Overview of National Grid Transco
National Grid Transco is an international network
utility company with electricity and gas
transmission and distribution interests in the
UK and US. We have also transferred our
network skills to related markets in the UK and
US, including communications infrastructure,
metering and liquefied natural gas, and have
interests in electricity interconnectors in the UK,
US and Australia.
National Grid Transco reports its operating
results by segment, reflecting the management
responsibilities and economic characteristics of
the Group’s business activities. The designation
of segments was informed by the level of
materiality of some of the Group’s activities and
to ensure that the disclosures are not overly
detailed.
The business operations of the Group are
divided into the following segments: UK
gas distribution; UK electricity and gas
transmission; US electricity transmission;
US electricity distribution; and US gas
distribution, with all other activities of the Group
being reported as part of ‘Other activities’. Our
Transmission business comprises high-voltage
electricity transmission networks in the UK and
US and the gas National Transmission System in
the UK. Through GridAmerica, we also manage
a range of electricity transmission operations for
other utilities. Our US Distribution business
provides electricity and gas distribution in New
York and electricity distribution in New England.
Our UK Gas Distribution business comprises the
majority of Britain’s gas distribution system.
The Operating Review focuses on the performance of individual
business segments, including a consideration
of the business environment within which each
of our businesses operates, the operational
performance of that business and the financial
performance of each business segment. In the
opinion of management, it is appropriate to
consider the financial performance of each
business segment in the context of its
operational performance and related business
issues for the period concerned.
The Financial Review primarily focuses on the financial impact of
matters that do not arise from operating
performance or are better discussed in the
wider Group context and is not intended to
duplicate the Operating Review. Consequently, it
focuses on items in our Group accounts which
we believe are the most material, such as
interest, taxation, exceptional items and cash
flows.
The Operating Review and the Financial Review
should be read together to obtain a complete
understanding of our results of operations and
financial condition during the years under review.
Adjusted profit measures
Management uses ‘adjusted’ profit measures in
considering the performance of the Group’s
operating segments and businesses. References
to ‘adjusted operating profit’, ‘adjusted profit
before taxation’, ‘adjusted earnings’ and
‘adjusted earnings per share’ are stated before
exceptional items and goodwill amortisation.
The Directors believe that the use of these
adjusted measures better indicates the
underlying business performance of the Group
than the unadjusted measures because the
exclusion of exceptional items and goodwill
amortisation provides a clearer comparison of
results from year to year for each of the years
presented. This is because excluding exceptional
items removes their distorting impact in order to
enhance comparability from year to year, and
excluding goodwill amortisation enhances
comparability with the reporting practices of
other UK companies.
Exceptional items, which are not included in the
adjusted measures referred to above, are defined
as material items that derive from events that fall
within the ordinary activities of the Group, but
that require separate disclosure on the grounds
of size or incidence for the accounts to give a
true and fair view. Such exceptional items
include, for example, material restructuring costs
and impairments. Exceptional items – 2003/04
and
Exceptional items – 2002/03
contain a discussion of the nature of these exceptional
items for each period.
The following tables reconcile the statutory or unadjusted UK GAAP measure to the corresponding
adjusted measure.
a) Reconciliation of total operating profit to adjusted operating profit
|
Years ended 31 March |
| 2004 | 2003 | 2002 | | £m | £m | £m
|
 |
| Total operating profit |
1,862 |
1,736 |
359
|
| Operating exceptional items – continuing operations |
277 |
308 |
285 |
| Operating exceptional items – discontinued operations |
- |
39 |
1,042 |
| Goodwill amortisation |
99 |
102 |
97
|
| | Operating profit before exceptional items and goodwill |
|
|
|
| amortisation (adjusted operating profit) |
2,238 |
2,185 |
1,783
|
|
The effect of the above reconciliation can be seen on the face of the profit and loss account, where adjusted operating profit is reconciled to total operating profit.
b) Reconciliation of profit/(loss) before taxation to adjusted profit before taxation
| |
Years ended 31 March |
| |
2004 |
2003 |
2002 |
| |
£m |
£m |
£m |
|
| Profit/(loss) before taxation |
1,362 |
667 |
(284) |
| Operating exceptional items – continuing operations |
277 |
308 |
285 |
| Operating exceptional items – discontinued operations |
– |
39 |
1,042 |
| Non-operating exceptional items – continuing operations |
(96) |
31 |
(125) |
| Non-operating exceptional items – discontinued operations |
(226) |
68 |
(31) |
| Exceptional financing charge |
– |
31 |
142 |
| Goodwill amortisation |
99 |
102 |
97 |
|
| Profit before taxation before exceptional items and goodwill |
|
|
|
| amortisation (adjusted profit before taxation) |
1,416 |
1,246 |
1,126 |
|
A summary of the above reconciliation can be seen in note 11 to the accounts.
c) Reconciliation of earnings or profit/(loss) for the year to adjusted earnings
|
Years ended 31 March |
| 2004 | 2003 | 2002 | | £m | £m | £m
|
|
| Earnings or profit/(loss) for the year |
1,099 |
391 |
(321) |
| Operating exceptional items – continuing operations |
277 |
308 |
285 |
| Operating exceptional items – discontinued operations |
- |
39 |
1,042 |
| Non-operating exceptional items – continuing operations |
(96) |
31 |
(125) |
| Non-operating exceptional items – discontinued operations |
(226) |
68 |
(31) |
| Exceptional financing charge |
- |
31 |
142 |
| Exceptional taxation |
(89) |
(128) |
(166) |
| Exceptional minority interest |
- |
28 |
(50) |
| Goodwill amortisation |
99 |
102 |
97 |
| | Earnings or profit/(loss) before exceptional items and |
|
|
|
| goodwill amortisation (adjusted earnings) |
1,064 |
870 |
873 |
|
The effect of the above reconciliation can be seen on the face of the profit and loss account where adjusted earnings are reconciled to earnings or profit/(loss). Note 11 to the accounts shows a reconciliation of earnings to adjusted earnings on a per share basis.
Summary results
The following is a summary of the turnover of the Group by segment:
|
Years ended 31 March |
| Turnover |
2004 |
2003
(restated) |
2002
(restated) |
| £m | £m | £m
|
|
| Continuing operations | | |
| | UK gas distribution |
2,245 |
2,089 |
2,013
|
| UK electricity and gas transmission |
1,867 |
1,893 |
1,799 |
| US electricity transmission | 318 | 407 |
278
|
| US electricity distribution | 3,537 | 3,446 |
2,282
|
| US gas distribution |
464 |
446 |
104
|
| Other activities |
906 |
922 |
892
|
| Sales between businesses |
(462) |
(370) |
(290) |
| |
8,875 |
8,833 |
7,078
|
| Discontinued operations |
| |
|
| Other activities |
158 |
586 |
513 |
| Sales between businesses |
- |
(19) |
(37) |
|
| |
158 |
567 |
476 |
|
| Turnover |
9,033 |
9,400 |
7,554 |
|
The following is a summary of adjusted operating profit and operating profit for Group undertakings by segment:
|
| | | Years ended 31 March |
| | Adjusted operating profit | Operating profit |
| 2004 | 2003
(restated) | 2002
(restated) | 2004 | 2003
(restated) | 2002
(restated) | | £m | £m | £m | £m | £m | £m
| | | Group undertakings – | | | | | |
| | continuing operations | | | | | |
| | UK gas distribution |
729 | 554 |
548 |
640 |
443 |
504
|
| UK electricity and gas |
769 | 820 |
756 |
755 |
774 |
713
|
| transmission | | | | | |
| | US electricity transmission |
133 |
128 |
87 |
105 |
103 |
64
|
| US electricity distribution |
449 | 513 |
266 |
294 |
413 |
149
|
| US gas distribution |
48 |
58 |
17 |
37 |
49 |
8
|
| Other activities |
103 |
143 |
206 |
24 |
24 |
120
|
| |
2,231 |
2,216 |
1,880 |
1,855 |
1,806 |
1,558
|
| Discontinued operations |
- | (26) |
(62) |
- |
(194) |
(498)
|
| | Operating profit of Group |
2,231 |
2,190 |
1,818 |
1,855 |
1,612 |
1,060
|
| undertakings | | | | | | | |
Comparative figures in the above tables have been restated to reflect minor changes to the presentation of segmental information as discussed in note 2 to the accounts.
Other performance measures
The Group uses a number of measures of
operational and financial performance relating
to its various businesses. The Group’s core
businesses are regulated utilities and therefore
many of these targets are determined by the
relevant regulators. Much of the Group’s
performance depends on meeting and exceeding
those regulatory targets. Measures of operational
performance include the management of
‘controllable costs’ in relation to our UK and US
regulated businesses; reliability of our energy
delivery networks and other service quality
measures; and Lost Time Injuries for the Group.
Our ability to meet or outperform our regulatory
targets depends in part on our ability to manage
our costs. Of those costs, some are fixed or
semi-fixed in nature and generally cannot be
altered by management in the ordinary course.
Examples of these include depreciation charges,
replacement expenditure, goodwill amortisation
and pension deficit related costs.
The Group is also allowed under the relevant
licence or regulatory settlement to pass through
certain costs to our customers. The costs that
we pass through are reflected in our turnover, an
important example of this being commodity cost.
We are allowed to pass through to our
customers most of the commodity cost of the
gas and electricity to which we are exposed and,
consequently, we currently assume only a limited
amount of risk in respect of these costs.
Other costs are within management’s ability
to control. These include employment costs
(excluding pension fund deficits in the UK) and
other costs incurred in maintaining transmission
and distribution systems. The manner in which
we calculate controllable costs varies within the
Group as a result of, among other things,
different regulatory regimes and the historical
treatment of costs by our regulators. However,
the underlying principle remains the same in that
the expression ‘controllable costs’ represents
management’s calculation of the costs that they
can control. Moreover, the definition of
controllable costs is consistent from year to year
within a given part of the business. Our ability to
reduce controllable costs is used by Ofgem to
measure a number of our activities. We have
extended controllable costs to our US regulated
operations as an internal performance measure.
The Directors believe that employee and public
safety is paramount and, as a fundamental part
of this, that all work-related injuries and illnesses
are preventable. Consequently, the level of Lost
Time Injuries (LTIs) is measured as a key
performance indicator of the Group. LTIs are
injuries and illnesses that arise from a person’s
employment and cause that employee to be
unable to attend the workplace and perform his
or her duties. All our businesses are required to
report on any LTIs suffered by their respective
employees and any contractors.
Turnover
As noted above in the discussion of other
performance measures, the Group takes very
limited commodity risk and certain categories
of costs are passed through to customers and,
as such, are reflected in turnover. As a result,
movements from year to year in turnover do not
necessarily have an impact on the financial
condition of the Group.
Cash flows from operating activities
Cash flows from our operations are largely stable
from year to year, although they do depend on
the timing of customer payments and exchange
rate movements. The Group’s gas and electricity
distribution and transmission operations in the
UK and US are subject to multi-year rate
agreements with regulators, which results in
essentially stable cash flows in local currency
terms. However, weather conditions can affect
cash flows in those businesses, with abnormally
mild or extreme weather driving volumes down
or up respectively. In the US, the timing of
recovery of commodity costs can influence the
timing of cash flows between financial years.
Exchange rates
As shown in the summary results table above, adjusted operating profit and operating profit
from our US businesses accounted for some
28% and 24% respectively of Group
undertakings for 2003/04. The functional
currency for our US operations is US dollars,
hence our US results are denominated in US
dollars and translated into sterling at the average
rate of exchange for the year for Group reporting
purposes. Consequently, to the extent that the
US dollar to sterling exchange rate moves from
year to year, the sterling value of US dollar
denominated results will also vary even if the
underlying US dollar values remain the same.
The Financial Review explains in more detail the financial impact of
the movement in average US dollar to sterling
exchange rates between years. In short,
although during the periods under review there
was a significant impact on operating profit and
adjusted operating profit as a result of the
movement in this exchange rate, this was
substantially offset by the impact of the
translation of US dollar denominated interest
and taxation. As a consequence, in comparing
the results of 2003/04 with 2002/03 and
2002/03 with 2001/02, the impact of currency
translation on earnings or adjusted earnings
was not significant.
Acquisitions, disposals and mergers
There were no significant acquisitions, disposals
or mergers during 2003/04.
In October 2002, National Grid merged with
Lattice and National Grid was renamed National
Grid Transco. In accordance with UK GAAP, the
Merger was accounted for using merger
accounting principles such that the results of the
Group under UK GAAP have been presented as
if the Group had been in existence for all of the
financial years presented. The results for all
years are presented on the basis of uniform
accounting policies.
Under US GAAP, the business combination of
National Grid and Lattice was accounted for
as an acquisition in accordance with US GAAP
acquisition accounting principles (‘purchase
accounting’). Under US GAAP, Lattice was
acquired for consideration of £6,598 million
primarily satisfied by the issuance of shares.
This acquisition gave rise to goodwill amounting
to £3,824 million. The US GAAP accounting of
this business combination is described in more
detail in the Financial Review.
The merger of National Grid and Lattice brought
together two companies with substantial UK
interests and has delivered significant integration
savings. The combined Group has significant
balance sheet strength and strong operational
cash flows and allows the Group to take
advantage of future opportunities as they arise.
In January 2002, the Group acquired Niagara
Mohawk for consideration of £2,186 million
comprising the issuance of shares which had a
fair value at the date of acquisition of £1,270
million (based on the share price on the date of
acquisition) and cash of £916 million, including
£45 million relating to the costs of acquisition.
The net assets acquired had a fair value of
£1,294 million resulting in goodwill of £892 million
being recognised and amortised over 20 years.
The acquisition of Niagara Mohawk was a further
step in the Group’s strategy of securing better
returns outside of its UK regulated business.
The existence and size of goodwill recognised as
a result of this transaction reflects management’s
judgement that the returns to be generated from
the investment were sufficient to justify paying in
excess of the fair value attributable to the net
assets of Niagara Mohawk.
In May 2003, we announced our plans to sell
up to four of our UK gas distribution networks
if this maximises value. Since then, plans have
progressed and we are in discussions with a
number of parties, with final bids expected this
summer. The disposal of these businesses is
likely to affect the Group significantly. The actual
impact will depend on the number of networks
sold, if any, the price received and the use of the
proceeds of any sales.
Delivering integration
We continue to develop further integration
opportunities across the businesses to
streamline our operations. In our Transmission
business, we are realising efficiencies in the UK
across our electricity and gas operations and in
the US across our electricity networks, while
we are also sharing best practice between the
UK and the US.
In order to maximise the benefits from the
Merger, a UK business services organisation was
established in Warwick. It provides shared
services such as legal, procurement, finance,
regulatory, information technology and human
resources support to UK Transmission, UK Gas
Distribution and the non-regulated businesses in
the UK, ensuring a more efficient use of
resources.
The information technology service provided to our
UK businesses took an important step forward in
December 2003 when an outsourcing contract
with Computer Sciences Corporation (CSC) for the
management and support of the Group’s UK
information technology infrastructure was agreed.
Under the seven-year outsourcing agreement, CSC
will manage and support National Grid Transco’s
data centres, desktop, telecommunications and
helpdesk activities in the UK.
As a result of this contract, National Grid Transco
will be able to benefit from CSC’s skills,
experience and best practice processes to drive
down costs, to create a more flexible cost base
for adapting to business change, to obtain
continuous service improvements, and to gain
access to technology, innovation and additional
technical capability.
Across our US operations, we launched a new
Enterprise Resource Planning (ERP) system in
May 2004. ERP will address finance and
accounting, supply chain and work management.
Through automation and improved technology,
the system will promote greater consistency in
work practices. It will also improve our ability to
collect and manage data on our operations,
telling us where we are performing well and
where we can improve. In the coming year,
we will merge the remainder of the information
technology systems across our New York and
New England operations.
In another initiative that will use technology to
synchronise our processes, we are planning a
field force automation project for our New York
and New England operations. By putting
computers into the hands of our field workers,
we will be able to distribute work assignments
and monitor their status in real time. This will
help us to optimise productivity and reduce
paperwork while improving customer
satisfaction. As we move forward with this
project, we are building on the lessons learnt
through similar initiatives undertaken across
the Group.
In the US, we successfully reached agreement
with our New England labour force in
May 2003. The four-year labour contract
with the New England field workers includes
new work processes that will provide multiple
benefits: improved employee safety; faster
response to outages; improved productivity; and
lower costs. In March 2004, we also reached a
separate labour agreement in our New England
customer service call centre, delivering equivalent
benefits and improvements there. The contract
with our New York labour force is up for renewal
in September 2004.
Also in the US, the Group made voluntary early
retirement offers to a subset of union employees
and to non-union employees who met certain
criteria based on age and length of service. The
offers were made in areas including transmission,
retail operations (in New England) and corporate
administrative functions such as finance, human
resources, legal and information technology.
Management sets the actual retirement dates for
individuals based on operational needs. The
majority of those who accepted the offers will
retire by 1 November 2004, with the remainder
retiring by 1 January 2008. During 2003/04, we
incurred approximately £70 million of exceptional
costs related to this programme.
|
