NGG

Business Context and Reporting Period

Company: National Grid Transco plc (NGT)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Six months ended 30 September 2004
Announcement Date: 18 November 2004

NGT reported strong operating performance, particularly from its US business. Key strategic developments include the agreement to sell four UK gas distribution networks, expected to complete in Q2 2005, and the acquisition of Crown Castle UK for £1.1 billion in August 2004.

Key Financial Metrics

Note: Statutory results for 2003 included a significant exceptional gain of 7.4p per share related to the EPIC bond settlement, which is not present in the current period.

Material Changes vs. Prior Period

• Revenue: Turnover from continuing activities decreased by £0.2 billion to £3.8 billion, primarily due to a weaker US Dollar/GBP exchange rate.
• Profitability: Underlying operating profit grew 2% on a constant currency basis despite a £52 million increase in UK gas mains replacement expenditure ("repex").
• Exceptional Items: Net exceptional charges totaled £58 million before tax, comprising £91 million in restructuring costs (including network sales and integration) offset by £33 million in gains on property and business sales.
• Debt: Net debt increased by £1.9 billion to £14.5 billion, driven by the £1.1 billion Crown Castle UK acquisition and seasonal cash outflows.
• Segment Performance:
  • US Distribution: Underlying operating profit increased 16% (constant currency) due to cost reductions and volume growth.
  • UK Gas Distribution: Underlying operating profit fell 53% to £18 million due to higher repex costs in the first half.
  • Wireless Infrastructure: Profit surged 350% to £9 million following the Crown Castle UK acquisition.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management expressed confidence in the Group's longer-term prospects, citing strong operational performance and disciplined capital management. The company plans to increase the total dividend for the year by 20% to 23.7p, subject to the completion of the UK network sales. From this level, the target is 7% annual dividend growth through March 2008.

Return of Value

The sale of four UK gas distribution networks is expected to generate £5.8 billion in cash proceeds, representing a 20% premium to regulatory asset value. This will enable a £2 billion return of value to shareholders (via a B-share scheme) and the repayment of £2.3 billion of debt.

Risks and Contingencies

• Regulatory Approvals: Completion of the network sales is contingent on regulatory approvals, expected in Q2 2005.
• Weather Sensitivity: UK gas distribution revenues are heavily weighted to the second half and sensitive to weather patterns; the current period was warmer than normal.
• Pension Deficits: The Lattice Group Pension Scheme shows a funding deficit of £400m-£500m, and the National Grid Pension Scheme shows a deficit of £190m. Discussions are ongoing to defer contributions until 2007.
• Integration Risks: Realization of synergies from the Crown Castle UK acquisition and Gridcom integration.

Key Facts for Investor Verification

• Dividend Policy: Verify the final dividend declaration in the full-year results to confirm the planned 20% total increase to 23.7p.
• Network Sales Completion: Monitor the Q2 2005 timeline for the sale of the four UK gas distribution networks and the associated £5.8 billion cash proceeds.
• Debt Reduction: Confirm the repayment of £2.3 billion in debt following the network sales.
• Pension Funding: Track the outcome of discussions regarding the deferral of pension deficit contributions until 2007.
• US Regulatory Outcomes: Verify the long-term impact of the Rhode Island rate plan review and the new New York labor contract on future margins.