Executive Reports
Chief Executive’s Review
Strategy
Our goal is to be the world’s premier network utility.
We concentrate on regulated networks which transport gas and electricity. Our world is highly regulated, which means that good relationships with economic and safety regulators and all our stakeholders are essential to our success because they set the frameworks within which we operate. Our ability to manage this complex environment puts us in a strong position to create opportunities and to make superior financial returns.
We aim for operational excellence, setting our performance against efficiency benchmarks and regulatory targets, with the utmost attention to safety and reliability.
We instil a disciplined approach to capital management which means that investment opportunities, organic or strategic, are considered only where value can be created.
The skills of our employees are at the heart of our success in reaching world-class safety, operating and financial performance. We rely on their skills to take advantage of opportunities to grow our business organically and to invest in new energy delivery networks as well as other network-related businesses which we believe have an acceptable risk profile.
Progress
Delivering our strategy is our day-to-day work. We continue to look to improve our performance – safety, financial and operational; share knowledge and skills; and invest responsibly for growth. Our drive to be the best that we can be is key to the results of our business.
We have made significant operational progress:- Improved safety performance, with 29% fewer incidents where employees needed to take time off work compared with 2003/04.
- Good operating performance, including the reliable delivery of all but one unit out of every five million units of the electricity demanded in the UK.
- Good financial performance, with underlying earnings per share up by 6%.
- Good organic growth, including a continued high level of investment of £1.9 billion during the year.
- Excellent reputation as a responsible business. In April 2005, we were placed 2nd in Business in the Community’s third Corporate Responsibility Index. We also improved our placing in the Dow Jones World and Stoxx sustainability indices, which together influence some £2 billion of responsible investment around the world.
We also made two strategic steps.
Our most significant move was the agreement, in August 2004, to sell four of our Gas Distribution networks in the UK at a price of £5.8 billion, a considerable premium to the regulatory value at 31 March 2005. We have announced the proposed return of £2 billion to shareholders with around £2.3 billion of the proceeds to be used to repay debt. Following the completion of these sales, which are now anticipated to occur on 1 June 2005, we will still own the largest Gas Distribution network in the country, but with a new unified structure which will enable us to place an increased emphasis on safety and efficiency, and on the sharing of best practice.
In August, we also completed the £1.1 billion purchase of the UK operations of Crown Castle International Corp. Combined with our existing Gridcom UK business, we are now the UK’s leading independent provider of towers and masts for mobile phone operators. We are one of two providers of broadcast transmission towers in the UK, providing transmission services to the BBC and BSkyB amongst others. Our core network skills put us in a strong position to take advantage of the growing demand in this key area, which we refer to as wireless infrastructure.
In the following pages, we take a closer look at our progress in the key areas of our business – our safety, our operations, our investment, our people, and our commitment to the environment and society. More detail can be found in the Operating and Financial Review and on our website www.ngtgroup.com.
Financial performance
We have delivered a good operating performance across the Group. We have continued to produce strong operating cash flows and have invested £3 billion for future growth.
Adjusted operating profit* from our UK electricity and gas transmission business increased 7% compared with last year from £759 million† to £809 million, and from our US electricity transmission business was up to £123 million, an increase of some 3%, based on a constant US dollar/sterling exchange rate.
Our UK Gas Distribution business’ contribution to the Group’s adjusted operating profit* was down to £570 million, due, as expected, to a decline in formula income, exacerbated by a very mild winter, and to the increased investment in our mains replacement programme. However, whilst managing the highly complex process of selling four regional networks, controllable costs were reduced by another 3% in real terms.
The performance from US electricity and gas distribution was particularly strong, with adjusted operating profit* up by 15% to £374 million compared with £325 million† last year, based on a constant US dollar/sterling exchange rate. This increase was largely attributable to the continued success of our efficiency programmes.
Adjusted operating profit* for wireless infrastructure was up £40 million at £46 million due to the strategic acquisition of the UK operations of Crown Castle International Corp. in August 2004. The business is performing in line with the Group’s expectations and the integration with the Group’s existing business, Gridcom UK, is on track.
The Group’s other activities contributed £162 million to adjusted operating profit*, an additional £66 million (69%) compared with £96 million† last year. This reflected increased property stock sales by SecondSite Property, elimination of losses from Fulcrum Connections and items relating to insurance, in part offset by the expected impact of lower prices charged by the Group’s Metering business under new contracts signed with its gas supply customers.
Outlook
We see considerable scope for organic growth within our existing UK and US businesses and this will be our first priority. We will do this by investing appropriately and continuing to control costs in our core businesses.
Overall, we will remain focused on our strategy to achieve world-class performance and deliver premium returns in a responsible manner for our shareholders.
Roger Urwin
Group Chief Executive
| * | Excludes the impact of exceptional items and goodwill amortisation |
|---|---|
| † | Restated for FRS 20 |