Interim Results

National Grid Transco PLC 19 November 2003 Embargoed until 0700 20 November 2003 National Grid Transco plc Results for the six months ended 30 September 2003 Strong Earnings Growth. Positive Outlook. Enhanced Dividend Policy. • 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 Six months ended 30 Sept 2003 30 Sept 2002 Change (£m) (£m) (%) Business Results * Underlying operating profit 815 802 2 Underlying pre-tax profit 405 339 19 Underlying earnings per share 9.7p 7.9p 23 Statutory Results Operating profit 595 578 3 Pre-tax profit/(loss) 451 (39) NM** Earnings/(loss) per share 13.0p (2.8)p NM** Dividend per Share 7.91p 6.86p 15 * '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 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 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) Analyst presentation An analyst presentation will be held at JP Morgan, 10 Aldermanbury, London EC2V at 8:45 am (UK time) today. Live telephone coverage of analyst presentation - password National Grid Transco Dial in number +44 (0) 20 7162 0195 US call in number + 1 334 420 4950 Telephone replay of the analyst presentation (available until 5.12.03 - passcode 216642) UK dial in number + 44 (0) 20 8288 4459 Freephone number 0500 637 880 (UK only) US dial in number + 1 334 323 6222 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 the ability to integrate Niagara Mohawk and Lattice Group plc successfully within National Grid Transco or to realise 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 effecting 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 20F). 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. Year ended 31 GROUP PROFIT AND LOSS ACCOUNT 2003 2002 March 2003 FOR THE SIX MONTHS ENDED 30 SEPTEMBER Notes £m £m £m =========== =========== =========== Group turnover - continuing operations 2a 4,029 4,104 8,833 Group turnover - discontinued operations 2a 158 226 567 ------------------- ------------------- --------------- Group turnover 4,187 4,330 9,400 Operating costs (3,597) (3,864) (7,788) ------------------- ------------------- --------------- Operating profit of Group undertakings - continuing 2c 590 648 1,806 operations Operating loss of Group undertakings - discontinued 2c - (182) (194) operations ------------------- ------------------- --------------- 590 466 1,612 ------------------- ------------------- --------------- Share of joint ventures' operating profit - continuing 2c 5 7 15 operations Share of joint ventures' operating profit - 2c - 105 109 discontinued operations ------------------- ------------------- --------------- 5 112 124 Operating profit ------------------- ------------------- --------------- - Before exceptional items and goodwill amortisation 2b 815 802 2,185 - Operating exceptional items 3a (170) (171) (347) - Goodwill amortisation (50) (53) (102) ------------------- ------------------- --------------- Total operating profit 595 578 1,736 Non-operating exceptional items 3b 266 (99) (99) Net interest - Excluding exceptional items 4 (410) (463) (939) - Exceptional items 3c, 4 - (55) (31) ------------------- ------------------- --------------- (410) (518) (970) Profit/(loss) on ordinary activities before taxation ------------------- ------------------- --------------- - Before exceptional items and goodwill amortisation 6a 405 339 1,246 - Exceptional items and goodwill amortisation 46 (378) (579) ------------------- ------------------- --------------- 451 (39) 667 Taxation - Excluding exceptional items 5 (102) (92) (373) - Exceptional items 54 59 128 ------------------- ------------------- --------------- (48) (33) (245) ------------------- ------------------- --------------- Profit/(loss) on ordinary activities after taxation 403 (72) 422 Minority interests - Excluding exceptional items (4) (3) (3) - Exceptional items 3d - (12) (28) ------------------- ------------------- --------------- (4) (15) (31) Profit/(loss) for the period ------------------- ------------------- --------------- - Before exceptional items and goodwill amortisation 6b 299 244 870 - Exceptional items and goodwill amortisation 100 (331) (479) ------------------- ------------------- --------------- 399 (87) 391 Dividends 7 (243) (212) (530) ------------------- ------------------- --------------- Profit/(loss) transferred to/(from) profit and loss 156 (299) (139) account reserve =========== =========== =========== EARNINGS/(LOSS) AND DIVIDENDS PER ORDINARY SHARE 2003 2002 Year ended 31 March FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003 Notes Pence Pence Pence =========== =========== =========== Basic (including exceptional items and goodwill amortisation) 6b 13.0 (2.8) 12.7 Adjusted basic (excluding exceptional items and goodwill 6b 9.7 7.9 28.3 amortisation) =========== =========== =========== Dividends per ordinary share 7 7.91 6.86 17.2 =========== =========== =========== GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES Year ended 31 March FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2003 2002 2003 £m £m £m =========== =========== =========== Profit/(loss) for the period 399 (87) 391 Exchange adjustments (171) (283) (322) Tax on exchange adjustments - - 12 Unrealised gain on transfer of fixed assets to a joint - - 6 venture (net of tax) ------------------- ------------------- ------------ Total recognised gains and losses 228 (370) 87 =========== =========== =========== At 31 March GROUP BALANCE SHEET AT 30 SEPTEMBER 2003 2002 2003 £m £m £m =========== =========== =========== Fixed assets Intangible assets 1,745 1,899 1,893 Tangible assets 16,845 16,647 16,847 Investments in joint ventures 41 55 44 Other investments 194 219 209 ------------------- ------------------- ------------ 18,825 18,820 18,993 ------------------- ------------------- ------------ Current assets Stocks 190 147 126 Debtors (amounts falling due within one year) 1,729 1,754 1,811 Debtors (amounts falling due after more than one year) 3,040 3,582 3,395 Assets held for exchange - 17 17 Cash and investments 499 699 601 ------------------- ------------------- ------------ 5,458 6,199 5,950 Creditors (amounts falling due within one year) (4,688) (5,492) (5,046) ------------------- ------------------- ------------ Net current assets 770 707 904 ------------------- ------------------- ------------ Total assets less current liabilities 19,595 19,527 19,897 Creditors (amounts falling due after more than one year) (14,146) (13,943) (14,255) Provisions for liabilities and charges (4,252) (4,393) (4,406) ------------------- ------------------- ------------ Net assets employed 1,197 1,191 1,236 =========== =========== =========== Capital and reserves Called up share capital 308 310 308 Share premium account 1,247 1,244 1,247 Other reserves (5,131) (5,139) (5,131) Profit and loss account 4,717 4,694 4,728 ------------------- ------------------- ------------ Equity shareholders' funds 1,141 1,109 1,152 Minority interests 56 82 84 ------------------- ------------------- ------------ Total shareholders' funds 1,197 1,191 1,236 =========== =========== =========== Net debt included above 13,921 14,162 13,878 ------------------- ------------------- ------------ Year ended 31 GROUP CASH FLOW STATEMENT 2003 2002 March 2003 FOR THE SIX MONTHS ENDED 30 SEPTEMBER Notes £m £m £m =========== =========== =========== Net cash inflow from operating activities before 8 932 1,279 3,154 exceptional items Expenditure relating to exceptional items (121) (97) (328) ------------------- ------------------- ------------- Net cash inflow from operating activities 811 1,182 2,826 Dividends from joint ventures 2 3 11 Net cash outflow for returns on investments and (335) (453) (912) servicing of finance Taxation Corporate tax received/(paid) 10 (41) (112) Capital expenditure and financial investment Net payments to acquire intangible and tangible fixed (752) (805) (1,518) assets Receipts from disposals of tangible fixed assets 64 58 111 Other - 2 - ------------------- ------------------- ------------- Net cash outflow for capital expenditure and financial (688) (745) (1,407) investment Acquisitions and disposals Payments to acquire investments - (160) (165) Receipts from disposals of investments 10 187 328 ------------------- ------------------- ------------- Net cash inflow from acquisitions and disposals 10 27 163 Equity dividends paid (317) (358) (571) ------------------- ------------------- ------------- Net cash outflow before the management of (507) (385) (2) liquid resources and financing Management of liquid resources Decrease/(increase) in short-term deposits 9 76 (193) (138) ------------------- ------------------- ------------- Net cash inflow/(outflow) from the management of liquid 76 (193) (138) resources Financing Issue of ordinary shares - 8 4 Payments to repurchase ordinary shares - - (97) Purchase of non-equity minority interest (27) - - Termination of cross currency swaps 9 148 - - Net increase in borrowings 9 287 655 267 ------------------- ------------------- ------------- Net cash inflow from financing 408 663 174 ------------------- ------------------- ------------- Movement in cash and overdrafts 9 (23) 85 34 =========== =========== =========== NOTES TO THE ACCOUNTS 1. Basis of preparation The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the National Grid Transco Annual Report and Accounts and Form-20F for the year ended 31 March 2003 and does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985. The financial information in respect of the year ended 31 March 2003 has been derived from the statutory accounts for the year ended 31 March 2003, which have been delivered to the Registrar of Companies. The auditors' report on those statutory accounts was unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The financial information in respect of the six months ended 30 September 2003 is unaudited but has been reviewed by the auditors and their report is attached to this document. The business combination of National Grid Group plc and Lattice Group plc which was completed on 21 October 2002 met the merger accounting criteria under UK GAAP and the Companies Act 1985. As a result the financial information of National Grid Transco plc for the year ended 31 March 2003 and the six month period ended 30 September 2002 have been presented on the basis of merger accounting principles as if National Grid and Lattice had always comprised the Group. The combined accounts of National Grid and Lattice have been adjusted for the issue on merger of 1,323m shares with a nominal value of £132m and the elimination of balances between the former groups. This interim results announcement was approved by the Board of Directors on 19 November 2003. 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 six months ended 30 September 2003, 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 Year ended 31 Six months ended 30 September 2003 2002 March 2003 (restated) £m £m £m =========== =========== =========== Continuing operations UK gas distribution 764 754 2,089 UK electricity and gas transmission 867 927 1,893 US electricity transmission 160 219 407 US electricity distribution 1,838 1,780 3,446 US gas 162 136 446 Other activities 424 466 922 Sales between businesses (186) (178) (370) ------------------- ------------------- ------------- 4,029 4,104 8,833 Discontinued operations Other activities 158 242 586 Sales between businesses - (16) (19) ------------------- ------------------- ------------- 158 226 567 ------------------- ------------------- ------------- 4,187 4,330 9,400 =========== ========== ========== Europe 2,033 2,185 5,096 North America 2,154 2,145 4,304 ------------------- ------------------- ------------- 4,187 4,330 9,400 =========== =========== =========== b) Operating profit - before exceptional items and goodwill amortisation Year ended 31 Six months ended 30 September 2003 2002 March 2003 (restated) £m £m £m =========== =========== =========== Group undertakings - continuing operations UK gas distribution 50 8 554 UK electricity and gas transmission 387 396 820 US electricity transmission 70 74 128 US electricity distribution 214 261 513 US gas 7 8 58 Other activities 82 80 143 ------------------- ------------------- ------------- 810 827 2,216 Discontinued operations - (16) (26) ------------------- ------------------- ------------- Operating profit of Group undertakings 810 811 2,190 ------------------- ------------------- ------------- Joint ventures - continuing operations Electricity activities 5 7 15 Discontinued operations - (16) (20) ------------------- ------------------- ------------- Operating profit/(loss) of joint ventures 5 (9) (5) ------------------- ------------------- ------------- 815 802 2,185 =========== =========== =========== Europe 517 462 1,481 North America 293 344 704 Latin America 1 (7) (7) Rest of the World 4 3 7 ------------------- ------------------- ------------- 815 802 2,185 =========== =========== =========== c) Operating profit - after exceptional items and goodwill amortisation Year ended 31 Six months ended 30 September 2003 2002 March 2003 (restated) £m £m £m =========== =========== =========== Group undertakings - continuing operations UK gas distribution 7 (60) 443 UK electricity and gas transmission 373 381 774 US electricity transmission 51 62 103 US electricity distribution 97 216 413 US gas 2 4 49 Other activities 60 45 24 ------------------- ------------------- ------------- 590 648 1,806 Discontinued operations - (182) (194) ------------------- ------------------- ------------- Operating profit of Group undertakings 590 466 1,612 ------------------- ------------------- ------------- Joint ventures - continuing operations Electricity activities 5 7 15 Discontinued operations - 105 109 ------------------- ------------------- ------------- Operating profit of joint ventures 5 112 124 ------------------- ------------------- ------------- 595 578 1,736 =========== =========== =========== Europe 442 181 1,051 North America 148 281 549 Latin America 1 113 128 Rest of the World 4 3 8 ------------------- ------------------- ------------- 595 578 1,736 =========== =========== =========== 3. Exceptional items a) Operating Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== =========== Continuing operations Restructuring costs (i) 150 100 203 Merger costs (ii) - 26 105 Loss on disposal of tangible fixed assets (iii) 20 - - ------------------- ------------------- ------------- 170 126 308 ------------------- ------------------- ------------- Discontinued operations Restructuring costs (i) - 6 6 Impairment of business (iv) - 166 168 Impairment of investments in joint ventures (v) - (127) (135) ------------------- ------------------- ------------- - 45 39 ------------------- ------------------- ------------- Total operating exceptional items 170 171 347 =========== =========== =========== i) Relates to costs incurred in business reorganisations in the UK and US businesses (30 September 2003: £96m after tax, 30 September 2002: £73m after tax, 31 March 2003: £165m after tax). ii) Represents employee and property costs associated with the Merger (30 September 2002: £20m after tax, 31 March 2003: £76m after tax). iii) The after tax loss on disposal of tangible fixed assets was £20m (30 September 2002: £nil, 31 March 2003: £nil). iv) During the year ended 31 March 2003, following a review of the carrying value of certain of the Group's telecom assets, the Group incurred impairment charges resulting in the write-down of those assets to their estimated recoverable amounts and the recognition of other related costs (30 September 2002: £165m after tax, 31 March 2003: £143m after tax). v) These credits relate to Intelig and other telecom joint ventures (30 September 2002: £145m after tax, 31 March 2003: £155m after tax). The exceptional credits 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 in the year ended 31 March 2003 and £121m in the period ended 30 September 2002 of the pre-tax exceptional credits have been reflected in 'Share of joint ventures' operating profit - discontinued operations'. b) Non-operating Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== =========== Continuing operations Merger costs (vi) - 79 79 Profit on disposal of tangible fixed assets (vii) (38) (12) (48) ------------------- ------------------- ------------- (38) 67 31 ------------------- ------------------- ------------- Discontinued operations (Profit)/loss on sale or termination of operations (viii) (2) 32 68 Gain on assets held for exchange (ix) (226) - - ------------------- ------------------- ------------- (228) 32 68 ------------------- ------------------- ------------- Total non-operating exceptional items (266) 99 99 =========== =========== =========== vi) The after tax transaction cost of the Merger was £nil (30 September 2002: £79m, 31 March 2003: £71m). vii) The after tax profit on disposal of tangible fixed assets was £38m (30 September 2002: £13m, 31 March 2003: £50m). viii) The credit for the six months ended 30 September 2003 relates to the profit on sale of EnMO (£2m after tax). The charges for the six months ended 30 September 2002 and year ended 31 March 2003 relate to the loss on sale of The Leasing Group (30 September 2002: £32m (£32m after tax), 31 March 2003: £45m (£45m after tax)) and loss on closure of 186k (30 September 2002: £nil (£nil after tax), 31 March 2003: £23m (£23m after tax)). ix) 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. 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. c) Financing costs The exceptional net interest cost before and after tax of £55m in the six months ended 30 September 2002 and £31m in the year ended 31 March 2003 relate to the Group's share of foreign exchange losses incurred on foreign currency borrowings by joint ventures amounting to £124m in the six months ended 30 September 2002 and £98m in the year ended 31 March 2003, partially offset by the Group's share of a gain on net monetary liabilities of £69m and £67m respectively. The gain on the net monetary liabilities relates to Citelec, a joint venture operating in Argentina, and reflects the net gain arising on net monetary liabilities that are financing the operation in a hyper-inflationary economy. d) Minority interests The exceptional minority interest charge of £12m in the six months ended 30 September 2002 and £28m in the year ended 31 March 2003 relate to the Group's share of the minority interest in the after taxation exceptional items of Citelec, a joint venture, and primarily reflects the minority interest's share of the gain on net monetary liabilities referred to above (note 3c). 4. Net interest Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== =========== Interest payable and similar charges 460 490 981 Unwinding of discount on provisions 6 6 13 Interest capitalised (26) (14) (28) ------------------- ------------------- ------------- Interest payable and similar charges net of interest 440 482 966 capitalised Interest receivable and similar income (37) (38) (55) ------------------- ------------------- ------------- 403 444 911 Joint ventures 7 74 59 ------------------- ------------------- ------------- 410 518 970 =========== =========== =========== Comprising: Net interest, excluding exceptional net interest 410 463 939 Exceptional net interest (note 3(c)) - 55 31 ------------------- ------------------- ------------- Net interest, including exceptional net interest 410 518 970 =========== =========== ========== 5. Taxation The tax charge of £102m (30 September 2002: £92m) on profit before taxation, excluding exceptional items and goodwill amortisation, for the six months ended 30 September 2003, is based on the estimated effective tax rate for the year ended 31 March 2004 of 25% (30 September 2002: 27%). 6. Adjusted profit on ordinary activities before taxation and earnings per ordinary share a) Reconciliation of adjusted profit on ordinary activities before taxation to basic profit on ordinary activities before taxation Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== =========== Profit/(loss) on ordinary activities before taxation 451 (39) 667 Exceptional operating items (note 3(a)) 170 171 347 Exceptional non-operating items (note 3(b)) (266) 99 99 Exceptional financing charge (note 3(c)) - 55 31 Goodwill amortisation 50 53 102 ------------------- ------------------- ------------- Adjusted profit on ordinary activities before taxation 405 339 1,246 =========== =========== =========== b) Earnings per share Six months ended 30 September 2003 Weighted Earnings Profit average per for the number share period of pence £m shares million =========== =========== =========== Basic, including exceptional items and goodwill 13.0 399 3,068 amortisation Exceptional operating items (note 3(a)) 5.6 170 - Exceptional non-operating items (note 3(b)) (8.7) (266) - Exceptional tax credit (1.8) (54) - Goodwill amortisation 1.6 50 - -------------------- -------------------- ------------- Adjusted basic, excluding exceptional items and goodwill 9.7 299 3,068 amortisation =========== =========== =========== There is no difference between basic and diluted earnings per share for the period ended 30 September 2003. Six months ended 30 September 2002 Weighted (Loss)/ (Loss)/ average earnings per profit for number share the period of shares pence £m million =========== =========== =========== Basic, including exceptional items and goodwill (2.8) (87) 3,078 amortisation Exceptional operating items (note 3(a)) 5.5 171 - Exceptional non-operating items (note 3(b)) 3.2 99 - Exceptional financing charge (note 3(c)) 1.8 55 - Exceptional tax credit (1.9) (59) - Exceptional minority interest (note 3(d)) 0.4 12 - Goodwill amortisation 1.7 53 - -------------------- -------------------- ------------- Adjusted basic, excluding exceptional items and goodwill 7.9 244 3,078 amortisation =========== =========== =========== There is no difference between basic and diluted earnings per share for the period ended 30 September 2002. b) Earnings per share (continued) Year ended 31 March 2003 Weighted Earnings Profit average per for the number share year of shares pence £m million =========== =========== ========== Basic, including exceptional items and goodwill 12.7 391 3,078 amortisation 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 (4.1) (128) - Exceptional minority interest (note 3(d)) 0.9 28 - Goodwill amortisation 3.3 102 - -------------------- -------------------- ------------- Adjusted basic, excluding exceptional items and goodwill 28.3 870 3,078 amortisation 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 27.9 892 3,198 amortisation 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 4.0 128 - Exceptional minority interest (note 3(d)) (0.9) (28) - Goodwill amortisation (3.2) (102) - -------------------- -------------------- ------------- Diluted, including exceptional items and goodwill 12.8 413 3,198 amortisation =========== =========== =========== 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. 7. Dividends The interim dividend of 7.91p per ordinary share (six months ended 30 September 2002: 6.86p) will be paid on 21 January 2004 to shareholders on the register on 28 November 2003. 8. Reconciliation of operating profit to net cash inflow from operating activities before exceptional items Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== =========== Operating profit of Group undertakings 590 466 1,612 Group exceptional operating items 170 292 476 Depreciation and amortisation 533 556 1,088 Increase in working capital (254) (62) (6) Decrease in provisions (107) 27 (16) ------------------- ------------------- ------------- Net cash inflow from operating activities before exceptional 932 1,279 3,154 items =========== =========== =========== 9. Reconciliation of net cash flow to movement in net debt Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== =========== Movement in cash and overdrafts (23) 85 34 Net cash (inflow)/outflow from the management of liquid (76) 193 138 resources Increase in borrowings (287) (655) (267) ------------------ ------------------- ------------- Change in net debt resulting from cash flows (386) (377) (95) Disposal of Group undertaking - - (62) Exchange adjustments 111 525 593 Settlement of EPICs (see note 3(b)(ix)) 243 - - Other non-cash movements (11) (11) (15) ------------------- ------------------- ------------- Movement in net debt in the period (43) 137 421 Net debt at start of period (13,878) (14,299) (14,299) ------------------- ------------------- ------------- Net debt at end of period (13,921) (14,162) (13,878) =========== =========== =========== During the six months ended 30 September 2003 certain cross-currency swaps were terminated and £209m of cash was received. £61m of this cash flow has been reported within the total of net cash outflow for returns on investments and servicing of finance amounting to £(335)m and £148m 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, which is reported within the net exchange adjustments of £111m reported above. 10. Cash flows from discontinued operations Included in the cash flow statement are cash flows from discontinued operations as set out below: Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== =========== Net cash inflow/(outflow) from operating activities 4 12 (70) Net cash outflow for returns on investments and servicing of (2) (6) (14) finance Net cash outflow for taxation - (1) (1) Net cash outflow for capital expenditure and financial (1) (94) (123) investment Net cash outflow for acquisitions and disposals - (1) (3) ------------------- ------------------- ------------- Net cash inflow/(outflow) before the management of liquid 1 (90) (211) resources and financing =========== =========== =========== 11. Net debt comprises At 31 March At 30 September 2003 2002 2003 £m £m £m =========== =========== =========== Cash and investments 499 699 601 Short-term debt including bank overdrafts (2,289) (2,944) (2,246) Long-term debt (12,131) (11,917) (12,233) ------------------- ------------------- ------------- (13,921) (14,162) (13,878) =========== =========== =========== 12. Exchange rates The Group's results are affected by the exchange rates used to translate the results of its US operations. The US dollar to sterling exchange rates used were: Six months ended 30 September 2003 2002 Year ended 31 March 2003 =========== =========== =========== Closing rate applied at period end 1.67 1.56 1.58 Average rate applied for the period 1.62 1.52 1.59 =========== =========== =========== 13. Differences between UK and US Generally Accepted Accounting Principles (' GAAP') 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. Year ended 31 Six months ended 30 September 2003 2002 March 2003 £m £m £m =========== =========== ========== Net income under UK GAAP 399 (87) 391 ------------------- ------------------- ------------- Adjustments to conform with US GAAP Elimination of Lattice pre-acquisition results, measured - 312 293 under UK GAAP Merger costs - 32 32 Deferred taxation (11) 26 7 Pensions 3 5 35 Share option schemes (5) (1) (29) Fixed assets - purchase of Lattice (181) - (169) Replacement expenditure 186 - 166 Financial instruments (87) (89) 40 Gain on assets held for exchange (226) - - Severance and integration costs 80 (13) (110) Recognition of income 15 - 2 Goodwill 50 54 70 Restructuring - purchase of Lattice - - 46 Share of joint ventures' adjustments (7) (22) (27) Other - (6) 4 ------------------- ------------------- ------------- Total US GAAP adjustments (183) 298 360 ------------------- ------------------- ------------- Net income under US GAAP 216 211 751 =========== =========== =========== Basic earnings per share - US GAAP 7.0p 12.0p 31.9p Diluted earnings per share - US GAAP 7.0p 11.8p 31.3p =========== =========== =========== 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 30 September 2003 At 31 March 2003 £m £m =========== =========== Equity shareholders' funds under UK GAAP 1,141 1,152 ------------------- ------------------- Adjustments to conform with US GAAP Deferred taxation (1,621) (1,593) Pensions (1,693) (1,800) Shares held by employee share trusts (39) (39) Ordinary dividends 243 317 Tangible fixed assets - reversal of partial release of impairment (33) (35) provision Fixed assets - impact of Lattice purchase accounting and 7,315 7,243 replacement expenditure Financial instruments (369) (253) Carrying value of EPICs liability - 243 Severance liabilities 3 3 Recognition of income (12) (27) Regulatory assets 224 241 Goodwill - purchase of Lattice 3,782 3,829 Goodwill - other acquisitions 218 179 Restructuring - purchase of Lattice (6) (6) Share of joint ventures' adjustments - (17) Other (8) (11) ------------------- ------------------- Total US GAAP adjustments 8,004 8,274 ------------------- ------------------- Equity shareholders' funds under US GAAP 9,145 9,426 =========== =========== Independent review report to National Grid Transco plc Introduction We have been instructed by the Company to review the financial information which comprises the Group Profit and Loss Account, Group Balance Sheet, Group Cash Flow Statement, Group Statement of Total Recognised Gains and Losses, comparative information and notes 1 to 13. We have read the other information contained in the interim results statement and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim results statement, including the financial information contained therein, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim results statement in accordance with the Listing Rules of the Financial Services Authority which require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with United Kingdom Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 September 2003. PricewaterhouseCoopers LLP Chartered Accountants London 19 November 2003 This information is provided by RNS The company news service from the London Stock Exchange

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