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, alongside other energy activities. Management highlighted a 19% increase in underlying pre-tax profit and a 23% increase in underlying earnings per share (EPS).

Key Financial Metrics

Note: "Underlying" figures exclude goodwill amortisation and exceptional items. Statutory figures include these items. NM = Not Meaningful.

Material Changes vs. Prior Period

• Profitability: Underlying pre-tax profit rose 19% to £405m, driven by a £100m+ improvement in operating performance after adjusting for weather, pension costs, and currency impacts. Statutory results swung from a £39m loss to a £451m profit, largely due to a £226m exceptional gain on the redemption of EPIC bonds and lower restructuring costs compared to the prior year.
• Revenue: Turnover decreased marginally to £4.2bn, primarily due to the exit from non-core businesses (£68m) and the weakening US dollar (£142m).
• Costs: Underlying net interest decreased by £53m to £410m due to debt refinancing and lower interest rates. Controllable costs were reduced significantly, with £60m in additional savings delivered.
• Cash Flow: Operating cash flow fell to £932m from £1,279m, attributed to a planned one-off pension contribution in the US and working capital timing differences.
• Debt: Net debt remained broadly unchanged at £13.9bn, with the weaker dollar and EPIC bond redemption offsetting seasonal increases in UK gas operations.

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 will be paid on 21 January 2004. The company targets 7% nominal annual dividend growth through March 2008.

Operational Outlook

• UK Gas Distribution: Commenced a sales process for one or more regional gas distribution networks, pending Ofgem decisions expected by April 2004. Launched "The WayAhead" transformation program targeting a 35% real reduction in controllable costs by March 2007.
• US Operations: GridAmerica began operations as a multi-system Independent Transmission Company. Savings from NY/New England integration are ahead of schedule.
• Investments: Capital expenditure includes £84m for growth investments (Grain LNG, Basslink). The Grain LNG terminal is expected to complete by early 2005 with a total investment of ~£130m.

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 Disposal: Monitor the progress and valuation of the UK gas distribution network sales process and Ofgem's final decision.
• Currency Exposure: Assess the impact of the weakening US dollar on future US-based earnings and cash flows.
• Repex Accounting: Understand the regulatory treatment of UK gas mains replacement costs (half expensed, half capitalized) versus accounting treatment (fully expensed) and its effect on reported earnings.
• Exceptional Items: Review the £226m gain on EPIC bond redemption as a non-recurring item when analyzing core profitability trends.