Interim results for the six months ended 30 September 2004

• Strong operating performance, particularly from the US
• Underlying earnings per share up 10%
• Sale of four UK gas distribution networks at a substantial premium to RAV on track
• Crown Castle UK – performance and integration progressing well
• Planned £2 billion return of value
• Planned 20% increase in total dividend for the year - 7% increase in interim dividend

Underlying Business Results exclude goodwill amortisation and exceptional items. For notes A, B and C - see REVIEW OF GROUP RESULTS below. * Statutory EPS last year included 7.4p exceptional gain related to the EPIC bond.

Sir John Parker, Chairman, said:

“We have delivered another robust operating performance across the Group, particularly from our US business. We have continued to drive strong growth in underlying earnings per share, up 10% over the same period last year.

“In addition, during the period we reached agreement to sell four of our UK gas distribution networks. These sales will realise a substantial premium to the regulatory asset values of the networks, deliver our desired shape for the UK gas distribution business going forward and enable a £2 billion return of value to our shareholders and repayment of £2.3 billion of debt following their completion. We have also completed the acquisition of Crown Castle UK, creating the UK’s leading independent provider of wireless infrastructure services.

“In the light of our outlook for the full year and our confidence in the Group’s longer term prospects, we plan to increase our total dividend for the year by 20%, subject to the completion of the network sales. This will bring dividend growth of nearly 40% since the merger of Lattice with National Grid. From this higher dividend level, we will then maintain our target of 7% annual dividend growth over the three years to March 2008.”

OVERVIEW

A strong operational performance across the Group, particularly from our US business, drove the growth in the Group’s underlying operating profit, which increased by £18m (2%) on a constant currency basis to £771m. This was despite our planned £52m increase in expenditure on the replacement of UK gas mains (“repex”) in UK gas distribution, which represents the great majority of the expected full year increase. Group underlying profit before tax increased by 6% to £394m, and underlying earnings per share grew 10% to 9.6p.

In the US, we reduced controllable costs by £25m to a level that is 15% below that at March 2002 in real terms. Building on the long term rate agreements we have in the US, we have now successfully completed the interim review of our Rhode Island regulatory rate plan, delivering immediate customer benefits whilst retaining a return on equity, including incentives, approaching 12%, with the opportunity to deliver further benefits from outperformance. Last month, we reached agreement with our labour union in New York on a new 42 month labour contract and look forward to delivering the benefits that this will bring. This, together with last year’s agreement with our New England unions, enables us to still further increase productivity through more efficient working practices alongside additional benefits in terms of safety and service standards.

In the UK, we continued our record of strong operating performance in both the transmission and distribution businesses. Following the agreement to sell four of our UK gas distribution networks, we are now implementing the next stage of our ”Way Ahead” programme within the retained UK gas distribution business. We have made good progress towards obtaining the required regulatory approvals to complete the sales, and anticipate completion in the second calendar quarter of 2005. With expected cash proceeds of £5.8bn, the sales will crystallise a 20% premium to the March 2004 regulatory asset value (14% to our estimated March 2005 regulatory asset value) and represent a further major step in value creation. They deliver our desired shape for the UK gas distribution business going forward and enable both a £2bn return of value to our shareholders and repayment of £2.3bn of debt following their completion.

During the period, we invested £900m (including repex) in our businesses. We also completed the acquisition of the UK assets of Crown Castle International Corp. (“Crown Castle UK”) for £1.1bn in August and its performance and integration with Gridcom in the UK are progressing well.

These results reflect National Grid Transco’s core strengths of operational performance, the management of regulation and disciplined capital management and reinforce our confidence in our business going forward. While we are announcing a 7% increase in the interim dividend, we intend (subject to completion of the network sales) to increase the ordinary dividend by 20% for the current year, a near 40% increase over the past 2 years. From this higher dividend level, we will continue to pursue our target of annual dividend growth of 7% until March 2008.

REVIEW OF GROUP RESULTS

Turnover from continuing activities was £3.8bn, down £0.2bn on the same period last year, mainly reflecting the weaker US Dollar/GBP exchange rate.

Underlying operating profit at constant US Dollar/GBP exchange rates was up 2%. This was despite a £52m increase in repex in the first half, which represents the great majority of the expected full year increase. The total repex of £238m in the period (£186m last year) is fully expensed for accounting (and taxation) purposes. However, for regulatory purposes, half of the regulatory allowance for repex is recovered in current revenues and half is 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 2.7p in the current period (2.1p in the prior period).

We reduced net interest expense by £33m to £377m, despite an increase in interest rates during the period, primarily by refinancing and continued active management of the debt book, lower average net debt during the period and the weaker US Dollar.

Underlying profit before tax was up 10% from £359m to £394m on a constant currency basis, and up 6% from £373m on an actual exchange rate basis.

The tax charge on underlying profit for the period was £100m, representing an effective tax rate of 25%.

Underlying earnings were £296m, up from £267m last year. Underlying earnings per share were up 10% to 9.6p from 8.7p last year.

The period-on-period weakness in the US Dollar means that last year’s underlying operating profit was £30m higher than on a constant currency basis but, after interest and tax, the net impact on underlying earnings was £9m.

There were net exceptional charges (including both operating and non-operating exceptional items) totalling £58m before tax, comprising:

• Restructuring costs of £91m (£67m after tax) relating to planned cost reduction programmes, the gas distribution network sales and the integration of Gridcom and Crown Castle, less
• Gains on sales of property and businesses of £33m before and after tax.

After exceptional items and goodwill amortisation, basic earnings per share were 7.0p, down from 12.6p last year, when we had a significant net exceptional gain arising from the settlement of the Energis-related EPIC bond, which enhanced last year’s earnings per share by 7.4p.

We maintained our high levels of investment in the business, with capital expenditure for the period, including capitalised interest, of £662m, compared with £723m last year.

The Group has consistently generated strong cashflow. Underlying cashflow from operations for the period of £988m (of which £387m came from our US businesses) up 6% from £932m last year.

Group net debt was £14.5bn at 30 September 2004, up £1.9bn from 31 March 2004, reflecting the £1.1bn acquisition of Crown Castle UK, the normal first half seasonal cash outflow and some strengthening of the US Dollar since 31 March 2004.

An interim dividend of 8.5p per ordinary share ($0.7865 per American Depositary Share (ADS)) will be paid on 24 January 2005 to shareholders on the register on 3 December 2004.

Note A: In our 2003/04 full year results, we indicated that we would implement FRS20 (Share-based Payment) and provided information on the expected financial impact. We have now implemented FRS20. In addition, to align with our presentation of the full year results for 2003/04, we have reclassified certain losses on the disposal of tangible fixed assets in the prior half year from exceptional items and included them within the depreciation charge. All comparisons in this statement are against the restated figures for the prior period. Further detail is provided in Note 1.

Note B: “Underlying business results” represent the primary measures used by the Board and are presented before goodwill amortisation and exceptional items. The Board believes that exclusion of these items provides a better comparison of results. Unless otherwise stated, all financial commentaries in this announcement are on an “underlying 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 6(a) and 6(b), and the Group Cash Flow Statement. Further detail is provided on our website (www.ngtgroup.com).

Note C: “Constant currency basis” refers to reporting of the actual 2004 first half underlying business results against the 2003 first half results which, in respect of any US$ currency denominated activity, have been translated using the average US$ exchange rate for the six months ended 30 September 2004.

REVIEW OF OPERATIONS

ELECTRICITY AND GAS TRANSMISSION

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Underlying operating profit from UK electricity transmission was up £25m (10%) at £283m compared with £258m last year. This primarily reflects the expected beneficial impact from the new connections charging reform (“Plugs”) of £16m and timing effects of transmission operator revenue which was under-collected last year (£14m), offset by £5m of higher electricity pension charges.

Underlying operating profit from UK gas transmission was down £37m (31%), although this primarily reflects a timing difference of £26m in lower income from capacity auctions that will be recovered in the second half of the year. The remainder of the variance mainly reflects a one-off benefit in gas shrinkage costs in 2003/04 of £9m.

In UK electricity transmission, we have been appointed as Great Britain System Operator and expect that the British Electricity Transmission and Trading Arrangements (BETTA) will be implemented in April 2005, expanding our System Operator role into Scotland. Furthermore, as the proportion of renewable generation and imports of both gas and LNG increase, we anticipate additional opportunities to invest in our UK transmission networks.

In the US, our transmission business delivered underlying operating profit of £65m, up 3% on last year on a constant currency basis.

In New England, we are working with other transmission owners to implement the recently approved Regional Transmission Organisation (“RTO”) and have filed with FERC requesting an increased return on equity for both existing operations and new transmission investment. GridAmerica has had a very successful first year of operations and is already bringing greater independence, coordination and efficiency to transmission in the Midwest.

UK GAS DISTRIBUTION

Underlying operating profit from UK gas distribution was £18m, compared with £38m in the same period last year, primarily because the great majority (£52m) of the planned year-on-year increase in repex was undertaken in the first half. This was only partially offset by an increase in formula income driven by increased underlying volumes and colder weather than last year.

Although colder than last year, the weather during the period was actually much warmer than normal and revenues would have been some £30m higher if seasonal normal temperatures had prevailed. Generally, the financial performance of this business is heavily weighted towards the second half, due to the seasonality of gas consumption.

As announced on 31 August 2004, we have reached agreement to sell four of our eight UK gas distribution networks. We are making good progress with the required regulatory approvals and expect the transactions to complete in the second calendar quarter of 2005.

The reshaped business distributes gas to more than 11 million consumers, including those in the cities of London, Birmingham, Manchester and Liverpool, with a more densely populated network covering just over a quarter of Great Britain. We expect that this will enable us to deliver our “Way Ahead” programme more effectively and continue to define the new efficiency frontier for UK gas distribution. Following the sales announcement, we immediately moved into the next implementation phase of the “Way Ahead”. The management team has been appointed and we have scheduled the office closures required to move towards a centralised business model that will enable us better to exploit best practice and operational synergies. We are also making excellent progress in developing our new contractor alliances in order to deliver our replacement expenditure programme more effectively.

US ELECTRICITY AND GAS DISTRIBUTION 

Six months ended 30 September 2004 (£m) 2003 (£m) % Change 
       
Underlying operating profit (constant currency basis)
- electricity distribution (excl stranded costs) 154 140 10
- gas distribution 16 6 167
 170 146 16
- stranded costs 53 52 2
 223 198 13
   
Underlying operating profit (actual exchange rate)
- electricity distribution (excl stranded costs) 154 156 (1)
- gas distribution 16 7 129
   
 170 163 4
- stranded costs 53 58 (9)
 223 221 1
   

The performance of our US electricity and gas distribution business has been particularly strong. Despite the impact of a cool summer, underlying operating profit (excluding stranded cost recovery)increased by £24m (16%) in the period on a constant currency basis to £170m.

Weather adjusted electricity distribution volume growth remains strong at 3% overall.

We have reduced our distribution controllable costs by £25m since last year, reflecting the effects of reductions in headcount and programmes for the management of bad debt. US controllable costs (including transmission) are now 15% below their March 2002 level in real terms.

We have reached agreement on a new 42 month contract with our labour union in New York. Together with last year’s agreement with our New England unions, this will enable us to increase productivity still further through more efficient working practices alongside additional benefits in terms of safety and service standards.

In Rhode Island, we have successfully completed the interim review of our regulatory rate plan, delivering immediate customer benefits whilst retaining a return on equity, including incentives, approaching 12%. The agreement allows us to retain our share of earned savings until 2019, in line with our original agreement, with the opportunity to deliver further customer benefits and shareholder value from further outperformance.

WIRELESS INFRASTRUCTURE AND OTHER ACTIVITIES 
   

Six months ended 30 September 2004 (£m) 2003 (£m)
(restated) % Change 
    
  
Underlying operating profit   
Wireless infrastructure business 9 2 350
Other activities (including joint ventures) 91 75 21
   

Wireless infrastructure business
We completed the acquisition of Crown Castle UK on 31 August 2004. The business is performing in line with our expectations and, with new mobile operator leases adding to recurring revenues, it is on track to deliver good profit growth. We remain confident of achieving our integration savings of £18m on an annualised basis by March 2006 and expect to deliver more than half this target by March 2005.

With one month’s contribution from Crown Castle UK and improved performances at Gridcom’s UK and US businesses, underlying operating profit in this business was £9m, up from £2m last year.

Other activities

Across our other activities (including joint ventures), underlying operating profit for the period was £91m, up from £75m last year. This reflects particularly strong first half sales of property stock by SecondSite and the elimination of losses at Fulcrum Connections, partially offset by the expected impact of the new pricing structure of our contracts with gas suppliers within our Metering business.

We continue to make good progress on construction of our LNG import terminal at the Isle of Grain and the Basslink project in Australia. These projects are expected to be ready for service as planned during 2005. We have also received planning permission to extend the Grain LNG import facility and are actively assessing market interest in potential expansion.

PENSIONS

We have completed the annual assessment of the Lattice Group Pension Scheme as agreed with the trustees last year. This is less extensive than a formal valuation and shows a funding deficit, net of tax, in the range of £400m - £500m at 31 March 2004.

A new three-yearly actuarial valuation for the National Grid Pension Scheme has been carried out and shows a funding deficit, net of tax, of £190m. We are in discussions with the trustees with a view to deferring deficit contributions until 2007.

The SSAP24 charges (including interest) for the period for the Lattice Group and National Grid pension schemes were £56m (2003 £73m) and £18m (2003 £4m) respectively.

BOARD CHANGES

As previously announced, Rick Sergel retired from the Board on 26 July 2004 and has been replaced by Mike Jesanis. Following James Ross’ retirement on 21 October 2004, Ken Harvey is now the Senior Independent Director.

OUTLOOK, RETURN OF VALUE AND DIVIDEND POLICY

Continued strong operational performance across our businesses in both the UK and the US underpins our confidence in the prospects for the Group. We are confident of achieving our targeted reductions in controllable costs across our businesses and of availing ourselves of the increasing opportunities for investment for growth.

With the sales of the four UK gas distribution networks scheduled for completion in the second calendar quarter of 2005, we expect to deliver the return of £2bn to shareholders during the summer of 2005. We expect this return of value to be by way of a B-share scheme, followed by a share consolidation. This will provide shareholders with the choice of receiving the return as a dividend or through the repurchase of B-shares.

As previously announced, we intend to raise the total dividend for the year by 20% to 23.7p, subject to completion of the network sales process, and expect that this increase over our previously stated policy will be paid as part of the final dividend. An interim dividend of 8.5p per ordinary share ($0.7865 per American Depositary Share (ADS)) will be paid on 24 January 2005 to shareholders on the register on 3 December 2004, representing a 7% increase on the interim dividend paid in the last financial year. Looking ahead, we continue to aim to increase dividends per ordinary share expressed in sterling by 7% in each financial year up to 31 March 2008.