Group turnover
Group turnover decreased from £9,400 million
in 2002/03 to £9,033 million in 2003/04, a fall
of £367 million, primarily reflecting a reduction
in turnover relating to discontinued operations
which dropped from £567 million in 2002/03 to
£158 million in 2003/04.
The vast majority of the discontinued turnover
related to EnMO, which provides the on-the-day
commodity market for gas trading in Great
Britain, and was disposed of by the Group
during 2003/04.
Group operating profit
Group total operating profit rose by £126 million
to £1,862 million in 2003/04. This reflected
an increase in adjusted operating profit of
£53 million and a reduction in net operating
exceptional charges of £70 million as compared
with 2002/03. The main reason for the increase
in adjusted operating profit was the strong
performance of UK gas distribution. Under History and development of the business, we explain the improvement in
adjusted operating profit performance for UK
gas distribution and movements for the other
businesses. Net operating exceptional items
included within total operating profit that related
to both continuing and discontinued operations
moved from a net charge of £347 million in
2002/03 to a net charge of £277 million in
2003/04. A separate discussion of operating and
non-operating exceptional items for 2003/04,
2002/03 and 2001/02 is included below.
Joint ventures
On 15 March 2004, National Grid Transco
agreed to sell its 42.5% stake in Citelec, the
holding company of Transener, which owns and
operates a transmission system in Argentina.
National Grid Transco continued to account
for Citelec’s results under hyper-inflationary
accounting principles during 2003/04. The
application of these principles had no material
impact on the results for the year ended
31 March 2004 and Citelec had no impact
on earnings during the year.
Goodwill amortisation
Goodwill amortisation for 2003/04 fell from
£102 million to £99 million. The reduction
reflected the reduced sterling cost of US dollar
denominated goodwill amortisation as a result of
the weakening of the US dollar during 2003/04.
Exceptional items – 2003/04
The results for the year ended 31 March 2004
included total net exceptional pre-tax credits of
£45 million. Pre-tax net credits were made up
of pre-tax net charges of £277 million of
operating exceptional charges (restructuring
and environmental costs) relating to continuing
operations offset by £322 million of non-operating
exceptional credits. The net £45 million
credits comprised:
- restructuring costs which consisted of
£24 million of costs associated with the
proposed disposal of UK-based distribution
networks (see
Network sales for a further
discussion of the proposed disposal) and
other costs of £225 million, totalling
£249 million (£170 million after tax). The other
costs primarily related to planned cost
reduction programmes which comprised:
£100 million for US distribution businesses
and US transmission; £77 million for UK
distribution; £14 million for UK transmission;
and £34 million for other businesses;
- £28 million of environmental costs
(£28 million after tax). Following the
completion of an investigative site survey
in the UK, the estimate of environmental
liabilities was altered to reflect the best
estimate of these liabilities having regard
to relevant legislation. This has resulted in an
additional charge being reflected in the profit
and loss account;
- £226 million gain on assets held for exchange
(£226 million after tax) relating to the profit
recognised on Energis shares, with a carrying
value of £17 million, delivered to Equity Plus
Income Convertible Securities (EPICs)
bondholders on 6 May 2003 in settlement
of all EPICs outstanding at that date that
had a carrying value of £243 million. This
transaction represented the culmination of
a deferred sale arrangement entered into in
February 1999; and
- £96 million gain on sales of property and other
tangible fixed assets (£96 million after tax).
Interest
Net interest fell from £970 million in 2002/03
to £822 million in 2003/04. In 2002/03,
exceptional financing costs relating to a joint
venture of £31 million were incurred. A separate
discussion of exceptional financing costs for
2002/03 is contained in
‘Exceptional items’, when comparing the results for 2002/03 with those of 2001/02.
Net interest, excluding exceptional items, fell
from £939 million in 2002/03 to £822 million in
2003/04. This reduction was primarily explained
by: the refinancing of debt in the UK and US;
lower short-term interest rates; the weaker US
dollar; and a lower level of Group net debt. In
addition, there was a higher level of capitalised
interest as a result of financing costs incurred
in respect of ongoing capital expenditure
programmes and a reduction in interest cost
from former joint ventures. These impacts more
than offset a net increase of £55 million in
pension interest costs (net of capitalised
interest) principally arising from the recognition
of additional net interest from the actuarial
valuation of the Lattice pension scheme
undertaken at 31 March 2003. This is
discussed further under ‘Retirement arrangements’ and ‘Pension accounting’.
Taxation
The net tax charge rose from £245 million in
2002/03 to £261 million in 2003/04. The tax
charge for 2003/04 of £261 million included net
exceptional tax credits amounting to £89 million
(2002/03: £128 million). Excluding the
exceptional tax items and current tax
adjustments for prior years, the effective tax rate
for 2003/04 based on adjusted profit before
taxation was 25.1% (2002/03: 29.9%) compared
with the standard corporation tax rate in the UK
of 30%. The effective tax rate for 2003/04 based
on profit before taxation after exceptional items
was 19.1% (2002/03: 36.7%).
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
The Group has used the weighted average
exchange rate to translate all US dollar results
into sterling for 2003/04 and 2002/03, being
£1.00 = $1.68 and £1.00 = $1.59 for each year
respectively. The balance sheets at 31 March
2004 and 31 March 2003 have been translated
at £1.00 = $1.83 and £1.00 = $1.58 respectively.
Exchange rate movements had an adverse effect
on the translation of US dollar denominated
operating profit and adjusted operating profit for
2003/04 compared with 2002/03. If the rate that
applied during 2002/03 had been used, sterling
operating profit and adjusted operating profit for
2003/04 would have been higher by around
£24 million and £36 million respectively, giving a
sterling operating profit and adjusted operating
profit of approximately £1,886 million and
£2,274 million respectively.
The effect of movements in the US dollar
exchange rate on adjusted operating profit and
operating profit was 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.
Retirement arrangements
The Group operates two major UK occupational
pension schemes – the National Grid Company
Group of the Electricity Supply Pension Scheme
(the National Grid Scheme) and the Lattice
Group Pension Scheme (the Lattice Scheme).
The National Grid Scheme is a defined benefit
pension scheme. The Lattice Scheme has a
defined benefit section that is effectively closed
to new entrants and a defined contribution
section. There are no current plans to merge
the two schemes.
In addition to the UK schemes, employees of
National Grid USA companies are eligible to
receive retirement income benefits primarily
through defined benefit arrangements.
Post-retirement healthcare and life insurance
benefits are also provided to qualifying retirees.
An actuarial valuation of the Lattice Scheme was
carried out at 31 March 2003, while the National
Grid Scheme actuarial valuation is being carried
out at 31 March 2004 and has not yet been
completed.
In respect of the US-based pension and other
post-retirement schemes, the latest full actuarial
valuations were carried out at 1 April 2003. These
valuations were updated using assumptions and
market values at 31 March 2004.
In August 2003, the New York State Public
Service Commission approved a settlement with
Niagara Mohawk, a Group undertaking, following
an audit that identified reconciliation issues
between the rate allowance and actual costs
of Niagara Mohawk’s pension and other
post-retirement benefits. The settlement resolved
all issues associated with those obligations for
the period prior to its acquisition by the Group
and, among other things, covered the funding of
Niagara Mohawk’s pension and post-retirement
benefit plans. As part of the settlement, the
Group provided $132 million (£83 million) of
tax-deductible funding during 2002/03 and
provided an additional $177 million (£105 million),
on a tax-deductible basis, during 2003/04.
Under the terms of the settlement, the Group
will earn a rate of return of at least 6.60%
(nominal) on $209 million of this funding through
to 31 December 2011. In addition, the Group is
eligible to earn 80% of the amount by which the
rate of return on the pension and post-retirement
benefit funds exceeds 5.34% (nominal)
measured at 31 December 2011.
In addition to the funding provided in respect
of the Niagara Mohawk settlement referred to
above, other contributions made in respect of
US-based pension and other post-retirement
schemes were higher in 2003/04 than 2002/03.
This arose primarily because the Group was
able to make more efficient tax-deductible
funding payments in 2003/04 than were
possible in 2002/03, together with higher
contributions in 2003/04 associated with the
Group’s early retirement programmes.
The actuarial valuation of the Lattice Scheme at
31 March 2003, covering current and former UK
gas employees and other former Lattice
businesses, was completed during the year
ended 31 March 2004. This revealed that the
pre-tax deficit was £879 million (£615 million net
of tax) in the defined benefit section on the basis
of the funding assumptions adopted by the
actuary. It is intended that there will be annual
assessments of the Lattice Scheme with the
next assessment being conducted at 31 March
2004. This assessment is in the process of
being carried out and therefore the outcome is
currently unknown.
It has been agreed that no funding of the deficit
identified in the 2003 actuarial valuation will need
to be provided to the scheme until the outcome
of the actuarial valuation at 31 March 2007 is
known. At this point, the Group will pay the
gross amount of any deficit up to a maximum
amount of £520 million (£364 million net of tax)
into the scheme. Until the 31 March 2007
actuarial valuation has been completed, the
Group has arranged for banks to provide the
trustees of the Lattice Scheme with letters of
credit. The main conditions under which these
letters of credit could be drawn relate to events
which would imperil the interests of the scheme,
such as Transco plc, a Group undertaking,
becoming insolvent or the Group failing to make
agreed payments into the fund. Cash
contributions for the ongoing cost of the Lattice
Scheme are currently being made at a rate of
22.3% of pensionable payroll.
Pension accounting
The Group continues to account for pensions
under UK GAAP in accordance with Statement
of Standard Accounting Practice 24 (SSAP 24)
and, consistent with that statement, the Group
had been spreading pension surpluses and
deficits over the remaining service lives of
employees based on the information contained
in the last formal actuarial valuations.
As referred to under
‘Pension accounting’
, during 2002/03, the Group made a
decision to suspend the recognition of any
further pension surplus during 2002/03 in
respect of the UK pension schemes.
During 2003/04, the actuarial funding and
SSAP 24 valuations of the Lattice Scheme
undertaken at 31 March 2003 were completed.
The charge for 2003/04 under SSAP 24 in
respect of this scheme amounted to £144 million
compared with £78 million for 2002/03. Of this
charge, £80 million related to the ongoing cost
(2002/03: £97 million), £33 million related to the
spreading of the deficit (2002/03: £19 million
credit), and £31 million related to the net interest
charge (2002/03: £8 million credit). The ongoing
SSAP 24 cost represents 23.0% (21.4%
excluding administrative costs) of pensionable
payroll.
As the 31 March 2004 actuarial valuation of the
National Grid Scheme has not been completed,
there has been no further amortisation in
2003/04 of any surplus arising from the previous
formal actuarial valuation undertaken at
31 March 2001. This is consistent with the
approach adopted during 2002/03.
The Group does not account for pension costs
under Financial Reporting Standard (FRS) 17
‘Retirement benefits’, but provides the necessary
disclosures required by this standard.
Substantially as a result of the improvement in
world stock markets, the Group’s net FRS 17
deficit fell from £2,262 million at 31 March 2003
to £1,563 million at 31 March 2004.
Further disclosures relating to pensions
consistent with the requirements of UK GAAP
are given in note 7 to the accounts.
Earnings per share
Adjusted basic earnings per share for 2003/04
were 34.7 pence compared with 28.3 pence for
2002/03. Basic earnings per share for 2003/04
rose from 12.7 pence in 2002/03 to earnings of
35.8 pence per share, reflecting a movement
from net exceptional charges in 2002/03 to net
exceptional credits in 2003/04 and an increase
in adjusted operating profit.
The reconciliation from basic earnings per share
of 35.8 pence (2002/03: 12.7 pence)
to adjusted earnings per share of 34.7 pence
(2002/03: 28.3 pence) involves adjusting for
goodwill amortisation of 3.2 pence (2002/03:
3.3 pence) and net exceptional credits, including
the effect of tax, amounting to 4.3 pence
(2002/03: 12.3 pence (net exceptional charges)).
Ordinary dividends
The total ordinary dividend for 2003/04
(£609 million) amounted to 19.78 pence per
ordinary share and represented an increase of
15% over the previous year’s ordinary dividend
per share. The total ordinary dividend per share
was covered 1.8 times by both adjusted and
basic earnings per ordinary share. The table
below shows the ordinary dividends paid or
payable by National Grid Transco or National
Grid, as appropriate (see ‘Dividend policy’
below), for the last five financial years. These
dividends do not include any associated UK tax
credit in respect of such dividends.
Dividends expressed in US dollars per ADS in
the table below reflect the actual amount paid to
ADS holders, expressed to two decimal places,
with respect to all amounts with the exception of
the final ordinary dividend for 2003/04. The final
ordinary dividend per ADS for 2003/04 reflects
the declared US dollar amount expressed to two
decimal places.
Dividend policy
As announced on 20 November 2003, the
Board has recommended a 15% increase in its
dividend per share for the year ended 31 March
2004. Going forward, the Board has declared its
dividend policy is to aim to increase dividends
per ordinary share, expressed in sterling, by 7%
nominal in each financial year to 31 March 2008.
Prior to the announcement on 20 November
2003, the Group had adopted at the date of the
merger of National Grid and Lattice, National
Grid’s dividend policy, which had been to aim to
increase dividends per share (as expressed in
pounds sterling) by a real rate of 5% in each of
the financial years to 31 March 2006.
Reporting the Lattice dividend history is
complicated by the fact that Lattice only
demerged from BG Group from 23 October
2000 and therefore only paid dividends in
respect of periods after that date. In addition,
prior to 31 March 2002, Lattice had a 31
December financial year end. As a consequence,
any historical comparison of dividends paid or
payable by National Grid Transco in 2002/03
should be made by reference to National Grid’s
dividends, which is the basis upon which the
table below is presented.
| Dividends | 2003/04 | 2002/03 | 2001/02 | 2000/01 | 1999/00
| | p | p | p | p | p
|  |
| Interim | 7.91 |
6.86 | 6.46 | 6.05 | 5.59
| | Final |
11.87 |
10.34 | 9.58 | 9.03 | 8.35
| |
|
| Total ordinary dividends |
19.78 |
17.20 |
16.04 | 15.08 | 13.94
| |
| | US dollar per ADS | 2003/04 | 2002/03 | 2001/02 | 2000/01 | 1999/00
| | $ |
$ |
$ |
$ |
$ |
|
| Interim | 0.67 | 0.54 | 0.47 | 0.45 | 0.46
| | Final |
1.05 |
0.84 | 0.73 | 0.65 | 0.63
| |
|
| Total ordinary dividends |
1.72 |
1.38 |
1.20 |
1.10 |
1.09 |
|
Application of UK GAAP accounting policies
As explained above, the application of UK GAAP
to the business combination of Lattice and
National Grid resulted in the transaction being
treated as a merger. As a result, the financial
information presented for all years has been
prepared on the basis of common accounting
policies as if the Group had always applied those
accounting policies.
The Group has adopted the provisions of Urgent
Issues Task Force (UITF) 38 ‘Accounting for ESOP
trusts’ during 2003/04. This pronouncement
requires the following accounting:
- Shares held by employee share trusts,
previously reported as part of ‘Fixed asset
investments – own shares’, are now reported
as a deduction from shareholders’ funds at
the amount paid for those shares. This has
resulted in the recognition of a prior year
adjustment and corresponding restatement
of prior years’ accounts. The net impact of
this restatement was to reduce ‘Fixed asset
investments – own shares’ and equity
shareholders’ funds at 31 March 2003 by
£39 million. There was no impact on the
profit and loss account.
On 8 April 2004, the Accounting Standards
Board issued FRS 20 ‘Share based payment’. It
is the intention of the Group to adopt the
provisions of FRS 20 with effect from 1 April
2004. The standard requires the following
accounting:
- Where shares or rights to shares are granted
to third parties, including employees, a charge
should be recognised in the profit and loss
account based on the fair value of the shares
at the date the grant of shares or right to
shares is made. If this accounting policy had
been adopted for this report and accounts,
it is estimated that in respect of 2003/04,
2002/03 and 2001/02 adjusted operating
profit would have been reduced by £25 million,
£37 million and £18 million respectively and
that adjusted basic earnings per share would
have been reduced by 0.8 pence, 1.2 pence
and 0.6 pence. Operating profit for these years
would have been reduced by £25 million,
£40 million and £18 million and basic earnings
per share would have been reduced by
0.8 pence, 1.3 pence and 0.6 pence.
|
