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Transmission
Performance during the year
In the UK, the winter of 2006/07 saw demand from the electricity transmission network in England and Wales hit a peak of 52.1 GW. This compares with 53.7 GW for 2005/06 and 53.3 GW for 2004/05. The total amount of electricity transmitted for 2006/07 was 303,721 GWh compared with 312,339 GWh for 2005/06 and 308,305 GWh for 2004/05. 2006/07 saw a maximum gas demand of 436 mcm on 8 February 2007. This increase on the previous year's peak of 411 mcm was partly due to a particularly cold snap at the beginning of February.
In the US, the summer of 2006/07 saw demand from the electricity transmission networks in New England and New York hit a combined peak load of 14.0 GW. This compares with 13.2 GW for 2005/06 and 11.8 GW for 2004/05.
Descriptions of our progress against our overall objectives in the areas of performance, growth, talent, relationships (including customer service) and responsibility are set out on pages 30 to 43. We include below further information specific to Transmission with respect to our performance, growth and customer service objectives.
Performance
Our progress against our operating objectives during the year includes the following:
| Safety | In the UK during 2006/07 there were 13 lost time injuries compared with 14 in 2005/06 and 8 in 2004/05. The lost time injury frequency rate was 0.25 in 2006/07 compared to 0.28 in 2005/06 and 0.17 in 2004/05. |
Our US electricity transmission lost time injury frequency rate increased to 0.19 in 2006/07 from zero for 2005/06 as a result of one lost time injury during the year. |
|
| Reliability | UK electricity transmission network reliability in 2006/07 was 99.9999%, compared with 99.9999% in 2005/06 and 99.99998% in 2004/05. Gas transmission network reliability was 100% in all three years. |
Average annual availability of our UK electricity transmission network in 2006/07 was 95.02%, compared with 95.09% in 2005/06 and 95.3% in 2004/05. Reduced availability reflects the increased amount of asset replacement activity to ensure the reliability of the network for years to come.
System availability at winter peak demand was 98.2% in 2006/07, 97.9% in 2005/06 and 97.6% in 2004/05. |
|
UK gas compressor fleet performance during 2006/07 declined slightly with the average time between compressor failures at 6% below our five year average, compared with 10% and 24% above the five year average time between failures in 2005/06 and 2004/05. |
|
In the US, our average annual network availability in 2006/07 was 98.1%. This compared with 98.5% in 2005/06 and 98.3% in 2004/05.
Overall average network availability was similar in New England and New York, for both summer and winter. |
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| Efficiency | We have been undertaking a number of internal business process reviews to seek out further savings without compromising our other objectives.
Efficiency is reflected in our financial performance, which is discussed below. |
| Financial performance | UK adjusted operating profit of £946 million is 12% higher than 2005/06. US adjusted operating profit of £108 million is 9% lower than 2005/06 on a constant currency basis. These are discussed in further detail in the financial results sections following. |
Growth
Investment - UK
Investment in electricity and gas transmission systems is, by its nature, variable and is largely driven by changing sources of supply and asset replacement requirements. The gas transporter and electricity transmission licences also oblige us to provide connections and capacity upon request.
The bulk of the current UK electricity transmission network was installed during the 1960s and 1970s, with main plant asset lives typically of between 40 and 50 years. We have increased our level of investment as, over the next few years, we replace parts of our UK electricity network as these assets become due for renewal. In addition, parts of the gas transmission network are reaching the end of their lives. These are mainly compressor stations, control systems and valves (ie above ground assets and not the high pressure pipes). This, together with work required to meet changing supply sources, means that the UK electricity and gas transmission business will be embarking on a significant increase in investment and network renewal.
Capital investment in the replacement, reinforcement and extension of the UK electricity and gas transmission systems in 2006/07 was £1,235 million, compared with £849 million in 2005/06 and £529 million in 2004/05.
2006/07 has seen a substantial increase in the level of capital investment in gas pipeline projects, some £244 million higher than 2005/06 (2005/06 £156 million higher than 2004/05).
In addition in 2006/07, 48% or £290 million (2005/06: 50% or £265 million, 2004/05: 41% or £163 million) of electricity transmission capital expenditure was related to asset replacement, reflecting the increasing need to replace transmission network assets, many of which were commissioned in the 1960s.
| Years ended 31 March | |||
|---|---|---|---|
| 2007 £m |
2006 £m |
2005 £m |
|
| Property, plant & equipment | 1,218 | 840 | 464 |
| Intangible assets | 17 | 9 | 65 |
| Capital investment | 1,235 | 849 | 529 |
Investment - US
We expect a significant increase in investment in New England to deliver our regional system expansion planning process projects. There will also be an increase in investment in New York in order to address asset replacement requirements and increase safety and reliability of the system.
Capital investment in the replacement, reinforcement and extension of the US electricity transmission networks in 2006/07 was £108 million compared with £91 million in 2005/06 and £74 million in 2004/05. This increase in capital expenditure principally reflects additional planned asset replacement in New England to increase reliability and system security as well as facilitating an increase in transfer capability into Boston.
Customer service
In the US, our principal customer is our own Electricity Distribution business and so customer service activities mainly comprise supporting our Electricity Distribution business in trying to improve our service to commercial and domestic consumers.
Financial results - UK
The results for the Transmission - UK segment for the years ended 31 March 2007, 2006 and 2005 were as follows:
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2007 £m |
2006 £m |
2005 £m |
| Revenue | 2,816 | 2,710 | 1,995 |
| Other operating income | 6 | - | - |
| Operating costs excluding exceptional items and remeasurements | (1,876) | (1,866) | (1,136) |
| Adjusted operating profit | 946 | 844 | 859 |
| Exceptional items | (10) | (1) | (2) |
| Operating profit | 936 | 843 | 857 |
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 increased by £106 million in 2006/07 compared to 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 passthrough costs, partly offset by unfavourable timing impacts on gas revenue and lower interconnector auction income.
Operating costs, excluding exceptional items and remeasurements, increased by £4 million in 2006/07 compared to 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 (in future periods this expenditure will be 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 (£15 million decrease comparing 2005/06 with 2004/05) reflects the movements in revenue and operating costs, excluding exceptional items, as described above.
The £10 million exceptional charge in 2006/07 is driven by the establishment of a shared services function and the implementation of a review of our business processes.
2005/06 compared with 2004/05
| Revenue £m |
Operating costs £m |
Operating profit £m |
|
|---|---|---|---|
| 2004/05 results | 1,995 | (1,138) | 857 |
| Add back 2004/05 exceptional items | - | 2 | 2 |
| 2004/05 adjusted results | 1,995 | (1,136) | 859 |
| LNG storage | 34 | (4) | 30 |
| French interconnector | 43 | (3) | 40 |
| BSIS | 214 | (235) | (21) |
| Scottish networks pass-through | 259 | (259) | - |
| Depreciation and amortisation | - | (83) | (83) |
| Other | 165 | (146) | 19 |
| 2005/06 adjusted results | 2,710 | (1,866) | 844 |
| 2005/06 exceptional items | - | (1) | (1) |
| 2005/06 results | 2,710 | (1,867) | 843 |
The £715 million increase in UK electricity and gas transmission revenue comparing 2005/06 with 2004/05 was mainly due to higher incentivised costs associated with balancing the electricity system, which flow through to revenue, and the collection of transmission use of system charges under the new BETTA on behalf of the Scottish network owners. Beneficial outcomes from the capacity auctions in the LNG and electricity interconnector markets resulted in higher revenues compared to 2004/05. Other higher revenues reflected favourable timing and inflationary impacts, and higher pass-through of costs partly reduced by the transfer of the Scottish interconnector into the electricity transmission regulated business under BETTA.
Operating costs, excluding exceptional items and remeasurements, increased by £730 million in 2005/06 compared with 2004/05. This was due to higher incentivised BSIS costs resulting from higher constraint, margin and energy balancing costs, and transmission use of system charges owed to the Scottish network owners under BETTA which became effective from 1 April 2005. Transmission owner depreciation and amortisation increased by £83 million due to higher accelerated depreciation associated with early asset write offs and an increase in core depreciation reflecting the acceleration in the capital programme. Higher other operating costs reflected higher pass-through costs partly offset by the transfer of the Scottish interconnector as referred to above.
The £15 million decrease in adjusted operating profit comparing 2005/06 with 2004/05 reflects the movements in revenue and operating costs, excluding exceptional items, as described above.
The £1 million exceptional charge in 2005/06 related to elements of the Way Ahead programme in Gas Distribution in the UK that affected Transmission.
Financial results - US
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.
| 2007 £m |
2006 £m |
2005 £m |
|
|---|---|---|---|
| Revenue | 270 | 310 | 284 |
| Operating costs excluding exceptional items and remeasurements | (162) | (183) | (158) |
| Adjusted operating profit | 108 | 127 | 126 |
| Exceptional items | (1) | - | (7) |
| Operating profit | 107 | 127 | 119 |
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 (£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 Electricity Distribution (see below). Partly offsetting these decreases was higher revenue from New England due to a higher investment base.
Operating costs, excluding exceptional items and remeasurements, decreased by £10 million in 2006/07 compared with 2005/06. 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 proposed acquisition of KeySpan.
2005/06 compared with 2004/05
The principal movements between 2004/05 and 2005/06 can be summarised as follows:
| Revenue £m |
Operating costs £m |
Operating profit £m |
|
|---|---|---|---|
| 2004/05 results | 284 | (165) | 119 |
| Add back 2004/05 exceptional items | - | 7 | 7 |
| 2004/05 adjusted results | 284 | (158) | 126 |
| Exchange movements | 13 | (7) | 6 |
| 2004/05 constant currency adjusted results | 297 | (165) | 132 |
| Tariff adjustment | 7 | (7) | - |
| Other changes | 6 | (11) | (5) |
| 2005/06 results and adjusted results | 310 | (183) | 127 |
The £13 million increase in revenue comparing 2005/06 with 2004/05 arose from a one-off tariff adjustment of £7 million to revenues collected from Electricity Distribution under the regional transmission organisation tariff and generally higher returns in New England, the beneficial timing impact of revenue collection in New York and higher pass-through costs in New England and the US interconnector. Partly offsetting these increases was lower revenue from GridAmerica, following cessation of its operations with effect from 1 November 2005, and a one-off refund associated with a prior period billing error in New England.
Operating costs, excluding exceptional items and remeasurements, increased by £18 million in 2005/06 compared with 2004/05. This was due to the £7 million operating cost adjustment as referred to above, higher payroll and associated benefits costs in New York, a one-off write off of interconnectionrelated costs and generally higher costs to address reliability issues, partly offset by lower operating costs in GridAmerica following its cessation of operations.
The £1 million increase in adjusted operating profit and operating profit in 2005/06 compared with 2004/05 arose from favourable exchange impacts of £6 million mainly offset by the £5 million movement in revenue and operating costs described above.