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Transmission

• Introduction
• Highlights
• UK map
• US map
• About
  Transmission
• Performance against
  our objectives
• Financial
  performance

Profit

Our objective is to drive continuous profit growth.

 

Our combined adjusted operating profit, excluding exceptional items, for Transmission in the UK and the US of £1,149 million is 10% higher than 2006/07 on a constant currency basis, which in turn was 9% higher than in 2005/06, also on a constant currency basis.

Returns on investment

Our objective is to deliver strong financial returns compared to the regulatory allowances within our UK price controls and US rate plans and agreements.

 

We measure the financial performance of our UK regulated business using an operational return metric comparable to the vanilla return defined in the UK price controls from 1 April 2007. In our electricity transmission operations we achieved a 4.6% operational return in 2007/08, performing broadly in line with regulatory assumptions. In our gas transmission operations we achieved a 7.2% return in 2007/08, significantly outperforming regulatory assumptions mainly as a result of performance under our incentive schemes.

In the US we measure our financial performance against the allowed regulatory return on equity under the terms of our rate plan or rate agreement. For New England Power we achieved an 11.9% regulatory return on equity for 2007/08, 0.9% lower than for 2006/07. The reduction related to non-Transmission activities of New England Power.

In New York, our electricity transmission activities are combined with electricity distribution under a single rate plan and the combined returns for these activities are included within our Electricity Distribution & Generation business commentary.

Financial results – Transmission UK

The results for the Transmission 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	2,956	2,816	2,710
Other operating income	–	6	–
Operating costs excluding exceptional items	(1,935)	(1,876)	(1,866)
Adjusted operating profit	1,021	946	844
Exceptional items	(8)	(10)	(1)
Operating profit	1,013	936	843

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	2,822	(1,886)	936
Add back 2006/07 exceptional items	–	10	10
2006/07 adjusted results	2,822	(1,876)	946
Allowed revenues	176	–	176
Timing on recoveries	10	–	10
Lower French interconnector
and LNG storage auctions	(62)	–	(62)
Depreciation and amortisation	–	(20)	(20)
Other	10	(39)	(29)
2007/08 adjusted results	2,956	(1,935)	1,021
2007/08 exceptional items	–	(8)	(8)
2007/08 results	2,956	(1,943)	1,013

Revenue and other operating income increased by £134 million in 2007/08 compared with 2006/07. Allowed revenues increased by £176 million, driven by the five year transmission price controls that came into effect on 1 April 2007. As expected, revenues from our French interconnector and LNG storage businesses were lower in 2007/08, down by a combined £62 million on 2006/07, as demand for capacity returned closer to normal levels following the abnormal demand in 2006/07.

Operating costs, excluding exceptional items, increased by £59 million in 2007/08 compared with 2006/07. As expected, depreciation and amortisation increased by £20 million as a result of increasing capital investment. Other items increased costs by £39 million, principally because of higher pass-through costs and increased non-price controlled activities, both recovered through revenue.

The £8 million exceptional charge in 2007/08 relates to costs incurred in establishing a shared services function in the UK and from the continuation of our review of business processes, compared with £10 million in 2006/07.

As a consequence, adjusted operating profit, excluding exceptional items, increased by £75 million in 2007/08 compared to 2006/07, while operating profit increased by £77 million.

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	2,710	(1,867)	843
Add back 2005/06 exceptional items	–	1	1
2005/06 adjusted results	2,710	(1,866)	844
Allowed revenues	106	(3)	103
Timing on recoveries	(64)	–	(64)
Transmission owner depreciation	–	27	27
Other	70	(34)	36
2006/07 adjusted results	2,822	(1,876)	946
2006/07 exceptional items	–	(10)	(10)
2006/07 results	2,822	(1,886)	936

Revenue and other operating income increased by £112 million in 2006/07 compared with 2005/06, driven by an increase of £85 million in electricity transmission owner revenue from the regulatory settlement with Ofgem for the extension of the previous price control for 2006/07, a 6% increase in real terms. The balance of the increase arose from higher incentivised costs associated with balancing the electricity system, which flow through to revenue, higher pass-through costs, partly offset by unfavourable timing impacts on gas revenue and lower interconnector auction income.

Operating costs, excluding exceptional items, increased by £10 million in 2006/07 compared with 2005/06. Transmission owner depreciation and amortisation decreased by £27 million due to the impact of accelerated depreciation charges and early asset write offs in 2005/06 partly offset by an increase in depreciation reflecting the increasing capital programme. Higher other operating costs reflected higher incentivised BSIS costs resulting from higher response and constraint costs partly offset by lower margin costs, higher pass-through costs and higher expenditure relating to tower foundations and steelwork (with effect from 1 April 2007 this type of expenditure is remunerated as part of the regulatory asset base). Gas shrinkage costs decreased mainly due to warmer weather resulting in lower volumes.

The £102 million increase in UK electricity and gas transmission adjusted operating profit comparing 2006/07 with 2005/06 reflects the movements in revenue and operating costs, excluding exceptional items, as described above.

The £10 million exceptional charge in 2006/07 was driven by the establishment of shared services functions in the UK and the implementation of a review of our business processes.

Financial results – Transmission 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
	2008 £m	2007 £m	2006 £m
Revenue	299	270	310
Operating costs excluding exceptional items	(171)	(162)	(183)
Adjusted operating profit	128	108	127
Exceptional items	(6)	(1)	–
Operating profit	122	107	127

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	270	(163)	107
Add back exceptional items	–	1	1
2006/07 adjusted results	270	(162)	108
Exchange movements	(13)	8	(5)
2006/07 constant currency results	257	(154)	103
Allowed revenues	27	–	27
Timing of recoveries	15	–	15
Other	–	(17)	(17)
2007/08 adjusted results	299	(171)	128
Exceptional items	–	(6)	(6)
2007/08 results	299	(177)	122

Revenue and operating costs decreased by £13 million and £8 million in 2007/08 respectively as a consequence of exchange rate movements when compared with 2006/07. On a constant currency basis revenue and operating costs increased by £42 million and £17 million respectively. This reflected an increase in allowed revenues of £27 million and £15 million arising from the timing of revenue recoveries, while operating costs increased by £17 million as a consequence of higher wages and other expenditure.

The £6 million exceptional charge in 2007/08 relates to the integration of the operations acquired with KeySpan, in particular costs arising from voluntary early redundancies, compared with £1 million incurred in 2006/07. As a consequence adjusted operating profit increased by £25 million in 2007/08 compared to 2006/07 on a constant currency basis and by £20 million in total. After reflecting exceptional items, operating profit was £15 million higher in 2007/08 than in 2006/07.

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	310	(183)	127
Exchange movements	(19)	11	(8)
2005/06 constant currency results	291	(172)	119
Tariff adjustment not repeated	(7)	7	–
GridAmerica	(4)	3	(1)
Other changes	(10)	–	(10)
2006/07 adjusted results	270	(162)	108
Exceptional items	–	(1)	(1)
2006/07 results	270	(163)	107

The £21 million decrease in revenue comparing 2006/07 with 2005/06 on a constant currency basis was due to the impact of the timing of a revenue adjustment mechanism in New York, lower US interconnector revenues reflecting a declining investment base and the November 2005 closure of GridAmerica, a multi-system independent transmission company that managed electricity transmission operations for other utilities in the US (£4 million in 2005/06). In addition, there was no repeat of the one-off tariff adjustment of £7 million in 2005/06 to revenues collected from another business segment. Partly offsetting these decreases was higher revenue from New England due to a higher investment base.

Operating costs, excluding exceptional items, decreased by £10 million in 2006/07 compared with 2005/06 on a constant currency basis. This is mainly due to the non-recurrence of the one-off £7 million operating cost adjustment reflected in 2005/06 as referred to above and a £3 million reduction in operating costs following the closure of GridAmerica in 2005/06. The £19 million overall decrease in adjusted operating profit and £20 million decrease in operating profit in 2006/07 compared with 2005/06 reflects the £11 million movement in revenue and operating costs as described above, together with unfavourable exchange movements of £8 million and, in the case of operating profit, £1 million exceptional costs relating to the then anticipated acquisition of KeySpan.