National Grid 2007 Annual Report Download - page 16

14 National Grid Electricity Transmission Annual Report and Accounts 2006/07
Growth
Capital investment
Our capital investment continues to increase as changing
energy requirements and the renewal of our networks require
increased investment in infrastructure and we invested
£595 million in the form of capital investment during 2006/07,
compared with £530 million in 2005/06. In the UK, there are
plans for significant expansion of renewable energy sources, as
well as the need to increase the rate of asset replacement, as
assets built in the 1960s and 1970s approach the end of their
useful lives. The UK transmission price controls for the next five
years include an allowance of £3.5 billion for investment in our
electricity networks over that period. This investment is to
respond to changing sources of energy and to replace our
ageing assets.
Acquisitions and disposals
Legislative changes which became effective on 14 August
2006, meant that as a holder of an electricity transmission
licence, we were no longer allowed to own or operate the
French Interconnector. Therefore, on 14 August 2006, we
transferred our French Interconnector assets and related
operating activities to National Grid Interconnectors Limited, a
fellow subsidiary company of National Grid for a price of
£128 million.
There were no other significant acquisitions or disposals
completed during the year ended 31 March 2007.
Assets held for sale
As part of its strategy of focusing on energy markets in the UK
and the US, National Grid committed during 2006/07 to exit
from its wireless infrastructure operations in the UK and in the
US. As a consequence, certain assets and liabilities relating to
those wireless infrastructure operations have been reclassified
as held for sale. Subsequent to the end of the 2006/07 financial
year, on 3 April 2007, National Grid completed the sale of its
UK wireless infrastructure operations, including these assets
and liabilities, for proceeds of £2.5 billion. For further details of
the sale see the National Grid Annual Report and Accounts
2006/07.
Generating value from our investments
This year we are reporting for the first time a return on
investment measure, the purpose of which is to allow us to
monitor how we are performing in generating value from our
businesses and from the investments we make. Return on
investment has been calculated using the measure developed
by Ofgem when setting our transmission price controls for the 5-
year period commencing 1 April 2007. If we perform in
accordance with Ofgem’s projections for the 5 year price control
period, then we would earn an average annual return of 5.05%
using Ofgem’s measure. For 2006/07, our return on investment
using this measure is 4.7%, compared with 4.5% in 2005/06.
The returns in 2005/06 and 2006/07 were mainly suppressed by
an increased investment programme prior to the price control
outcome but for which higher revenue will be allowed in future
years.
The following table shows how return on investment has been
calculated:
Years ended 31 March
2007
2006
£m £m
Electricity Transmission adjusted operating profit1
576
484
Adjustment of operating costs onto a price control
basis2
(26)
(10)
Excess of regulatory value depreciation over
accounting depreciation and amortisation
(177)
(130)
Regulatory operating profit 373 344
Notional current taxation on a price control basis3 (104) (104)
Regulatory return 269 240
Estimated regulatory value at 1 April4 5,759 5,351
Return on investment – regulatory return as a
percentage of regulatory value 4.7% 4.5%
1 Adjusted operating profit is operating profit before exceptional items and
remeasurements.
2 Adjustments to operating costs primarily comprise an allocation of corporate centre costs
which are reported in these financial statements within other activities and certain
additions to fixed assets which are treated as an operating cost for price control purposes.
3 Notional current taxation is an allocation of the actual current tax for the year, excluding
prior year items and adjusted for the effect of actual interest payments being less than
would result from the gearing assumed by Ofgem when setting the price control.
4 Regulatory values have been restated from previous estimates to reflect the outcome of
the price control review for the 5 years from 1 April 2007 and are stated at average year
values
Talent
Motivation and performance
In July 2006, National Grid conducted a company-wide
employee opinion survey. 58% of employees took part in the
process – a 9% increase on the response rate compared with
the 2004 survey. For over 90% of the questions asked, a more
favourable response rate was received than in 2004. The
survey demonstrated that the workforce better understand our
strategy and the need for change. Our employees believe that
the business is heading in the right direction and are willing to
do their jobs differently to help National Grid improve. Respect
and integrity, two of our three core values, are also becoming
embedded in the culture of the organisation and safety
continues to be recognised as one of National Grid’s key
strengths.
Areas which the survey results highlighted as needing
improvement included general management behaviours around
communication with employees and performance management.
Action plans have been developed by each of the businesses to
address their key priorities for improvement.
Greater use is being made of electronic communication
channels with the new Chief Executive of National Grid outlining
the new strategy for all employees via video and issuing a New
Year video message to all employees.
Development of talent
Development and recruitment of employees is undertaken on
an integrated basis for all National Grid’s UK businesses.
Our focus on developing the talent of our current and future
business leaders has intensified, with participants in our
leadership and management development programmes more
than doubled over last year. Specific areas of focus include