Operating and Financial Review
Operating Review
Other businesses
- Background information
- Safety
- Financial performance
- Investment in other activities
- Metering
- Interconnectors
- Liquefied Natural Gas
- Property Services Group
- Fulcrum Connections
- Advantica
- Discontinued operations
Background information
Progress continues to re-focus the portfolio of other businesses to the provision of infrastructure and related services where we can exploit our core skills and assets to create value.
Other businesses are Metering, Interconnectors, Liquefied Natural Gas, Property Services Group, Fulcrum Connections, Advantica and other corporate activities. These businesses are included in the financial statements under Other activities.
Safety
There was an increase in the total number of employee LTIs in the other businesses, rising from five in 2003/04 to nine in 2004/05.
During the year, Fulcrum Connections received recognition for its safety performance, including a Gas Industry Award for Safety and a Gold RoSPA Award, and achieved world-class status in the Confederation of British Industry's 'Contour' benchmark.
Financial performance
The aggregated results of Other activities for the years ended 31 March 2005, 2004 and 2003 were as follows.
Years ended 31 March Other activities | 2005 £m | 2004 (restated) £m | 2003 (restated) £m |
|---|---|---|---|
| Turnover | 844 | 834 | 861 |
| Operating costs excluding exceptional items and goodwill amortisation | (682) | (738) | (714) |
| Adjusted operating profit | 162 | 96 | 147 |
| Exceptional items | (33) | (66) | (95) |
| Goodwill amortisation | - | (1) | - |
| Operating profit | 129 | 29 | 52 |
Turnover from Other activities in 2004/05 was in line with 2003/04, despite a £27 million reduction in Metering, primarily reflecting lower prices offered in commercial contracts signed in March 2004. Offsetting this reduction was a £23 million improvement in Fulcrum Connections' revenues.
The £27 million decrease in turnover comparing 2003/04 with 2002/03 was primarily due to a reduction in turnover from Advantica of £13 million, as a result of reduced activity with Transco, and £17 million from Fulcrum Connections.
The £56 million reduction in Other activities operating costs comparing 2004/05 with 2003/04 primarily reflected the lower carrying value of property stock sold during the year by SecondSite Property.
The £24 million increase in operating costs comparing 2003/04 with 2002/03 was mainly due to an increase in Metering costs of £26 million, principally as a result of increased depreciation.
The £66 million increase in Other activities adjusted operating profit comparing 2004/05 with 2003/04 and the £51 million reduction in adjusted operating profit comparing 2003/04 with 2002/03 were due to the above factors.
Exceptional items and goodwill amortisation explain the difference between adjusted operating profit and operating profit. The improvement in exceptional costs during the year was mainly due to the £21 million impairment of assets and restructuring at Advantica in 2003/04.
The £29 million decrease in exceptional costs comparing 2003/04 with 2002/03 was primarily due to merger costs incurred in 2002/03.
Investment in other activities
Capital expenditure in 2004/05 amounted to £310 million, an increase of £38 million compared with £272 million in 2003/04. This reflected an increase of £58 million relating to the Basslink project, offset by a £7 million reduction in capital expenditure on the Isle of Grain LNG importation terminal and a £13 million reduction in other capital expenditure.
Capital expenditure in 2003/04 of £272 million was £99 million higher than in 2002/03, comprising a £58 million increase on the Isle of Grain LNG project, a £28 million increase in Basslink and a £13 million increase in other capital spending.
Metering
The UK Metering businesses, Transco Metering and OnStream, provide installation, maintenance and meter reading services to gas and electricity suppliers in the regulated and unregulated markets. During 2005/06, it is our intention to bring together the two businesses under a single legal entity, reinforcing our position as the national leading provider of utility metering services in Great Britain.
Transco Metering
Transco Metering has continued to provide services on behalf of Transco for an asset base of around 20 million domestic and industrial and commercial gas meters. On 12 July 2004, the UK gas metering industry successfully implemented a suite of new contracts, information systems and business processes to deliver the recommendations of Ofgem's Review of Gas Metering Arrangements. Transco Metering played a major role in the four-year industry-wide project.
OnStream
OnStream's focus is the provision of metering services to the competitive market. During the year, it continued the installation of gas meters and began to install electricity meters under a major contract signed with British Gas Trading.
Interconnectors
In the UK, we own and operate electricity interconnectors between England and Scotland and England and France that provide access to alternative wholesale electricity markets and additional sources of supply.
2004/05 is the last year in which the England/Scotland interconnector operated as a separate business activity. The introduction of BETTA means that it became part of the enlarged transmission assets in the Great Britain electricity market from 1 April 2005.
The Basslink project is a 600 MW interconnector linking the electricity network on the island state of Tasmania to mainland Australia. As a result of damage to six transformers incurred during shipment from Germany, commissioning is expected to be delayed until Spring 2006.
Capital expenditure on the Basslink project was £136 million in 2004/05, compared with £78 million in 2003/04 and £50 million in 2002/03. Total project costs remain broadly on budget and the total cost to completion, excluding capitalised financing costs, is still expected to be approximately £300 million.
Liquefied Natural Gas
The first phase of our development of the Isle of Grain LNG import terminal will be ready for commissioning in June 2005. It will be the first new LNG import terminal constructed and operated in the UK for some 20 years. In 2004/05, capital expenditure on the project was £51 million, compared with £58 million in 2003/04 and £2 million in 2002/03.
In March 2005, we announced a new £355 million investment to triple the capacity of the Isle of Grain LNG import terminal. This second phase of development will increase the facility's capacity to import and process LNG from 3.3 million tonnes per year to 9.8 million tonnes per year, representing around 12% of the current UK annual gas demand, and is planned to commence operations in late 2008. These investments in the Isle of Grain LNG import terminal are underpinned by 20-year customer contracts.
Our LNG storage business, which covers the four other UK sites (Glenmavis, Partington, Dynevor Arms and Avonmouth), continues to provide gas storage facilities. In 2005/06, this business has been incorporated back into the UK electricity and gas transmission segment.
Property Services Group
During the year, we consolidated all of our property holding and management activities into a single unit, Property Services Group.
Property Services Group is responsible for the management of all occupied operational property. In addition, through its SecondSite Property arm, it is responsible for the management, clean up and disposal of surplus non-operational properties largely comprising contaminated former gas works.
During the year ended 31 March 2005, SecondSite Property disposed of 57 properties and generated £114 million in disposal proceeds, compared with 91 properties and £154 million in 2003/04 and 74 properties and £89 million in 2002/03.
Property disposals contributed £62 million to profit on the disposal of fixed assets in 2004/05 compared with £88 million in 2003/04 and £54 million in 2002/03.
Fulcrum Connections
Fulcrum Connections is the largest provider of gas connections and associated design services with a national footprint in the UK. During 2004/05, Fulcrum Connections provided, on behalf of our UK Gas Distribution business, some 130,000 new gas connections and gas meter alterations to domestic and industrial customers, a similar level to that in 2003/04.
Reflecting the need to restructure our connection services as a result of the planned sales of four of our gas distribution networks, going forward the business will be incorporated into our UK Gas Distribution business.
Advantica
Advantica is an engineering and software consultancy providing services to the gas, oil, water and electricity sectors primarily in the UK and US.Discontinued operations
During the year, we have continued our exit from our non-core businesses. We completed the sale of our interests in Citelec, viavera and Kielder.