Final Results

National Grid Transco PLC 21 May 2003 Embargoed until 0700 21 May 2003 National Grid Transco plc Results for the year ended 31 March 2003 Strong Results and Successful Integration • Strong operating performance from all businesses, including first full year contribution from the New York operation • National Grid and Lattice annual merger savings target increased to at least £135m • Delivered real controllable cost reductions across Group of over £140m • Dividend increased by 7.2% to 17.20p per ordinary share for full year Financial highlights 2002/3 (£m) 2001/2 (£m) Change % Group Turnover 9,400 7,554 24% Dividend per Share 17.20p 16.04p * 7.2% Business Results ** Underlying operating profit 2,185 1,783 23% Underlying pre-tax profit 1,246 1,126 11% Underlying earnings per share 28.3p 30.8p (8%) Underlying operating cashflow 3,154 2,394 32% Statutory Results Operating profit 1,736 359 384% Pre-tax profit/(loss) 667 (284) N/A Earnings/(loss) per share 12.7p (11.3)p N/A Operating cashflow 2,826 2,291 23% In accordance with UK GAAP, the merger between National Grid Group plc (' National Grid') and Lattice Group plc ('Lattice') to form National Grid Transco plc ('National Grid Transco,' 'NGT' or 'the Group'), which was completed on 21 October 2002, has been accounted for using merger accounting principles. As a consequence, the results of the merged entity are presented as if the Group had been in existence for each of the financial years presented. * The dividend for 2001/2 is National Grid's dividend for that year. ** Business Results is the primary measure used by management and is presented before goodwill amortisation and exceptional items. Management believes that exclusion of these items provides a better comparison of results for the periods presented. Unless otherwise stated, all financial commentaries in this Statement are on a business results basis and are preceded by the prefix 'underlying'. Reconciliations of these measures to statutory measures are provided in the Group Profit & Loss Account, notes 5a and 5b and the Group Cash Flow Statement. Sir John Parker, Chairman of National Grid Transco, said: 'This is a strong set of results building on the progress reported at the half year. 'In our first year as National Grid Transco, we have made excellent progress across the Group with good growth in operating profit. Integration is already ahead of plan and our businesses are ahead of targets for controllable costs and merger savings. These results are achieved whilst maintaining our solid record of delivering energy safely, efficiently and reliably. 'Reflecting the Group's strength and prospects, we are recommending a final dividend of 10.34p per share, bringing our full year dividend to 17.20p per share ($0.8396 per ADR). Looking ahead, we have the management strength, skills and market position to enable us to continue to deliver strong results and growth in shareholder value.' NATIONAL GRID TRANSCO plc Financial information has been provided for the main NGT business segments. As reported in our half year results, we have taken the opportunity of the merger and the first full contribution from Niagara Mohawk to review how best to segment our results and have adopted both a geographical and functional split. We have included additional data on the Investors' section of our website (www.ngtgroup.com) to allow the reconciliation of operating profit against the main elements of the previous National Grid and Lattice segments. Turnover increased by 24%, from £7.6 billion to £9.4 billion, predominantly as a result of the full year contribution from the New York operation (Niagara Mohawk) of National Grid USA, which joined the Group on 31 January 2002. Underlying operating profit for the year increased 23% to £2,185m, representing strong performances from all our regulated operations in the UK and US, but primarily due to the first full-year contribution from the New York operation. The replacement expenditure ('repex') of UK gas mains totalled £405m in the year. This is fully expensed for accounting purposes and tax deductible. However, for regulatory purposes, half the costs are allowed to be recovered in current revenues and half are added to the regulatory asset base upon which we receive a continuing return over the asset life. Were regulatory treatment consistent with the Group's accounting, this would increase earnings per share in the short term. The impact of the weakened US dollar reduced underlying operating profit by around £34m. This analysis excludes ten months of Niagara Mohawk operating profit since there are no comparable figures for the prior year. The impact on current year earnings as a result of the weakened US dollar was largely neutral due to the benefits associated with the lower sterling cost of dollar-denominated interest, exceptional items, goodwill amortisation and tax charges. Underlying net interest was £939m, up £282m from last year, principally due to the inclusion of Niagara Mohawk-related debt. Underlying EBIT interest cover was 2.3 times, compared to 2.7 last year. (The statutory interest cover was 1.7 times, compared to 0.6 times last year.) Underlying profit before tax for the year was up 11% from £1,126m to £1,246m. The underlying tax charge on the profit for the year was £373m, up £122m from last year and representing an effective tax rate of 29.9% (before goodwill amortisation and exceptional items). There were no releases of prior year tax provisions during the year (£73m of releases last year.) Consistent with Financial Reporting Standard (FRS) 19, the charge includes full provision for deferred tax on an undiscounted basis. Underlying earnings were £870m, as compared to £873m last year. Underlying earnings per share were 28.3p, down from 30.8p last year, largely due to last year's benefit of releasing tax provisions. Underlying cash flow from operations for the year was £3.2 billion, up 32% from last year, largely as a result of the contribution from the New York operation. Capital expenditure, including capitalised interest, decreased by £0.3 billion to £1.5 billion, primarily due to reduced spend on businesses now treated as discontinued. As expected, there were substantial net exceptional charges which totalled £477m before tax and minority interest (£377m after tax and minority interest). Most of these exceptional items were reported in our half-year results announcement. After exceptional charges and goodwill amortisation, basic earnings per share were 12.7p, 24.0p higher than last year. The exceptional items comprise: • Restructuring costs related to cost reduction programmes of £209m (£165m after tax), including £100m for Transco, £24m for UK electricity, £34m for US energy operations, and £51m for other businesses; • Merger related costs of £184m (£147m after tax), including £105m of restructuring charges to secure integration savings; • £191m (£166m after tax) to write down fully the carrying value of telecom assets held by 186k and to provide for the sale of the business and the closure of any residual interests; • Net credits of £104m (£96m after tax and minority interest), primarily relating to the release of provisions reversing the Group's share of retained losses incurred by joint ventures during the year; and • Gains on property sales of £48m (£50m after tax), offset by losses on the sale of The Leasing Group of £45m (£45m post tax). Group net debt fell £0.4 billion from 31 March 2002 to £13.9 billion at 31 March 2003. Pensions FRS 17 has not yet been implemented and the 2003 accounts have been prepared under SSAP 24. However, as announced in our year-end trading statement in March, we suspended the recognition of the SSAP 24 non-cash UK pension surplus credits with effect from 1 October 2002. This reduced profit before tax by £31m as compared with the ongoing recognition of such credits. At 31 March 2003, the FRS 17 deficit (net of deferred tax) in respect of pension obligations for the Lattice scheme was £1,217m and for the UK operations of National Grid was £303m. The next actuarial valuations will be carried out as at 31 March 2003 for the Lattice scheme and as at 31 March 2004 for the National Grid scheme. It will be the outcome of these valuations that will determine any change in future cash contributions. The US operations had a net FRS 17 deficit in respect of pension and other post-retirement benefit obligations at 31 March 2003 of £742m, of which 60% relates to New York. As an indication of the volatility of FRS 17, the movement of the market value of scheme assets in April 2003 would have reduced the overall Group deficit (net of tax) by almost £300m. Final dividend The Board is recommending a final dividend of 10.34p per ordinary share to be paid on 20 August to shareholders on the register on 30 May. This brings the total dividend for the year to 17.20p per ordinary share, a 7.2% nominal increase compared with last year's National Grid payment. This is in line with our aim to increase dividends per share expressed in sterling by 5% in real terms in each financial year to 31 March 2006. This dividend per share is covered 1.6 times by underlying earnings per share (0.7 times on a statutory basis). The recommended final dividend for ADS holders is $0.8396 per ADS. The ADS dividend will be paid on 20 August to ADS holders of record on 30 May. REVIEW OF OPERATIONS BUSINESS OVERVIEW Last month we announced important Board-level management changes. Steve Holliday has taken on responsibility for our UK gas distribution and business services operations. Nick Winser has joined the Board and is responsible for US and UK transmission operations. In addition to his current responsibility for our non-regulated businesses, Edward Astle has assumed responsibility for business development. Rick Sergel retains responsibility for our US distribution business. Safety continues to be paramount for us. We reduced the number of lost time incidents across our businesses by up to 46% and continue to focus our efforts on ensuring our employees, those who work on our sites, and the general public are not put at risk. Each of our businesses continues to deliver aggressive cost-cutting and improved efficiency and we have delivered over £140m in real savings this year alone. We continue to deliver significant outperformance in the UK electricity business, where the goal is to reduce transmission owner controllable costs by 30% in real terms by March 2006, and to date have achieved real reductions of 22%. In our UK gas business, we met the first-year target to reduce operating costs to the level assumed by Ofgem. This was a reduction of 6.3% in real terms, and we remain confident of outperforming over the 5-year price control period. In the US, we aim to reduce controllable costs by 20% in real terms by March 2005. We have already achieved a reduction of 6.5% and have delivered over half of the merger integration savings ahead of schedule. The Group has made good progress in securing the savings related to the National Grid and Lattice merger. The two previous London headquarters were brought together on the day we completed the merger, and we are in the process of moving the majority of our UK business services staff to our new operational centre in Warwick. The combined gas and electricity transmission businesses have identified savings and efficiencies above our original targets. We are now confident of achieving at least £135m annualised synergy savings, the great majority of which will be achieved by March 2004. UK GAS DISTRIBUTION Underlying operating profit from UK gas distribution rose by £6m to £554m, primarily due to lower controllable costs (£26m) and increased external income (£29m), partially offset by the planned £37m increase in repex and a £9m increase in depreciation. Repex totalled £405m in the year. Our performance under the new repex incentive mechanism has been encouraging, and we have earned an estimated £15m in the first year. With a real reduction in controllable costs, we met our target to achieve the regulatory allowance by March 2003 for the gas business and are on track to outperform over the remaining 4 years of the price control period. Our safety and reliability performance remains high. We met the required timescales of the Health & Safety Executive (HSE) for the decommissioning over 2 years of some 2,400 kilometres of medium pressure ductile iron (MPDI) mains. We also achieved our targets under the long-term programme to replace other metallic mains within 30 metres of property. Separation of Transco's distribution price control into eight separate price controls is well advanced, and Ofgem is due to publish its final proposals soon. We are also in detailed discussions with Ofgem on the many regulatory issues associated with the separation and potential sale of individual networks. We expect Ofgem to publish a consultation document on these issues within the next month. However, the process of separation and sale will require extensive consultations across the gas industry, including detailed discussions with the HSE, which are likely to take many months to complete. We are committed to retaining a significant presence in the UK gas distribution business but will consider the sale of one or more individual networks if this were to maximise shareholder value. UK ELECTRICITY AND GAS TRANSMISSION The UK transmission business delivered a strong performance, meeting record demands for both electricity and gas and achieving underlying operating profits of £846m, an increase of £65m over last year. The electricity Transmission Owner (TO) business contributed £486m and the electricity System Operator (SO) £63m. The gas TO business contributed £228m and the gas SO £41m. This operating performance was driven by further reductions in controllable costs, strong performance under the electricity SO incentive schemes and the recognition of some £20m of non-recurring income in the first half of the year. We have reduced electricity transmission owner controllable costs by 22% in real terms since 1 April 2001, and therefore remain confident that we will achieve the planned 30% real reduction in controllable costs by March 2006. The cost reduction programmes underway in our gas operation are on track to exceed Ofgem's targets for its price control period to March 2007. We performed well against this year's Balancing Services Incentive Scheme, contributing £45m to electricity SO operating profit for the year. We also made a good start to the new gas SO incentive scheme, earning £12m in this first year. As with the repex incentive, this will be recovered in future years. Interconnector profits were £21m, up £1m on last year. US ELECTRICITY AND GAS National Grid USA delivered good results, with cost cutting and highly favourable weather conditions offsetting the impact of the sluggish economy, a weakened US dollar, and increased pension costs. The US businesses contributed £699m to underlying operating profit, compared with £370m last year, primarily reflecting a full year contribution from our New York operations. Underlying operating profit from our distribution businesses was £571m, compared with £283m last year. This includes £58m from the gas business and £146m from stranded cost recovery. Exceptionally hot summer and cold winter weather resulted in an increase in delivery volumes over last year in New England and New York of 4.5% and 2.5%, respectively. However, underlying volume growth on a weather-corrected basis was 1.5% and flat in the respective regions. Overall, the impact of the favourable weather contributed £34m to operating profit. Underlying operating profit from US electricity transmission amounted to £128m, up from £87m last year, primarily as a result of the inclusion of a full year contribution from our New York business. Savings from the integration of our New York and New England operations are being delivered ahead of schedule, with an annualised reduction in controllable costs of 6.5% in real terms toward our goal of reducing real controllable costs by 20% by March 2005. The nominal pre-tax return on investment was an annualised 9.2%. The development of regional electricity markets and the associated electric transmission restructuring in the US continues to make progress. GridAmerica, an Independent Transmission Company, is expected, to begin operations in the autumn, following receipt of the remaining regulatory approvals. It will manage the transmission assets of three midwestern utilities, Ameren, First Energy, and Northern Indiana Public Service Company. These assets span over 14,000 miles of transmission lines, serving an area larger than that we serve in the northeastern US. OTHER ACTIVITIES Underlying operating profit from all other activities, including joint ventures and discontinued operations, was £86m compared to £84m last year. Competition in the gas metering services market continues to develop in the UK. During the course of the year we won contracts to provide competitive metering services to 4 of the British Gas Trading (Centrica) areas for a period of five years. Gridcom, our mobile infrastructure services businesses, is well-established in the UK. During the year, we launched Gridcom US and will be utilising our existing assets in much the same way as in the UK. In Argentina, the underlying performance of our electricity transmission operation is stable, but the depreciation of the peso has resulted in the deterioration of the underlying operating profit as reported in sterling. During the year, we implemented hyper-inflationary accounting under UK GAAP, bringing our share of net assets back to zero. Basslink, the project to build, own and operate an interconnector between the Australian mainland and Tasmania, received final government approval during the year. The £300m project is due to be completed in late 2005. Withdrawal from our altnet investments is substantially complete. During the year, we sold our stakes in Manquehue net and Silica Networks, sold 186k's assets, and restructured our shareholding in Energis Polska. We are providing no further funding to Intelig, and our exit will be completed within the provisions already made. Accordingly, with effect from 1 October 2002, we ceased to equity account for that joint venture. We have also made rapid progress rationalising our portfolio of other businesses, completing the sales of The Leasing Group and part of Energy Services. OUTLOOK Our Group wide cost reduction and synergy creation programmes are exceeding our targets. We remain confident that 2003/04 will be another strong year for the Group. CONTACT DETAILS National Grid Transco: Investors Marcy Reed +44 (0)20 7004 3170 +44 (0)7768 490807(m) Terry McCormick +44 (0)20 7004 3171 +44 (0)7768 045139(m) Louise Clamp +44 (0)20 7004 3172 +44 (0)7768 555641(m) Bob Seega (US) +1 508 389 2598 Media Gillian Home +44 (0)20 7004 3150 Clive Hawkins +44 (0)20 7004 3147 Pager +44 (0)7659 117841 (out of hours) Citigate Dewe Rogerson +44 (0)20 7638 9571 Anthony Carlisle +44 (0)7973 611888(m) Analyst presentation An analyst presentation will be held at JP Morgan, 10 Aldermanbury, London EC2V at 9:00 am (UK time) today. Live telephone coverage of analyst presentation - password National Grid Transco Dial in number +44 (0) 20 7162 0187 US call in number + 1 334 420 4951 Telephone replay of the analyst presentation (available until 6 June 2003) - passcode 694302 UK dial in number + 44 (0) 20 8288 4459 Freephone number 0500 637 880 US dial in number + 1 334 323 6222 Live webcast of presentation will also be available at www.ngtgroup.com Photographs are available on www.newscast.co.uk Cautionary Statement This announcement contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Because these forward-looking statements are subject to assumptions, risks and uncertainties, actual future results may differ materially from those expressed in or implied by such statements. Many of these assumptions, risks and uncertainties relate to factors that are beyond National Grid Transco's ability to control or estimate precisely, such as delays in obtaining or adverse conditions contained in regulatory approvals, competition and industry restructuring, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in energy market prices, changes in historical weather patterns, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the availability of new acquisition opportunities or the timing and success of future acquisition opportunities. Other factors that could cause actual results to differ materially from those described in this announcement include the ability to integrate Niagara Mohawk and Lattice Group plc successfully within National Grid Transco or to realise synergies from such integration, the failure to retain key management, unseasonal weather impacting on demand for electricity and gas, the behaviour of UK electricity market participants on system balancing, the timing of amendments in prices to shippers in the UK gas market, the performance of the Group's pension schemes and the regulatory treatment of pension costs and the impact of any potential separation and disposal by the Group of any UK gas distribution network(s). For a more detailed description of these assumptions, risks and uncertainties, together with any other risk factors please see National Grid Transco's filings with the United States Securities and Exchange Commission (and in particular the 'Risk Factors' and 'Operating and Financial Review' sections in its most recent annual report on 20F). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this announcement. National Grid Transco does not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this announcement. GROUP PROFIT AND LOSS ACCOUNT FOR THE YEARS ENDED 31 MARCH 2003 2002 Notes £m £m ====================== ====================== Group turnover - continuing operations 2a 9,363 7,471 Group turnover - discontinued operations 2a 37 83 ---------------------- ---------------------- Group turnover 9,400 7,554 Operating costs (7,788) (6,494) ---------------------- ---------------------- Operating profit of Group undertakings - continuing operations 2c 1,806 1,556 Operating loss of Group undertakings - discontinued operations 2c (194) (496) ---------------------- ---------------------- 1,612 1,060 ---------------------- ---------------------- Share of joint ventures' operating profit/(loss) - continuing 2c 15 (29) operations Share of joint ventures' and associate's operating profit/(loss) 2c 109 (672) - discontinued operations ---------------------- ---------------------- 124 (701) Operating profit Before exceptional items and goodwill amortisation 2b 2,185 1,783 - Exceptional items 3a (347) (1,327) - Goodwill amortisation (102) (97) ---------------------- ---------------------- Total operating profit 1,736 359 Non-operating exceptional items 3b (99) 156 Net interest - Excluding exceptional items 4 (939) (657) - Exceptional items 4 (31) (142) ---------------------- ---------------------- (970) (799) ---------------------- ---------------------- Profit/(loss) on ordinary activities before taxation 667 (284) Taxation - Excluding exceptional items (373) (251) - Exceptional items 128 166 ---------------------- ---------------------- (245) (85) ---------------------- ---------------------- Profit/(loss) on ordinary activities after taxation 422 (369) Minority interests - Excluding exceptional items (3) (2) - Exceptional items 3d (28) 50 ---------------------- ---------------------- (31) 48 ---------------------- ---------------------- Profit/(loss) for the year 391 (321) Dividends 6 (530) (580) ---------------------- ---------------------- Loss transferred from profit and loss account reserve (139) (901) ====================== ====================== Earnings/(loss) per ordinary share Basic (including exceptional items and goodwill amortisation) 5b 12.7p (11.3)p Adjusted basic (excluding exceptional items and goodwill 5b 28.3p 30.8p amortisation) ====================== ====================== Dividends per ordinary share 6 17.20p 16.04p ====================== ====================== GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEARS ENDED 31 MARCH 2003 2002 £m £m ====================== ===================== Profit/(loss) for the year 391 (321) Exchange adjustments (322) (58) Tax on exchange adjustments 12 21 Reduction in revaluation reserve on reclassification of investment - (50) properties Unrealised gain on transfer of fixed assets to a joint venture (net of 6 7 tax) ---------------------- --------------------- Total gains and losses recognised 87 (401) ====================== ===================== GROUP BALANCE SHEET AT 31 MARCH 2003 2002 £m £m ====================== ====================== Fixed assets Intangible assets 1,893 2,107 Tangible assets 16,847 17,210 Investments in joint ventures (net of impairment) 44 61 Other investments 209 257 ----------------------- ---------------------- 18,993 19,635 ----------------------- ---------------------- Current assets Stocks 126 125 Debtors (amounts falling due within one year) 1,811 1,889 Debtors (amounts falling due after more than one year) 3,395 4,058 Assets held for exchange 17 17 Investment held for resale - 15 Cash and investments 601 464 ----------------------- ---------------------- 5,950 6,568 Creditors (amounts falling due within one year) (5,046) (4,888) ----------------------- ---------------------- Net current assets 904 1,680 ----------------------- ---------------------- Total assets less current liabilities 19,897 21,315 Creditors (amounts falling due after more than one year) (14,255) (14,868) Provisions for liabilities and charges (4,406) (4,663) ----------------------- ---------------------- Net assets employed 1,236 1,784 ====================== ====================== Capital and reserves Called up share capital 308 310 Share premium account 1,247 1,243 Other reserves (5,131) (5,139) Profit and loss account 4,728 5,276 ----------------------- ---------------------- Equity shareholders' funds 1,152 1,690 Minority interests 84 94 ----------------------- ---------------------- Total shareholders' funds 1,236 1,784 ======================= ====================== Net debt included above 13,878 14,299 ----------------------- ---------------------- GROUP CASH FLOW STATEMENT FOR THE YEARS ENDED 31 MARCH 2003 2002 Notes £m £m ======================= ===================== Net cash inflow from operating activities before exceptional items 7 3,154 2,394 Expenditure relating to exceptional items (328) (103) ---------------------- ---------------------- Net cash inflow from operating activities 2,826 2,291 Dividends from joint ventures 11 13 Net cash outflow for returns on investments and servicing of (912) (705) finance Taxation Corporate tax paid (112) (212) Capital expenditure and financial investment Net payments to acquire intangible and tangible fixed assets (1,518) (1,734) Receipts from disposals of tangible fixed assets 111 191 Receipts from disposals of shares by an employee share plan - 50 Other - 10 ---------------------- ---------------------- Net cash outflow for capital expenditure and financial investment (1,407) (1,483) Acquisitions and disposals Payments to acquire investments (165) (56) Receipts from disposals of investments 328 37 Acquisition of Group undertaking - (950) ---------------------- ---------------------- Net cash inflow/(outflow) for acquisitions and disposals 163 (969) Equity dividends paid (571) (478) ---------------------- ---------------------- Net cash outflow before the management of liquid resources and financing (2) (1,543) Management of liquid resources (Increase)/decrease in short-term deposits 8 (138) 347 ---------------------- ---------------------- Net cash (outflow)/inflow from the management of liquid resources (138) 347 Financing Issue of ordinary shares 4 12 Payments to repurchase ordinary shares (97) - Increase in borrowings 8 267 1,206 ---------------------- ---------------------- Net cash inflow from financing 174 1,218 ---------------------- ---------------------- Movement in cash and overdrafts 8 34 22 ====================== ====================== NOTES TO THE ACCOUNTS 1. Basis of Preparation The financial information contained in this announcement, which does not constitute statutory accounts as defined in Section 240 of the Companies Act 1985, has been derived from the statutory accounts for the year ended 31 March 2003, which will be filed with the Registrar of Companies in due course. The auditors' report on these accounts is unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. This preliminary results announcement was approved by the Board of Directors on 20 May 2003. The business combination of National Grid and Lattice meets the merger accounting criteria under UK GAAP and therefore the transaction has been accounted for as a merger. The accounts have been presented as if Lattice and National Grid had always comprised the Group. The combined statements have been adjusted for the issue on merger of 1,323m shares with a nominal value of £132m and for the elimination of balances between the former groups. An adjustment of £221m has been made to other reserves, representing the difference between the nominal value of shares issued of £132m and the called up share capital of Lattice Group plc at the date of the Merger. FRS 17 'Retirement benefits' has not been adopted. Implementation is required by the year ended 31 March 2006. Changes in accounting policies prior to merger Lattice implemented Financial Reporting Standard (FRS) 19 'Deferred Tax' on the basis of discounting deferred tax balances during the period ended 31 March 2002. As reported in November, Lattice aligned its accounting policies with those of National Grid with effect from 1 April. The primary changes included accounting for deferred tax on an undiscounted basis and reporting the interest credit on pensions within the net interest charge. Previously, the pensions interest credit was reported by Lattice in operating costs. The impact of these changes in accounting policies on the previously reported results of Lattice for the twelve months ended 31 March 2002 is shown below. The impact of these accounting changes has also been reflected in the comparative financial information of National Grid Transco, as if these accounting policies had always been applied. Year ended 31 March 2002 £m ============= Profit and loss account Total operating profit: Reclassification of pensions interest (22) Net interest: Reclassification of pensions interest 22 Taxation: Accounting for deferred tax on an undiscounted basis (4) ------------- Decrease in profit for the 12 month period ended 31 March 2002 (4) ============= Balance sheet Provisions for liabilities and charges: Accounting for deferred tax on an undiscounted basis (605) ============= In addition to the above changes, National Grid changed its policy in respect of the capitalisation of capital contributions. An adjustment has been made to the 31 March 2002 balances to reclassify £90m of capital contributions from tangible fixed assets to creditors. 2. Segmental analysis a) Group turnover Years ended 31 March 2003 2002 £m £m ====================== ====================== Continuing operations UK gas distribution 2,089 2,013 UK electricity and gas transmission 1,948 1,850 US electricity transmission 407 278 US electricity distribution 3,446 2,282 US gas 446 104 Other activities 1,358 1,189 Sales between businesses (331) (245) ---------------------- ---------------------- 9,363 7,471 Discontinued operations Other activities 56 120 Sales between businesses (19) (37) ---------------------- ---------------------- 37 83 ---------------------- ---------------------- 9,400 7,554 ====================== ====================== Europe 5,096 4,865 North America 4,304 2,689 ---------------------- ---------------------- 9,400 7,554 ====================== ====================== b) Operating profit - before exceptional items and goodwill amortisation Years ended 31 March 2003 2002 £m £m ====================== ====================== Group undertakings - continuing operations UK gas distribution 554 548 UK electricity and gas transmission 846 781 US electricity transmission 128 87 US electricity distribution 513 266 US gas 58 17 Other activities 117 179 ---------------------- ---------------------- 2,216 1,878 Discontinued operations (26) (60) ---------------------- ---------------------- Operating profit of Group undertakings 2,190 1,818 ---------------------- ---------------------- Joint ventures and associate - continuing operations Electricity activities 15 36 Other activities - (17) ---------------------- ---------------------- 15 19 Discontinued operations (20) (54) ---------------------- ---------------------- Operating loss of joint ventures and associate (5) (35) ---------------------- ---------------------- 2,185 1,783 ====================== ====================== Europe 1,481 1,420 North America 704 377 Latin America (7) (19) Rest of the World 7 5 ---------------------- ---------------------- 2,185 1,783 ====================== ====================== c) Operating profit - after exceptional items and goodwill amortisation Years ended 31 March 2003 2002 £m £m ====================== ====================== Group undertakings - continuing operations UK gas distribution 443 504 UK electricity and gas transmission 800 688 US electricity transmission 103 64 US electricity distribution 413 149 US gas 49 8 Other activities (2) 143 ---------------------- ---------------------- 1,806 1,556 Discontinued operations (194) (496) ---------------------- ---------------------- Operating profit of Group undertakings 1,612 1,060 ---------------------- ---------------------- Joint ventures and associate - continuing operations Electricity activities 15 36 Other activities - (65) ---------------------- ---------------------- 15 (29) Discontinued operations 109 (672) ---------------------- ---------------------- Operating profit/(loss) of joint ventures and associate 124 (701) ---------------------- ---------------------- 1,736 359 ====================== ====================== Europe 1,051 440 North America 549 224 Latin America 128 (310) Rest of the World 8 5 ---------------------- ---------------------- 1,736 359 ====================== ====================== 3. Exceptional items a) Operating Years ended 31 March 2003 2002 £m £m ====================== ====================== Continuing operations Restructuring costs (i) 203 187 Merger costs (ii) 105 - Impairment of assets (iii) - 50 Share of exceptional operating items of joint venture (iv) - 48 ---------------------- ---------------------- 308 285 ---------------------- ---------------------- Discontinued operations Restructuring costs (i) 6 - Impairment of business (v) 168 250 Impairment of investments in joint ventures and associate (vi) (135) 792 ---------------------- ---------------------- 39 1,042 ---------------------- ---------------------- Total operating exceptional items 347 1,327 ====================== ====================== i) Relates to costs incurred in business reorganisations in the UK and US businesses (2003: £165m after tax; 2002: £130m after tax). ii) Represents employee and property costs associated with the Merger of National Grid and Lattice (£76m after tax). iii) The impairment charge for 2002 relates to a review of the carrying value of LNG storage assets, which resulted in a charge to operating profit amounting to £50m (£35m after tax). In the LNG review, future cash flows were determined based on a five-year business plan projected out to 20 years and discounted at a pre-tax rate of 6.25%. iv) Share of exceptional operating items of a joint venture in 2002 represents the Group's share of the write-off of an investment and the write-down of goodwill in a joint venture prior to it becoming a wholly owned subsidiary of the Group (£48m after tax). The write-down of goodwill followed an impairment review which applied a discount rate of 15%. The review used growth rates over a plan period covering nine years. The assumptions of the plan were consistent with management views of the market and the joint venture's performance therein. v) Following a review of the carrying value of certain of the Group's telecom assets, the Group has incurred impairment charges resulting in the write-down of those assets to their estimated recoverable amounts and the recognition of other related costs (2003: £143m after tax; 2002: £175m after tax). vi) The 2003 credits relate to Intelig and other telecom joint ventures (£155m after tax). The exceptional credits arising in 2003 substantially represent the reversal of the Group's share of retained losses incurred by these joint ventures during the period from 1 April 2002 to the date of disposal or the date that equity accounting ceased. £129m of the pre-tax exceptional credits have been reflected in 'Share of joint ventures' and associate's operating profit/(loss) - discontinued operations'. The 2002 exceptional charge of £792m (£775m after tax) relates to the write-down of the Group's investment in its joint ventures and associate. This charge comprised a write-down of the carrying value of the investments of £606m (£589m after tax) to their estimated recoverable amounts, and the recognition of related liabilities of £186m (£186m after tax). b) Non-operating Years ended 31 March 2003 2002 £m £m ====================== ====================== Continuing operations Merger costs (vii) 79 - Profit on disposal of tangible fixed assets (viii) (48) (94) Gain on sale of shares by an employee share plan (ix) - (31) ---------------------- ---------------------- 31 (125) ---------------------- ---------------------- Discontinued operations Loss on sale or termination of operations (x) 68 - Profit on disposal of investments (xi) - (31) ---------------------- ---------------------- 68 (31) ---------------------- ---------------------- Total non-operating exceptional items 99 (156) ====================== ====================== vii) The after tax transaction cost of the Merger between National Grid and Lattice was £71m. viii) The after tax profit on disposal of tangible fixed assets was £50m (2002: £96m). ix) The after tax gain on sale of shares by an employee share plan was £nil (2002: £31m). x) Relates to the loss on sale of The Leasing Group of £45m and loss on closure of 186k of £23m. The after tax loss relating to the sale and closure amounted to £68m. xi) The after tax profit on disposal of investments was £nil (2002: £31m). c) Financing costs The exceptional net interest cost of £31m (2002: £142m) before and after tax relates to the Group's share of foreign exchange losses incurred on foreign currency borrowings by joint ventures amounting to £98m (2002: £142m), partially offset by the Group's share of a gain on net monetary liabilities of £67m (2002: £nil). The gain on the net monetary liabilities relates to Citelec, a joint venture operating in Argentina, and reflects the net gain arising on net monetary liabilities that are financing the operation in a hyper-inflationary economy. d) Minority interests The 2003 exceptional minority interest charge of £28m relates to the Group's share of the minority interest in the after taxation exceptional items of Citelec, a joint venture, and primarily reflects the minority interest's share of the gain on net monetary liabilities referred to above (note 3c). The 2002 exceptional minority interest credit of £50m relates to the Group's share of the minority interest in the after taxation exceptional items of Citelec, a joint venture, and primarily relates to foreign exchange losses incurred on foreign currency borrowings. 4. Net interest Years ended 31 March 2003 2002 £m £m ======================= ====================== Interest payable and similar charges 981 755 Unwinding of discount on provisions 13 17 Interest capitalised (28) (38) ---------------------- ---------------------- Interest payable and similar charges net of interest capitalised 966 734 Interest receivable and similar income (55) (123) ---------------------- ---------------------- 911 611 Joint ventures (including exceptional net interest of £31m (2002: £142m) 59 172 net of interest capitalised £1m (2002: £10m)) Associate - 16 ---------------------- ---------------------- 970 799 ======================= ====================== Comprising: Net interest, excluding exceptional net interest 939 657 Exceptional net interest (note 3(c)) 31 142 ---------------------- ---------------------- Net interest, including exceptional net interest 970 799 ======================= ====================== 5. Adjusted profit on ordinary activities before taxation and earnings per ordinary share a) Reconciliation of adjusted profit on ordinary activities before taxation to basic profit on ordinary activities before taxation Years ended 31 March 2003 2002 £m £m ======================= ====================== Profit/(loss) on ordinary activities before taxation 667 (284) Exceptional operating items (note 3(a)) 347 1,327 Exceptional non-operating items (note 3(b)) 99 (156) Exceptional financing charge (note 3(c)) 31 142 Goodwill amortisation 102 97 ---------------------- ---------------------- Adjusted profit on ordinary activities before taxation 1,246 1,126 ======================= ====================== b) Earnings per share Year ended 31 March 2003 Weighted Earnings Profit average per for the number share year of shares pence £m million ==================== ==================== ================== Basic, including exceptional items and goodwill 12.7 391 3,078 amortisation Exceptional operating items (note 3(a)) 11.3 347 - Exceptional non-operating items (note 3(b)) 3.2 99 - Exceptional financing charge (note 3(c)) 1.0 31 - Exceptional tax credit (4.1) (128) - Exceptional minority interest (note 3(d)) 0.9 28 - Goodwill amortisation 3.3 102 - -------------------- -------------------- ------------------ Adjusted basic, excluding exceptional items and goodwill 28.3 870 3,078 amortisation Dilutive impact of employee share options (0.1) - 10 Dilutive impact of 4.25% exchangeable bonds (0.3) 22 110 -------------------- -------------------- ------------------ Adjusted diluted, excluding exceptional items and goodwill 27.9 892 3,198 amortisation Exceptional operating items (note 3(a)) (10.9) (347) - Exceptional non-operating items (note 3(b)) (3.1) (99) - Exceptional financing charge (note 3(c)) (1.0) (31) - Exceptional tax credit 4.0 128 - Exceptional minority interest (note 3(d)) (0.9) (28) - Goodwill amortisation (3.2) (102) - -------------------- -------------------- ------------------ Diluted, including exceptional items and goodwill 12.8 413 3,198 amortisation ==================== ==================== ================== Year ended 31 March 2002 Weighted (Loss)/ (Loss)/ average earnings per profit for number share the year of shares pence £m million ==================== ==================== ================== Basic, including exceptional items and goodwill (11.3) (321) 2,832 amortisation Exceptional operating items (note 3(a)) 46.9 1,327 - Exceptional non-operating items (note 3(b)) (5.5) (156) - Exceptional financing charge (note 3(c)) 5.0 142 - Exceptional tax credit (5.9) (166) - Exceptional minority interest (note 3(d)) (1.8) (50) - Goodwill amortisation 3.4 97 - -------------------- -------------------- ------------------ Adjusted basic, excluding exceptional items and goodwill 30.8 873 2,832 amortisation Dilutive impact of employee share options (0.2) - 21 Dilutive impact of 4.25% exchangeable bonds (0.4) 22 110 -------------------- -------------------- ------------------ Adjusted diluted, excluding exceptional items and goodwill 30.2 895 2,963 amortisation Exceptional operating items (note 3(a)) (44.8) (1,327) - Exceptional non-operating items (note 3(b)) 5.3 156 - Exceptional financing charge (note 3(c)) (4.8) (142) - Exceptional tax credit 5.6 166 - Exceptional minority interest (note 3(d)) 1.7 50 - Goodwill amortisation (3.3) (97) - -------------------- -------------------- ------------------ Diluted, including exceptional items and goodwill (10.1) (299) 2,963 amortisation ==================== ==================== ================== In respect of the years ended 31 March 2003 and 31 March 2002, the potential ordinary shares related to the 4.25% exchangeable bonds are dilutive, as they would decrease earnings from continuing operations. Consequently, the diluted earnings per share are higher than basic earnings per share because of the effect of losses arising from discontinued operations. 6. Dividends The National Grid Transco plc dividends for the year ended 31 March 2003 of £530m have been calculated on the basis of the number of National Grid Transco plc ordinary shares in issue and eligible for dividend, based on an ordinary interim dividend per share of 6.86p and the proposed final 2003 dividend per share of 10.34p. Total dividend per share for the year ended 31 March 2003 was 17.20p. The total of pre-Merger dividends for National Grid and Lattice for the year ended 31 March 2002 was £580m. The National Grid dividend per share for the year ended 31 March 2002 was 16.04p. 7. Reconciliation of operating profit to net cash inflow from operating activities before exceptional items Years ended 31 March 2003 2002 £m £m ======================= ======================= Operating profit of Group undertakings 1,612 1,060 Group exceptional operating items 476 673 Depreciation and amortisation 1,088 876 (Increase)/decrease in working capital (6) 45 Decrease in provisions (16) (260) ---------------------- ----------------------- Net cash inflow from operating activities before exceptional items 3,154 2,394 ======================= ======================= 8. Reconciliation of net cash flow to movement in net debt Years ended 31 March 2003 2002 £m £m ======================= ======================= Movement in cash and overdrafts 34 22 Net cash outflow/(inflow) from the management of liquid resources 138 (347) Increase in borrowings (267) (1,206) ---------------------- ----------------------- Change in net debt resulting from cash flows (95) (1,531) Acquisition of Group undertaking - (3,678) Disposal of Group undertaking (62) - Exchange adjustments 593 20 Other non-cash movements (15) (5) ---------------------- ----------------------- Movement in net debt in the year 421 (5,194) Net debt at start of year (14,299) (9,105) ---------------------- ----------------------- Net debt at end of year (13,878) (14,299) ======================= ======================= 9. Cash flows from discontinued operations Included in the Cash Flow Statement are cash flows from discontinued 2003 2002 operations as set out below: £m £m ======================= ======================= Net cash (outflow)/inflow from operating activities (71) 52 Net cash outflow for returns on investments and servicing of finance (14) (3) Net cash (outflow)/inflow from taxation (1) 13 Net cash outflow for capital expenditure and financial investment (123) (342) Net cash outflow for acquisitions and disposals (3) (12) ----------------------- ----------------------- Net cash outflow before the management of liquid resources and (212) (292) financing ======================= ======================= 10. Net debt comprises At 31 March 2003 2002 £m £m ======================= ======================= Cash and investments 601 464 Short-term debt including bank overdrafts (2,246) (2,050) Long-term debt (12,233) (12,713) ----------------------- ----------------------- (13,878) (14,299) ======================= ======================= 11. Exchange rates The Group's results are affected by the exchange rates used to translate the results of its US operations. The US dollar to sterling exchange rates used were: 2003 2002 ============= ============= Closing rate applied at year end 1.58 1.42 Average rate applied for the year 1.59 1.44 ============= ============= 12. Differences between UK and US Generally Accepted Accounting Principles (' GAAP') Under US GAAP, the business combination of National Grid and Lattice must be accounted for as an acquisition in accordance with acquisition accounting principles. As a result, the separately identifiable net assets attributable to Lattice have been fair valued at the date of acquisition on 21 October 2002, and goodwill has been recognised. A further consequence of acquisition accounting is that the results of the Group under US GAAP only include the results of Lattice with effect from the date of acquisition. Summarised financial statements on a US GAAP basis will be set out in the Annual Report and Accounts, and details of the principal differences between UK and US GAAP are shown below. a) Reconciliation of net income to US GAAP The following is a summary of the material adjustments to net income that would have been required if US GAAP had been applied instead of UK GAAP. Years ended 31 March 2003 2002 £m £m ============= ============= Net income/(loss) under UK GAAP 391 (321) Adjustments to conform with US GAAP Elimination of Lattice pre-acquisition results, measured under UK GAAP 293 (172) Merger costs 32 - Deferred taxation 7 7 Pensions 35 29 Share option schemes (29) (5) Fixed assets - purchase of Lattice (169) - Replacement expenditure 166 - Financial instruments 40 (83) Carrying value of Equity Plus Income Convertible Securities (EPICS) 2 203 liability Severance and integration costs (110) 67 Recognition of income 2 (4) Goodwill 70 78 Restructuring - purchase of Lattice 46 - Share of joint ventures' and associate's adjustments (27) 37 Other 2 (3) ------------- ------------- Total US GAAP adjustments 360 154 ------------- ------------- Net income/(loss) under US GAAP 751 (167) ============= ============= Basic earnings/(loss) per share - US GAAP 31.9p (10.9)p Diluted earnings/(loss) per share - US GAAP 31.3p (8.8)p ============= ============= b) Reconciliation of equity shareholders' funds to US GAAP The following is a summary of the material adjustments to equity shareholders' funds that would have been required if US GAAP had been applied instead of UK GAAP. At 31 March 2003 2002 £m £m ============= ============= Equity shareholders' funds under UK GAAP 1,152 1,690 Adjustments to conform with US GAAP Elimination of Lattice shareholders' funds - 1,506 Deferred taxation (1,593) (52) Pensions (1,800) 217 Shares held by employee share trusts (39) (46) Ordinary dividends 317 169 Tangible fixed assets - reversal of partial release of impairment (35) (38) provision Fixed assets - impact of Lattice purchase accounting and replacement 7,243 - expenditure Financial instruments (253) (81) Issue costs associated with EPICS - 2 Carrying value of EPICS liability 243 241 Severance liabilities 3 15 Recognition of income (27) (22) Regulatory assets 241 34 Goodwill - purchase of Lattice 3,829 - Goodwill - other acquisitions 179 105 Restructuring - purchase of Lattice (6) - Share of joint ventures' and associate's adjustments (17) 21 Other (11) (2) ------------- ------------- Total US GAAP adjustments 8,274 2,069 ------------- ------------- Equity shareholders' funds under US GAAP 9,426 3,759 ============= ============= This information is provided by RNS The company news service from the London Stock Exchange

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