NGG

Business Context and Reporting Period

Company: National Grid Transco plc (NGT)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended 31 March 2004
Announcement Date: 20 May 2004

NGT operates regulated electricity and gas transmission and distribution networks in the UK and US. The company reported strong underlying growth driven by cost savings, operational efficiency, and a robust UK gas distribution performance, despite adverse weather impacts in the US and pension cost increases.

Key Financial Metrics

Note: "Underlying" figures exclude goodwill amortisation and exceptional items, representing management's primary performance measure.

Material Changes vs. Prior Period

• Profitability Surge: Statutory pre-tax profit jumped 104% to £1,362m, primarily due to a £226m non-operating gain from the redemption of EPIC bonds and lower exceptional costs compared to the prior year.
• Underlying Growth: Underlying pre-tax profit grew 14% to £1,416m, driven by a £175m increase in UK gas distribution profits and significant cost reductions across the group.
• Debt Reduction: Net debt decreased by £1.2 billion to £12.6 billion, aided by strong cash generation, the redemption of the EPIC bond (£0.2bn impact), and exchange rate movements (£0.7bn impact).
• Segment Performance:
  • UK Gas Distribution: Underlying operating profit rose 32% to £729m due to cost cuts and revenue increases.
  • US Distribution: Underlying operating profit (excluding stranded costs) fell to £363m due to weaker dollar exchange rates, normalised weather, and bad debt charges.
  • Transmission: UK transmission profits were slightly lower due to regulatory charging reforms ("Plugs"), while US transmission profits increased slightly.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management expressed confidence in future prospects, citing strong financial performance and stable regulatory frameworks. The Board targets a 7% annual dividend growth rate through March 2008. The company is proceeding with the sale of up to four UK gas distribution networks, expecting final bids in summer 2004.

Dividend Policy

A 15% increase in the full-year dividend to 19.78p per share was recommended. A final dividend of 11.87p is payable on 23 August 2004.

Risks and Contingencies

• Pension Deficits: The Lattice Group Pension Scheme showed an actuarial deficit of £879m (pre-tax). Funding is deferred until the 2007 valuation, though cash contributions continue at ~22% of payroll. The total FRS 17 deficit for all schemes was £1,563m.
• Regulatory and Operational: Risks include regulatory approval delays, changes in energy market prices, currency fluctuations, and weather patterns affecting demand.
• Disposal Uncertainty: The sale of UK gas networks is contingent on maximizing value; the company will sell no more than four networks.
• Exceptional Items: The year included £249m in restructuring costs and £28m in environmental provisions, offset by a £226m gain on EPIC bond redemption.

Investor Verification Checklist

• Dividend Sustainability: Verify the ability to maintain the targeted 7% annual dividend growth given the £879m pension deficit and deferred funding schedule.
• Asset Sale Execution: Monitor the progress of the UK gas distribution network sales process and the final valuation achieved for the four networks.
• US Currency Exposure: Assess the impact of the weaker US dollar on future US segment earnings, which contributed to a £20m reduction in operating profit this year.
• Regulatory Frameworks: Review the implications of the new Ofgem rolling 5-year cost savings mechanism and the "Plugs" charging reform on future UK transmission margins.
• Capital Expenditure: Confirm the completion timeline and cost adherence for the Isle of Grain LNG and Basslink projects, where nearly half of the £410m investment programme has been spent.