National Grid PLC — Annual Report 2004

May 20, 2004

6-K 1 finmay.htm FORM 6-K ======================================================================================================================================= SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ___ FORM 6-K REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 Date: 20 May 2004 NATIONAL GRID TRANSCO plc (Registrant's Name) 1-3 Strand London WC2N 5EH (Registrant's Address) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F Form 40-F Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3- 2(b) under the Securities Exchange Act of 1934. Yes No If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorised. NATIONAL GRID TRANSCO plc s/ David C. Forward By:_______ Name: David C Forward Title: Assistant Secretary Date: 20 May 2004 ANNEX 1 - SUMMARY FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 Report of Foreign Issuer Pursuant to Rule 13a - 16 or 15d - 16 of The Securities Exchange Act of 1934 Announcement sent to the London Stock Exchange on 20 May 2004: National Grid Transco plc ('NGT') 1-3 Strand London WC2N 5EH United Kingdom --------------------------------------------------------------------------------------------------------------------------------------- Announcement: 'National Grid Transco plc -Results for the year ended 31 March 2004' 20 May 2004 National Grid Transco plc Results for the year ended 31 March 2004 Strong growth - underlying earnings per share up 23% |X| underlying profit before tax up 14% to 1,416 million pounds |X| delivery of substantial cost savings |X| strong underlying cashflow from operations of 3.1 billion pounds |X| net debt down to 12.6 billion pounds |X| recommended dividend for year up 15%; 7% pa growth targeted until March 2008 ------------------------------------------------------------------------------------------------------------------------------- Financial highlights Years ended 31 March million pounds 2004 2003 % Change Business results * ---------------------------------------------------- 2,238 2,185 2 Underlying operating profit ---------------------------------------------------- Underlying pre-tax profit 1,416 1,246 14 Underlying earnings 1,064 870 22 Underlying earnings per share 34.7p 28.3p 23 ---------------------------------------------------- Statutory results Operating profit 1,862 1,736 7 Pre-tax profit 1,362 667 104 Earnings 1,099 391 181 Earnings per share 35.8p 12.7p 182 ---------------------------------------------------- 19.78p 17.20p 15 Dividend per share Net debt (at 31 March) 12,632 13,878 (9) ----------------------------------------------------- ----------------------- ------------------------- ----------------------- --------------------------------------------------------------------------------------------------------------------------------------- * "Business results" represent the primary measures used by management and are presented before goodwill amortisation and exceptional items. Management believes that exclusion of these items provides a better comparison of results. Unless otherwise stated, all financial commentaries in this Announcement are on a "business results basis" and are preceded by the prefix "underlying". Reconciliations of these measures to statutory measures are provided in the Group Profit and Loss Account, notes 5a and 5b and the Group Cash Flow Statement. Further detail is provided on our website (www.ngtgroup.com). Expenditure on the replacement of UK gas mains ("repex") of 388m pounds in the year (405m pounds last year) is fully expensed for accounting purposes and is tax deductible. However, for regulatory purposes, half the costs are recovered in current revenues and half are added to the regulatory asset base. The effect of removing half of the repex, net of tax, from earnings is equivalent to increasing earnings per share by 4.4p and 4.6p for each of the annual results shown above, respectively. Sir John Parker, Chairman, said: "These excellent results demonstrate the successful delivery of our strategy and the quality of our operational performance in both the UK and US. We are delighted to deliver over 1 billion pounds in earnings for the first time. "Our strong financial performance has been matched by our endeavours to operate our business in a responsible manner and we were pleased to be ranked 1st in Business in the Community's 2003 Corporate Responsibility Index. "Safety and network reliability are, as always, top priorities, and we have invested over 1.8 billion pounds this year in our networks. We have achieved further reductions in safety incidents across the Group, whilst maintaining high standards of service. The power cuts in London and the West Midlands last summer, which we very much regret, are isolated exceptions to an excellent performance, and we are continuing to work with Ofgem on their investigation. Despite these events, our UK electricity reliability performance remains at world class levels - delivering 99.9997% of the energy demanded during the year. "The sales process for five of our gas distribution networks is proceeding well and we expect final bids this summer. As we made clear from the outset, we will sell no more than four networks and will only proceed if those sales maximise value. "Our financial strength, as demonstrated by these results, combined with our confidence in the future prospects of our businesses enable the Board to recommend a 15% increase in the dividend this year and to target 7% per annum dividend growth for each of the next four years to March 2008." NATIONAL GRID TRANSCO plc Turnover from continuing activities was broadly unchanged at 8.9 billion pounds. Underlying operating profits rose by 2% from 2,185m pounds to 2,238m pounds, equivalent to 4% at constant USD/GBP exchange rates. We have delivered significant reductions in controllable costs, improved the performance of Gridcom, and benefited from exiting a number of non-core businesses. A particularly strong operating performance and increased revenues in UK gas distribution more than offset the adverse impact of year to year weather patterns in the US, increased UK pensions costs, and lower profits from the recovery of US stranded costs. Underlying net interest expense was 822m pounds, down from 939m pounds last year. Underlying operating profit interest cover was 2.7 times, compared to 2.3 times last year. Interest cover, based on our statutory results was 2.7 times, compared to 1.7 times last year. Underlying profit before tax was up 14% from 1,246m pounds to 1,416m pounds. The tax charge on underlying profit for the year was 350m pounds, representing an effective tax rate of 25%. Underlying earnings were 1,064m pounds, up from 870m pounds last year. Underlying earnings per share were up 23% to 34.7p from 28.3p last year. Expenditure on the replacement of old metallic gas mains in the UK ("repex") totalled 388m pounds in the year (405m pounds last year). For regulatory purposes, half the costs are recovered in current revenues and half are added to the regulatory asset base upon which we earn an allowed return. However, for accounting purposes repex is fully expensed and is tax deductible. In 2004, the effect of removing half of the repex, net of tax, from earnings is equivalent to increasing earnings per share by 4.4p. Our businesses remain strongly cash generative, with underlying cashflow from operations for the year broadly unchanged at 3.1 billion pounds. Capital expenditure on continuing operations, including capitalised interest, was maintained at 1.5 billion pounds and included 136m pounds for investments in our Isle of Grain LNG and Basslink projects. There were net exceptional gains (including both operating and non-operating exceptional items) totalling 45m pounds before tax, comprising: o A credit of 226m pounds (before and after tax) representing the realisation of a deferred gain on Energis shares held to redeem the EPIC bond; o Gains on sales of property and other tangible fixed assets of 96m pounds (before and after tax); o Restructuring costs of 249m pounds (170m pounds after tax), including 100m pounds for US distribution and transmission, 101m pounds for UK distribution, 14m pounds for UK transmission, and 34m pounds for other businesses; and o Recognition of additional UK environmental costs of 28m pounds (before and after tax). After exceptional gains and goodwill amortisation, basic earnings per share were 35.8p, up from 12.7p last year. Group net debt was 12.6 billion pounds at 31 March 2004, down 1.2 billion pounds from last year, with the weaker US dollar and EPIC bond redemption contributing 0.7 billion pounds and 0.2 billion pounds respectively to the overall decrease. REVIEW OF OPERATIONS We have delivered our previously promised merger savings and each of our businesses has delivered improvements in operating efficiency, together resulting in substantial cost savings across the Group compared to last year. The quality of our earnings is underpinned by the length and stability of regulatory frameworks in the US and the UK. In the UK, there have been a number of recent positive developments. Ofgem has confirmed that where additional capital expenditure is demonstrated to be efficiently incurred during the course of a price control period, this will be added to the regulatory asset base and be considered for a retroactive return allowance. In addition, Ofgem is moving to a rolling 5-year cost savings mechanism, aligning the gas and electricity transmission price control reviews in 2007, and moving the gas distribution review to 2008. UK GAS DISTRIBUTION Underlying operating profits from UK gas distribution increased from 554m pounds to 729m pounds, primarily as a result of a 103m pounds reduction in controllable costs and an 84m pounds increase in revenues, somewhat offset by a 23m pounds increase in pension deficit accounting charges. Over the past two years, the level of controllable costs within the business has been reduced by 20% in real terms, more than half way to our targeted reduction. The sales process for five of our gas distribution networks is proceeding well and we expect final bids this summer. As we made clear from the outset, we will sell no more than four of our networks and will only proceed if those sales maximise value. ELECTRICITY AND GAS TRANSMISSION Underlying operating profit from UK electricity and gas transmission was 769m pounds compared to 820m pounds last year. We had strong performance from the UK transmission business during the year and reduced controllable costs by 4% in real terms in line with our targets. The strength of our performance, however, was masked by the implementation of a charging reform (known as "Plugs") which reduced underlying operating profit by 22m pounds. This charge will be more than offset by increased operating profits arising from Plugs in future years. In addition, we incurred an increased depreciation charge of 27m pounds. Despite tougher regulatory targets in both the electricity and the gas system operator (SO) incentive schemes, we delivered operating profits of 52m pounds (down 8m pounds from last year) from these. In the US, our transmission business delivered underlying operating profits of 133m pounds compared to 128m pounds last year, with one-off benefits more than offsetting the impact of a weaker US dollar. GridAmerica, the first multi-system independent transmission company in the US, added the operations of Ameren on 1 May 2004 to those already managed for FirstEnergy and Northern Indiana Public Service Company, having received regulatory approvals in March. Together, these assets comprise over 14,000 miles of transmission lines, serving an area almost as large as England and Wales. In addition, the FERC continues to take steps to encourage participation in Regional Transmission Organisations (RTOs) and has recently approved key elements of the New England RTO filing that we made last autumn. US ELECTRICITY AND GAS DISTRIBUTION Underlying operating profit from US electricity and gas distribution (excluding stranded cost recovery) was 363m pounds this year, down from 401m pounds last year. Weather adjusted electricity distribution volumes were up 0.8% (including a 4.6% increase in the important domestic sales), contributing 22m pounds to underlying operating profit, and controllable costs were reduced by a further 12m pounds. Offsetting these benefits were the continued weakness of the dollar (20m pounds), a return to more normal weather (27m pounds) and the adverse impact of bad debt (9m pounds) and other one off items (16m pounds). Savings from the integration of our operations in New York and New England continue to be delivered in line with our targets. Over the past two years, we have reduced controllable costs by 10% in real terms. Monthly costs as at March 2004 were running at an annualised reduction of 15%. As expected, underlying operating profit from US stranded cost recovery declined from 170m pounds to 134m pounds, including a 8m pounds decrease due to the weaker dollar. OTHER BUSINESSES Across our other businesses, underlying operating profit for the year was 110m pounds as compared to 112m pounds last year. Gridcom has cut its costs in the UK while growing revenues in both the UK and US allowing it to deliver underlying operating profits of 6m pounds, a 29m pounds improvement on last year. The continued rapid expansion of the mobile telecoms industry should create significant opportunities for growth. Our metering business delivered underlying operating profits of 81m pounds, down 24m pounds from last year. The key variances were an increase in the depreciation charge and start-up losses relating to our competitive metering business. Looking ahead, we have successfully secured long-term contracts including a new pricing structure with gas suppliers, covering substantially all of Transco's domestic meters, to secure a long-term revenue stream. Last year, we had the benefit of the 10m pounds pension credit and an 8m pounds greater contribution from our electricity joint ventures. Losses at Fulcrum connections were 13m pounds greater than in the previous year. Discontinued businesses, including discontinued joint ventures, had no impact on underlying operating profits, after a loss of 46m pounds in the previous year. We continue to make good progress on construction of our LNG import terminal at the Isle of Grain and the Basslink project in Australia. As at 31 March 2004, we had invested almost half of our 410m pounds investment programme for these projects which provide us with new growth opportunities in the area of infrastructure development. We expect to complete these projects during 2005. PENSIONS As announced at our half-year results, the actuarial valuation of the Lattice Group Pension Scheme as at 31 March 2003, covering current and former UK gas employees and other former Lattice businesses (the "Lattice Scheme"), has been completed. This valuation resulted in an actuarial deficit of 879m pounds before tax (615m pounds after tax). Going forward, annual assessments of this scheme will be carried out. It has been agreed that funding of this deficit will be deferred until the results of the 2007 actuarial valuation are known. Meanwhile, the Company's cash contributions for the ongoing cost of the Lattice Scheme are being made at a rate of some 22% of pensionable payroll. A new SSAP 24 actuarial valuation for the Lattice Scheme resulted in a SSAP 24 charge of 144m pounds, compared to 70m pounds last year. FRS 17 has not yet been implemented and the 2004 accounts have been prepared under SSAP 24. At 31 March 2004, the FRS 17 deficit (net of deferred tax) in respect of all our Group pension schemes was 1,563m pounds, down from 2,262m pounds at 31 March 2003. MANAGEMENT CHANGES As previously announced, Rick Sergel will retire as Group Director, US Distribution at our Annual General Meeting on 26 July 2004. Michael Jesanis, currently Chief Operating Officer of our US distribution business, will then join the NGT Board and assume Rick's responsibilities. OUTLOOK AND DIVIDEND POLICY With our businesses performing well, we are confident of the future prospects for the Group. This confidence and the Group's solid financial position reflected in these results allows the Board to recommend a 15% increase in the full year dividend to 19.78p per ordinary share and to target an increase in dividends per ordinary share expressed in sterling of 7% in each financial year to 31 March 2008. A final dividend of 11.87p per ordinary share ($1.0500 per American Depositary Share (ADS)) will be paid on 23 August 2004 to shareholders on the register on 4 June 2004. CONTACT DETAILS National Grid Transco: Investors Marcy Reed/Alexandra Morton +44 (0)20 7004 3170 +44 (0)7768 490807/+44 (0)7768 554879(m) Terry McCormick +44 (0)20 7004 3171 +44 (0)7768 045139(m) Louise Clamp +44 (0)20 7004 3172 +44 (0)7768 555641(m) Bob Seega (US) +1 508 389 2598 Media Clive Hawkins +44 (0)20 7004 3147 +44 (0) 7836 357173 Citigate Dewe Rogerson +44 (0)20 7638 9571 Anthony Carlisle +44 (0)7973 611888(m) An analyst presentation will be held at Cazenove, 20 Moorgate, London EC2R 6DA at 8:45 am (UK time) today. Live telephone coverage of analyst presentation - password National Grid Transco Dial in number +44 (0)20 7081 9429 US call in number +1 800 897 3158 Telephone replay of the analyst presentation (available until 3 June 2004) Dial in number +44 (0)20 7081 9440 Account number 869448 Recording number 6542831 Live webcast of presentation will also be available at www.ngtgroup.com Photographs are available on www.newscast.co.uk Cautionary statement This announcement contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Because these forward-looking statements are subject to assumptions, risks and uncertainties, actual future results may differ materially from those expressed in or implied by such statements. Many of these assumptions, risks and uncertainties relate to factors that are beyond National Grid Transco's ability to control or estimate precisely, such as delays in obtaining or adverse conditions contained in regulatory approvals, competition and industry restructuring, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in energy market prices, changes in historical weather patterns, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, the availability of new acquisition opportunities or the timing and success of future acquisition opportunities. Other factors that could cause actual results to differ materially from those described in this announcement include the ability to integrate the US and UK businesses acquired by or merged with National Grid Transco or to continue to realise the expected synergies from such integrations, the failure for any reason to achieve reductions in costs or to achieve operational efficiencies, unseasonable weather impacting on demand for electricity and gas, the behaviour of UK electricity market participants on system balancing, the timing of amendments in prices to shippers in the UK gas market, the performance of National Grid Transco's pension schemes and the regulatory treatment of pension costs, the impact of any potential separation and disposal by National Grid Transco of any UK gas distribution network(s) and any adverse consequences arising from outages on or otherwise affecting energy networks owned and/or operated by National Grid Transco. For a more detailed description of these assumptions, risks and uncertainties, together with any other risk factors, please see National Grid Transco's filings with the United States Securities and Exchange Commission (and in particular the "Risk Factors" and "Operating and Financial Review" sections in its most recent annual report on Form 20-F). Recipients are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this announcement. National Grid Transco does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this announcement. GROUP PROFIT AND LOSS ACCOUNT FOR THE YEARS ENDED 31 MARCH 2004 2003 Notes (GBP)m (GBP)m ============ ============ Group turnover - continuing operations 2a 8,875 8,833 Group turnover - discontinued operations 2a 158 567 ------------ ------------ Group turnover 9,033 9,400 Operating costs (7,178) (7,788) ------------ ------------ Operating profit of Group undertakings - continuing operations 2c 1,855 1,806 Operating loss of Group undertakings - discontinued operations 2c - (194) ------------ ------------ 1,855 1,612 ------------ ------------ Share of joint ventures' operating profit - continuing operations 2c 7 15 Share of joint ventures' and associate's operating profit - discontinued operations 2c - 109 ------------ ------------ 7 124 Operating profit ------------ ------------ - Before exceptional items and goodwill amortisation 2b 2,238 2,185 - Exceptional items 3a (277) (347) - Goodwill amortisation (99) (102) ------------ ------------ Total operating profit 1,862 1,736 Non-operating exceptional items 3b 322 (99) Net interest - Excluding exceptional items 4 (822) (939) - Exceptional items 4 - (31) ------------ ------------ (822) (970) Profit on ordinary activities before taxation ------------ ------------ - Before exceptional items and goodwill amortisation 1,416 1,246 - Exceptional items and goodwill amortisation (54) (579) ------------ ------------ 1,362 667 Taxation - Excluding exceptional items (350) (373) - Exceptional items 3d 89 128 ------------ ------------ (261) (245) ------------ ------------ Profit on ordinary activities after taxation 1,101 422 Minority interests - Excluding exceptional items (2) (3) - Exceptional items 3e - (28) ------------ ------------ (2) (31) Profit for the year ------------ ------------ - Before exceptional items and goodwill amortisation 1,064 870 - Exceptional items and goodwill amortisation 35 (479) ------------ ------------ 1,099 391 Dividends 6 (609) (530) ------------ ------------ Profit/(loss) transferred to/(from) profit and loss account reserve 490 (139) ============ ============ EARNINGS AND DIVIDENDS PER ORDINARY SHARE FOR THE YEAR ENDED 31 MARCH 2004 2003 Notes Pence Pence =========== =========== Basic (including exceptional items and goodwill amortisation) 5a 35.8 12.7 Adjusted basic (excluding exceptional items and goodwill amortisation) 5a 34.7 28.3 =========== =========== Dividends per ordinary share 6 19.78 17.20 =========== =========== GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEARS ENDED 31 MARCH 2004 2003 (GBP)m (GBP)m ============ ============ Profit for the year 1,099 391 Exchange adjustments (417) (322) Tax on exchange adjustments (12) 12 Unrealised gain on transfer of fixed assets to a joint venture (net of tax) - 6 ------------ ------------ Total recognised gains and losses 670 87 ============ ============ GROUP BALANCE SHEET AT 31 MARCH 2004 2003 (restated) (GBP)m (GBP)m ============ ============ Fixed assets Intangible assets 1,537 1,893 Tangible assets 16,706 16,847 Investments in joint ventures 19 44 Other investments 132 170 ------------- ------------ 18,394 18,954 ------------- ------------ Current assets Stocks 91 126 Debtors (amounts falling due within one year) 1,588 1,811 Debtors (amounts falling due after more than one year) 2,708 3,395 Assets held for exchange - 17 Cash and investments 616 601 ------------- ----------- 5,003 5,950 Creditors (amounts falling due within one year) (4,513) (5,046) ------------- ----------- Net current assets 490 904 ------------- ------------ Total assets less current liabilities 18,884 19,858 Creditors (amounts falling due after more than one year) (13,464) (14,255) Provisions for liabilities and charges (4,157) (4,406) ------------- ----------- Net assets employed 1,263 1,197 ============ ============ Capital and reserves Called up share capital 309 308 Share premium account 1,280 1,247 Other reserves (5,131) (5,131) Profit and loss account 4,755 4,689 ------------ ------------ Equity shareholders' funds 1,213 1,113 Minority interests 50 84 ------------ ------------ Total shareholders' funds 1,263 1,197 ============ ============ Net debt included above 12,632 13,878 ------------ ------------ GROUP CASH FLOW STATEMENT FOR THE YEARS ENDED 31 MARCH 2004 2003 Notes (GBP)m (GBP)m ============ ============ Net cash inflow from operating activities before exceptional items 7 3,058 3,154 Expenditure relating to exceptional items (248) (328) ------------ ------------ Net cash inflow from operating activities 2,810 2,826 Dividends from joint ventures 8 11 Net cash outflow for returns on investments and servicing of finance (692) (912) Taxation Net corporate tax paid (18) (112) Capital expenditure and financial investment Net payments to acquire intangible and tangible fixed assets (1,400) (1,518) Receipts from disposals of tangible fixed assets 146 111 ------------ ------------ Net cash outflow for capital expenditure and financial investment (1,254) (1,407) Acquisitions and disposals Payments to acquire investments (26) (165) Receipts from disposals of investments 33 328 ------------ ------------ Net cash inflow from acquisitions and disposals 7 163 Equity dividends paid (560) (571) ------------ ------------ Net cash inflow/(outflow) before the management of liquid resources and financing 301 (2) Management of liquid resources Decrease in short-term deposits 8 (48) (138) ------------ ------------ Net cash outflow for the management of liquid resources (48) (138) Financing Issue of ordinary shares 38 4 Payments to repurchase ordinary shares - (97) Termination of cross-currency swaps 8 148 - (Decrease)/increase in borrowings 8 (426) 267 ------------ ------------ Net cash (outflow)/inflow (for)/from financing (240) 174 ------------ ------------ Movement in cash and overdrafts 8 13 34 ============ ============ NOTES TO THE ACCOUNTS 1. Basis of preparation The financial information contained in this announcement, which does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985, has been derived from the statutory accounts for the year ended 31 March 2004, which will be filed with the Registrar of Companies in due course. The auditors report on these accounts is unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. New accounting standards During the year the company has adopted UITF 38 "Accounting for ESOP trusts". The adoption of the standard constitutes a change in accounting policy and therefore the impact has been reflected as a prior year adjustment in accordance with FRS 3. The effect of the adoption of the standard is as follows: Adoption of UITF 38 At 31 March 2003, the Group reported 39m pounds of own shares within fixed asset investments. On adoption of UITF 38, the own shares have been moved out of fixed asset investments and into the profit and loss reserve. The adoption has therefore resulted in a decrease in net assets of 34m pounds at 31 March 2004 and 39m pounds at 31 March 2003. Change in composition of segments The segmental disclosures for the year ended 31 March 2003 have been restated to reflect the current management responsibilities. The change in segment composition is described in note 2. This preliminary results announcement was approved by the Board of Directors on 19 May 2004. 2. Segmental analysis Segmental information is presented in accordance with the management responsibilities and economic characteristics of the Group's business activities. Management responsibilities changed during the year ended 31 March 2004, and as a result segmental reporting has been aligned to reflect these changes in responsibilities, resulting in a restatement of segmental results for the year ended 31 March 2003. The principal effect of this is to reclassify the results of the UK Interconnectors and LNG Storage businesses from "UK electricity and gas transmission" to "Other activities". a) Group turnover Years ended 31 March 2004 2003 (restated) (GBP)m (GBP)m ============ ============ Continuing operations UK gas distribution 2,245 2,089 UK electricity and gas transmission 1,867 1,893 US electricity transmission 318 407 US electricity distribution 3,537 3,446 US gas distribution 464 446 Other activities 906 922 Sales between businesses (462) (370) ------------ ------------ Discontinued operations 158 586 Sales between businesses - (19) ------------ ------------ 158 567 ------------ ------------ 9,033 9,400 ============ ============ UK 4,736 5,096 US 4,297 4,304 ------------ ------------ 9,033 9,400 ============ ============ 2. Segmental analysis (continued) b) Operating profit - before exceptional items and goodwill amortisation Years ended 31 March 2004 2003 (restated) (GBP)m (GBP)m ============ ============ Group undertakings - continuing operations UK gas distribution 729 554 UK electricity and gas transmission 769 820 US electricity transmission 133 128 US electricity distribution 449 513 US gas distribution 48 58 Other activities 103 143 ------------ ------------ Discontinued operations - (26) ------------ ------------ Operating profit of Group undertakings 2,231 2,190 ------------ ------------ Joint ventures - Continuing operations 7 15 Discontinued operations - (20) ------------ ------------ Operating profit/(loss) of joint ventures 7 (5) ------------ ------------ 2,238 2,185 ============ ============ UK 1,600 1,481 US 632 704 Latin America - (7) Rest of the World 6 7 ------------ ------------ 2,238 2,185 ============ ============ 2. Segmental analysis (continued) c) Operating profit - after exceptional items and goodwill amortisation Years ended 31 March 2004 2003 (restated) (GBP)m (GBP)m ============ ============ Group undertakings - continuing operations UK gas distribution 640 443 UK electricity and gas transmission 755 774 US electricity transmission 105 103 US electricity distribution 294 413 US gas distribution 37 49 Other activities 24 24 ------------ ------------ Discontinued operations - (194) ------------ ------------ Operating profit of Group undertakings 1,855 1,612 ------------ ------------ Joint ventures - Continuing operations 7 15 Discontinued operations - 109 ------------ ------------ Operating profit of joint ventures 7 124 ------------ ------------ 1,862 1,736 ============ ============ UK 1,440 1,051 US 416 549 Latin America - 128 Rest of the World 6 8 ------------ ------------ 1,862 1,736 ============ ============ 3. Exceptional items a) Operating Years ended 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Continuing operations Restructuring costs (i) 249 203 Environmental provision (ii) 28 - Merger costs (iii) - 105 ------------ ------------ 277 308 ------------ ------------ Discontinued operations Restructuring costs (i) - 6 Impairment of investments in joint ventures and associate (iv) - (135) Impairment of business (v) - 168 ------------ ------------ - 39 ------------ ------------ Total operating exceptional items 277 347 ============ ============ i) The 2004 restructuring costs consist of 24m pounds of costs associated with the proposed disposal of UK-based distribution networks and other charges of 225m pounds. The other charges primarily relate to planned cost reduction programmes in the UK and US businesses. The 2003 charges primarily relate to costs incurred in reorganisations in the UK and US businesses (2004: 170m pounds after tax; 2003: 165m pounds after tax). ii) Following completion of site investigations in the UK, the environmental obligations in respect of those sites have been adjusted resulting in the recognition of an additional charge of 28m pounds (28m pounds after tax). iii) Represents employee and property costs associated with the Merger in 2003 of National Grid and Lattice (76m pounds after tax). iv) The 2003 credits relate to Intelig and other telecoms joint ventures (155m pounds after tax). The exceptional credits arising in 2003 substantially represent the reversal of the Group's share of retained losses incurred by these joint ventures during the period from 1 April 2002 to the date of disposal or the date that equity accounting ceased. 129m pounds of the pre-tax exceptional credits have been reflected in "Share of joint ventures' and associate's operating profit/(loss) - discontinued operations". v) In 2003, following a review of the carrying value of certain of the Group's telecoms assets, the Group incurred impairment charges that resulted in the write-down of those assets to their estimated recoverable amounts and the recognition of other related costs (143m pounds after tax). b) Non-operating Years ended 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Continuing operations Profit on disposal of tangible fixed assets (vi) (96) (48) Merger costs (vii) - 79 ------------ ------------ (96) 31 ------------ ------------ Discontinued operations Gain on assets held for exchange (viii) (226) - Loss on sale or termination of operations (ix) - 68 ------------ ------------ (226) 68 ------------ ------------ Total non-operating exceptional items (322) 99 ============ ============ vi) The after tax profit on disposal of tangible fixed assets was 96m pounds (2003: 50m pounds). vii) The after tax transaction cost of the Merger between National Grid and Lattice in 2003 was 71m pounds. viii) The gain on assets held for exchange relates to the profit recognised on Energis shares delivered to Equity Plus Income Convertible Securities (EPICs) bondholders on 6 May 2003 in settlement of all EPICs outstanding at that date that had a carrying value of 243m pounds. This transaction represents the culmination of a deferred sale arrangement entered into in February 1999. The after tax gain on assets held for exchange was 226m pounds. ix) The charges for 2003 relate to losses on the sale of The Leasing Group 45m pounds and loss on closure of 186k of 23m pounds. The after tax loss relating to the 2003 sale and closure amounted to 68m pounds. 3. Exceptional items (continued) c) Financing costs For 2003, the exceptional net interest cost of 31m pounds (31m pounds after tax) relates to the Group's share of foreign exchange losses incurred on foreign currency borrowings by joint ventures amounting to 98m pounds, partially offset by the Group's share of a gain on net monetary liabilities of 67m pounds. The gain on the net monetary liabilities related to Citelec, a joint venture operating in Argentina, and reflected the net gain arising on net monetary liabilities that were financing the operation in a hyper-inflationary economy. d) Taxation The exceptional tax credit for 2004 of 89m pounds includes a net credit amounting to 10m pounds relating to investments disposed of in prior periods. e) Minority interests The 2003 exceptional minority interest charge of 28m pounds related to the Group's share of the minority interest in the after taxation exceptional items of Citelec, a joint venture, and primarily reflected the minority interest's share of the gain on net monetary liabilities referred to in note 3(c). 4. Net interest Years ended 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Interest payable and similar charges 920 981 Unwinding of discount on provisions 11 13 Interest capitalised (55) (28) ------------ ------------ Interest payable and similar charges net of interest capitalised 876 966 Interest receivable and similar income (58) (55) ------------ ------------ 818 911 Joint ventures (2003 includes exceptional net interest of 31m pounds net of interest capitalised 1m pounds) 4 59 ------------ ------------ 822 970 ============ ============ Comprising: Net interest, excluding exceptional net interest 822 939 Exceptional net interest (note 3(c)) - 31 ------------ ------------ Net interest, including exceptional net interest 822 970 ============ ============ 5. Earnings per share and adjusted profit on ordinary activities before taxation a) Earnings per share Year ended 31 March 2004 Weighted Earnings Profit average per for the number share year of shares pence (GBP)m million =========== =========== =========== Basic, including exceptional items and goodwill amortisation 35.8 1,099 3,070 Exceptional operating items (note 3(a)) 9.0 277 - Exceptional non-operating items (note 3(b)) (10.4) (322) - Exceptional tax credit (note 3(d)) (2.9) (89) - Goodwill amortisation 3.2 99 - ------------ ------------ ------------ Adjusted basic, excluding exceptional items and goodwill amortisation 34.7 1,064 3,070 Dilutive impact of employee share options (0.1) - 7 ------------ ------------ ------------ Adjusted diluted, excluding exceptional items and goodwill amortisation 34.6 1,064 3,077 Exceptional operating items (note 3(a)) (9.0) (277) - Exceptional non-operating items (note 3(b)) 10.4 322 - Exceptional tax credit (note 3(d)) 2.9 89 - Goodwill amortisation (3.2) (99) - ------------ ------------ ------------ Diluted, including exceptional items and goodwill amortisation 35.7 1,099 3,077 =========== =========== =========== Year ended 31 March 2003 Weighted Earnings Profit average per for the number share year of shares pence (GBP)m million =========== =========== =========== Basic, including exceptional items and goodwill amortisation 12.7 391 3,078 Exceptional operating items (note 3(a)) 11.3 347 - Exceptional non-operating items (note 3(b)) 3.2 99 - Exceptional financing charge (note 3(c)) 1.0 31 - Exceptional tax credit (note 3(d)) (4.1) (128) - Exceptional minority interest (note 3(e)) 0.9 28 - Goodwill amortisation 3.3 102 - ------------ ------------ ------------ Adjusted basic, excluding exceptional items and goodwill amortisation 28.3 870 3,078 Dilutive impact of employee share options (0.1) - 10 Dilutive impact of 4.25% Exchangeable Bonds (0.3) 22 110 ------------ ------------ ------------ Adjusted diluted, excluding exceptional items and goodwill amortisation 27.9 892 3,198 Exceptional operating items (note 3(a)) (10.9) (347) - Exceptional non-operating items (note 3(b)) (3.1) (99) - Exceptional financing charge (note 3(c)) (1.0) (31) - Exceptional tax credit (note 3(d)) 4.0 128 - Exceptional minority interest (note 3(e)) (0.9) (28) - Goodwill amortisation (3.2) (102) - ------------ ------------ ------------ Diluted, including exceptional items and goodwill amortisation 12.8 413 3,198 =========== =========== =========== In respect of the year ended 31 March 2003, the potential ordinary shares related to the 4.25% Exchangeable Bonds are dilutive, as they would decrease earnings from continuing operations. Consequently, the diluted earnings per share are higher than basic earnings per share because of the effect of losses arising from discontinued operations. 5. Earnings per share and adjusted profit on ordinary activities before taxation (continued) b) Reconciliation of adjusted profit on ordinary activities before taxation to basic profit on ordinary activities before taxation Years ended 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Profit on ordinary activities before taxation 1,362 667 Exceptional operating items (note 3(a)) 277 347 Exceptional non-operating items (note 3(b)) (322) 99 Exceptional financing charge (note 3(c)) - 31 Goodwill amortisation 99 102 ------------ ------------ Adjusted profit on ordinary activities before taxation 1,416 1,246 ============ ============ 6. Dividends The National Grid Transco plc dividends for the year ended 31 March 2004 of 609m pounds (2003: 530m pounds) have been calculated on the basis of the number of National Grid Transco plc ordinary shares in issue and eligible for dividend, based on an ordinary interim dividend per share of 7.91p (2003: 6.86p) and the proposed final 2004 dividend per share of 11.87p (2003: 10.34p). Total dividend per share for the year ended 31 March 2004 was 19.78p (2003: 17.20p). 7. Reconciliation of operating profit to net cash inflow from operating activities before exceptional items Years ended 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Operating profit of Group undertakings 1,855 1,612 Group exceptional operating items 277 476 Depreciation and amortisation 1,117 1,088 Increase in working capital (96) (6) Decrease in provisions (95) (16) ------------ ------------ Net cash inflow from operating activities before exceptional items 3,058 3,154 ============ ============ 8. Reconciliation of net cash flow to movement in net debt Years ended 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Movement in cash and overdrafts 13 34 Net cash outflow from the management of liquid resources 48 138 Decrease/(increase) in borrowings 426 (267) ------------ ------------ Change in net debt resulting from cash flows 487 (95) Disposal of Group undertaking - (62) Exchange adjustments 534 593 Settlement of EPICs (note 3(b)) 243 - Other non-cash movements (18) (15) ------------ ------------ Movement in net debt in the year 1,246 421 Net debt at start of year (13,878) (14,299) ------------ ------------ Net debt at end of year (12,632) (13,878) ============ ============ During the year ended 31 March 2004 certain cross-currency swaps were terminated and 209m pounds of cash was received. 61m pounds of this cash flow has been reported in the cash flow statement within the total of net cash outflow for returns on investments and servicing of finance amounting to (692)m pounds and 148m pounds has been reported within net cash inflow from financing. Termination of these cross-currency swaps also necessitated a retranslation of Euro denominated debt at new swapped rates amounting to (140)m pounds, which is reported within the net exchange adjustments of 534m pounds reported above. 9. Cash flows from discontinued operations Included in the Cash Flow Statement are cash flows from discontinued operations as set out below: 2004 2003 (GBP)m (GBP)m ============ ============ Net cash inflow/(outflow) from/(for) operating activities 5 (70) Net cash outflow for returns on investments and servicing of finance (2) (14) Net cash outflow for taxation - (1) Net cash outflow for capital expenditure and financial investment (1) (123) Net cash outflow for acquisitions and disposals - (3) ------------ ------------ Net cash inflow/(outflow) before the management of liquid resources and financing 2 (211) ============ ============ 10. Net debt At 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Cash and investments 616 601 Short-term debt including bank overdrafts (1,706) (2,246) Long-term debt (11,542) (12,233) ------------ ------------ (12,632) (13,878) ============ ============ 11. Exchange rates The Group's results are affected by the exchange rates used to translate the results of its US operations and US dollar transactions. The US dollar to sterling exchange rates applied were: 2004 2003 ============ ============ Closing rate applied at year end 1.83 1.58 Average rate applied for the year 1.68 1.59 ============ ============ 12. Differences between UK and US Generally Accepted Accounting Principles ("GAAP") Summarised financial statements on a US GAAP basis will be set out in the Annual Report and Accounts, and details of the principal differences between UK and US GAAP are shown below. a) Reconciliation of net income to US GAAP The following is a summary of the material adjustments to net income that would have been required if US GAAP had been applied instead of UK GAAP. Years ended 31 March 2004 2003 (GBP)m (GBP)m ============ ============ Net income under UK GAAP 1,099 391 Adjustments to conform with US GAAP Elimination of Lattice pre-acquisition results, measured under UK GAAP - 293 Merger costs - 32 Deferred taxation (24) 7 Pensions 7 35 Share option schemes (25) (29) Fixed assets - purchase of Lattice (364) (169) Impairment of Advantica - goodwill and other intangible assets (31) - Replacement expenditure (net of depreciation) 383 166 Financial instruments 82 40 Carrying value of EPICs liability (226) 2 Severance and integration costs - (110) Recognition of income (9) 2 Goodwill 99 70 Restructuring - purchase of Lattice 2 46 Share of joint ventures' adjustments - (27) Other 5 2 ------------ ------------ Total US GAAP adjustments (101) 360 ------------ ------------ Net income under US GAAP 998 751 ============ ============ Basic earnings per share - US GAAP 32.5p 31.9p Diluted earnings per share - US GAAP 32.4p 31.3p ============ ============ 12. Differences between UK and US Generally Accepted Accounting Principles ("GAAP") (continued) (b) Reconciliation of equity shareholders' funds to US GAAP The following is a summary of the material adjustments to equity shareholders' funds that would have been required if US GAAP had been applied instead of UK GAAP. At 31 March 2004 2003 (restated) (GBP)m (GBP)m ============ ============ Equity shareholders' funds under UK GAAP 1,213 1,113 Adjustments to conform with US GAAP Deferred taxation (1,868) (1,593) Pensions (1,069) (1,800) Ordinary dividends 366 317 Tangible fixed assets - reversal of partial release of impairment provision (32) (35) Fixed assets - impact of Lattice purchase accounting and replacement expenditure 7,318 7,243 Financial instruments (285) (253) Carrying value of EPICs liability - 243 Severance liabilities 3 3 Recognition of income (35) (27) Regulatory assets 128 241 Goodwill - purchase of Lattice 3,820 3,829 Goodwill - other acquisitions 245 179 Restructuring - purchase of Lattice (4) (6) Share of joint ventures' adjustments - (17) Other 21 (11) ------------ ------------ Total US GAAP adjustments 8,608 8,313 ------------ ------------ Equity shareholders' funds under US GAAP 9,821 9,426 ============ ============