial gains 181 253Net losses taken to equity inrespect of cash flow hedges (12) -Transferred to profit or losson sale of cash flow hedges (20) -Net gains taken to equity onavailable-for-sale investments 4 -Transferred to profit or losson sale of available-for-saleinvestments (1) -Tax on items taken directly toor transferred from equity (43) (66) ----------- -----------Net income recognised directlyin equity 250 181Profit for the year 3,850 1,424 ----------- -----------Total recognised income andexpense for the year 4,100 1,605 =========== ===========Attributable to: - Equity shareholders of the parent 4,097 1,605 - Minority interests 3 - ----------- ----------- 4,100 1,605 =========== =========== Effect of change in accountingpolicy - IAS 39 (ii) (43) - =========== =========== i) Refer to note 1 for the basis of preparation of the comparatives presented under International Financial Reporting Standards. ii) The Group has adopted IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' prospectively with effect from 1 April 2005, in accordance with the transition provisions of IFRS 1. The impact of IAS 39 attributable to minority interests was £nil. GROUP CASH FLOW STATEMENT 2006 2005(i)for the years ended 31 March £m £m =========== ===========Cash flows from operating activitiesTotal operating profit 2,439 2,142Adjustments for:Exceptional items andremeasurements 88 301Depreciation and amortisation 952 819Share-based payment charge 15 12Changes in working capital (212) (105)Changes in provisions 9 (119)Changes in pensions and otherpost-retirement benefitobligations (42) (19)Cash flows relating toexceptional items (118) (120) ----------- -----------Cash flows generated fromcontinuing operations 3,131 2,911Cash flows relating todiscontinued operations (20) 547 ----------- -----------Cash generated from operations 3,111 3,458Tax paid - continuingoperations (103) (52)Tax paid - discontinuedoperations (37) (98) ----------- -----------Net cash inflow from operatingactivities 2,971 3,308 ----------- -----------Cash flows from investing activitiesAcquisition of subsidiaries,net of cash acquired - (1,122)Sale of investments in jointventures 8 8Purchases of intangible assets (16) (79)Purchases of property, plantand equipment (1,750) (1,427)Disposals of property, plantand equipment 18 22Net movements in financialinvestments 25 (59)Dividends received from jointventures 2 5 ----------- -----------Cash flows used in continuingoperations investing activities (1,713) (2,652)Cash flows relating todiscontinued operations -disposal proceeds 5,750 -Cash flows relating todiscontinued operations - otherinvesting activities (115) (323) ----------- -----------Net cash inflow from/(used in)investing activities 3,922 (2,975) ----------- -----------Cash flows from financing activitiesProceeds from issue of sharecapital 54 13(Decrease)/increase inborrowings and relatedderivatives (2,304) 1,052Net interest paid (704) (762)Exceptional finance costs onthe repayment of debt (49) -Dividends paid to shareholders (745) (628)Cash paid to shareholders under'B' share scheme (1,957) -Purchase of treasury shares (7) - ----------- -----------Net cash used in financingactivities (5,712) (325) ----------- -----------Net increase in cash and cashequivalents 1,181 8Exchange movements 14 (1)Net cash and cash equivalentsat start of year (ii) 254 247 ----------- -----------Net cash and cash equivalentsat end of year (ii) 1,449 254 =========== =========== i) Refer to note 1 for the basis of preparation of the comparatives presented under International Financial Reporting Standards. ii) Net of bank overdrafts. NOTES TO THE PRELIMINARY ANNOUNCEMENT 1. Basis of preparation Basis of preparation The financial information contained in this announcement, which does notconstitute statutory accounts as defined in Section 240 of the Companies Act1985, has been derived from the statutory accounts for the year ended 31 March2006, which will be filed with the Registrar of Companies in due course. Theauditors' report on these statutory accounts was unqualified and did not containa statement under Section 237(2) or (3) of the Companies Act 1985. For the financial periods up to 31 March 2005, National Grid plc preparedconsolidated financial statements in accordance with UK GAAP. From 1 April 2005National Grid has prepared its consolidated financial statements in accordancewith International Financial Reporting Standards (IFRS) as endorsed by the EUand effective for National Grid's reporting for the year ended 31 March 2006.This preliminary announcement has been prepared on the basis of the Group'saccounting policies applicable for the year ending 31 March 2006 as set out inAppendix 1. IFRS transitional arrangements The Group's transition date to IFRS is 1 April 2004. The rules for first-timeadoption of IFRS are set out in IFRS 1 'First-time adoption of InternationalFinancial Reporting Standards'. In preparing the Group's first IFRS financialstatements, these transition rules have been applied to the amounts reportedpreviously under generally accepted accounting principles in the United Kingdom('UK GAAP'). IFRS 1 generally requires full retrospective application of thestandards and interpretations in force at the first reporting date. However,IFRS 1 allows certain exemptions in the application of particular standards toprior periods in order to assist companies with the transition process. NationalGrid has applied the following exemptions and choices on transition: i) The Group has elected to adopt IAS 32 and IAS 39 with effect from 1 April2005, with no restatement of comparative information for the year to 31 March2005. As a result, the balance sheet at 31 March 2005 and the income statementfor the year ended 31 March 2005 exclude the effect of IAS 32 and IAS 39. Theadoption of IAS 39 had the effect of increasing net debt at 1 April 2005 by£348m and reducing net assets by £43m. ii) IFRS 3 'Business combinations' has not been applied to business combinationsthat occurred before 1 April 2004. iii) The Group has deemed cumulative translation differences for foreignoperations to be zero at the date of transition. Any gains and losses onsubsequent disposals of foreign operations will not therefore includetranslation differences arising prior to the transition date. iv) At the date of transition, the vast majority of assets were valued atdepreciated cost, as adjusted for IFRS measurement changes with some assetsbeing measured at deemed cost. v) The Group has elected to account for existing joint ventures using the equitymethod. vi) For pensions accounting, the Group has elected to recognise all actuarialgains and losses each year in the Statement of Recognised Income and Expense. vii) For share-based payments, all active grants were recognisedretrospectively. This is consistent with the treatment the Group had applied inprior years under UK GAAP in accordance with FRS 20. New IFRS accounting standards and interpretations adopted in 2005/06 In preparing these financial statements, the Group has complied with all IFRSsapplicable for periods beginning on or after 1 January 2005. In addition theGroup has adopted the following amendments to standards: Amendment to IAS 1 'Presentation of Financial Statements' The amendment requires new disclosures about entities' management of theircapital resources and compliance with capital requirements. Amendment to IAS 19 'Employee Benefits: Actuarial Gains and Losses, Group Plansand Disclosures' The principal impact of adopting the amendment is that actuarial gains andlosses in respect of the Group's defined benefit schemes are recognised in thestatement of recognised income and expense and additional disclosures regardingthe schemes have been provided. Amendment to IAS 39 'Financial Instruments: Recognition and Measurement - CashFlow Hedge Accounting of Forecast Intragroup Transactions' In consolidated financial statements, the amendment allows the foreign currencyrisk of a highly probable forecast intragroup transaction to qualify as a hedgeditem provided that the transaction is denominated in a currency other than thefunctional currency of the entity entering into that transaction and that theforeign currency risk will affect consolidated profit or loss. IFRS 7 'Financial Instruments: Disclosures' IFRS 7 replaces the disclosure requirements in IAS 32 'Financial Instruments:Presentation and Disclosure' and locates in one place all disclosures relatingto financial instruments. The new requirements incorporate many of IAS 32'sdisclosures as well as additional qualitative and quantitative disclosures onthe risks arising from financial instruments. This announcement was approved by the Board of Directors on 17 May 2006. 2. Segmental analysis Segmental information is presented in accordance with the managementresponsibilities and economic characteristics, including consideration of risksand returns, of the Group's business activities. The following table describesthe main activities for each business segment: UK electricity and High-voltage electricity transmission networks, the gasgas transmission National Transmission System in the UK, UK liquefied natural gas storage activities and the Scottish and French electricity interconnectorsUS electricity High-voltage electricity transmission networks and managementtransmission of electricity transmission operations for other utilities in the USUK gas Four of the eight regional networks of Great Britain's gasdistribution distribution systemUS electricity and Electricity and gas distribution in New York and electricitygas distribution distribution in New EnglandUS stranded cost The recovery of stranded costs from US customers as permittedrecoveries by regulatory agreementsWireless Broadcast and mobile telephone infrastructure in the UK andinfrastructure US Other activities primarily relate to UK-based gas metering activities, UKproperty management, a UK LNG import terminal, an electricity interconnector inAustralia and our engineering and software company, together with corporateactivities, including business development. UK liquefied natural gas storage activities and the Scottish and Frenchinterconnectors are both included within UK electricity and gas transmission.These were previously reported in the Group UK GAAP accounts for the year ended31 March 2005 within Other activities. This change in segmental presentationfollows a change in the organisational and management structure within the Groupand the change in regulatory arrangements for the Scottish interconnectorfollowing the introduction of British Electricity Trading and TransmissionArrangements (BETTA). The segment results for the year ended 31 March 2005 havebeen amended to reflect this change. The impact of this change on segmentresults for the year ended 31 March 2005 was to increase UK electricity and gastransmission revenue by £65m and operating profit by £42m, to reduce Otheractivities revenue by £110m and operating profit by £42m and to reduceintra-group revenue eliminations by £45m. There was no difference between theimpact on operating profit before exceptional items and remeasurements and thatfor operating profit after exceptional items and remeasurements. Discontinued operations comprise the operations of the four UK gas distributionnetworks that the Group sold on 1 June 2005 and the results of Citelec, anArgentinian joint venture sold in August 2004. The results for discontinuedoperations are disclosed in note 6. The Group assesses the performance of its businesses principally on the basis ofoperating profit before exceptional items and remeasurements. The Group'sprimary reporting format is by business and the secondary reporting format is bygeographical area. Sales between businesses are generally based on the same prices as would havebeen charged to third parties ('arms-length' principle). a) Group revenue Years ended 31 March 2006 2005 £m £m =========== ===========Business segmentsUK electricity and gastransmission 2,710 1,995US electricity transmission 310 284UK gas distribution 1,222 1,113US electricity and gasdistribution 3,711 3,087US stranded cost recoveries 511 409Wireless infrastructure 325 208Other activities 701 734Sales between businesses (297) (448) ----------- -----------Group revenue 9,193 7,382 =========== ===========Geographical segmentsUK 4,671 3,621US 4,522 3,761 ----------- -----------Group revenue 9,193 7,382 =========== =========== b) Operating profit - before exceptional items and remeasurementsYears ended 31 March 2006 2005 £m £m =========== ===========Business segmentsUK electricity and gastransmission 844 859US electricity transmission 127 126UK gas distribution 483 424US electricity and gasdistribution 364 375US stranded cost recoveries 489 465Wireless infrastructure 75 42Other activities 145 152 ----------- -----------Operating profit beforeexceptional items andremeasurements 2,527 2,443 =========== =========== Geographical segmentsUK 1,549 1,473US 983 970Rest of the World (5) - ----------- -----------Operating profit beforeexceptional items andremeasurements 2,527 2,443 =========== =========== c) Operating profit - after exceptional items and remeasurementsYears ended 31 March 2006 2005 £m £m =========== ===========Business segmentsUK electricity and gastransmission 843 857US electricity transmission 127 119UK gas distribution 432 333US electricity and gasdistribution 364 258US stranded cost recoveries 440 427Wireless infrastructure 70 29Other activities 163 119 ----------- -----------Operating profit after exceptionalitems and remeasurements 2,439 2,142 =========== =========== Geographical segmentsUK 1,489 1,335US 934 807Rest of the World 16 - ----------- -----------Operating profit after exceptionalitems and remeasurements 2,439 2,142 =========== =========== 3. Exceptional items and remeasurements The Group separately discloses items of income and expenditure relating totransactions that are material, either by their nature or their size, that arerelevant to an understanding of the Group's financial performance. These includenon-recurring exceptional income or charges that do not relate to the underlyingfinancial performance of the Group and remeasurement gains or losses arisingfrom movements in the carrying value of certain commodity contracts and ofderivative financial instruments. Years ended 31 March 2006 2005 £m £m ============ ============Exceptional items -restructuring costs (i) 60 121Exceptional items - pastservice pension costs (ii) - 41Exceptional items -environmental relatedprovisions (iii) - 101Exceptional items - profit onsale and reversal ofimpairment (iv) (21) -Remeasurements - commoditycontracts (v) 49 38Total exceptional items andremeasurements included withinoperating profit 88 301 Exceptional finance costs (vi) 49 -Remeasurements - commoditycontracts (v) 14 -Remeasurements - net gains onderivative financialinstruments (vii) (6) -Total exceptional items andremeasurements included withinfinance costs 57 - ----------- -----------Total exceptional items andremeasurements before taxation 145 301 =========== =========== Tax on restructuring costs (i) (12) (34)Tax on exceptional pastservice pension costs (ii) - (17)Tax on environmental relatedprovisions (iii) - (39)Tax on commodity contractremeasurements (v) (25) (15)Tax on exceptional financecosts (vi) (15) -Tax on derivative financialinstrument remeasurements(vii) 17 -Other exceptional tax credits(viii) - (13) ----------- -----------Tax on exceptional items andremeasurements (35) (118) ============ ============ Total exceptional items andremeasurements 110 183 ============ ============ i) Restructuring costs relate to planned cost reduction programmes in theUK and US businesses. For the year ended 31 March 2006, restructuring costsincluded pension curtailment costs of £25m arising as a result of redundancies(2005: £22m). ii) Past service pension costs arose from the renegotiation of terms andconditions of service with certain employees in the US. iii) During the year ended 31 March 2005, a review of the environmentalprovisions was undertaken to take into account the impact of changes to UKregulations on waste disposal. This review, together with related revisions tothe expected UK expenditure profile, resulted in a charge of £41m in 2005.Following a similar review in the US of environmental provisions, an additionalexceptional charge of £60m was made for site restoration, which reflected theexperience of restoring similar sites. iv) Reversal of prior period impairment of £13m related to National Grid'sinvestment in Copperbelt Energy Corporation (CEC) and gain on disposal of aninvestment in Energis Polska of £8m. v) Remeasurements - commodity contracts represent mark-to-market movementson certain commodity contract obligations, primarily indexed-linked swapcontracts, in the US. Under the Group's existing rate plans in the US, commoditycosts are fully recovered from customers, although the pattern of recovery maydiffer from the pattern of costs incurred. These movements are comprised ofthose impacting operating profit which is based on the change in the commoditycontract liability and those impacting finance costs as a result of changingdiscount rates due to market fluctuations. vi) Exceptional finance costs for the year ended 31 March 2006 representcosts incurred on the early redemption of debt following the disposal of four UKgas distribution networks (£39m), together with issue costs associated with the'B' share scheme (£10m). vii) Remeasurements - net gains on derivative financial instruments representmark-to-market movements in the fair value of financial instruments, primarilyderivatives, that are mainly held for economic hedging purposes, but which donot achieve hedge accounting or are partly ineffective under IAS 39. viii) The exceptional tax credit in 2005 includes a credit of £22m associatedwith the prior period disposal of Energis, a former associate company, a £3mcredit associated with the prior period write-down of investments, and a £12mcharge relating to the settlement of the liabilities arising from operating theGroup's Qualifying Employee Share Ownership Trust. 4. Finance income and costs Years ended 31 March 2006 2005 £m £m =========== ===========Pensions - expected return onscheme assets 903 882Interest income on financialinstruments held at amortised cost 135 64 ----------- -----------Interest income and similar income 1,038 946 =========== =========== Pensions - interest on schemeliabilities (891) (881)Interest payable on borrowings(and related derivatives) (795) (820)Unwinding of discount onprovisions (18) (14)Less: interest capitalised 60 63 ----------- ----------- (1,644) (1,652)Net losses on derivative financialinstruments and commoditycontracts (8) -Exceptional losses on earlyredemption of debt and B shareissue costs (49) - ----------- -----------Interest expense and other financecosts (1,701) (1,652) =========== ===========Net finance costs (663) (706) =========== ===========Comprising:Net finance costs - excludingexceptional finance costs andremeasurements (606) (706)Exceptional finance costs andremeasurements (note 3) (57) - ----------- ----------- (663) (706) =========== =========== 5. Taxation Years ended 31 March 2006 2005 £m £m =========== ===========United KingdomCorporation tax at 30% 290 31Adjustment in respect of prioryears (i) (5) (19)Deferred tax 1 82 ----------- ----------- 286 94 =========== ===========OverseasCorporate tax 125 33Adjustment in respect of prioryears 22 (21)Deferred tax 129 213 ----------- ----------- 276 225 =========== ===========Taxation 562 319 =========== ===========Comprising:Taxation - excluding exceptionalitems and remeasurements 597 437Taxation - exceptional items andremeasurements (note 3) (35) (118) ----------- ----------- 562 319 =========== =========== i) The UK corporation tax adjustment in respect of prior years includes £nil(2005: £10m) that relates to exceptional items. 6. Discontinued operations On 1 June 2005, the Group disposed of its holding in four of its eight regionalgas distribution networks. The results of these operations were previouslyincluded within the UK gas distribution segment, when reported under UK GAAP.The Group disposed of its interest in Citelec, an Argentinian joint venture inAugust 2004. Results of discontinued operationsYears ended 31 March 2006 2005 £m £m =========== ===========Revenues 168 1,102Operating costs (122) (666) ----------- -----------Operating profit beforeexceptional items 61 510Exceptional items (i) (15) (74)Total operating profit fromdiscontinued operations 46 436Share of post-tax results of jointventure - (5) ----------- -----------Profit before tax fromdiscontinued operations 46 431Taxation (18) (140) ----------- -----------Profit after tax from discontinuedoperations 28 291 ----------- -----------Gain on disposal of gasdistribution networks (ii) 2,636 -Gain on disposal of joint venture - 13 ----------- -----------Gain on disposal of discontinuedoperations before tax 2,636 13Taxation (31) - ----------- -----------Gain on disposal of discontinuedoperations 2,605 13 ----------- -----------Total profit for the year from discontinuedoperations - Before exceptional items 43 352 - Exceptional items 2,590 (48) 2,633 304 =========== =========== i) The operating exceptional item for the year ended 31 March 2006 relatedto a fine incurred in respect of a breach of the Health and Safety at Work Actarising from a gas explosion in Scotland in December 1999. Exceptional items forthe year ended 31 March 2005 related to restructuring costs (£70m) andenvironmental costs (£4m). ii) The gain on disposal of the UK gas distribution networks resulted fromproceeds of £5,760m comprising cash and cash equivalents, which is significantlyin excess of the net book value of the net assets disposed of £3,155m. 7. Earnings per share a) Basic earnings per share Years ended 31March 2006 2006 2005 2005 £m pence £m pence ========== ========== ========== ==========Adjustedearnings -continuingoperations 1,325 46.7p 1,303 42.3pExceptionaloperatingitems (39) (1.4)p (263) (8.5)pExceptionalfinance costs (49) (1.7)p - -Tax onexceptionalitems 27 0.9p 103 3.3pRemeasurements (57) (2.0)p (38) (1.2)pTax onremeasurements 8 0.3p 15 0.4p ----------- ----------- ----------- -----------Earnings pershare -continuingoperations 1,215 42.8p 1,120 36.3p ========== ========== ========== ==========Adjustedearnings -discontinuedoperations 43 1.5p 352 11.4pGain ondisposal ofgasdistributionnetworks (netof tax) 2,605 91.8p - -Otherexceptionalitems (net oftax) (15) (0.5)p (48) (1.5)p ----------- ----------- ----------- -----------Earnings pershare -discontinuedoperations 2,633 92.8p 304 9.9p ========== ========== ========== ==========Basic earningsper share 3,848 135.6p 1,424 46.2p ========== ========== ========== ========== millions millions ========== ==========Weightedaverage numberof shares -basic 2,837 3,082 ========== ========== b) Diluted earnings per share Years ended 31March 2006 2006 2005 2005 £m pence £m pence ========== ========== ========== =========Adjusteddilutedearnings -continuingoperations 1,325 46.5p 1,303 42.1pExceptionaloperatingitems (39) (1.4)p (263) (8.5)pExceptionalfinance costs (49) (1.7)p - -Tax onexceptionalitems 27 0.9p 103 3.3pRemeasurements (57) (2.0)p (38) (1.2)pTax onremeasurements 8 0.3p 15 0.5p ----------- ----------- ----------- -----------Dilutedearnings pershare -continuingoperations 1,215 42.6p 1,120 36.2p ========== ========== ========== =========Adjusteddilutedearnings -discontinuedoperations 43 1.5p 352 11.4pGain ondisposal ofgasdistributionnetworks (netof tax) 2,605 91.4p - -Otherexceptionalitems (net oftax) (15) (0.5)p (48) (1.6)p ----------- ----------- ----------- -----------Dilutedearnings pershare -discontinuedoperations 2,633 92.4p 304 9.8p ========== ========== ========== =========Dilutedearnings pershare 3,848 135.0p 1,424 46.0p ========== ========== ========== ========= millions millions ========== =========Weightedaverage numberof shares -diluted 2,851 3,096 ========== ========= 8. Dividends The following table shows the dividends paid to equity shareholders: Years ended 31March 2006 2006 2005 2005 pence £m pence £m per ordinary per ordinary share share =========== =========== =========== ===========OrdinarydividendsFinal dividendfor the yearended 31 March2005 15.2p 469 - -Interimdividend forthe year ended31 March 10.2p 276 8.5p 262Final dividendfor the yearended 31 March2004 - - 11.9p 366 ----------- ----------- ----------- ----------- 25.4p 745 20.4p 628 =========== =========== =========== =========== In addition, the Directors are proposing a final dividend for 2006 of 15.9p pershare that will absorb £433m of shareholders' equity. It will be paid on 23August 2006 to shareholders who are on the register of members on 9 June 2006. 9. Reconciliation of net cash flow to movement in net debt Years ended 31 March 2006 2005 £m £m =========== ===========Movement in cash and cashequivalents 1,181 8(Decrease)/increase in financialinvestments (25) 59Decrease/(increase) in borrowingsand derivatives 2,304 (1,052)Cash paid to shareholders under'B' share scheme 1,957 -Net interest paid (i) 704 n/a ----------- -----------Change in net debt resulting fromcash flows 6,121 (985)Exchange adjustments (i) - 112Changes in fair value of financialassets and liabilities andexchange movements (i) (299) n/aIssue of 'B' shares (2,009) -Net interest charge (i) (660) n/aOther non-cash movements (17) (28) ----------- -----------Movement in net debt (net ofrelated derivative financialinstruments) in the year 3,136 (901)Net debt at start of year (13,638) (12,737)Impact of adoption of IAS 32 andIAS 39 (i) (348) - ----------- -----------Net debt (net of relatedderivative financial instruments)at end of year (10,850) (13,638) =========== =========== i) The adoption of IAS 39 resulted in changes to the carrying value ofborrowings and financial investments as at 1 April 2005. Consequently, changesin fair value of financial assets and liabilities are reported in the year ended31 March 2006. Amounts previously reported as exchange adjustments are includedwithin changes in fair value of financial assets and liabilities and exchangemovements. In addition net interest is reported as part of net debt at 31 March2006. 10. Net debt At 31 March 2006 2005 £m £m =========== ===========Cash and cash equivalents 1,452 272Bank overdrafts (3) (18) ----------- -----------Net cash and cash equivalents 1,449 254Financial investments 384 398Borrowings (13,126) (14,290) ----------- ----------- (11,293) (13,638) ===========Net debt related derivativefinancial assets (i) 665Net debt related derivativefinancial liabilities (i) (222) -----------Net debt (net of relatedderivative financial instruments) (10,850) =========== i) As measured in accordance with the requirement of IAS 39. There are no comparatives for net debt related derivative assets and liabilitiesas the Group adopted IAS 39 with effect from 1 April 2005 consistent with therequirements of IFRS 1. The adoption of IAS 39 also resulted in changes to thecarrying value of borrowings and financial investments as at 1 April 2005. 11. Reconciliation of movements in total equity Years ended 31 March 2006 2005(i) £m £m ========== ==========Opening total equity 2,121 1,110Effect of change in accountingpolicy - IAS 39 (ii) (43) - ----------- -----------Restated at 1 April 2005 2,078 1,110 Changes in total equity for the yearNet income recognised directly inequity 250 181Profit for the year 3,850 1,424Equity dividends (745) (628)Return of capital to shareholdersthrough 'B' share scheme (2,009) -Issue of ordinary share capital 28 9Other movements in minorityinterests (2) -Movement in shares held in employeeshare trusts 19 5Employee share option scheme issues 17 16Tax on employee share option schemeissues 7 4 ----------- -----------Closing total equity 3,493 2,121 ========== ========== i) Refer to note 1 for the basis of preparation of the comparativespresented under International Financial Reporting Standards. ii) The Group has adopted IAS 32 'Financial Instruments: Disclosure andPresentation' and IAS 39 'Financial Instruments: Recognition and Measurement'prospectively with effect from 1 April 2005, in accordance with the transitionprovisions of IFRS 1. 12. Exchange rates The Group's results are affected by the exchange rates used to translate theresults of its US operations and US dollar transactions. The US dollar tosterling exchange rates used were: 31 March 2006 2005 =========== ===========Closing rate applied at year end 1.74 1.89Average rate applied for the year 1.79 1.87 =========== =========== 13. Differences between IFRS and US generally accepted accounting principles("US GAAP") Summarised financial statements on a US GAAP basis are set out in the AnnualReport and Accounts. Details of the principal differences between IFRS and USGAAP are shown below. a) Reconciliation of net income to US GAAP The following is a summary of the material adjustments to net income that wouldhave been required if US GAAP had been applied instead of IFRS: Years ended 31 March 2006 2005 £m £m ============ ============Profit for the year attributable to equityshareholders under IFRS 3,848 1,424 ------------ ------------Adjustments to conform with US GAAPDepreciation of property, plant and equipment('PP&E') (127) (233)US regulatory accounting (269) (246)Pensions and other post-retirement benefits (56) 2Financial instruments (130) 254Severance costs (63) 62Revenue recognition (48) 13Amortisation of intangibles (2) (2)Interest on discounted provisions (14) -Deferred taxation 208 28Other (3) 2Discontinued operations - gain on disposal ofbusiness (2,196) -Discontinued operations - pensions and otherpost-retirement benefits (127) -Discontinued operations - deferred tax 286 - ------------ ------------ (2,541) (120) ------------ ------------Net income under US GAAP 1,307 1,304 ============ ============Basic earnings per share - US GAAP 48.2p 48.2p (i)Diluted earnings per share - US GAAP 48.0p 47.9p (i) ============ ============ i) Restated as a result of the 43 for 49 share consolidation, related to thereturn of capital via the 'B' share scheme. b) Reconciliation of shareholders' equity from IFRS to US GAAP The following is a summary of the material adjustments to shareholders' equitythat would have been required if US GAAP had been applied instead of IFRS: At 31 March 2006 2005 £m £m ============ ============Total shareholders' equity under IFRS 3,482 2,111 ------------ ------------Adjustments to conform with US GAAPPP&E fair value adjustments 2,162 3,116Goodwill 2,689 4,027US regulatory accounting 2,702 2,746Pensions and other post-retirement benefits 886 944Financial instruments 119 117Severance liabilities 2 65Revenue recognition (42) 6Intangible assets 28 30Provisions (154) (130)Non-reversal of impairments (39) (29)Deferred taxation (2,090) (2,441)Other 2 29 ------------ ------------ 6,265 8,480 ------------ ------------Shareholders' equity under US GAAP 9,747 10,591 ============ ============ c) Description of reconciling items The principal differences between IFRS and US GAAP, as applied in preparing theGroup's full year results announcement under US GAAP, are set out below: (i) Property, plant and equipment fair value adjustments and relateddepreciation - the Lattice Group plc business combination in 2002/03 continuedto be accounted for as a merger (pooling-of-interests) under IFRS, but wastreated as an acquisition using purchase accounting under US GAAP. Fair valueadjustments have been recognised under US GAAP, which are being amortised overthe related assets' useful lives. The fair value adjustments relating to thedisposed networks have been recycled to net income and included within'Discontinued operations - gain on disposal of business'. (ii) US regulatory accounting - SFAS 71 requires specified regulated utilitiesto defer certain costs as regulatory assets, where these costs are recoverableby the collection of rates charged to customers. Under IFRS, these costs areexpensed when incurred and recoveries are recognised when receivable. (iii) Goodwill and intangible assets - differences in fair value adjustmentsrelating to certain intangibles and related deferred tax liabilities give riseto adjustments to the goodwill arising on a business combination. In addition,under US GAAP amortisation of goodwill ceased on adoption of SFAS 141. Thegoodwill relating to the disposed networks has been recycled to net income andis included within 'discontinued operations - gain on disposal of business'. (iv) Pensions and other post-retirement obligations - differences arise fromvariations in the different actuarial methods and assumptions used to measurethe scheme assets and liabilities and a different method of amortising certainsurpluses and deficits. (v) Financial instruments - although IAS 39 and FAS 133 are similar in nature,many subtle differences exist in application of these standards. As a result ofthis and also due to the prospectively only adoption of IAS 39, certaintransactions which qualify for hedge accounting under IFRS do not qualify underUS GAAP. (vi) Severance liabilities - under IFRS severance costs are provided where aconstructive or legal obligation exists and the costs of the obligation areprobable and can be measured reliably. Under US GAAP these costs are notprovided until the employees accept the severance offer. (vii) Revenue recognition - under US GAAP, income is recognised when the serviceis provided up to the maximum revenue allowed under the terms of the relevantregulatory regime. Under IFRS, income is recognised received or receivable inexcess of the maximum revenue allowed for the period, even where prices will bereduced in a future period. (viii) Non-reversal of impairments - a difference arises as US GAAP does notpermit reversal of an impairment, whereas this is allowed under IFRS. (ix) Deferred taxation - this is the result of deferred tax arising on the otherIFRS to US GAAP adjustments. APPENDIX 1 GROUP ACCOUNTING POLICIES - for the year ended 31 March 2006 (a) Basis of preparation of Group financial statements These Group financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) adopted by the EuropeanUnion. They are prepared on the basis of all IFRSs and Interpretations that aremandatory for periods ending 31 March 2006 and in accordance with applicableUnited Kingdom law and Article 4 of the IAS regulation. The 2005 comparativefinancial information has also been prepared on this basis, with the exceptionof certain standards, for which comparative information has not been restated. In respect of the comparative financial information disclosed, IFRS 1 requiresthat estimates made under IFRS must be consistent with estimates made for thesame date under UK GAAP except where adjustments are required to reflect anydifferences in accounting policies. The Group financial statements have been prepared on an historical cost basis,except for the recording of pension liabilities and revaluation of certainfinancial instruments from 1 April 2005 onwards. These Group financial statements are presented in pounds sterling. The preparation of financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities,disclosures of contingent assets and liabilities and the reported amounts ofrevenue and expenses during the reporting period. Actual results could differfrom these estimates. (b) Basis of consolidation The Group financial statements incorporate the financial statements of theCompany and its subsidiaries ('Group undertakings'), together with the Group'sshare of the results, assets and liabilities of jointly controlled entities('joint ventures') using the equity method of accounting, where the investmentis carried at cost plus post-acquisition changes in the Group's share of netassets of the joint venture, less any provision for impairment. A subsidiary isdefined as an entity controlled by the Company. Control is achieved where theCompany has the power to govern the financial and operating policies of anentity so as to obtain benefits from its activities. A joint venture is anentity established to engage in economic activity, which the Group jointlycontrols with its fellow venturers. Losses in excess of the Group's interest in joint ventures are not recognised,except where the Group has made a commitment to make good those losses. Where necessary, adjustments are made to bring the accounting policies usedunder relevant local GAAP in the individual financial statements of the Company,subsidiaries and joint ventures into line with those used by the Group underIFRS. Inter-company transactions are eliminated. The results of subsidiaries and joint ventures acquired or disposed of duringthe year are included in the Group income statement from the effective date ofacquisition or up to the effective date of disposal, as appropriate. Acquisitions are accounted for using the purchase method, where the purchaseprice is allocated to assets and liabilities on a fair value basis and theremainder recognised as goodwill. (c) Foreign currencies Transactions in currencies other than the functional currency of the Groupundertaking concerned are recorded at the rates of exchange prevailing on thedates of the transactions. At each balance sheet date, monetary assets andliabilities that are denominated in foreign currencies are retranslated atclosing exchange rates. Other non-monetary assets are not retranslated unlessthey are carried at fair value. As set out in note (p) below, as permitted by IFRS 1, prior to 1 April 2005 theGroup adopted UK GAAP for hedge accounting and, consequently, monetary assetsand liabilities denominated in foreign currencies were translated at hedgedrates instead of closing exchange rates. Gains and losses arising on retranslation of monetary assets and liabilities areincluded in the income statement. On consolidation, the assets and liabilities of the operations that have afunctional currency different from the Group's presentation currency aretranslated at exchange rates prevailing at the balance sheet date. Income andexpense items are translated at the weighted average exchange rates for theperiod. Exchange differences arising are classified as equity and transferred tothe Group's translation reserve. (d) Goodwill Goodwill arising on a business combination represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of a subsidiary or joint venture at the date ofacquisition. Goodwill is recognised as an asset and is not amortised, but is reviewed forimpairment at least annually. Any impairment is recognised immediately in theincome statement and is not subsequently reversed. Goodwill recorded under UK GAAP arising on acquisitions before 1 April 2004, thedate of transition to IFRS, has been frozen at that date, subject to testing forimpairment. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing exchange rate. (e) Intangible assets other than goodwill With the exception of goodwill, as described above, identifiable intangibleassets are recorded at cost less accumulated amortisation and any provision forimpairment. Internally generated intangible fixed assets, such as software, are recognisedonly if an asset is created that can be identified; it is probable that theasset created will generate future economic benefits; and that the developmentcost of the asset can be measured reliably. Where no internally generatedintangible asset can be recognised, development expenditure is recorded as anexpense in the period in which it is incurred. On a business combination, as well as recording separable intangible assetspossessed by the acquired entity at their fair value, identifiable intangibleassets that arise from contractual or other legal rights are also included inthe balance sheet at their fair value. Intangible assets, other than goodwill are amortised on a straight line basisover their estimated economic useful lives. Amortisation periods for categoriesof intangible assets are: Amortisation periods for categories of intangibles Years----------------------------------- --------Software 3 to 5Telecommunication licences 10 to 25Acquired customer relationships 10 to 25----------------------------------- -------- (f) Property, plant and equipment Property, plant and equipment is recorded at cost or deemed cost at the date oftransition to IFRS, less accumulated depreciation and any impairment losses. Cost includes payroll and finance costs incurred which are directly attributableto the construction of property, plant and equipment as well as the cost of anyassociated asset retirement obligations. Property, plant and equipment includes assets in which the Group's interestcomprises legally protected statutory or contractual rights of use. Additions represent the purchase or construction of new assets, includingcapital expenditure for safety and environmental assets, and extensions to,enhancements to, or replacement of existing assets. Contributions received towards the cost of property, plant and equipment areincluded in creditors as deferred income and credited on a straight-line basisto the income statement over the estimated economic useful lives of the assetsto which they relate. No depreciation is provided on freehold land and assets in the course ofconstruction. Other property, plant and equipment are depreciated, principally on astraight-line basis, at rates estimated to write off their book values overtheir estimated useful economic lives. In assessing estimated useful economiclives, which are reviewed on a regular basis, consideration is given to anycontractual arrangements and operational requirements relating to particularassets. Unless otherwise determined by operational requirements, thedepreciation periods for the principal categories of property, plant andequipment are, in general, as shown below: Depreciation periods for category of assets Years----------------------------------- --------Plant and machineryElectricity transmission plant 15 to 60Electricity distribution plant 15 to 60Interconnector plant 15 to 60Gas plant - mains, services and regulating equipment 30 to 65Gas plant - storage 40Gas plant - meters 10 to 33Wireless towers/infrastructure 20 to 55Freehold and leasehold buildings up to 65Motor vehicles and office equipment up to 10----------------------------------- -------- (g) Impairment of assets Impairments of assets are calculated as the difference between the carryingvalue of the asset and its recoverable amount, if lower. Where such an assetdoes not generate cash flows that are independent from other assets, the Groupestimates the recoverable amount of the cash-generating unit to which that assetbelongs. Recoverable amount is defined as the higher of fair value less costs tosell and estimated value in use at the date the impairment review is undertaken. Value in use represents the present value of expected future cash flows,discounted using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset forwhich the estimates of future cash flows have not been adjusted. Goodwill is tested for impairment at least annually. Otherwise, tests forimpairment are carried out only if there is some indication that the carryingvalue of the assets may have been impaired. Impairments are recognised in theincome statement and, where material, are disclosed separately. (h) Taxation Current tax Current tax asset and liabilities for the current and prior periods are measuredat the amount expected to be recovered from or paid to the taxation authorities.The tax rates and tax laws used to compute the amount are those that are enactedor substantively enacted by the balance sheet date. Deferred tax and investment tax credits Deferred tax is provided using the balance sheet liability method and isrecognised on temporary differences between the carrying amounts of assets andliabilities in the financial statements and the corresponding tax bases used inthe computation of taxable profit. Deferred tax liabilities are generally recognised on all taxable temporarydifferences and deferred tax assets are recognised to the extent that it isprobable that taxable profits will be available against which deductibletemporary differences can be utilised. Such assets and liabilities are notrecognised if the temporary difference arises from the initial recognition ofgoodwill or from the initial recognition (other than a business combination) ofother assets and liabilities in a transaction that affects neither theaccounting profits nor the taxable profits. Deferred tax liabilities are recognised on taxable temporary differences arisingon investments in subsidiaries and jointly controlled entities, except where theGroup is able to control the reversal of the temporary difference and it isprobable that the temporary difference will not reverse in the foreseeablefuture. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised, based on the taxrates (and tax laws) that have been enacted or substantively enacted by thebalance sheet date. Deferred tax is charged or credited to the income statement,except where it relates to items charged or credited directly to equity, inwhich case the deferred tax is also dealt with in equity. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the deferred incometax asset to be recovered. Unrecognised deferred tax assets are reassessed ateach balance sheet date and are recognised to the extent that it has becomeprobable that future taxable profit will allow the deferred tax asset to berecovered. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current tax assets against current tax liabilitiesand when they relate to income taxes levied by the same taxation authority andthe Group intends to settle its current tax asset and liabilities on a netbasis. Investment tax credits are amortised over the economic life of the asset whichgives rise to the credits. (i) Discontinued operations and non-current assets held for sale Cash flows and operations that relate to a major component of the business thathas been sold or is classified as held for sale are shown separately from thecontinuing operations of the Group. Non-current assets (and disposal groups) classified as held for sale aremeasured at the lower of carrying amount and fair value less costs to sell. Nodepreciation is charged on assets and disposal groups classified as held forsale. Non-current assets and disposal groups are classified as held for sale if theircarrying amount will be recovered through a sale transaction rather than throughcontinuing use. This condition is regarded as met only when the sale is highlyprobable and the asset (or disposal group) is available for immediate sale inits present condition. Management must be committed to the sale, which should beexpected to qualify for recognition as a completed sale within one year from thedate of classification. (j) Inventories Inventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs as well asthose overheads that have been incurred in bringing the inventories to theirpresent location and condition. (k) Decommissioning and environmental costs Provision is made for decommissioning and environmental costs, based on futureestimated expenditures, discounted to present values. Where appropriate, theestablishment of a provision is recorded as part of the original cost of therelated property, plant and equipment. Changes in the provision arising from revised estimates or discount rates orchanges in the expected timing of expenditures that relate to property, plantand equipment are recorded as adjustments to their carrying value anddepreciated prospectively over their remaining estimated useful economic lives,otherwise such changes are recognised in the income statement. The unwinding of the discount is included within the income statement as afinancing charge. (l) Revenues Revenues primarily represent the sales value derived from the transmission anddistribution of energy and recovery of US stranded costs together with the salesvalue derived from the provision of other services, including wirelessinfrastructure services, to customers during the year and excludes value addedtax and intra-group sales. US stranded costs are various generation-related costs that the Group incurredprior to the divestiture of generation assets beginning in the late 1990's andthe Group is recovering these costs over the period up to 2011. The recovery of stranded costs and other amounts allowed to be collected fromcustomers under regulatory arrangements are recognised in the period in whichthey are recoverable from customers. Revenues include an assessment of energy and transportation services supplied tocustomers between the date of the last meter reading and the year end, excludeinter-business and intercompany transactions, and are stated net of value addedtax and similar sales based taxes. Where revenues received or receivable exceed the maximum amount permitted byregulatory agreement and adjustments will be made to future prices to reflectthis over-recovery, no liability is recognised. Similarly no asset is recognisedwhere a regulatory agreement permits adjustments to be made to future prices inrespect of an under-recovery. (m) Pensions and other post-retirement benefits For defined benefit retirement schemes, the cost of providing benefits isdetermined using the projected unit method, with actuarial valuations beingcarried out at each balance sheet date. Current service cost is recognised inoperating costs in the period in which the defined benefit obligation increasesas a result of employee services. Actuarial gains and losses are recognised in full in the period in which theyoccur in the Statement of Recognised Income and Expense. Past service costs are recognised immediately to the extent that benefits arealready vested. Otherwise such costs are amortised on a straight-line basis overthe period until the benefits vest. Settlements are recognised when the Group enters into a transaction thateliminates all further legal or constructive obligations for benefits under ascheme. Curtailments are recognised when the Group is committed to a material reductionin the number of employees covered by a scheme. The retirement benefit obligations recognised in the balance sheet represent thepresent value of the defined benefit obligations, as reduced by the fair valueof scheme assets and any unrecognised past service cost. The expected return on scheme assets and the unwinding of the discount ondefined benefit obligations are recognised within interest income and expenserespectively. (n) Leases Rentals under operating leases are charged to income on a straight-line basisover the term of the relevant lease. Assets held under finance leases are recognised at their fair value or, iflower, the present value of the minimum lease payments on inception, anddepreciated over their useful economic lives. The corresponding liability isrecognised as a finance lease obligation within borrowings. Rental payments areapportioned between finance costs and reduction in the finance lease obligation,so as to achieve a constant rate of interest. (o) Financial instruments Financial assets, liabilities and equity instruments are classified according tothe substance of the contractual arrangements entered into. An equity instrumentis any contract that evidences a residual interest in the assets of the Groupafter deducting all of its liabilities and is recorded at the proceeds received,net of direct issue costs. Trade receivables are initially recognised at fair value and subsequentlymeasured at amortised cost, less any appropriate allowances for estimatedirrecoverable amounts. A provision is established for irrecoverable amounts whenthere is objective evidence that the Group will not be able to collect allamounts due under the original payment terms. Indications that the tradereceivable may become irrecoverable would include financial difficulties of thedebtor, likelihood of the debtors insolvency, and default or significant failureof payment. Loans receivable and other receivables are carried at amortised cost using theeffective interest method. Interest income, together with gains and losses whenthe loans and receivables are derecognised or impaired, are recognised in theincome statement. Other financial investments are initially measured at cost including transactioncosts, but with effect from 1 April 2005 are subsequently carried at fair value.Changes in the fair value of investments classified at fair value through profitand loss are included in the income statement, while changes in the fair valueof investments classified as available-for-sale are recognised directly inequity, until the investment is disposed of or is determined to be impaired, atwhich time the cumulative gain or loss previously recognised in equity isincluded in the net profit or loss for the period. Investment income ininvestments classified at fair value through profit and loss and onavailable-for-sale investments is recognised in the income statement as itaccrues. Interest-bearing loans and overdrafts are recorded at the proceeds received, netof direct issue costs plus accrued interest less any repayments, andsubsequently stated at amortised cost. Any difference between the proceeds afterdirect issue costs and the redemption value is recognised in the incomestatement over the life of the borrowing. Prior to 1 April 2005, accruedinterest is presented as part of current liabilities and not combined with theprincipal amounts payable. Derivative financial instruments are recognised initially at fair value, and aresubsequently also measured at fair value. Changes in the fair value ofderivative financial instruments are included in the income statement to theextent hedge accounting is not applied. Subsequent to initial recognition, the fair values of financial instrumentsmeasured at fair value that are quoted in active markets are based on bid pricesfor assets held and offer prices for issued liabilities. When independent pricesare not available, fair values are determined by using valuation techniqueswhich refer to observable market data. These include comparison with similarinstruments where market observable prices exist, discounted cash flow analysis,option pricing models and other valuation techniques commonly used by marketparticipants. Finance charges, including premiums payable on settlement or redemption anddirect issue costs, are accounted for on an accruals basis using the effectiveinterest rate method. Borrowing costs directly attributable to the acquisition, construction orproduction of qualifying assets (being assets that necessarily take asubstantial period of time to get ready for their intended use or sale) areadded to their cost. Such additions cease when the assets are substantiallyready for their intended use or sale. All other borrowing costs are recognisedin the income statement in the period in which they are incurred. All regular way purchases and sales of financial assets are recognised on thetrade date, being the date that the Group commits to purchase or sell theassets. Regular way transactions require delivery of assets within the timeframegenerally established by regulation or convention in the marketplace. (p) Hedge accounting and derivative financial instruments The Group enters into both derivative financial instruments ('derivatives') andnon-derivative financial instruments in order to manage its interest rate andforeign currency exposures and commodity price risks in respect of expectedenergy usage. The principal derivatives used include interest rate swaps,forward rate agreements, currency swaps, forward foreign currency contracts,interest rate swaptions and indexed swap contracts relating to the purchase ofenergy. All derivative transactions are undertaken, or maintained, with a view toproviding a commercial hedge of the interest, currency or commodity price risksassociated with the Group's underlying business activities and the financing ofthose activities. With effect from 1 April 2005, derivatives are carried in the balance sheet attheir fair value. Commodity contracts that meet the definition of a derivativeand which are not used for normal purchase normal sale requirements are alsocarried at fair value. From 1 April 2005, the accounting policy for hedge accounting is as describedbelow. Changes in the carrying value of financial instruments that are designated andeffective as hedges of future cash flows (cash flow hedges) are recogniseddirectly in equity and any ineffective portion is recognised immediately in theincome statement. Amounts deferred in equity in respect of cash flow hedges aresubsequently recognised in the income statement in the same period in which thehedged item affects net profit or loss. Where a non-financial asset or anon-financial liability results from a forecasted transaction or firm commitmentbeing hedged, the amounts deferred in equity are included in the initialmeasurement of that non-monetary asset or liability. Changes in the carrying value of financial instruments that are designated ashedges of the changes in the fair value of assets or liabilities (fair valuehedges) are recognised in the income statement. An equal and opposite amount isrecorded as an adjustment to the carrying value of hedged items, with acorresponding entry in the income statement, to the extent that the change isattributable to the risk being hedged and that the fair value hedge iseffective. Exchange gains or losses arising on financial instruments that are designatedand effective as hedges of the Group's net investment in overseas operations(net investment hedges) are recorded directly in equity, with any ineffectiveportion recognised immediately in the income statement. Amounts deferred inequity in respect of net investment hedges are subsequently recognised in theincome statement in the event of the disposal of the overseas operationsconcerned. Changes in the fair value of derivatives that do not qualify for hedgeaccounting are recognised in the income statement as they arise, within financecosts. Remeasurements of commodity contracts carried at fair value arerecognised in the income statement, with changes due to movements in commodityprices recorded in operating costs and changes relating to movements in interestrates within finance costs. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualifies for hedge accounting. At thattime, any cumulative gains or losses relating to cash flow hedges recognised inequity are initially retained in equity and subsequently recognised in theincome statement in the same periods in which the previously hedged item affectsnet profit or loss. For fair value hedges, the cumulative adjustment recorded tothe carrying value of the hedged item at the date hedge accounting isdiscontinued, is amortised to the income statement using the effective interestmethod. If a hedged transaction is no longer expected to occur, the net cumulative gainor loss recognised in equity is transferred to the income statement immediately. Derivatives embedded in other financial instruments or other host contracts aretreated as separate derivatives when their risks and characteristics are notclosely related to those of host contracts and the host contracts are notcarried at fair value with unrealised gains or losses reported in the incomestatement. Prior to 1 April 2005, the Group adopted UK GAAP accounting principles for hedgeaccounting and for derivatives. Derivatives used for hedging purposes were notrecorded on the balance sheet as assets or liabilities. Monetary assets andliabilities in foreign currencies were retranslated at hedged rates instead ofclosing rates. Exchange gains and losses relating to the hedge of the netinvestment in overseas subsidiaries were recorded directly in equity. As permitted by the provisions of IFRS 1, the comparative balance sheet andincome statement for the year ended 31 March 2005 have not been restated toreflect either the adoption of IAS 39 or IAS 32. (q) Restructuring costs Costs arising from Group restructuring programmes primarily relate to redundancycosts. Redundancy costs are charged to the income statement in the year in whichthe Group becomes irrevocably committed to incurring the costs and the mainfeatures of the restructuring plan have been announced to affected employees. (r) Share-based payments The Group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight-line basis over the vestingperiod, based on the Group's estimate of shares that will eventually vest. (s) Exceptional items and remeasurements Exceptional items are credits or charges relating to non-recurring transactionsthat are material, by virtue of their size or nature, and therefore relevant tounderstanding the Group's financial performance and are shown separately toprovide a better indication of the underlying results of the Group. Remeasurements are gains or losses arising from movements in the carrying valueof commodity contracts and of financial instruments, principally derivatives,which provide economic hedges but do not achieve hedge accounting or areineffective under IAS 39, and are shown separately to provide a betterindication of the underlying results of the Group. (t) Other operating income Other operating income includes profits or losses arising on the disposal ofproperties by the Group's property management business, which is considered tobe part of the normal recurring operating activities of the Group. (u) Emission allowances Emission allowances are recorded as an intangible asset within current assetsand are initially recorded at deemed cost. For allocations of emissionallowances granted to the Group by the UK government, cost is measured as fairvalue at the date of allocation. Receipts of such grants are treated as deferredincome and are recognised in the income statement over the period to which theyrelate. A provision is recorded in respect of the Group's obligation to deliveremission allowances and charges are recognised in the income statement in theperiod in which carbon dioxide emissions are made. (v) Cash and cash equivalents Cash and cash equivalents include cash held at bank and in hand, together withshort-term highly liquid investments with an original maturity of less thanthree months that are readily convertible to known amounts of cash and subjectto an insignificant change in value. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
National Grid