• Strong business performance. Underlying PBT up 19%. Underlying EPS up 23%.
• Continued growth underpins enhanced dividend policy
  • 15% increase this year with 7% nominal annual growth targeted until March 2008.
• Sales process for UK gas distribution networks to commence.

Financial highlights

Six months ended 30 Sept 2003 (£m) 

339 

* “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 for the periods presented. Unless otherwise stated, all financial commentaries in this Statement 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 & Loss Account, notes 6a and 6b and the Group Cash Flow Statement. There are further reconciliations on our website (www.ngtgroup.com).

**NM = Not Meaningful

NB. Expenditure on the replacement of UK gas mains (“repex”) of £186m in the period (£216m 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 2.1p and 2.5p for each of the half year results shown above, respectively.

Sir John Parker, Chairman, said:

“These excellent results show the strength of our business, and the great benefits of the mergers we have managed on both sides of the Atlantic.

“We see further growth opportunities in our existing businesses and we are today increasing the target for cutting controllable costs in our UK gas distribution business to 35% in real terms in the 5 years to March 2007.

“Notwithstanding our focus on efficiency, our top priorities always remain safety and network reliability. Despite the regrettable power interruptions in the summer, our record speaks for itself with 99.9999% of power delivered successfully over the past 10 years over our UK electricity network. Through our £2 billion annual investment we are confident that our networks will continue to deliver energy consistently, efficiently and reliably.

“With Ofgem providing clarity on its decision-making timetable and prospective buyers showing strong interest, we are commencing the sales process for one or more of our regional gas distribution networks. However, we will only sell networks if it creates value for customers and shareholders alike.

“Based on our very strong financial performance and the confidence in future prospects from our existing businesses, the Board will recommend a 15% nominal increase in the dividend this year and target growth of 7% nominal per annum thereafter for the next 4 years.”

NATIONAL GRID TRANSCO plc

Turnover was marginally down from £4.3 billion to £4.2 billion. This was largely as a result of our exit from non-core businesses (£68m) and the impact of the weakening dollar (£142m).

Underlying operating profits were £815m, up from £802m. This represents an improvement of over £100m over the same period last year, taking into account the impact of weather patterns in the UK and US, UK pensions costs, last year’s one-off connection-related fee and the continuing weakness of the US dollar. This strong performance has largely been achieved by a combination of significant reductions in controllable costs, the exit from non-core businesses and lower repex.

Underlying net interest was £410m, down by £53m from last year, due to the refinancing of debt of $1.3bn, lower short term interest rates, the weaker US dollar and reductions in interest costs from former joint ventures. These more than offset an increase of £35m in pension interest costs.

Underlying EBIT interest cover was 2.0 times, compared to 1.7 times last year. The statutory interest cover was 2.1 times, compared to 0.9 times last year. Funds From Operations ("FFO") interest cover, adjusted for repex, was 2.9 (2.9 last year). Full year ratios are expected to improve due to the seasonality of profits and cashflow from our UK gas distribution operations.

Underlying profit before tax for the half year was up 19% from £339m to £405m.

The underlying tax charge on the profit for the period was £102m, representing an effective tax rate of 25% (before goodwill amortisation and exceptional items). There were no releases of prior year tax provisions during the period.

Underlying earnings were up 23% to £299m, from £244m last year.

Underlying earnings per share were also up 23% to 9.7p from 7.9p last year.

Expenditure on the replacement of UK metallic gas mains (“repex”) totalled £186m in the period (£216m last year). The full year expenditure is expected to be similar to 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. The effect of removing half of the repex, net of tax, from earnings is equivalent to increasing earnings per share by 2.1p and 2.5p for each of the half year results, respectively.

As expected, underlying cashflow from operations for the period was £932m, down from £1,279m last year, reflecting the planned one-off pension contribution in the US and working capital movements associated with the timing of commodity payments, also in the US.

Capital expenditure on continuing operations, including capitalised interest, was £723m in the period (£652m last year), including £84m for growth investments in Grain LNG and Basslink.

There were substantial net exceptional gains totalling £96m before tax, compared to £325m exceptional losses before tax in the same period last year. The exceptional items comprised:

A credit of £226m (before and after tax) representing the realisation of a deferred gain on Energis shares held to redeem the EPIC bond;

Gains on sales of property and businesses of £40m (before and after tax);

Restructuring costs related to the planned cost reduction programmes of £150m (£96m after tax), including £93m for US distribution and transmission, £39m for UK distribution, £8m for UK transmission, and £10m for other businesses; and

Loss on disposal of other tangible fixed assets of £20m (before and after tax).
After exceptional charges and goodwill amortisation, unadjusted earnings per share were 13.0p, 15.8p higher than last year.
Group net debt was £13.9 billion at 30 September 2003, broadly unchanged from 31 March 2003, with the weaker US dollar and EPIC bond redemption broadly offsetting the expected increase associated with the seasonality of our UK gas operations.

REVIEW OF OPERATIONS

Our business continues to deliver impressive improvements in operating efficiency and we have delivered £60m of additional cost savings over the same period last year.

We welcome the statements from Ofgem which clarify the principle that efficiently incurred pension costs, including deficit funding, are a normal, allowable business expense. Additionally, Ofgem has stated its intention to align the gas and electricity transmission price control reviews in 2007 and proposed to move the gas distribution review to 2008. These changes, together with the move to a rolling 5-year cost savings mechanism, are positive changes to our UK regulatory framework.

UK GAS DISTRIBUTION

Underlying operating profits from UK gas distribution increased by £42m to £50m, primarily as a result of lower controllable costs and timing effects of repex, more than offsetting the increased pension charges and the impact of warm weather. The level of controllable costs within the business is now at the level assumed by Ofgem for 2006.

Following a fundamental review, the new management team in our UK gas distribution business has begun a business transformation programme called "The WayAhead." Through this programme we will aim to enhance the operational performance of our distribution networks whilst reducing controllable costs by 35% real from March 2002 levels by March 2007.

Since our full year results in May, we have continued to work closely with our regulators, Ofgem and the Health and Safety Executive, to evaluate the possibility of separating and selling one or more of our regional gas distribution networks. We welcome Ofgem’s recent statement indicating it will reach a decision by April 2004 and committing significant resources to the process. With Ofgem’s commitment and the strong interest we have received from prospective buyers, we are commencing the sales process for certain of our gas distribution networks. We are prepared to sell one or more networks if this maximises shareholder value. In addition, we will work closely with Ofgem to demonstrate the delivery of material benefits to customers. We remain committed to gas distribution as a core business of the Group and to remaining the largest gas distributor in the UK market.

ELECTRICITY AND GAS TRANSMISSION

The UK transmission business delivered underlying operating profit of £387m compared to £396m in the same period last year. Delivery of our planned efficiency and merger savings has largely offset the one off connection-related fee we received last year.

We are well on track to reduce UK Transmission Owner controllable costs by 11% real over the three years to March 2006, representing delivery of the Staying Ahead programme and merger benefits.

In the US, the development of regional electricity markets is continuing along with associated transmission restructuring. GridAmerica, the first multi-system Independent Transmission Company in the US, began operations on 1 October 2003. It manages the transmission assets of the Midwestern utilities, FirstEnergy and Northern Indiana Public Service Company, and will add the transmission assets of Ameren once state approvals are received. These assets span over 14,000 miles of transmission lines, serving an area almost as large as England and Wales.

US ELECTRICITY AND GAS

Underlying operating profit from the US businesses was £291m, compared to £343m in the same period last year. This includes £214m from electricity distribution (including £58m from stranded cost recovery), £70m from transmission and £7m from the gas business. In addition to the adverse effect from weather, as expected, underlying operating profit from our US businesses was impacted by the expected reduction in the recovery of stranded costs and the continued weakness of the dollar, partially offset by continued reductions in controllable costs.

Savings from the New York / New England integration continue to be delivered ahead of schedule, keeping us on track to deliver our target of reducing our US controllable costs by 20% real in the three years to March 2005. Benefits from the new labour agreement in New England and the recent early retirement programmes will begin to materialise in the coming months.

OTHER ACTIVITIES

We have continued to rationalise our portfolio of non-core businesses. Our exit from various non-core businesses has improved underlying operating profit from other activities including joint ventures and discontinued businesses by £32m to £87m.

Gridcom UK has aggressively cut its overheads by 36% through a combination of merger and efficiency savings allowing it to break even for the first time, a £9m improvement in underlying operating profit.

As previously announced, we have started work on an LNG import terminal at the Isle of Grain and expect to complete the project by early 2005. We expect to invest some £130m in this project.

PENSIONS

The actuarial review 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 and has resulted in a post-tax funding deficit of £615m. There will be annual assessments of the Lattice Scheme with the next assessment at 31 March 2004. The deficit is expected to be funded over the next 12 years and discussions with relevant parties continue on the timing of the payments to meet this. In addition, cash contributions for the ongoing cost of the Lattice Scheme will be made at a rate of 22% of payroll.

The Lattice Scheme charge for the period reflects a new SSAP 24 actuarial valuation and amounted to £73m in total, compared to £18m in the same period last year. Of this total charge, £41m relates to the ongoing cost (£45m last year), £17m relates to the deficit (£19m credit last year), and £15m is interest (£8m benefit last year). The ongoing SSAP 24 charge represents 23% of pensionable payroll.

BOARD CHANGES

We have previously announced this month’s retirement of John Wybrew and the succession of Michael Jesanis to the Board upon Rick Sergel’s retirement next summer. In addition, Maria Richter joined the Board in October as a non-executive director.

OUTLOOK AND DIVIDEND POLICY

Based on our very strong financial performance and confidence in the future prospects of our business, the Board will recommend an increase for the full year dividend to 19.78p per ordinary share, representing a 15% nominal increase compared with that paid last year. An interim dividend of 7.91p per ordinary share ($0.6690 per American Depositary Share (ADS)) will be paid on 21 January 2004 to shareholders on the register on 28 November 2003. Looking ahead, we will aim to increase dividends per ordinary share expressed in sterling by 7% nominal in each financial year to 31 March 2008.

CONTACT DETAILS

Investors  
Marcy Reed +44 (0)20 7004 3170 +44 (0)7768 490807(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 
Gillian Home +44 (0)20 7004 3150 
    
Pager +44 (0)7659 117841 (out of hours)
    
Citigate Dewe Rogerson +44 (0)20 7638 9571  
Anthony Carlisle +44 (0)7973 611888(m) 

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