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Gas Distribution

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• About
  Gas Distribution
• Performance against
  our objectives
• Financial
  performance

Profits

Our objective is to increase profits each year.

 

The adjusted operating profit for Gas Distribution was £987 million in 2007/08 compared with £480 million in 2006/07 and £530 million in 2005/06.

Returns on investment

Our aim is to meet or exceed the base financial returns in our price controls in the UK and our rate plans in the US.

 

In the UK, we measure our return on investment using a vanilla return measure as defined in our UK price controls from 1 April 2008. In the US, we measure our return on investment using our defined return on equity under the terms of each rate plan.

Gas Distribution UK achieved a 5.1% vanilla return in 2007/08, broadly in line with the regulatory allowance.

Financial results – Gas Distribution UK

The results for our Gas Distribution UK 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	1,383	1,193	1,222
Other operating income	8	6	4
Operating costs excluding exceptional items and remeasurements	(796)	(790)	(743)
Adjusted operating profit	595	409	483
Exceptional items	(21)	3	(51)
Operating profit	574	412	432

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	1,199	(787)	412
Add back 2006/07 exceptional items	–	(3)	(3)
2006/07 adjusted results	1,199	(790)	409
Allowed revenues	146	–	146
Timing on recoveries	59	–	59
Depreciation and amortisation	–	(11)	(11)
Pass-through costs	–	(18)	(18)
Other revenue and costs	(13)	23	10
2007/08 adjusted results	1,391	(796)	595
2007/08 exceptional items	–	(21)	(21)
2007/08 results	1,391	(817)	574

Revenue and other operating income in Gas Distribution UK increased by £192 million in 2007/08 compared with 2006/07. Net formula income was up £165 million due to the outcome of the one year price control extension. In addition there was a £59 million timing impact on recoveries. This was offset by lower non-formula income as a result of the cessation of transitional service agreements with the independent distribution networks and lower meter work activities, which is reflected in the improvement in other costs.

The allowed formula revenue is no longer linked to delivery volumes, this decoupling now eliminates the sensitivity to warm weather and lower underlying volumes. Furthermore, a smaller proportion of our income is recovered through the volume delivery component of our charges.

Cooler temperatures than the prior year increased consumption by 14 TWh, which was partially offset by the impact of underlying volumes being lower by 2 TWh. The net year-on-year timing impact against allowed revenues was £59 million as in 2007/08 there was a net benefit of £26 million (comprising the recovery of £43 million relating to the previous year, partially offset by a £17 million under-recovery for 2007/08), compared with a net detriment of £33 million in 2006/07 (comprising a £43 million under-recovery for 2006/07, partially offset by £10 million recovered relating to 2005/06).

Operating costs, excluding exceptional items, were £6 million higher in 2007/08 compared with 2006/07. Depreciation and amortisation costs were £11 million higher reflecting the increased capital investment in the distribution network. In line with 2006/07, there was a £12 million increase in business rates following the changes in rateable values introduced from 1 April 2005. From 2007/08 there is an extra allowance of £12 million for the recovery of non-active members pensions costs. This was offset by a reduction in operating costs of £11 million partly driven by the cessation of the transitional services agreement with the Independent Distribution Networks and partly efficiency savings.

Exceptional charges of £21 million in 2007/08 related primarily to the creation of the new shared services organisation in the UK and global information services function, together with pension costs associated with these restructuring programmes. This compared with a £3 million net gain in 2006/07.

As a consequence of the above, adjusted operating profit excluding exceptional items was £186 million higher in 2007/08 than 2006/07, an increase of 45%. Including exceptional items, operating profit was £162 million higher in 2007/08 than 2006/07, an increase of 39%.

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	1,226	(794)	432
Add back 2005/06 exceptional items	–	51	51
2005/06 adjusted results	1,226	(743)	483
Price changes	73	–	73
Weather and volumes	(69)	–	(69)
Timing on recoveries	(32)	–	(32)
Depreciation and amortisation	–	(9)	(9)
Business rates	–	(23)	(23)
Other revenues and costs	1	(15)	(14)
2006/07 adjusted results	1,199	(790)	409
2006/07 exceptional items	–	3	3
2006/07 results	1,199	(787)	412

Revenue and other operating income in Gas Distribution UK fell by £27 million in 2006/07 compared with 2005/06. Net formula income was up by £4 million with the benefit of an average price increase of 8.8% implemented on 1 October 2006 giving rise to a £73 million increase in revenue, but largely offset by delivery volumes being significantly lower than the prior year reducing revenue by £69 million.

The weather in 2006/07 was significantly warmer than 2005/06 lowering consumption by 28 TWh which, combined with the impact of underlying volumes being lower by 16 TWh (caused principally by the continuing effect of high wholesale gas prices), led to an under-recovery of income of £43 million in 2006/07. This was partically offset by a £10 million recovery relating to 2005/06.

Operating costs, excluding exceptional items were £47 million higher in 2006/07 compared with 2005/06. Depreciation and amortisation costs were £9 million higher reflecting the increased capital investment in the distribution network. As in 2005/06 (see below) there was a £23 million increase in business rates following the changes in rateable values introduced from 1 April 2005. The remaining increase in operating costs of £15 million was mainly driven by workload including significant investment in maintenance and other safety-related activities.

Adjusted operating profit was £74 million lower in 2006/07 than 2005/06, a reduction of 15%. An exceptional credit of £3 million in 2006/07 related to pension elements of restructuring programmes offsetting costs associated with the creation of the new shared services organisation in the UK. Operating profit was £20 million lower in 2006/07 than 2005/06, a reduction of 5%.

In summary, revenue and other operating income were £27 million lower, operating costs were £47 million higher and exceptional charges were £54 million lower.

Financial results – Gas Distribution US

The average exchange rates used to translate the results of US operations during 2007/08, 2006/07 and 2005/06 were $2.01:£1, $1.91:£1 and $1.79:£1 respectively.

	Years ended 31 March
Continuing operations	2008 £m	2007 £m	2006 £m
Revenue	2,845	638	571
Operating costs excluding exceptional items and remeasurements	(2,453)	(567)	(524)
Adjusted operating profit	392	71	47
Exceptional items and remeasurements	95	(4)	–
Operating profit	487	67	47

2007/08 compared with 2006/07

The principal movements between 2006/07 and 2007/08 can be summarised as follows:

	Revenue £m	Operating costs £m	Operating profit £m
2006/07 results	638	(571)	67
Add back exceptional items	–	4	4
2006/07 adjusted results	638	(567)	71
Exchange movements	(32)	29	(3)
2006/07 constant currency results	606	(538)	68
KeySpan	2,181	(1,832)	349
Rhode Island gas operations	61	(74)	(13)
Bad debt expense	–	(3)	(3)
Pension and benefit costs	–	(3)	(3)
Other	(3)	(3)	(6)
2007/08 adjusted results	2,845	(2,453)	392
2007/08 exceptional items	–	(46)	(46)
2007/08 remeasurements	–	141	141
2007/08 results	2,845	(2,358)	487

Revenue and operating costs excluding exceptional items and remeasurements increased by £2,239 million and £1,915 million respectively in 2007/08 compared with 2006/07 on a constant currency basis, an increase of 369% and 356% in each case. The rise in revenue and operating cost primarily arose from five months of additional activities from the gas distribution network in Rhode Island we acquired from Southern Union Company in August 2006 and seven months of activities from the gas distribution networks we acquired with KeySpan in August 2007.

Adjusted operating profit was £324 million higher in 2007/08 than 2006/07 on a constant currency basis, an increase of 476%. Exceptional charges of £46 million in 2007/08 related to integration initiatives, including the cost of voluntary early redundancies, while favourable mark-to-market commodity contract remeasurement gains were recorded as a consequence of higher energy prices compared with contracted amounts as at 31 March 2008. The benefit of these gains will be realised in subsequent periods and passed back to consumers.

Operating profit was £420 million higher in 2007/08 than 2006/07, an increase of 627%. In summary, revenue was £2,207 million higher, operating costs were £1,886 million higher, exceptional charges were £42 million higher and remeasurement gains were £141 million.

2006/07 compared with 2005/06

The principal movements between 2005/06 and 2006/07 can be summarised as follows:

	Revenue £m	Operating costs £m	Operating profit £m
2005/06 results and adjusted results	571	(524)	47
Exchange movements	(36)	33	(3)
2005/06 constant currency results	535	(491)	44
Purchased gas	(77)	79	2
Rhode Island gas operations	176	(159)	17
Bad debts	–	(3)	(3)
Pension and benefit costs	–	5	5
Other	4	2	6
2006/07 adjusted results	638	(567)	71
Exceptional items	–	(4)	(4)
2006/07 results	638	(571)	67

Revenue increased by £103 million in 2006/07 compared with 2005/06 on a constant currency basis, an increase of 19%. The rise in revenue was primarily due to seven months of revenue from the gas distribution network in Rhode Island we acquired from Southern Union Company in August 2006. This increase was partially offset by a reduction of purchase gas recovery due to lower purchased gas costs.

Operating costs increased by £76 million in 2006/07 compared with 2005/06 on a constant currency basis, an increase of 15%. This rise is largely due to £159 million of costs incurred in the gas distribution network in Rhode Island in the seven months subsequent to its acquisition in August 2006. This increase was partially offset by lower purchased gas costs of £79 million due to lower gas prices and lower sales volumes.

Adjusted operating profit was £27 million higher in 2006/07 than 2005/06 on a constant currency basis, an increase of 61%. Exceptional charges of £4 million in 2006/07 related to merger integration initiatives.

Operating profit was £20 million higher in 2006/07 than 2005/06, an increase of 43%. In summary, revenue was £67 million higher, operating costs were £43 million higher and exceptional charges were £4 million higher.