Business Context and Reporting Period
National Grid Group plc issued a pre-close trading update on September 24, 2002, covering the six-month period ending September 30, 2002. The company is preparing for the formal announcement of interim results on November 26, 2002. The update focuses on the UK transmission business, US operations (New England and New York), Latin American assets, and the ongoing exit from alternative telecoms investments.
Key Financial Metrics and Performance
- UK Transmission: Operating profits are expected to be higher than the equivalent period last year, driven by a 10% real reduction in controllable costs and progress on the Balancing Services Incentive Scheme.
- US Operations: Integration is ahead of schedule with a 5% real reduction in controllable costs. New England underlying profits (excluding interconnector/generation reductions) are expected to be slightly ahead of last year. New York operating profit is expected to be approximately £200 million.
- Latin America: Transener operating profits are expected to fall substantially due to the devaluation of the Argentine peso.
- Telecoms: Pre-exceptional operating losses from joint ventures are expected to be slightly lower than last year. The company is exiting all alternative telecoms investments within existing financial provisions.
- Debt and Liquidity: Net debt is expected to have fallen by £0.5 billion from the year-end, largely due to US dollar depreciation. Net interest expense is expected to be approximately 90% higher than the first half of the prior year, primarily due to increased debt from the Niagara Mohawk acquisition.
- Tax: The effective tax rate is expected to be slightly above 30%. No releases of prior year tax provisions are expected, contrasting with £42 million released in the first half of the prior year.
Material Changes Versus Prior Period
- Cost Reductions: Significant real reductions in controllable costs achieved in both UK (10%) and US (5%) businesses compared to the prior period.
- Interest Expense: A material increase in net interest expense (approx. 90% higher) compared to the first half of the previous year.
- Telecoms Portfolio: Energis entered administration and is no longer treated as an associate; its investment was fully written down as of March 31, 2002. The company is restructuring stakes in Energis Polska and selling its stake in Silica.
- Exchange Rates: A significantly weaker US dollar is affecting US operating profits, though beneficial effects on interest, goodwill amortization, and tax are expected to neutralize the impact on earnings per share.
Guidance, Outlook, and Risks
- Merger with Lattice: The proposed merger to form National Grid Transco remains on track for completion in the autumn of 2002.
- Restructuring Costs: Exceptional restructuring costs in the UK and US are expected to total around £30 million. Approximately half relates to US integration and the UK "Staying Ahead" programme, with the remainder related to the Lattice merger.
- Telecoms Exit: Management is confident of exiting all alternative telecoms investments by the financial year-end within existing provisions.
- Risks: Forward-looking statements are subject to risks including future market conditions, currency fluctuations, regulatory actions, and the ability to successfully integrate Lattice and realize synergies.
Investor Verification Checklist
- Confirm the final interim results announced on November 26, 2002, to verify the projected profit increases in UK transmission and US operations.
- Monitor the completion status and timeline of the merger with Lattice Group plc.
- Verify the actual impact of the Argentine peso devaluation on Transener's financial performance.
- Track the progress of the exit from telecoms investments (Intelig, Manquehue net, Energis Polska) to ensure it occurs within the stated financial provisions.
- Review the final net debt figure to confirm the £0.5 billion reduction attributed to currency depreciation.