- Strong operating performance from all businesses, including first full year contribution from the New York operation
- National Grid and Lattice annual merger savings target increased to at least £135m
- Delivered real controllable cost reductions across Group of over £140m
- Dividend increased by 7.2% to 17.20p per ordinary share for full year
Financial highlights
2002/3 (£m) 2001/2 (£m) Change %
Group Turnover 9,400 7,554 24%
Dividend per Share 17.20p 16.04p * 7.2%
Business Results **
Underlying operating profit 2,185 1,783 23%
Underlying pre-tax profit 1,246 1,126 11%
Underlying earnings per share 28.3p 30.8p (8%)
Underlying operating cashflow 3,154 2,394 32%
Statutory Results
Operating profit 1,736 359 384%
Pre-tax profit/(loss) 667 (284) N/A
Earnings/(loss) per share 12.7p (11.3)p N/A
Operating cashflow 2,826 2,291 23%
In accordance with UK GAAP, the merger between National Grid Group plc (“National Grid”) and Lattice Group plc (“Lattice”) to form National Grid Transco plc (“National Grid Transco,” “NGT” or “the Group”), which was completed on 21 October 2002, has been accounted for using merger accounting principles. As a consequence, the results of the merged entity are presented as if the Group had been in existence for each of the financial years presented.
* The dividend for 2001/2 is National Grid’s dividend for that year.
** Business Results is the primary measure used by management and is 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 5a and 5b and the Group Cash Flow Statement.
Sir John Parker, Chairman of National Grid Transco, said:
“This is a strong set of results building on the progress reported at the half year.
“In our first year as National Grid Transco, we have made excellent progress across the Group with good growth in operating profit. Integration is already ahead of plan and our businesses are ahead of targets for controllable costs and merger savings. These results are achieved whilst maintaining our solid record of delivering energy safely, efficiently and reliably.
“Reflecting the Group’s strength and prospects, we are recommending a final dividend of 10.34p per share, bringing our full year dividend to 17.20p per share ($0.8396 per ADR). Looking ahead, we have the management strength, skills and market position to enable us to continue to deliver strong results and growth in shareholder value.”
NATIONAL GRID TRANSCO plc
Financial information has been provided for the main NGT business segments. As reported in our half year results, we have taken the opportunity of the merger and the first full contribution from Niagara Mohawk to review how best to segment our results and have adopted both a geographical and functional split. We have included additional data on the Investors’ section of our website (www.ngtgroup.com) to allow the reconciliation of operating profit against the main elements of the previous National Grid and Lattice segments.
Turnover increased by 24%, from £7.6 billion to £9.4 billion, predominantly as a result of the full year contribution from the New York operation (Niagara Mohawk) of National Grid USA, which joined the Group on 31 January 2002.
Underlying operating profit for the year increased 23% to £2,185m, representing strong performances from all our regulated operations in the UK and US, but primarily due to the first full-year contribution from the New York operation.
The replacement expenditure (“repex”) of UK gas mains totalled £405m in the year. This is fully expensed for accounting purposes and tax deductible. However, for regulatory purposes, half the costs are allowed to be recovered in current revenues and half are added to the regulatory asset base upon which we receive a continuing return over the asset life. Were regulatory treatment consistent with the Group’s accounting, this would increase earnings per share in the short term.
The impact of the weakened US dollar reduced underlying operating profit by around £34m. This analysis excludes ten months of Niagara Mohawk operating profit since there are no comparable figures for the prior year.
The impact on current year earnings as a result of the weakened US dollar was largely neutral due to the benefits associated with the lower sterling cost of dollar-denominated interest, exceptional items, goodwill amortisation and tax charges.
Underlying net interest was £939m, up £282m from last year, principally due to the inclusion of Niagara Mohawk-related debt. Underlying EBIT interest cover was 2.3 times, compared to 2.7 last year. (The statutory interest cover was 1.7 times, compared to 0.6 times last year.)
Underlying profit before tax for the year was up 11% from £1,126m to £1,246m.
The underlying tax charge on the profit for the year was £373m, up £122m from last year and representing an effective tax rate of 29.9% (before goodwill amortisation and exceptional items). There were no releases of prior year tax provisions during the year (£73m of releases last year.) Consistent with Financial Reporting Standard (FRS) 19, the charge includes full provision for deferred tax on an undiscounted basis.
Underlying earnings were £870m, as compared to £873m last year.
Underlying earnings per share were 28.3p, down from 30.8p last year, largely due to last year’s benefit of releasing tax provisions.
Underlying cash flow from operations for the year was £3.2 billion, up 32% from last year, largely as a result of the contribution from the New York operation.
Capital expenditure, including capitalised interest, decreased by £0.3 billion to £1.5 billion, primarily due to reduced spend on businesses now treated as discontinued.
As expected, there were substantial net exceptional charges which totalled £477m before tax and minority interest (£377m after tax and minority interest). Most of these exceptional items were reported in our half-year results announcement. After exceptional charges and goodwill amortisation, basic earnings per share were 12.7p, 24.0p higher than last year. The exceptional items comprise:
- Restructuring costs related to cost reduction programmes of £209m (£165m after tax), including £100m for Transco, £24m for UK electricity, £34m for US energy operations, and £51m for other businesses;
- Merger related costs of £184m (£147m after tax), including £105m of restructuring charges to secure integration savings;
- £191m (£166m after tax) to write down fully the carrying value of telecom assets held by 186k and to provide for the sale of the business and the closure of any residual interests;
- Net credits of £104m (£96m after tax and minority interest), primarily relating to the release of provisions reversing the Group’s share of retained losses incurred by joint ventures during the year; and
- Gains on property sales of £48m (£50m after tax), offset by losses on the sale of The Leasing Group of £45m (£45m post tax).
Group net debt fell £0.4 billion from 31 March 2002 to £13.9 billion at 31 March 2003.
Pensions
FRS 17 has not yet been implemented and the 2003 accounts have been prepared under SSAP 24. However, as announced in our year-end trading statement in March, we suspended the recognition of the SSAP 24 non-cash UK pension surplus credits with effect from 1 October 2002. This reduced profit before tax by £31m as compared with the ongoing recognition of such credits. At 31 March 2003, the FRS 17 deficit (net of deferred tax) in respect of pension obligations for the Lattice scheme was £1,217m and for the UK operations of National Grid was £303m. The next actuarial valuations will be carried out as at 31 March 2003 for the Lattice scheme and as at 31 March 2004 for the National Grid scheme. It will be the outcome of these valuations that will determine any change in future cash contributions.
The US operations had a net FRS 17 deficit in respect of pension and other post-retirement benefit obligations at 31 March 2003 of £742m, of which 60% relates to New York.
As an indication of the volatility of FRS 17, the movement of the market value of scheme assets in April 2003 would have reduced the overall Group deficit (net of tax) by almost £300m.
Final dividend
The Board is recommending a final dividend of 10.34p per ordinary share to be paid on 20 August to shareholders on the register on 30 May. This brings the total dividend for the year to 17.20p per ordinary share, a 7.2% nominal increase compared with last year’s National Grid payment. This is in line with our aim to increase dividends per share expressed in sterling by 5% in real terms in each financial year to 31 March 2006. This dividend per share is covered 1.6 times by underlying earnings per share (0.7 times on a statutory basis).
The recommended final dividend for ADS holders is $0.8396 per ADS. The ADS dividend will be paid on 20 August to ADS holders of record on 30 May.
REVIEW OF OPERATIONS
BUSINESS OVERVIEW
Last month we announced important Board-level management changes. Steve Holliday has taken on responsibility for our UK gas distribution and business services operations. Nick Winser has joined the Board and is responsible for US and UK transmission operations. In addition to his current responsibility for our non-regulated businesses, Edward Astle has assumed responsibility for business development. Rick Sergel retains responsibility for our US distribution business.
Safety continues to be paramount for us. We reduced the number of lost time incidents across our businesses by up to 46% and continue to focus our efforts on ensuring our employees, those who work on our sites, and the general public are not put at risk.
Each of our businesses continues to deliver aggressive cost-cutting and improved efficiency and we have delivered over £140m in real savings this year alone. We continue to deliver significant outperformance in the UK electricity business, where the goal is to reduce transmission owner controllable costs by 30% in real terms by March 2006, and to date have achieved real reductions of 22%. In our UK gas business, we met the first-year target to reduce operating costs to the level assumed by Ofgem. This was a reduction of 6.3% in real terms, and we remain confident of outperforming over the 5-year price control period. In the US, we aim to reduce controllable costs by 20% in real terms by March 2005. We have already achieved a reduction of 6.5% and have delivered over half of the merger integration savings ahead of schedule.
The Group has made good progress in securing the savings related to the National Grid and Lattice merger. The two previous London headquarters were brought together on the day we completed the merger, and we are in the process of moving the majority of our UK business services staff to our new operational centre in Warwick.
The combined gas and electricity transmission businesses have identified savings and efficiencies above our original targets. We are now confident of achieving at least £135m annualised synergy savings, the great majority of which will be achieved by March 2004.
UK GAS DISTRIBUTION
Underlying operating profit from UK gas distribution rose by £6m to £554m, primarily due to lower controllable costs (£26m) and increased external income (£29m), partially offset by the planned £37m increase in repex and a £9m increase in depreciation. Repex totalled £405m in the year. Our performance under the new repex incentive mechanism has been encouraging, and we have earned an estimated £15m in the first year.
With a real reduction in controllable costs, we met our target to achieve the regulatory allowance by March 2003 for the gas business and are on track to outperform over the remaining 4 years of the price control period.
Our safety and reliability performance remains high. We met the required timescales of the Health & Safety Executive (HSE) for the decommissioning over 2 years of some 2,400 kilometres of medium pressure ductile iron (MPDI) mains. We also achieved our targets under the long-term programme to replace other metallic mains within 30 metres of property.
Separation of Transco’s distribution price control into eight separate price controls is well advanced, and Ofgem is due to publish its final proposals soon. We are also in detailed discussions with Ofgem on the many regulatory issues associated with the separation and potential sale of individual networks. We expect Ofgem to publish a consultation document on these issues within the next month. However, the process of separation and sale will require extensive consultations across the gas industry, including detailed discussions with the HSE, which are likely to take many months to complete. We are committed to retaining a significant presence in the UK gas distribution business but will consider the sale of one or more individual networks if this were to maximise shareholder value.
UK ELECTRICITY AND GAS TRANSMISSION
The UK transmission business delivered a strong performance, meeting record demands for both electricity and gas and achieving underlying operating profits of £846m, an increase of £65m over last year. The electricity Transmission Owner (TO) business contributed £486m and the electricity System Operator (SO) £63m. The gas TO business contributed £228m and the gas SO £41m. This operating performance was driven by further reductions in controllable costs, strong performance under the electricity SO incentive schemes and the recognition of some £20m of non-recurring income in the first half of the year.
We have reduced electricity transmission owner controllable costs by 22% in real terms since 1 April 2001, and therefore remain confident that we will achieve the planned 30% real reduction in controllable costs by March 2006. The cost reduction programmes underway in our gas operation are on track to exceed Ofgem’s targets for its price control period to March 2007.
We performed well against this year's Balancing Services Incentive Scheme, contributing £45m to electricity SO operating profit for the year. We also made a good start to the new gas SO incentive scheme, earning £12m in this first year. As with the repex incentive, this will be recovered in future years. Interconnector profits were £21m, up £1m on last year.
US ELECTRICITY AND GAS
National Grid USA delivered good results, with cost cutting and highly favourable weather conditions offsetting the impact of the sluggish economy, a weakened US dollar, and increased pension costs. The US businesses contributed £699m to underlying operating profit, compared with £370m last year, primarily reflecting a full year contribution from our New York operations.
Underlying operating profit from our distribution businesses was £571m, compared with £283m last year. This includes £58m from the gas business and £146m from stranded cost recovery. Exceptionally hot summer and cold winter weather resulted in an increase in delivery volumes over last year in New England and New York of 4.5% and 2.5%, respectively. However, underlying volume growth on a weather-corrected basis was 1.5% and flat in the respective regions. Overall, the impact of the favourable weather contributed £34m to operating profit.
Underlying operating profit from US electricity transmission amounted to £128m, up from £87m last year, primarily as a result of the inclusion of a full year contribution from our New York business.
Savings from the integration of our New York and New England operations are being delivered ahead of schedule, with an annualised reduction in controllable costs of 6.5% in real terms toward our goal of reducing real controllable costs by 20% by March 2005. The nominal pre-tax return on investment was an annualised 9.2%.
The development of regional electricity markets and the associated electric transmission restructuring in the US continues to make progress. GridAmerica, an Independent Transmission Company, is expected, to begin operations in the autumn, following receipt of the remaining regulatory approvals. It will manage the transmission assets of three midwestern utilities, Ameren, First Energy, and Northern Indiana Public Service Company. These assets span over 14,000 miles of transmission lines, serving an area larger than that we serve in the northeastern US.
OTHER ACTIVITIES
Underlying operating profit from all other activities, including joint ventures and discontinued operations, was £86m compared to £84m last year.
Competition in the gas metering services market continues to develop in the UK. During the course of the year we won contracts to provide competitive metering services to 4 of the British Gas Trading (Centrica) areas for a period of five years.
Gridcom, our mobile infrastructure services businesses, is well-established in the UK. During the year, we launched Gridcom US and will be utilising our existing assets in much the same way as in the UK.
In Argentina, the underlying performance of our electricity transmission operation is stable, but the depreciation of the peso has resulted in the deterioration of the underlying operating profit as reported in sterling. During the year, we implemented hyper-inflationary accounting under UK GAAP, bringing our share of net assets back to zero.
Basslink, the project to build, own and operate an interconnector between the Australian mainland and Tasmania, received final government approval during the year. The £300m project is due to be completed in late 2005.
Withdrawal from our altnet investments is substantially complete. During the year, we sold our stakes in Manquehue net and Silica Networks, sold 186k’s assets, and restructured our shareholding in Energis Polska. We are providing no further funding to Intelig, and our exit will be completed within the provisions already made. Accordingly, with effect from 1 October 2002, we ceased to equity account for that joint venture.
We have also made rapid progress rationalising our portfolio of other businesses, completing the sales of The Leasing Group and part of Energy Services.
OUTLOOK
Our Group wide cost reduction and synergy creation programmes are exceeding our targets. We remain confident that 2003/04 will be another strong year for the Group.
Contact details
National Grid Transco:
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
Gillian Home +44 (0)20 7004 3150
Clive Hawkins +44 (0)20 7004 3147
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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