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Electricity Distribution

Performance during the year

Performance during the year

Descriptions of our progress against our overall objectives in the areas of performance, growth, talent, relationships (including customer service) and responsibility are set out in Key performance indicators and Performance during the year. We include below further information specific to Electricity Distribution with respect to our performance, growth and customer service objectives.

Performance

Our progress against our principal performance objectives during the year included the following:

Safety	The number of employee lost time injuries in Electricity Distribution – US increased by 36% in 2006/07 to 90, compared with 66 in 2005/06 and81 in 2004/05. As a consequence, our lost time injury frequency rate rose to 0.59 in 2006/07 from 0.45 in 2005/06 and 0.5 in 2004/05.
Reliability	The system average interruption duration for 2006/07, being the average time the average customer is without power during the year, was 121 minutes, compared with a target of 115 minutes. In New England, we missed targets for reliability in the 2006 calendar year, incurring an aggregate net penalty of £5.8 million. We have requested that this penalty not be levied as reliability performance was impacted by extraordinary storms during the year. We missed targets for reliability in the 2006 calendar year in New York, incurring an aggregate net penalty of £4.6 million.
Efficiency	We continued to advance efficiency initiatives, including the introduction of a mobile work management system, which equips vehicles with computers to allow for real-time online information.
Financial	Adjusted operating profit was £67 million higher in 2006/07 than 2005/06 on a constant currency basis, an increase of 23% largely driven by the recovery of costs incurred in prior periods from the New York deferral account. Further information is included under financial results below.

Safety improvements

As a consequence of the deterioration in our safety performance this year, we are taking action to improve in 2007/08. This has included addressing areas of improvement identified following a safety evaluation we conducted in 2006, including aiming to enable management to spend more time in the field; aiming to improve the quality of safety observation tours and following up on recommendations and findings arising; developing a comprehensive, long-term staffing plan to assure adequate resources; training managers and supervisors in safety communications; and ensuring that managers and supervisors are made accountable for meeting safety objectives and safety performance is monitored.

In 2007/08, we plan to ensure our US employee safety handbook is well understood and effectively applied, that improvements are made based on feedback from employees, that we enhance the safety aspects of our annual expert training and supervisory training programmes and that we analyse and learn from incidents and near misses. We are also considering how we can improve our approach to preventing soft tissue or muscular skeletal injuries, which comprise 60% of injuries.

Reliability enhancement programme

To improve our reliability performance, we are committed to reducing the frequency and duration of service interruptions. We are therefore increasing our investments in the coming financial year for asset enhancement, replacement and maintenance. Continuation of this programme into future years should improve reliability, reduce inefficient use of resources in responding to outages and create a safer work environment.

In line with our reliability objective, in order to improve performance, we have developed and begun execution of a five year reliability enhancement programme. This includes: vegetation management - incremental tree trimming to address an increase in customer outages related to contacts with tree limbs; feeder hardening - upgrading our worst performing overhead electricity circuits by replacing aged and deteriorated components and protecting against lightning strikes and animal contacts; asset replacement - replacing aging distribution equipment before its expected end of life, including poles, underground cable, and substation equipment; and inspection and maintenance - increasing our preventive maintenance and repair activities to find potential faults before they occur to improve reliability and public safety.

Growth

Capital investment in the replacement, reinforcement and extension of our US electricity distribution networks was £218 million in 2006/07, £219 million in 2005/06 and £204 million in 2004/05. After excluding the effect of exchange movements of £14 million in 2006/07 compared with 2005/06, capital investment increased by £13 million. This reflected an increase of £19 million spend related to our reliability enhancement programme and other increases in capital investment, partially offset by a £17 million reduction relating to the Nantucket cable project.

After excluding the effect of exchange movements of £9 million in 2005/06 compared with 2004/05, capital investment increased by £6 million due to a £14 million increase in investment in our Nantucket cable project and £5 million of other capital increases, partially offset by a lease recapitalisation of £13 million.

Customer service

Under our service quality plans, we met or exceeded our customer service targets in Massachusetts, earning an incentive of £1.6 million. We met or exceeded most of the customer service targets in New York, but incurred a penalty of £1.1 million for missing the customer satisfaction targets.

We believe that lower customer satisfaction in New York is mainly a consequence of a negative reaction to sustained higher commodity prices. However, reliability and service issues are also a factor and we are taking steps to improve customer outreach on managing cost and use, billing quality, responsiveness to customer queries, regulatory complaints and call handling. We also believe that our investment in enhancing reliability will improve the way our customers perceive us.

Financial results - Electricity Distribution - US

The results of the Electricity Distribution - US segment for the years ended 31 March 2007, 2006 and 2005 were as follows:

Years ended 31 March	2007 £m	2006 £m	2005 £m
Revenue	3,004	3,134	2,633
Other operating income	-	2	-
Operating costs excluding exceptional items and remeasurements	(2,640)	(2,819)	(2,291)
Adjusted operating profit	364	317	342
Exceptional items	(9)	-	(101)
Operating profit	355	317	241

The average exchange rates used to translate the results of US operations during 2006/07, 2005/06 and 2004/05 were $1.91: £1, $1.79: £1 and $1.87: £1 respectively.

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 and adjusted results	3,136	(2,819)	317
Exchange movements	(197)	177	(20)
2005/06 constant currency	2,939	(2,642)	297
Purchased electricity	(16)	39	23
Deferral account recoveries	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
Exceptional items	-	(9)	(9)
2006/07 results	3,004	(2,649)	355

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 passthrough 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 decreased by £2 million in 2006/07 on a constant currency basis. This was primarily due to lower purchased electricity and other passthrough 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 from US electricity distribution in 2006/07 compared to 2005/06 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.

2005/06 compared with 2004/05

The principal movements between 2004/05 and 2005/06 can be summarised as follows:

	Revenue and other operating income £m	Operating costs £m	Operating profit £m
2004/05 results	2,633	(2,392)	241
Add back 2004/05 exceptional items	-	101	101
2004/05 adjusted results	2,633	(2,291)	342
Exchange movements	117	(102)	15
2004/05 constant currency	2,750	(2,393)	357
Purchased power	334	(337)	(3)
Volume	18	-	18
Weather	14	-	14
Storm costs	-	(13)	(13)
Depreciation and amortisation	-	(7)	(7)
Pension costs	-	(21)	(21)
Other	20	(48)	(28)
2005/06 results	3,136	(2,819)	317

Revenue increased £386 million in 2005/06 on a constant currency basis compared with 2004/05. This was primarily due to the recovery of higher purchased electricity costs of £334 million. Commodity costs are recovered in full from customers although the recovery of these costs can occur in more than one financial year. The remaining increases in revenue are due to favourable weather impact of £14 million, primarily due to the hot summer weather and underlying growth which added £18 million, as weather normalised deliveries to residential customers increased 1.5% over last year.

Operating costs excluding exceptional items, increased by £427 million in 2005/06 on a constant currency basis compared to 2004/05. This was primarily due to higher purchased electricity costs of £337 million. The remainder of the variance was largely due to increased pension costs of £21 million, the majority of which is being recovered from customers in future periods, an increase in depreciation and amortisation expense of £7 million as capital projects, including new IT systems, went into service, and higher storm costs of £13 million. Costs also increased as the reliability enhancement programme began in 2005/06.

Operating profit in 2005/06 was £65 million higher than 2004/05, an increase of 26%. In summary, revenue was £386 million higher, operating costs were £320 million higher and exceptional charges were £106 million lower.

Financial performance - US stranded cost recoveries

The results of the US stranded cost recoveries segment for the years ended 31 March 2007, 2006 and 2005 were as follows:

Years ended 31 March	2007 £m	2006 £m	2005 £m
Revenue	426	517	436
Operating costs excluding exceptional items and remeasurements	(3)	(28)	29
Adjusted operating profit	423	489	465
Remeasurements	81	(49)	(38)
Operating profit	504	440	427

2006/07 compared with 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 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 costs for US stranded cost recoveries decreased by £25 million, mainly because of lower purchased power contract expenses.

Remeasurements comprised a credit of £81 million in 2006/07, arising from a reduction in the carrying value of commodity contract liabilities.

Operating profit increased by £64 million as a consequence of the above changes.

2005/06 compared with 2004/05

The £81 million increase in revenue comparing 2005/06 with 2004/05 resulted from the recovery of higher purchased power contracts costs and increased recoveries of stranded costs in accordance with our rate plans. Operating costs for US stranded cost recoveries increased by £57 million, mainly because of higher purchased power contracts costs.

Remeasurements in 2005/06 comprised a charge of £49 million (2004/05: charge of £38 million) arising from an increase in the carrying value of commodity contract liabilities.

Operating profit increased by £13 million as a consequence of the above changes.

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