Financial performance
Profit
Our objective is to increase profits each year.
The adjusted operating profit was £1,284 million in 2008/09 compared with £987 million in 2007/08 and £480 million in 2006/07.
Financial results – Gas Distribution UK
The results for our Gas Distribution UK segment for the years ended 31 March 2009, 2008 and 2007 were as follows:
| Years ended 31 March | |||
|---|---|---|---|
| Continuing operations | 2009 £m |
2008 £m |
2007 £m |
| Revenue | 1,466 | 1,383 | 1,193 |
| Other operating income | 2 | 8 | 6 |
| Operating costs excluding exceptional items | (796) | (796) | (790) |
| Adjusted operating profit | 672 | 595 | 409 |
| Exceptional items | (43) | (21) | 3 |
| Operating profit | 629 | 574 | 412 |
2008/09 compared with 2007/08
The principal movements between 2007/08 and 2008/09 can be summarised as follows:
| Revenue and other operating income £m |
Operating costs £m |
Operating profit £m |
|
|---|---|---|---|
| 2007/08 results | 1,391 | (817) | 574 |
| Add back exceptional items | – | 21 | 21 |
| 2007/08 adjusted results | 1,391 | (796) | 595 |
| Allowed revenues | 90 | – | 90 |
| Timing on recoveries | (15) | – | (15) |
| Pass-through costs | – | (9) | (9) |
| Non-formula | 9 | (12) | (3) |
| Other revenue and costs | (7) | 21 | 14 |
| 2008/09 adjusted results | 1,468 | (796) | 672 |
| Exceptional items | – | (43) | (43) |
| 2008/09 results | 1,468 | (839) | 629 |
Revenue and other operating income in Gas Distribution UK increased by £77 million in 2008/09 compared with 2007/08. Allowed revenue was up £90 million, driven by the five year price control that came into effect on 1 April 2008 and incentive gains through the efficient management of our capacity requirements and improved pressure management. This was partially offset by a £15 million timing impact on recoveries.
The net year-on-year timing impact against allowed revenues was a reduction of £15 million as in 2008/09 there was a net benefit of £10 million (comprising the under-recovery of £20 million relating to the previous year, partially offset by a £10 million under-recovery for 2008/09), compared with a net benefit of £25 million in 2007/08 (comprising a £20 million under-recovery in 2007/08, offset by £45 million under-recovery from 2006/07).
Operating costs for 2008/09, excluding exceptional items, were in line with 2007/08. Efficiency savings through strong operating cost performance were combined with one-off benefits in the year. As expected, this was offset by £9 million higher pass-through costs due to an increase in business rates following the changes in rateable values introduced from 1 April 2005 and shrinkage costs due to higher gas prices. Non-formula costs were £12 million higher because of increased meter work and other non-formula activities.
Exceptional charges of £43 million in 2008/09 included an increase in the environmental provision of £13 million with the remaining £30 million made up of restructuring and transformation costs, which include system related projects costs. This compared with a £21 million charge in 2007/08.
As a consequence of the above, adjusted operating profit excluding exceptional items was £77 million higher in 2008/09 than 2007/08, an increase of 13%. Including exceptional items, operating profit was £55 million higher in 2008/09 than 2007/08, an increase of 10%.
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 exceptional items | – | (3) | (3) |
| 2006/07 adjusted results | 1,199 | (790) | 409 |
| Allowed revenues | 165 | – | 165 |
| Timing on recoveries | 59 | – | 59 |
| Depreciation and amortisation | – | (11) | (11) |
| Pass-through costs | – | (18) | (18) |
| Other revenue and costs | (32) | 23 | (9) |
| 2007/08 adjusted results | 1,391 | (796) | 595 |
| 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 higher by £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 partially 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 was 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’ pension costs. This was partially 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 by 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%.
Financial results – Gas Distribution US
The average exchange rates used to translate the results of US operations during 2008/09, 2007/08 and 2006/07 were $1.54:£1, $2.01:£1 and $1.91:£1 respectively.
| Years ended 31 March | |||
|---|---|---|---|
| 2009 £m |
2008 £m |
2007 £m |
|
| Revenue | 4,786 | 2,845 | 638 |
| Operating costs excluding exceptional items and remeasurements | (4,174) | (2,453) | (567) |
| Adjusted operating profit | 612 | 392 | 71 |
| Exceptional items and remeasurements | (386) | 95 | (4) |
| Operating profit | 226 | 487 | 67 |
2008/09 compared with 2007/08
The principal movements between 2007/08 and 2008/09 can be summarised as follows:
| Revenue £m |
Operating costs £m |
Operating profit £m |
|
|---|---|---|---|
| 2007/08 results | 2,845 | (2,358) | 487 |
| Add back exceptional items | – | (95) | (95) |
| 2007/08 adjusted results | 2,845 | (2,453) | 392 |
| Exchange movements | 873 | (753) | 120 |
| 2007/08 constant currency results | 3,718 | (3,206) | 512 |
| KeySpan contribution | 902 | (896) | 6 |
| Rate increases | 32 | – | 32 |
| Weather and volumes | 22 | – | 22 |
| Timing on recoveries | (6) | 52 | 46 |
| Merchant function charge | 38 | – | 38 |
| Energy efficiency programme | 19 | (12) | 7 |
| Pass-through costs | 69 | (69) | – |
| Bad debt expense | – | (29) | (29) |
| Other revenues and costs | (8) | (14) | (22) |
| 2008/09 adjusted results | 4,786 | (4,174) | 612 |
| Exceptional items | – | (52) | (52) |
| Remeasurements | – | (334) | (334) |
| 2008/09 results | 4,786 | (4,560) | 226 |
Revenue and operating costs excluding exceptional items and remeasurements increased by £1,068 million and £968 million respectively in 2008/09 compared with 2007/08 on a constant currency basis, an increase of 29% and 30% in each case. The rise in revenue and operating costs primarily arose from an increase in contributions from KeySpan operations in 2008/09 reflecting the first full year of ownership since acquisition in August 2007.
Revenue increased by £1,073 million in 2008/09 compared with 2007/08. Revenue from KeySpan operations increased by £902 million compared with 2007/08. The remaining £171 million was primarily driven by New York, Long Island, Rhode Island, and New Hampshire rate increases of £32 million, colder weather and higher consumption of £22 million, higher recoveries of gas inventory carrying charges of £38 million, higher commodity pass-through costs of £69 million, and other increases of £10 million.
The weather in 2008/09 was significantly colder than 2007/08. As measured in heating degree days, weather in 2008/09 across National Grid’s US gas territories was approximately 5% colder than normal and was approximately 8% colder than 2007/08.
Operating costs, excluding exceptional items were £973 million higher in 2008/09 compared with 2007/08. The increase in costs from KeySpan operations in 2008/09 was £896 million on a constant currency basis. The remaining increase of £77 million was a result of higher commodity pass-through costs, an increase in maintenance costs and higher bad debt expense as a result of the economic downturn partially offset by a favourable overcollection in commodity costs.
Exceptional charges of £52 million in 2008/09 related to integration initiatives, including the cost of voluntary early redundancies, while adverse mark-to-market commodity contract remeasurement losses were recorded as a consequence of lower energy prices compared with contracted amounts as at 31 March 2009. The losses from these transactions will be realised in subsequent periods and recovered from consumers.
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 contribution | 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 |
| Exceptional items | – | (46) | (46) |
| 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. The rise in revenue and operating costs 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.
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.