NGG

Business Context and Reporting Period

Company: National Grid Transco plc (NGT)
Filing Type: Form 6-K (Interim Results Announcement)
Reporting Period: Six months ended 30 September 2003
Announcement Date: 20 November 2003

NGT reported strong earnings growth driven by cost reductions, the exit from non-core businesses, and lower replacement expenditure on UK gas mains ("repex"). The company operates regulated electricity and gas networks in the UK and US. Management highlighted a 99.9999% power delivery record over the past decade and announced the commencement of a sales process for one or more UK regional gas distribution networks.

Key Financial Metrics

Note: "Underlying" figures exclude goodwill amortisation and exceptional items. Statutory EPS includes exceptional gains of £96m pre-tax.

Material Changes vs. Prior Period

• Revenue: Turnover decreased marginally to £4.2 billion, primarily due to the exit from non-core businesses (£68m) and the weakening US dollar (£142m).
• Profitability: Underlying pre-tax profit rose 19% to £405m. This growth was achieved despite adverse weather impacts and pension costs, driven by significant reductions in controllable costs and lower repex expenditure (£186m vs £216m last year).
• Interest Costs: Underlying net interest decreased by £53m to £410m, attributed to debt refinancing ($1.3bn), lower short-term rates, and the weaker US dollar.
• Cash Flow: Underlying cash flow from operations fell to £932m from £1,279m, reflecting a planned one-off pension contribution in the US and working capital movements related to commodity payments.
• Exceptional Items: The period saw substantial net exceptional gains of £96m pre-tax, compared to £325m losses in the prior year. Key items included a £226m credit from the realisation of a deferred gain on Energis shares and £40m gains on property/business sales, partially offset by £150m in restructuring costs.

Guidance, Outlook, and Risks

Dividend Policy

The Board recommended a 15% nominal increase in the full-year dividend to 19.78p per share. The interim dividend of 7.91p is payable on 21 January 2004. The company targets 7% nominal annual dividend growth through March 2008.

Operational Outlook

• Cost Reduction: Target for cutting controllable costs in UK gas distribution increased to 35% in real terms over five years (to March 2007) via the "WayAhead" programme.
• Asset Sales: Sales process for UK gas distribution networks has commenced, contingent on creating value for customers and shareholders. Ofgem is expected to decide by April 2004.
• Investments: £130m investment planned for the Grain LNG import terminal, expected completion early 2005.

Risks and Contingencies

• Pensions: The Lattice Group Pension Scheme has a post-tax funding deficit of £615m, to be funded over 12 years. The charge for the period was £73m.
• Regulatory: Ofgem has clarified that pension costs are allowable expenses but has proposed moving the gas distribution price control review to 2008.
• Forward-Looking Statements: Results are subject to risks including regulatory approvals, currency fluctuations, weather patterns, and the success of integration and cost-reduction programs.

Investor Verification Checklist

• Dividend Sustainability: Verify the ability to maintain the 7% annual dividend growth target given the £615m pension deficit and funding schedule.
• Asset Sale Execution: Monitor the progress of the UK gas distribution network sales process and Ofgem's decision timeline (April 2004).
• Currency Exposure: Assess the impact of the weakening US dollar on future US-based earnings and cash flows.
• Repex Accounting: Confirm the regulatory treatment of gas mains replacement costs, noting that only half is recovered in current revenues while the other half is capitalised.
• Exceptional Items: Review the £226m gain on Energis shares to ensure it is not a recurring revenue stream.