NGG

Business Context and Reporting Period

Company: National Grid Transco plc (Foreign Private Issuer)

Filing Type: Form 6-K (Annual Review 2004/05)

Reporting Period: Year ended 31 March 2005

Business Overview: The Group operates as a premier network utility, owning and operating high-voltage electricity transmission systems in England and Wales and across Great Britain, high-pressure gas transmission in Britain, and electricity/gas distribution networks in the northeastern US. It also provides wireless infrastructure services following the acquisition of Crown Castle International Corp's UK operations.

Key Financial Metrics

Dividends: Total dividend for the year was 23.7 pence per share (20% increase). Final dividend recommended at 15.2 pence per share.

Gearing: 91% (Net debt / Net debt + Net assets). Adjusted gearing (including regulatory asset values) was 56%.

Material Changes vs. Prior Period

• Turnover: Decreased by £512 million, primarily due to a weaker US dollar exchange rate (£435 million impact) and the disposal of EnMO Limited in the prior year, partially offset by the Crown Castle acquisition.
• Profitability: Adjusted operating profit remained flat at £2,212 million (down £1 million) on a constant currency basis, though adjusted earnings per share rose 6% to 35.9p due to reduced interest and tax charges.
• Segment Performance:
  • UK Transmission: Adjusted operating profit up 7% to £809 million.
  • US Distribution: Adjusted operating profit up 15% to £374 million.
  • UK Gas Distribution: Adjusted operating profit declined to £570 million due to a mild winter and formula income declines, despite a 3% reduction in controllable costs.
  • Wireless Infrastructure: Profit up £40 million to £46 million following the Crown Castle acquisition.
• Debt: Net debt increased by £917 million, driven by borrowings for the £1.1 billion Crown Castle acquisition.
• Accounting Changes: Prior year figures restated for FRS 20 (Share-based Payment), reducing prior year operating profit by £25 million.

Guidance, Outlook, and Risks

Strategic Actions:

• Divestiture: Agreed to sell four UK Gas Distribution networks for £5.8 billion. Proceeds will return £2 billion to shareholders and repay £2.3 billion of debt. Completion anticipated 1 June 2005.
• Acquisition: Completed £1.1 billion acquisition of Crown Castle International Corp's UK operations.
• Rebranding: Proposed name change from National Grid Transco to National Grid following the network sales.

Outlook:

• Dividend Policy: Target of 7% annual dividend growth in sterling terms through March 2008.
• Investment: Plans to invest over £750 million in new high-pressure gas pipelines and up to £500 million in the Isle of Grain LNG project over the next five years. Significant renewal investment planned for UK electricity networks.

Risks and Contingencies:

• Regulatory: Ofgem investigation into UK Gas Distribution connection standards for 2003/04.
• Operational: Missed some reliability targets in US Distribution; ongoing need to manage safety and asset renewal.
• Market: Exposure to US dollar/sterling exchange rate fluctuations; impact of weather on gas demand.
• Environmental: Ongoing remediation of contaminated land and management of methane emissions.

Investor Verification Checklist

• Network Sale Completion: Verify the closing of the £5.8 billion sale of four UK Gas Distribution networks and the subsequent debt reduction.
• Dividend Payment: Confirm the payment of the final dividend of 15.2 pence per share and the mechanics of the £2 billion shareholder return (B share scheme).
• Regulatory Status: Monitor the outcome of the Ofgem investigation regarding UK Gas Distribution connection standards.
• US GAAP Reconciliation: Note the significant difference between UK GAAP profit (£908m) and US GAAP net income (£1,304m) due to accounting treatment of goodwill and replacement expenditure.
• Capital Expenditure: Track progress on the Isle of Grain LNG project and UK electricity network renewal programs.