Group turnover
Group turnover for 2002/03 increased by
£1,846 million over 2001/02 to £9,400 million,
reflecting a full year’s turnover being recorded
respect of Niagara Mohawk, which was acquired
by the Group on 31 January 2002. Therefore
this only affected the results of 2001/02 for two
months while impacting on the results for
2002/03 for the full year.
Group operating profit
Group total operating profit rose by
£1,377 million to £1,736 million in 2002/03,
primarily reflecting a movement in total
operating exceptional net charges relating to
both continuing and discontinued operations,
which fell from £1,327 million in 2001/02 to
£347 million in 2002/03.
Niagara Mohawk contributed £83 million to
adjusted operating profit and £2 million to
operating profit in 2001/02 for the period from
the date of acquisition to 31 March 2002.
A separate discussion of exceptional items
relating to 2002/03 and 2001/02 is given below.
Group total adjusted operating profit rose by
£402 million to £2,185 million, primarily reflecting
increased adjusted operating profit from US
electricity transmission and US electricity
distribution which reported a full year’s
contribution from the acquisition of Niagara
Mohawk. As a result, the contribution of US
electricity transmission and US electricity
distribution rose from £353 million in 2001/02
to £641 million in 2002/03, an increase of
£288 million, accounting for 72% of the total
increase.
Total operating profit from Group undertakings
included losses of £194 million relating to
discontinued operations compared with
£496 million for 2001/02, as a result of the sale
of, or exit by the Group from, certain business
activities during the year. The principal
businesses exited during 2002/03 included The
Leasing Group and 186k, a UK-based fibre optic
telecommunications company.
Group operating profit also included a profit
of £109 million compared with losses of
£672 million in 2001/02 relating to the
discontinued activities of joint ventures and
the associate. A discussion of the impact the
activities of discontinued joint ventures and the
associate have had on the results is given below.
Joint ventures and associate
On 16 July 2002, Energis plc (‘Energis’) went
into administration. As a direct result of this
event, Energis ceased to be an associate of the
Group from that date. The results for 2002/03
were not affected by this change in status,
because the Group’s investment in Energis had
been fully written down during 2001/02 and
Energis had not publicly declared any results
since reporting its results for the six months
ended 30 September 2001.
The Group ceased equity accounting for Intelig,
its Brazilian telecoms joint venture, with effect
from 30 September 2002. This arose as a result
of the Group’s share of net assets falling to zero
and the Group declaring its intention not to fund
this business any further while pursuing a
withdrawal strategy.
During 2002/03, the Group’s interests in Energis
Polska, Manquehue net and Silica Networks
were disposed of or, in the case of Energis
Polska, the interest reduced to a level where the
Group had no significant influence on the
activities of this business. As a result, these
entities are no longer equity accounted for, and
any loss arising from the disposal or reduction in
interest has been reflected in exceptional items.
As explained in ‘Exceptional items – 2002/03’, the total operating profit for 2002/03 of
joint ventures (discontinued operations) included
an exceptional pre-tax credit amounting to
£129 million. The £129 million credit represented
the partial release of impairment provisions
charged in the year ended 31 March 2002 to
match the recognition of retained losses arising
from these joint ventures, and is recorded within
the net £109 million credit relating to the Group’s
‘share of joint ventures’ and associate’s
operating profit/(loss) – discontinued operations’.
The retained losses of the joint ventures against
which the provisions were being released were
reflected in the profit and loss account according
to their nature, for example: share of operating
loss; share of net interest; and share of tax.
However, the principal element was an
exceptional net interest charge of £92 million
(before and after tax) relating to the Group’s
share of exchange losses incurred on foreign
exchange borrowings denominated in US dollars
reported by Intelig.
Operating losses of £672 million recorded in
2001/02 in respect of the discontinued activities
of share of joint ventures’ and associate’s
operating profit/(loss) reflect the very significant
level of impairment charges incurred during
that year.
Operating results for all the above associate and
joint ventures have been reflected in the accounts
within ‘share of joint ventures’ and associate’s
operating profit/(loss) – discontinued operations’.
Goodwill amortisation
Goodwill amortisation for 2002/03 rose from
£97 million to £102 million. This increase
reflected a full year’s amortisation of goodwill
relating to the prior year’s acquisition of Niagara
Mohawk, partially offset by the following:
- no recognition of the Group’s share of
goodwill amortisation in 2002/03 in respect
of Energis; and
- the reduced sterling cost of US dollar
denominated goodwill amortisation as a result
of the weakening of the US dollar.
Exceptional items – 2002/03
The results for 2002/03 included total net
exceptional pre-tax charges of £477 million
(£349 million post-tax). Pre-tax charges were
made up of pre-tax net charges of £308 million
and £39 million of operating exceptional items
relating to continuing and discontinued operations
respectively; £99 million of non-operating
exceptional items; and £31 million of financing
exceptional charges. In addition, the Group
recorded £28 million of exceptional minority
interest charge. These net charges comprised:
- costs arising from the Merger of £184 million
(£147 million after tax) related to transaction
costs of the Merger, together with related
employee share scheme costs amounting to
£79 million and other property and employee
costs of £105 million;
- restructuring costs principally arising from
business-related efficiency programmes of
£209 million (£165 million after tax). These
costs were mainly severance-related;
- an impairment charge related to the Group’s
telecoms assets held by 186k of £168 million
(£143 million after tax). The Group wrote
down the assets of 186k consistent with its
announced intention to withdraw from the
altnet sector. Subsequent to the impairment
charge, the majority of the assets relating to
186k were sold for a nominal sum to a third
party;
- a £135 million credit (£155 million after tax)
in respect of Intelig and other telecoms joint
ventures of which £129 million was reflected
in ‘share of joint ventures’ and associate’s
operating profit/(loss) – discontinued
operations’ – see
‘Joint ventures and associate’;
- an exceptional net interest loss of £31 million
(before and after tax). This related to the
Group’s share of exchange losses incurred on
foreign exchange borrowings of £98 million
(£92 million of which related to Intelig as
referred to in
‘Joint ventures and associate’) partially offset by a gain on net
monetary liabilities of £67 million as a result of
the adoption of hyper-inflationary accounting,
under UK GAAP, relating to Citelec, the Group’s
Argentinian joint venture – see
‘Exchange rates and hyper-inflation’;
- a £28 million minority interest charge, being
their share of the £61 million net exceptional
credit related to the Argentinian joint venture
(Citelec) – see
‘Exchange rates and hyper-inflation’;
- a £68 million loss (before and after tax) arising
from the sale of the Group’s leasing business,
The Leasing Group, and the termination of
186k’s operations following the sale of 186k’s
assets for a nominal amount to a third party
as referred to above; and
- a net profit on the disposal of tangible fixed
assets of £48 million (£50 million after tax).
Exceptional items – 2001/02
The results for 2001/02 included net exceptional
pre-tax losses of £1,313 million (£1,147 million
post-tax).
Pre-tax net exceptional charges were made up of £285 million and £1,042 million of operating exceptional items relating to continuing and discontinued operations respectively and £142 million of financing exceptional charges, partially offset by non-operating exceptional credits of £156 million. In addition, the Group recorded £50 million of exceptional minority interest credit. The net charges comprised:
- £792 million impairment of the Group’s joint
venture and associate investments
(£775 million after tax) primarily arising from
the decision to exit from its Latin American
telecoms investments and the full impairment
of the investment in Energis, following the
collapse in the associate’s share price. The
impairment charges resulted in writing down
the value of these investments to £nil and the
recording of associated liabilities;
- £250 million impairment of assets in 186k
(£175 million after tax). The basis of this
charge was to write down these assets to
their estimated recoverable amounts;
- the Group’s share of the pre- and post-tax
exceptional charge of a telecoms joint venture
(SST) amounting to £48 million, reflecting the
write down of an investment and goodwill in
that joint venture, prior to the acquisition of all
the issued ordinary share capital of this entity
by the Group;
- an impairment of the Group’s LNG storage
assets of £50 million (£35 million after tax),
reflecting a reduction in the expected future
cash flows under the current regulatory
arrangements;
- restructuring and integration costs within the
UK businesses and the integration of Niagara
Mohawk, which amounted to £187 million
(£130 million after tax); and
- the Group’s share of Citelec’s foreign
exchange pre- and post-tax financing charge
which amounted to £142 million relating to
the devaluation of the Argentine peso.
These exceptional losses were partially offset by:
- pre-tax profits amounting to £94 million
(£96 million after tax) relating to the sale of
tangible fixed assets;
- a £31 million pre- and post-tax gain on the
sale of BG Group shares by the Lattice ‘All
Employee Share Ownership Plan’;
- an exceptional pre- and post-tax profit of
£31 million relating to the gain on disposal
of investments; and
- a credit of £50 million relating to the Group’s
share of the minority interest’s share of the
foreign exchange financing charge referred
to above.
Interest
Net interest rose from £799 million in 2001/02
to £970 million in 2002/03. Both years included
exceptional financing costs amounting to
£142 million and £31 million in 2001/02 and
2002/03 respectively. A separate discussion
of exceptional financing costs is contained in
‘Exceptional items – 2002/03’ and ‘Exceptional
items – 2001/02’ as shown above.
Net interest, excluding exceptional items, rose
from £657 million in 2001/02 to £939 million for
2002/03. This increase is explained by a full
year’s interest charge in respect of the
acquisition of Niagara Mohawk and foreign
exchange movements.
Taxation
The net tax charge rose to £245 million in
2002/03 from £85 million in 2001/02 and
included an exceptional tax credit on pre-tax
exceptional items amounting to £128 million
and £166 million in 2002/03 and 2001/02
respectively, giving rise to effective tax rates of
36.7% and 29.9% (negative) for these years.
Excluding the exceptional tax items and current
tax adjustments to prior years, the effective tax
rate for 2002/03 and 2001/02 based on
adjusted profit before taxation was 29.9% and
29.0% respectively, compared with the standard
corporation tax rate in the UK of 30% for both
years. The effective tax rate for 2002/03 and
2001/02 based on profit before taxation and
before exceptional items was 32.6% and
24.4% respectively.
A reconciliation of the main components giving
rise to the difference between the relevant
effective tax rate and the UK standard
corporation tax rate is shown in note 9 to the
accounts.
Exchange rates and hyper-inflation
The Group has used the weighted average
exchange rate to translate all US dollar results
into sterling for 2002/03 and 2001/02, being
£1.00 = $1.59 and £1.00 = $1.44 respectively.
Exchange rate movements had an adverse effect
on the translation of US dollar denominated
operating profit and adjusted operating profit for
2002/03 compared with 2001/02. If the
exchange rate that applied during 2001/02 had
been used, sterling operating profit and adjusted
operating profit for 2002/03 would have been
higher by around £57 million and £74 million
respectively, giving a sterling operating and
adjusted operating profit of approximately
£1,793 million and £2,259 million.
The above analysis does not take into account
the fact that Niagara Mohawk only impacted on
Group results for two months in 2001/02. On the
basis of excluding 10 months’ results relating to
Niagara Mohawk from the 2002/03 results, to
place them on a basis comparable with
2001/02, it is estimated that on this pro forma
basis adjusted operating profit would have been
higher by around £34 million.
The effect of exchange rate movements on
adjusted operating profit and operating profit
were largely offset by the reduced sterling cost
of US dollar debt taken out to finance US dollar
denominated investments and the reduced
sterling cost of US taxes. As a result, the
impact of the higher US dollar rate on results
arising in the US did not have a significant
effect on adjusted earnings per share or
earnings per share.
Exchange rate movements only marginally
affected the Group’s recognition of operating
losses that arose in respect of Intelig, the Group’s
Brazilian telecoms joint venture, during 2002/03.
This reflected sterling strengthening against the
Brazilian currency during the period that the
Group equity accounted for Intelig – see
‘Joint ventures and associate’. The Group
estimated that, compared with the average
exchange rate for 2001/02, this effect reduced
our share of operating losses by around
£2 million.
The Group’s joint venture in Argentina, Citelec,
operated within a hyper-inflationary economy. In
accordance with UK GAAP, the accounts of the
joint venture, which included Transener, a
transmission company, were prepared using
hyper-inflationary accounting principles. This
resulted in all entries in the joint venture’s
accounts being measured at the current
purchasing price.
The fall in the Argentinian exchange rate gave
rise to the recognition of the Group’s share of
exchange losses arising on this joint venture’s
US dollar denominated debt, that amounted to
£6 million. This loss was more than offset by the
Group’s share of a gain on net monetary liabilities
of £67 million, as a result of inflating the liabilities
as part of the hyper-inflationary adjustments
referred to above. Together with the minority
interest’s share of these items, all these effects
were reflected as exceptional in the profit and
loss account.
Pension accounting
During 2002/03, while valuations of the UK
pension schemes had not been carried out, the
Board considered that such valuations would,
in all likelihood, reveal a deficit in both the UK
schemes. The continuing recognition of a surplus
relating to previous actuarial valuations was
considered incompatible with this position,
and until the next actuarial valuations were
undertaken or completed, the decision was
taken to suspend the recognition of any further
pension surplus in respect of both schemes.
Consequently, with effect from 1 October 2002,
the spreading of pension surpluses in respect of
the UK defined benefit schemes, based on their
last formal actuarial valuations at 31 March 2001,
was suspended.
Operating profit and net interest in 2001/02
included £21 million and £12 million credits
respectively in respect of the recognition of the
UK pension schemes’ surplus up to
30 September 2002, and totalled £33 million
(£23 million net of tax). As a result of the
suspension of the recognition of any further
pension surplus since that date, adjusted
operating profit and net interest were reduced
and increased by £21 million and £10 million
respectively compared with the ongoing
recognition of a surplus. Accordingly, adjusted
profit before tax was reduced by around
£31 million (£22 million net of tax).
Earnings per share
Adjusted basic earnings per share for 2002/03
were 28.3 pence compared with 30.8 pence for
2001/02. Basic earnings per share for 2002/03
rose from a loss per share of 11.3 pence in
2001/02 to earnings of 12.7 pence per share,
reflecting a reduction in net exceptional charges
between the two years. The reconciliation from
basic earnings per share of 12.7 pence (2001/02:
loss of 11.3 pence) to adjusted earnings per
share of 28.3 pence (2001/02: 30.8 pence)
involved adjusting for goodwill amortisation of
3.3 pence (2001/02: 3.4 pence) and net
exceptional charges, including the effect of tax,
amounting to 12.3 pence (2001/02: 38.7 pence).
Ordinary dividends
The total ordinary dividend for 2002/03
(£530 million) amounted to 17.20 pence per
ordinary share. This represented an increase of
7.2% (5% in real terms) over the previous year’s
National Grid ordinary dividend per share, as this
was the most appropriate dividend comparison
for the reason explained in ‘Dividend policy’.
The total ordinary dividend per share
was covered 1.6 times by adjusted earnings per
ordinary share and 0.7 times by basic earnings
per ordinary share.
|
