Electricity Distribution & Generation
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Distribution & Generation - Performance against
our objectives - Financial
performance
Profit |
Our objective is to increase profits each year. |
Adjusted operating profit was £16 million lower in 2007/08 than 2006/07 on a constant currency basis, a decrease of 5% largely driven by higher bad debt expense, an increase in our environmental remediation provision and, as anticipated, increased spending on our reliability enhancement programme, partially offset by the contribution from operations acquired with KeySpan.
Further information is included under financial results below.
Returns on investment |
We measure our return on investment using our defined regulatory return on equity under the terms of each rate plan. |
The regulatory return on equity for our operating companies declined in both Massachusetts and New York.
In Massachusetts the regulatory return on equity declined to 9.5% for the 12 months ended 31 December 2007, principally as a result of an increase in bad debt costs.
In New York, the combined regulatory return on equity includes electricity transmission, electricity distribution, gas distribution and stranded cost recoveries. For the rate year ended 31 October 2007 this was 6.4%, including savings. Our achieved return reflects gas distribution returns that are significantly less than allowed and, as described here, a new gas rate case is being filed. If one-off items relating to voluntary early retirement costs and negative adjustments to our deferral account balance are excluded, our achieved return was 8.4%. This was lower than the previous year reflecting an increase in bad debts and higher spending on our reliability enhancement programme.
Financial results
The results of the Electricity Distribution & Generation segment for the years ended 31 March 2008, 2007 and 2006 were as follows:
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2008 £m |
2007 £m |
2006 £m |
| Revenue excluding stranded cost recoveries | 3,126 | 3,004 | 3,134 |
| Other operating income | - | - | 3 |
| Operating costs excluding exceptional | |||
| items and remeasurements | (2,796) | (2,640) | (2,820) |
| Adjusted operating profit | 330 | 364 | 317 |
| Exceptional items | (104) | (9) | – |
| Remeasurements | 91 | 81 | (49) |
| Stranded cost recoveries | 379 | 423 | 489 |
| Operating profit | 696 | 859 | 757 |
2007/08 compared with 2006/07
The principal movements between 2006/07 and 2007/08 can be summarised as follows:
| Revenue and other operating income £m |
Operating costs £m |
Operating profit £m |
|
|---|---|---|---|
| 2006/07 results | 3,430 | (2,571) | 859 |
| Add back exceptional items | - | 9 | 9 |
| Add back remeasurements | – | (81) | (81) |
| Add back stranded cost recoveries | (426) | 3 | (423) |
| 2006/07 adjusted results | 3,004 | (2,640) | 364 |
| Exchange movements | (150) | 132 | (18) |
| 2006/07 adjusted results at constant currency | 2,854 | (2,508) | 346 |
| Purchased electricity | (47) | 20 | (27) |
| Volumes, including weather | 17 | – | 17 |
| Depreciation and amortisation | – | (7) | (7) |
| Reliability enhancement | – | (13) | (13) |
| Bad debts | – | (17) | (17) |
| Storms | – | 33 | 33 |
| KeySpan acquisition | 293 | (268) | 25 |
| Other | 9 | (36) | (27) |
| 2007/08 adjusted results | 3,126 | (2,796) | 330 |
| 2007/08 exceptional items | – | (104) | (104) |
| 2007/08 remeasurements | – | 91 | 91 |
| 2007/08 stranded cost recoveries | 382 | (3) | 379 |
| 2007/08 results | 3,508 | (2,812) | 696 |
Excluding stranded cost recoveries, revenue increased by £272 million in 2007/08 on a constant currency basis as compared with 2006/07. This was primarily due to the acquisition of KeySpan partially offset by lower purchased electricity costs. Commodity costs are recovered in full from customers although the recovery of these costs can occur in more than one financial year.
Excluding stranded cost recoveries, exceptional items and remeasurements, operating costs increased by £288 million in 2007/08 on a constant currency basis. This was primarily due to the acquisition of KeySpan and higher bad debt costs of £17 million. Spend on our reliability enhancement programme also increased in 2007/08. These items were partially offset by lower purchased electricity and other pass-through costs of £20 million, which are recovered from customers as described above, and storm costs which were £33 million lower in 2007/08. A portion of storm costs incurred in 2007/08 will be recovered in future periods.
The £16 million decrease on a constant currency basis in adjusted operating profit from Electricity Distribution & Generation US in 2007/08 compared to 2006/07 was primarily due to higher bad debts and other expenses including an expected increase in our reliability enhancement spend, the timing of commodity cost recovery and the non-recurrence of one-off items incurred in 2006/07. These were partially offset by lower storm costs of £33 million, increased deliveries, including the effect of weather, of £17 million, and the acquisition of KeySpan.
2006/07 compared with 2005/06
The principal movements between 2005/06 and 2006/07 can be summarised as follows:
| Revenue and other operating income £m |
Operating costs £m |
Operating profit £m |
|
|---|---|---|---|
| 2005/06 results | 3,654 | (2,897) | 757 |
| Less stranded cost recoveries | (517) | 28 | (489) |
| Add back remeasurements | - | 49 | 49 |
| 2005/06 adjusted results | 3,137 | (2,820) | 317 |
| Exchange movements | (198) | 178 | (20) |
| 2005/06 adjusted results at | |||
| constant currency | 2,939 | (2,642) | 297 |
| Purchased electricity | (16) | 39 | 23 |
| Deferral account | 72 | - | 72 |
| Depreciation and amortisation | - | (9) | (9) |
| Reliability enhancement | - | (8) | (8) |
| Bad debts | - | (11) | (11) |
| Pension and benefit costs | - | 28 | 28 |
| Storm costs | - | (43) | (43) |
| Other | 9 | 6 | 15 |
| 2006/07 adjusted results | 3,004 | (2,640) | 364 |
| 2006/07 exceptional items | – | (9) | (9) |
| 2006/07 remeasurements | – | 81 | 81 |
| 2006/07 stranded cost recoveries | 426 | (3) | 423 |
| 2006/07 results | 3,430 | (2,571) | 859 |
Excluding stranded cost recoveries, revenue increased £65 million in 2006/07 on a constant currency basis compared with 2005/06. This was primarily due to the recovery of previously incurred costs in New York of £72 million through the deferral account mechanism. This was partially offset by lower purchased electricity and other pass-through costs of £16 million. Commodity costs are recovered in full from customers although the recovery of these costs can occur in more than one financial year.
Operating costs excluding exceptional items, remeasurements and stranded cost recoveries decreased by £2 million in 2006/07 on a constant currency basis. This was primarily due to lower purchased electricity and other pass-through costs of £39 million, which are recovered from customers as described above. Storm costs were £43 million higher in 2006/07. The majority of these storm costs will be recovered in future periods.
The £67 million increase in adjusted operating profit in 2006/07 compared with 2005/06 on a constant currency basis was primarily due to the recovery of previously incurred costs in New York, reduced pension and benefit costs, and the timing of commodity cost recovery. These were partially offset by higher storm costs, the majority of which will be recovered in future periods, and higher bad debts.
Exceptional items of £9 million in 2006/07 related to integration costs in preparation for the proposed acquisition of KeySpan. There were no exceptional items in 2005/06. Remeasurements comprised a credit of £81 million in 2006/07, arising from a reduction in the carrying value of commodity contract liabilities.
Stranded cost recoveries contributed £426 million to revenues and £423 million to operating profit, compared with £517 million and £489 million respectively in 2005/06. The £91 million decrease in revenue comparing 2006/07 with 2005/06 resulted from a £32 million reduction as a consequence of exchange rate movements, a reduction in purchased power contract cost recoveries due to lower market commodity prices and lower stranded cost recoveries in accordance with our rate plans.
Operating profit increased by £102 million as a consequence of the above changes.
£3,508m
Revenue
£330m
Adjusted operating profit
£379m
Stranded cost recoveries
£257m
Capital investment
9.5%
Regulatory return on equity in Massachusetts for 2007/08
8.4%
Regulatory return on equity in New York for 2007/08, excluding one-off items
(5)%
Decline in adjusted operating profit on a constant currency basis
18%
Increase in capital investment