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 2005
Announcement Date: 19 May 2005

NGT reported sustained earnings growth and significant strategic achievements, including the expected completion of the sale of four UK gas distribution networks on 1 June 2005. The company also completed the acquisition of Crown Castle UK. This is the final set of results reported under UK GAAP; future reporting will transition to International Financial Reporting Standards (IFRS).

Key Financial Metrics

Note: Underlying results exclude goodwill amortisation and exceptional items. Statutory results include these items.

Material Changes vs. Prior Period

• Earnings Growth: Underlying earnings increased 6% to £1,106m, driven by strong performance in US Distribution and Transmission, offsetting a decline in UK Gas Distribution.
• Statutory Decline: Statutory earnings fell 15% to £908m due to net exceptional charges of £168m (including £210m restructuring costs and £41m environmental charges) and goodwill amortisation. This contrasts with 2004, which included a £226m exceptional gain from the Energis EPICs bond settlement.
• Segment Performance:
  • US Distribution: Underlying operating profit rose 15% (constant currency) to £374m due to volume growth and cost reductions.
  • UK Gas Distribution: Underlying operating profit fell 20% to £570m due to lower transportation prices, a mild winter, and increased replacement expenditure (£86m).
  • Wireless Infrastructure: Profit surged 667% to £46m following the acquisition of Crown Castle UK.
• Debt: Net debt increased by £0.9bn to £13.5bn, primarily reflecting the £1.1bn acquisition of Crown Castle UK.

Guidance, Outlook, and Risks

• Dividend Policy: The Board recommended a 28% increase in the final dividend to 15.2p, resulting in a 20% increase in the full-year dividend. The company retains a target of 7% annual dividend growth through March 2008.
• Strategic Transactions: The sale of four UK gas distribution networks is expected to complete on 1 June 2005, generating £5.8bn in proceeds. This will enable a £2.0bn return of value to shareholders and the repayment of approximately £2.3bn of debt.
• Investment: Total investment reached £3.0bn, including £1.4bn in capital expenditure and the Crown Castle acquisition. Major projects include the Isle of Grain LNG terminal and the Basslink project in Australia (delayed to Q2 2006).
• Accounting Transition: The company is transitioning to IFRS. Unaudited IFRS figures for 2005 show significantly higher underlying operating profit (£2,866m) and earnings per share (51.9p) compared to UK GAAP, primarily due to the capitalization of replacement expenditure and regulatory assets.
• Risks: Key risks include regulatory approval delays for network sales, currency fluctuations (weaker US dollar reduced operating profit by £65m), weather impacts on demand, and pension deficit charges.

Investor Verification Checklist

• Network Sale Completion: Verify the final regulatory approval and closing date for the £5.8bn sale of UK gas distribution networks.
• IFRS Impact: Review the unaudited IFRS reconciliation to understand the long-term impact on reported profitability and asset values starting in the next fiscal year.
• Debt Reduction: Confirm the execution of the £2.3bn debt repayment plan following the network sale proceeds.
• Dividend Payment: Note the ex-dividend date (10 June 2005) and payment date (24 August 2005) for the increased final dividend.
• Project Delays: Monitor the status of the Basslink project, which has been delayed due to transformer damage, and assess potential impacts on returns.