SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
| (Mark One) | |
 | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| or | |
 | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| or | |
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 1-14826
TRANSCO PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
1-3 Strand, London WC2N 5EH, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act
| Title of each class | Name of each exchange on which registered |
| 6.625% Guaranteed Notes due 2018 | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
6.625% Guaranteed Notes due 2018
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
3,944,133,594 Ordinary Shares of 12/15 pence each
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:
Yes No
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 Item 18
Financial highlights
Group turnover £3,037m | Operating profit £936m Adjusted* £790m Basic * Excludes impact of exceptional items | Net cash inflow from operating activities £1,454m Adjusted* £1,319m Basic * Excludes impact of exceptional items |
| Cautionary statement This document 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 United States Securities Act of 1933, as amended, and Section 21E of the United States 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 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 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 document include the ability to integrate Transco plc successfully within National Grid Transco or to realise synergies from such integration or the failure to retain key management, unseasonal weather impacting on demand for gas, the timing of amendments in prices to shippers in the UK gas market, the performance of the Lattice Group Pension | Scheme, of which the substantial majority of Transco’s employees are members, and the regulatory treatment of pension costs. For a more detailed description of these assumptions, risks and uncertainties, together with any other risk factors please see Transco’s filings with the United States Securities and Exchange Commission (and in particular the ‘Risk Factors’ and ‘Operating and Financial Review’ sections of this document). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. 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 publication of this document. |
 | Chairman’s Statement | ||||
Merger of National Grid and Lattice | It is against this background that we deeply regret that three members of the public died as a result of gas explosions associated with Transco’s operations during the year. Whenever such events occur it is important to understand the reasons and therefore we always cooperate fully with the relevant authorities in their investigations and apply any lessons to be learned as soon as possible. | Transco people Outlook Roger Urwin Chairman | |||
Business Review
Introduction
Overview of Transco
Transco is a part of National Grid Transco, an international energy delivery business.
Transco owns, operates and develops Britain’s natural gas transmission and distribution systems, which deliver gas to around 21 million consumers.
Our business is organised into three segments:
| • | UK gas distribution, which comprises Transco’s local transmission and distribution pipeline business in Britain and is organised into eight regional Networks; |
| • | UK gas transmission, which operates the national transmission system (NTS) and which is managed jointly with National Grid Transco’s electricity transmission activities; and |
| • | other activities, which mainly comprises Transco’s regulated gas metering activities. |
History and development of the business
In October 2002, National Grid Group plc merged with Lattice Group plc and was renamed National Grid Transco plc. Lattice was one of the three successor companies to what was formerly British Gas plc. Its principal business was Transco, the owner and operator of the substantial majority of Britain’s gas transportation system.
The UK gas industry was nationalised in 1948 and the British Gas Corporation was established in 1973. British Gas was incorporated as a public limited company in April 1986 and the Government sold substantially all of its shareholding in it to the public in December 1986. In 1997, Centrica, which was then primarily a supplier of gas to end users, was demerged from British Gas which was renamed BG. BG retained the gas transportation and storage businesses, the majority of the exploration and production as well as the international downstream and a number of smaller businesses. In December 1999, BG completed a financial and restructuring programme which resulted in the creation of a new parent company, BG Group, and involved separating its UK regulated business, Transco, from its other businesses. This created a ‘ring-fence’ around Transco designed to ensure its financial, organisational and managerial independence. In October 2000, Lattice was demerged from BG Group and comprised Transco, together with start-up telecommunications and non-regulated infrastructure services businesses.
Restructuring programme
Prior to the Merger, Transco was in the midst of a restructuring programme designed to meet and, where possible, outperform the regulatory targets set by Ofgem.
Transco embarked on this extensive restructuring programme following settlement of its price control review which took effect in April 2002. Since then, controllable costs have been reduced by 6.3% in real terms and Transco has delivered on its initial target of reducing the monthly profile of operating expenditure down to the corresponding regulatory target by March 2003.
UK gas distribution
Background information
Our UK gas distribution business comprises the majority of Britain’s gas distribution system. The gas distribution system is organised into eight regional Networks and consists of approximately 172,000 miles of high pressure local transmission and lower pressure distribution pipelines. Gas is transported on behalf of approximately 70 active gas ‘shippers’ from the NTS to around 21 million consumers and also to third party pipeline systems. As well as gas transportation, Transco is responsible for the safety, development and maintenance of the transportation system and operates the national gas emergency service.
Regulation
Transco is the holder of a gas transporter licence for England, Wales and Scotland, in respect of its gas distribution, transmission and metering businesses. From 1 April 2002, the UK gas distribution business became subject to a separate five-year price control formula, which is expected to last until March 2007. The formula takes into account, amongst other factors, operating expenditure, replacement expenditure, capital expenditure, cost of capital at a real pre-tax rate of 6.25% and transportation volumes. The price control is structured so that 65% of revenue is fixed and 35% varies with volumes. In addition, pass-through is given in respect of some of the formula rates the Group is liable for and Ofgem’s licence fees. We are currently working with Ofgem on disaggregating the control into a separate control for each Network.
In setting the price control, replacement expenditure costs were divided 50:50 between regulatory capital and regulatory operating expenditure. This ensures that the cost of the iron mains replacement programme does not fall wholly on today’s customers, but is shared with future customers who will also stand to benefit from the further improvements in safety and operational integrity. The regulatory
treatment of replacement expenditure contrasts with the accounting treatment where all such costs are expensed (see critical accounting policies – replacement expenditure on page 13.)
The distribution mains replacement incentive scheme provides that if Transco outperforms cost targets then it keeps 33% of the savings as additional allowed revenues, but if it under-performs, it may recover only 50% of its additional expenditure through additional allowed revenues. In 2002/03, Transco generated an estimated additional £15 million of allowed revenues through outperformance of the cost target.
Financial performance
UK gas distribution turnover for the year ended 31 March 2003 was £2,089 million, compared with £2,013 million in 2001/02 and £2,070 million in 2000/01.
UK gas distribution adjusted operating profit for 2002/03 was £554 million, compared with £548 million in 2001/02 and £663 million in 2000/01.
The £6 million increase in adjusted operating profit compared with 2001/02 was mainly a result of the following:
| • | colder weather that increased turnover by £10 million; |
| • | a £26 million reduction in controllable operating costs; and |
| • | an offsetting £37 million increase in replacement expenditure with the commencement of the long term programme to replace all iron distribution mains within 30 metres of a building (see critical accounting policies – replacement expenditure on page 13). |
Principal factors behind the £115 million decrease in adjusted operating profit comparing 2001/02 to 2000/01 were:
| • | warmer weather that reduced turnover by £78 million; |
| • | a £92 million increase in replacement expenditure; and |
| • | an offsetting £50 million provision for shipper related liabilities in 2000/01. |
Operating performance
Gas throughput was 708 TWh in 2002/03 compared to 697 TWh in 2001/02 and 733 TWh in 2000/01. If the weather had corresponded to seasonal normal temperatures, it is estimated that gas throughput would have been 730 TWh in 2002/03 compared to 727 TWh in 2001/02 and 726 TWh in 2000/01.
This Business Review should be read in conjunction with the Operating and Financial review on pages 8 to 15. Adjusted operating profit excludes the impact of exceptional items.
 | Business Review continued | ||||
While there has been underlying growth of 2.0% in demand from domestic users (2001/02 1.0% demand growth), 2002/03 saw a 1.6% reduction in underlying demand from business and other large users (2001/02 1.0% reduction). This is attributed to higher relative gas prices compared to competing fuels and to the recession in manufacturing. The Quarterback system, which provides mobile workforce technology to field operations in the eight Networks, is on schedule for roll-out in late summer. Cumulatively to 31 March 2003, £20 million had been spent on this system. In addition, we have implemented in-vehicle technology (VeSAS) to manage the performance and utilisation of our large vehicle fleet and we are undertaking further improvement of our supply chain deliveries by reducing and rationalising our logistics network. Investment in the network Transco has successfully completed its programme to replace certain medium pressure ductile iron mains and has now commenced the long term programme, agreed with the HSE in 2001, to replace all metallic mains within 30 metres of buildings. This amounts to a potential 57,000 miles of mains. Ofgem has allowed £1.5 billion (in 2000 prices) of investment in the UK gas distribution price control, covering the first five years of the programme. Fixed assets | UK gas transmission The UK gas transmission business comprises two separately regulated businesses: NTS Transmission Owner and NTS System Operator. The NTS Transmission Owner (NTS TO) activity involves the ownership and maintenance of the physical assets, developing the system to accommodate growth and changes in gas loads and managing a programme of investment to ensure the long-term reliability of the system. The NTS System Operator (NTS SO) undertakes a range of activities necessary for the successful delivery in real time of secure, reliable and efficient energy and the balancing of supply and demand. The NTS SO is subject to a number of two-year regulatory incentive schemes. In February 2003, the UK Government published a White Paper outlining its proposals for future energy policy. This highlights four goals in terms of reducing carbon emissions, maintaining reliability and security of energy supplies, continuing to promote a market-based framework for the energy sector and ensuring affordable warmth for consumers. Gas is acknowledged as continuing to form a large part of the energy mix beyond 2020, and the Government has set an aspirational target of 20% renewables by 2020, as well as aiming for significant increases in energy efficiency. The White Paper recognises the importance of robust and flexible infrastructure for the transmission and distribution of both gas and electricity to realise the Government’s policy objectives. In the case of gas, the NTS will need to adapt to the growing proportion of gas imports from a variety of landing points and LNG sources. It will further need to do so in a time-scale which will accommodate new patterns of gas transmission in Continental Europe and the UK. Under the proposed European Directives on electricity and gas liberalisation, July 2004 has been set as the deadline for the introduction of full competition in the industrial and commercial sectors of Europe’s gas and electricity markets; and | July 2007, as the deadline for full domestic competition. Another draft Directive proposes common standards relating to the security of gas supplies and coordination of emergency arrangements in the event of a supply shock. Work on contingency planning in the event of such incidents in the UK has already taken place. Regulation The NTS SO price control includes a series of incentive arrangements such that if performance exceeds the targets set in the Licence, Transco retains a share of the benefits, and vice versa. The incentives primarily cover the costs of managing capacity constraints, the costs of purchasing shrinkage gas and Transco’s own operating costs. Investment incentives are also included in the Licence and are expected to increase in significance over time. Financial performance UK gas transmission adjusted operating profit for 2002/03 was £274 million, compared with £238 million in 2001/02 and £227 million in 2000/01. The £36 million increase in adjusted operating profit in 2002/03 was mainly a result of higher income from system entry capacity auctions. The £11 million increase in adjusted operating profit comparing 2001/02 to 2000/01 was largely due to higher income from system entry capacity auctions partly offset by an increase in the price of gas used in operating the system. Operating performance | |||
There has been an increase in 2002/03 of more than 17% in the mean time between compressor failures, building on the 27% increase achieved in 2001/02. We have also reduced by a third the time compressors are taken out of service by improving the efficiency with which maintenance is carried out or enhancements made.
Investment in the network
Capital investment on the reinforcement and extension of the NTS in 2002/03 was £182 million, compared with £239 million in 2001/02 and £228 million in 2000/01.
Fixed assets
The NTS comprises approximately 4,100 miles of steel pipeline. Transco’s interest in these pipelines is legally protected, although the legal protection is slightly different in Scotland from that in England and Wales.
In England and Wales, Transco’s interest is legally protected by both private easements entered into with third party landowners, and by statutory rights. 99% of all associated sites are owned outright via a freehold purchase process, with the remainder covered by long-term leasing arrangements.
In Scotland, Transco’s interest is protected by deeds of servitude as well as statutory rights. 95% of all associated sites are owned outright through a disposition purchase process. The remaining sites are owned through a feudal disposition where an outright purchase has been made but the previous owner retains specified rights, for example, mineral or forestry rights.
Transco has three Commercial Lettings, at St Fergus to Shell and Mobil, and at Theddlethorpe to ConocoPhillips. Any land issues impacting on normal agricultural activity local to pipelines and their associated easement or servitude are covered by national agreements with the National Farmers Union and Countryside Landowners Business Associations of England and Scotland.
Other businesses
Metering
Our UK Metering business owns and operates Transco’s 21 million gas meters, providing services to gas shippers, including British Gas. It also provides meter reading services to Transco’s UK gas distribution business and to some gas shippers.
The major focus during 2002/03 has been to respond to the challenges of competition, which is developing in the UK gas metering market. Currently, nearly all Britain’s approximately 20 million domestic
gas meters are owned by Transco, which receives revenue regulated under its price control. In the competitive market, newly installed meters are provided by or on behalf of, the metering companies that install them.
British Gas, which accounts for around two-thirds of the UK domestic gas metering market, has announced that it will be progressively moving away from Transco as its metering services provider. In January 2003, National Grid Transco, Transco’s parent company, announced that it had been awarded a five-year contract with British Gas to provide competitive metering services for around 11 million consumers. This contract will be undertaken by a fellow subsidiary undertaking of National Grid Transco.
Financial performance
The adjusted operating profit for the year ended 31 March 2003 was £108 million, compared with £154 million in 2001/02 and £160 million in 2000/01.
The reduction in adjusted operating profit of £46 million compared to 2001/02 is due to a reduction in prices. The £6 million reduction in adjusted operating profit comparing 2001/02 to 2000/01 is a result of higher depreciation following an asset life review offset by increased turnover.
Safety
We believe that safety is paramount, and we strive to safeguard the public in all we do. We keep our approach to safe working under continuous review. We continue to invest significant capital resources in maintaining the gas distribution infrastructure in the UK. Our long term programme aimed at replacing metallic mains with modern polyethylene pipes should reduce further the risk of gas leaks from the network. We also make significant resources available to the public to explain the risks associated with gas to ensure the public uses it safely.
Despite our best efforts, regrettably three members of the public died as a result of gas explosions associated with Transco’s operations during the year. The verdict at the inquest into the explosion at Clitheroe on 1 April 2002 in which one person died was one of accidental death. On 3 October 2002, an explosion at West Bridgford, Nottingham resulted in the deaths of two people. HSE investigations are continuing.
In December 2002, an explosion occurred at a property in Hedgerly injuring one person. In January 2003, an explosion damaged a property in Chipping Norton.
As a result of a fatal accident at Larkhall, Lanarkshire in December 1999 in which
four people died, the Company has been served with proceedings alleging breach of section 3 of the Health and Safety at Work Act 1974.
Environment
Contaminated land
Transco has inherited a portfolio of potentially contaminated land. This contamination has mainly arisen from the historic manufacture of gas from coal and oil. The sites of former manufactured gas plants can sometimes have a complex mix of contamination dating back to the 19th century.
SecondSite Property manages this portfolio of land on our behalf, applying a rigorous approach to the identification, assessment, control and remediation of these sites. We continue to give priority to addressing statutory obligations on our sites and seek agreement with environmental regulators on standards and timetables.
Climate change
We actively manage our activities to reduce their impact on climate change. Across our operations the largest source of greenhouse gas emissions is methane leakage from the Transco distribution network. Most leakage is associated with the joints on older cast iron parts of the low pressure gas network. Cast iron currently makes up 37% of the distribution system and, as this pipe is replaced by polyethylene, the level of methane emissions will be gradually reduced.
Our people
Following the Merger, National Grid Transco has reviewed its Human Resources policies and condensed them into a high level statement. This statement is being applied throughout National Grid Transco, including Transco. National Grid Transco and Transco aim to foster a learning environment where all group employees can realise their full potential. We are updating our procedures in line with the high level statement to cover the areas of Diversity, Learning & Development, Performance Management, Reward Framework, Recruitment & Selection, Flexible Working and Employee Procedures. Whilst achieving the standards set in the high level statement, these procedures will reflect local cultures and practices.
We have established, through e-mails, intranets, cascade briefings and in-house magazines, effective methods for communicating with employees on matters of concern to them. Regular consultation with staff and their trade union representatives takes place using both formal and informal mechanisms.
Business Review continued
Restructuring our business
Prior to the Merger, Transco was undergoing substantial restructuring. Consistent with our restructuring programme, we wish to ensure we have the right number of people to deliver our business in the long term. Throughout this process, we have consulted with trade union representatives and our employees and we aim wherever possible to achieve redundancies through early retirement or voluntarily.
Ethical standards
We are currently updating the UK Code of Conduct which documents our employees’ responsibilities with regard to ethical and legal issues. We provide our employees with a confidential helpline through which they can discuss any concerns or report behaviour that does not align with our standards.
Equality and diversity
We are committed to being an equal opportunity employer, encouraging diversity and avoiding any discrimination on the grounds of race, colour, religion, political opinion, nationality, gender, disability, sexual orientation, age, social status and origin, indigenous status or other status unrelated to the individual’s ability to perform his or her work.
We are currently considering the reporting processes that will enable us to ensure our approach to equality and diversity is operating in practice.
Employee share ownership
National Grid Transco, Transco’s ultimate parent company, encourages share ownership among its employees as a means of aligning employee and shareholder objectives. National Grid Transco operates a Sharesave Scheme in the UK in which the majority of Transco employees participate.
Board of Directors
Roger Urwin (57)
Chairman
Appointed a Director of the Company in October 2002 and is also Group Chief Executive of National Grid Transco. He was previously Chief Executive of London Electricity plc and prior to this he held a number of appointments within the Central Electricity Generating Board before joining the Midlands Electricity Board as Director of Engineering. He is a Non-executive Director of The Special Utilities Investment Trust PLC and is a Fellow of the Royal Academy of Engineering.
Steve Holliday (46)
Chief Executive
Appointed a Director of the Company in October 2002 and Chief Executive on 28 April 2003. He is also Executive Director of National Grid Transco responsible for the Group’s UK gas distribution business. He was formerly an Executive Director of British Borneo Oil and Gas. Prior to this he spent nineteen years with the Exxon Group, where he held senior positions in business development and areas such as refining and shipping. His international experience includes a four-year spell in the US and has also worked developing business opportunities in countries as diverse as Russia, Australia, Japan, Brazil and China.
Rob Verrion (50)
Chief Operating Officer
He joined the British Gas Corporation in 1982 and held a number of posts in finance, new business development and operations. In 1992 he was appointed the first Managing Director of MetroGas. He returned to the UK in 1996 joining Transco as a Director and was appointed Finance Director of that business in July 1999. He was appointed Chief Operating Officer of Transco in November 2001 and following the resignation of Colin Matthews was acting Chief Executive until the appointment of Steve Holliday.
Colin Buck (53)
Finance Director
Appointed a director of Transco in October 2002 and is responsible for all financial aspects and Corporate Governance issues within Transco. He joined National Grid in 1990 and held a number of posts in finance; he was appointed Finance Director of National Grid Company plc in January 2001 before moving to his current position.
Steve Lucas (49)
Executive Director
A Chartered Accountant he worked in private practice in the City of London until 1983, specialising in corporate tax. He then joined Shell International Petroleum Company, occupying a number of finance management positions and Treasury roles. Moving to British Gas in 1994, he was appointed Treasurer of BG Group in December 1998 and a Director of Transco in December 1999. He was appointed to the Lattice Group Board as Executive Director, Finance in September 2000 and on the merger with National Grid in October 2002 was appointed Group Finance Director of National Grid Transco.
Jim O’Sullivan (43)
Engineering and Safety Director
Appointed a director of the Company in October 2002 he has over 15 years’ experience in safety sensitive roles in the aviation industry with particular knowledge of engineering governance, design processes, project control and quality assurance. He joined Transco in September 2002 from British Airways where his latter roles included Technical and Quality Director, Maintenance and Engineering Manager for Concorde and leading the Boeing 777 project in the USA.
Tony Wray (41)
Commercial Director
He joined British Gas in 1983 and held a number of posts in operational, support and project management roles developing systems, processes and organisation in line with the deregulated gas supply market. In 1996 he was appointed Transco Programme Manager for the introduction of competition in the domestic gas supply sector and in 1998 became General Manager, Support Services. He was appointed a Director of Transco in December 2001 and prior to this he had been head of Asset Management since 1999.
During the period under review the following have resigned as Directors of the Company: Chris Bolt, Colin Matthews, David Rees and John Wybrew.
Changes since 31 March 2003
Rob Verrion resigned as Chief Operating Officer and Director of Transco with effect from 1 June 2003 and was replaced by Mark Fairbairn – Mark joined National Grid in 1989 from BNFL. Within National Grid he held a variety of roles in Asset Management, Systems Operation and, most recently, as Director of Engineering Services. He was instrumental in achieving significant improvements on Safety and Environmental issues within National Grid and was awarded the OBE in 2002 for his services to the Electrical industry in respect of his leadership of the fundamental changes implemented for the introduction of the New Electricity Trading Arrangements (NETA). Tony Wray resigned as Commercial Director and Director of Transco with effect from 6 June 2003.
Alison Kay
Company Secretary
Alison Kay was appointed Company Secretary on 21 October 2002. She is also Company Secretary of National Grid Company plc.
Directors’ Report and Operating and Financial Review
Operating and Financial Review
References to adjusted operating profit are stated before exceptional items. A reconciliation of total operating profit to adjusted operating profit is shown below.
Merger of National Grid and Lattice, including Transco
On 21 October 2002 Lattice, the then parent company of Transco, merged with National Grid to form National Grid Transco. To achieve consistency of reporting in the National Grid Transco group, Transco has adopted revised accounting policies in respect of deferred tax and pensions costs. Prior year comparatives have been restated to reflect these changes. The effect of these restatements is explained in note 1 to the accounts, on page 25.
Under US GAAP, the business combination of National Grid and Lattice must be accounted for as an acquisition by National Grid of Lattice, including Transco, in accordance with acquisition accounting principles (‘purchase accounting’). A discussion of the impact of US GAAP accounting principles is shown below, and details of the principal differences between UK and US GAAP are shown in note 29 to the accounts on page 46.
Segmental reporting
As a result of the Merger, reporting segments have been re-aligned to reflect
the management responsibilities and economic characteristics of Transco’s business activities. The choice of segments has also had regard to the level of materiality of some of Transco’s activities and to ensure that the disclosures are not overly detailed.
Segmental information is disclosed in note 2 to the accounts on pages 26 and 27, and a review of the performance of these businesses is contained on pages 3 to 6. Additional financial and performance information relating to the reporting segments is also included in the Business Review.
The segments at 31 March 2003 comprised UK gas distribution, UK gas transmission and other activities.
12 months ended 31 March 2003 compared with the unaudited 12 months ended 31 March 2002
Group turnover
Group turnover for the 12 months ended 31 March 2003, increased by £57 million over the 12 months ended 31 March 2002 to £3,037 million.
Group total operating profit
Group total operating profit fell by £50 million to £790 million, primarily reflecting a £46 million increase in the total exceptional operating charges, from £100 million in the 12 months ended 31 March 2002 to £146 million in the 12 months ended 31 March 2003.
Within group adjusted operating profit, a £36 million increase in the contribution from the UK gas transmission business was offset by a £46 million reduction in contribution from other activities.
Exceptional items
The results for the 12 months ended 31 March 2003 include total net exceptional pre-tax charges of £159 million (£118 million post tax). Pre-tax charges are made up of £146 million of operating
| exceptional items and £13 million of non-operating exceptional items. These charges comprise: | |
| • | Costs arising from the Merger amounting to £54 million (£45 million post tax); |
| • | Restructuring costs, principally arising from business related efficiency programmes, amounting to £100 million (£70 million post tax); and |
| • | Net losses on the disposal of fixed assets amounting to £5 million (£3 million after taxation). |
Interest
Net interest fell from £332 million in the 12 months ended 31 March 2002 to £322 million for the 12 months ended31 March 2003 mainly due to an increase in interest receivable.
Taxation
The net tax charge for the 12 months ended 31 March 2003 of £148 million, includes a net credit relating to exceptional items amounting to £41 million. Excluding the exceptional tax items from the tax charge, the effective tax rate for the 12 months ended 31 March 2003 based on profit before taxation and exceptional items was 30.8% compared with the standard corporation tax rate in the UK of 30%. The effective tax rate after taking account of exceptional items was 32.5%. Note 9 to the accounts on page 30 shows a reconciliation of the main components giving rise to the difference between the relevant effective rate and the UK standard corporation tax rate.
Retirement arrangements
The substantial majority of Transco’s employees are members of the Lattice Group Pension Scheme (the Scheme). The Scheme has a defined benefit section, which is effectively closed to new entrants, and a defined contribution section. There are no current plans to merge the Scheme with that of National Grid.
Summary of results
| Unaudited | Unaudited | Unaudited | Unaudited | |||||||||||
| 12 months | 12 months | 12 months | 3 months | 3 months | 15 months | 12 months | ||||||||
| ended | ended | ended | ended | ended | ended | ended | ||||||||
| 31 Mar 2003 | 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2001 | 31 Mar 2000 | 31 Mar 2002 | 31 Dec 2000 | ||||||||
| as restated | as restated | as restated | as restated | as restated | as restated | |||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||
| Group turnover | 3,037 | 2,980 | 2,975 | 942 | 942 | 3,922 | 2,975 | |||||||
| Total operating profit before exceptional items | 936 | 940 | 1,050 | 451 | 515 | 1,391 | 1,114 | |||||||
| Exceptional operating items | (146 | ) | (100 | ) | (41 | ) | – | – | (100 | ) | (41 | ) | ||
| Total operating profit | 790 | 840 | 1,009 | 451 | 515 | 1,291 | 1,073 | |||||||
| Exceptional non-operating items | (13 | ) | 9 | (13 | ) | 1 | (1 | ) | 10 | (15 | ) | |||
| Net interest | (322 | ) | (332 | ) | (357 | ) | (86 | ) | (89 | ) | (418 | ) | (360 | ) |
| Profit before tax | 455 | 517 | 639 | 366 | 425 | 883 | 698 | |||||||
| Tax – excluding exceptional items | (189 | ) | (188 | ) | (223 | ) | (112 | ) | (117 | ) | (300 | ) | (228 | ) |
| Tax – exceptional items | 41 | 32 | 8 | – | – | 32 | 8 | |||||||
| Profit for the financial period | 307 | 361 | 424 | 254 | 308 | 615 | 478 | |||||||
The next actuarial valuation of the Scheme is being carried out as at 31 March 2003. Note 7 to the Accounts on page 29 provides more information on Transco’s retirement arrangements.
Pension accounting
The Group continues to account for pensions under UK GAAP in accordance with Statement of Standard Accounting Practice 24 (SSAP 24). Consistent with that statement, the pension costs charged to the Group by Lattice included an amount for amortisation of pension surpluses.
The Board of National Grid Transco is of the view that, in the light of the performance of the world’s stock markets over the past year, if a formal valuation of the pension fund were conducted, this would in all likelihood reveal a deficit. The continuing recognition of a surplus is incompatible with this position, and until the next formal valuation is undertaken, the decision to suspend the recognition of any further pension surplus has been taken. Consequently, with effect from 1 October 2002, the spreading of the pension surplus in respect of the defined benefit section, based on the last formal actuarial valuation at 31 March 2001, and the crediting of Transco with its share, was suspended.
Total operating profit and net interest include credits of £8 million and £1 million respectively in respect of the recognition of the pension scheme surplus up to 30 September 2002, totalling £9 million (£7 million net of tax). As a result of the suspension of the recognition of any further pension surplus since that date, total operating profit and net interest are reduced and increased by £8 million and £1 million respectively as compared with the ongoing recognition of a surplus. Accordingly, profit after tax is reduced by £7 million.
The Group does not account for pension costs under Financial Reporting Standard 17 ‘Retirement benefits’ (FRS 17), but has provided the required transitional disclosures as shown in note 7 to the accounts on page 29.
Application of UK GAAP accounting policies
There have been no new UK GAAP accounting pronouncements issued during the year that have had any significant impact on the Group.
Accounting policies adopted by Transco that were changed to accord with the accounting policies adopted by National Grid Transco, were deferred taxation and the classification of the interest element of the amortisation of pension surplus in the profit and loss account. Full details of these
Unaudited 12 months ended 31 March 2002 compared with the unaudited 12 months ended 31 March 2001
Group turnover
Group turnover for the 12 months ended 31 March 2002 increased by £5 million over the 12 months ended 31 March 2001 to £2,980 million.
Group total operating profit
Group total operating profit fell by £169 million to £840 million reflecting a £59 million increase in exceptional operating charges to £100 million in the 12 months ended 31 March 2002 and a £115 million reduction in the contribution from the UK gas distribution business.
Exceptional items
The results for the 12 months ended 31 March 2002 include total net exceptional pre-tax charges of £91 million (£59 million post tax). Pre-tax charges are made up of £100 million of operating exceptional items and £9 million of non-operating exceptional profits. The net charge comprises:
| • | Restructuring costs, principally arising from business related efficiency programmes, amounting to £50 million (£39 million post tax); |
| • | An impairment of LNG storage fixed assets amounting to £50 million (£35 million post tax); and |
| • | Net profits on the disposal of fixed assets amounting to £9 million (£15 million after taxation). |
The results for the 12 months ended 31 March 2001 include total net exceptional pre-tax charges of £54 million (£46 million post tax). Pre-tax charges are made up of £41 million of operating exceptional items and £13 million of non-operating exceptional items. The charge comprises:
| • | Demerger costs arising from the Demerger of Lattice from BG in 1999, amounting to £41 million (£32 million post tax); and |
| • | Net losses on the disposal of fixed assets amounting to £13 million (£14 million after taxation). |
Interest
Net interest fell from £357 million in the 12 months ended 31 March 2001 to £332 million for the 12 months ended 31 March 2002, reflecting lower interest rates.
Taxation
The net tax charge for the 12 months ended 31 March 2002 of £156 million includes a net credit relating to exceptional items amounting to £32 million. Excluding the exceptional tax items from the tax charge, the effective tax rate for the 12 months ended 31 March 2002 based on profit before taxation and exceptional items was 30.9% compared with the standard corporation tax rate in the UK of 30%. The effective tax rate after taking account of exceptional items was 30.2%. Note 9 to the accounts on page 30 shows a reconciliation of the main components giving rise to the difference between the relevant effective rate and the UK standard corporation tax rate.
Unaudited 12 months ended 31 March 2002 compared with the 12 months ended 31 December 2000
Group turnover
Group turnover for the 12 months ended 31 March 2002 increased by £5 million over the 12 months ended 31 December 2000 to £2,980 million.
Group total operating profit
Group total operating profit fell by £233 million to £840 million reflecting a £59 million increase in exceptional operating charges to £100 million in the 12 months ended 31 March 2002 and a £111 million reduction in the contribution from the UK gas distribution business.
Exceptional items
The results for the 12 months ended 31 March 2002 include total net exceptional pre-tax charges of £91 million (£59 million post tax). Pre-tax charges are made up of £100 million of operating exceptional items and £9 million of non-operating exceptional profits. The net charge comprises:
| • | Restructuring costs, principally arising from business related efficiency programmes, amounting to £50 million (£39 million post tax); |
| • | An impairment of LNG storage fixed assets amounting to £50 million (£35 million post tax); and |
| • | Net profits on the disposal of fixed assets amounting to £9 million (£15 million after taxation). |
The results for the 12 months ended 31 December 2000 include total net exceptional pre-tax charges of £56 million (£48 million post tax). Pre-tax charges are made up of £41 million of operating exceptional items and £15 million of non-operating exceptional items. The charge comprises:
 | Operating and Financial Review continued | ||||||||
| • | Demerger costs arising from the Demerger of Lattice from BG in 1999, amounting to £41 million (£32 million post tax); and | Interest Taxation Liquidity and capital resources Net cash inflow from operations was £1,128 million in the 3 months ended 31 March 2001, compared with £1,114 million in the 3 months ended 31 March 2000. Included within net cash inflow from operations were exceptional cash outflows of £1 million in the 3 months ended 31 March 2001, compared with £1 million in the 3 months ended 31 March 2000. Net cash inflow from operations before exceptional items was £1,454 million in the 12 months ended 31 March 2003, compared with £1,224 million in the 12 months ended 31 March 2002, £1,482 million in the 12 months ended 31 March 2001 and £1,468 million in the 12 months ended 31 December 2000. Net cash inflow from operations before exceptional items was £1,129 million in the 3 months ended 31 March 2001, compared with £1,115 million in the 3 months ended 31 March 2000. The increased cash flow from operations before exceptional items in the 12 months ended 31 March 2003 was mainly due to a reduction in working capital. The increased cash flow from operations before exceptional items in the 12 months ended 31 March 2002 was due to a reduction in | adjusted operating profits and an increase in working capital. Exceptional cash flows in the 12 months ended 31 March 2003 relate to cash flows arising from restructuring initiatives, Merger related costs and environmental expenditure. In respect of the 12 months ended 31 March 2002, exceptional cash outflows related to environmental and restructuring costs. In respect of the 12 months ended 31 March 2001, such cash outflows related to environmental costs. Net payments of interest totalled £309 million in the 12 months ended 31 March 2003, compared with £299 million in the 12 months ended 31 March 2002, £332 million in the 12 months ended 31 March 2001 and £383 million in the 12 months ended 31 December 2000. The reductions in the 12 months ended 31 March 2002 and in the 12 months ended 31 March 2001 are mainly due to falling interest rates. Net interest cash outflows amounted to £65 million in the 3 months ended 31 March 2001, compared with £116 million in the 3 months ended 31 March 2000. The decrease reflects lower interest rates. Net corporation tax payments amounted to £62 million in the 12 months ended 31 March 2003, compared with £205 million in the 12 months ended 31 March 2002, £193 million in the 12 months ended 31 March 2001 and £191 million in the 12 months ended 31 December 2000. Net corporation tax payments in the 12 months ended 31 March 2003 were lower than the 12 months ended 31 March 2002 as a result of the surrender to Transco of Group Relief by other companies in the Lattice group. Net corporation tax payments amounted to £35 million in the 3 months ended 31 March 2001, compared with £33 million in the 3 months ended 31 March 2000. Net purchases of tangible fixed assets absorbed cash of £605 million in the 12 months ended 31 March 2003, compared with £756 million in the 12 months ended 31 March 2002, £651 million in the 12 months ended 31 March 2001 and £606 million in the 12 months ended 31 December 2000. The reduction in net cash outflow in the 12 months ended 31 March 2003 reflects a lower level of investment across all businesses. The increase in net cash outflow in the 12 months ended 31 March 2002 and the 12 months ended 31 March | ||||||
| • | Net losses on the disposal of fixed assets amounting to £15 million (£16 million after taxation). | ||||||||
Interest Taxation The effective tax rate after taking account of exceptional items was 30.2%. Note 9 to the accounts on page 30 shows a reconciliation of the main components giving rise to the difference between the relevant effective rate and the UK standard corporation tax rate. Unaudited three months ended 31 March 2001 compared with the unaudited three months ended 31 March 2000 Group total operating profit Exceptional items The results for the 3 months ended 31 March 2000 include total net exceptional pre-tax charges of £1 million (£1 million post tax), all non-operating items. | |||||||||
2001 reflects a higher level of investment in gas distribution and gas transmission.
Net purchases of tangible fixed assets absorbed cash of £153 million in the 3 months ended 31 March 2001, compared with £108 million in the 3 months ended 31 March 2000, reflects a higher level of investment in gas distribution and gas transmission.
Equity shareholders’ funds
Equity shareholders’ funds increased from £1,586 million at 31 March 2002 to £1,649 million at 31 March 2003. This increase is explained by retained profits for the year amounting to £63 million.
Capital expenditure
Capital expenditure was £646 million in the 12 months ended 31 March 2003, compared with £818 million in the 12 months ended 31 March 2002, £722 million in the 12 months ended 31 March 2001 and £658 million in the 12 months ended 31 December 2000. The reduction in capital expenditure in the 12 months ended 31 March 2003 reflects a lower level of investment across all businesses. The increase in capital expenditure in the 12 months ended 31 March 2002 and the 12 months ended 31 March 2001 reflects a higher level of investment in gas distribution and gas transmission. An analysis of capital expenditure by segment is contained in note 2 on page 27.
Capital expenditure was £147 million in the 3 months ended 31 March 2001, compared with £83 million in the 3 months ended 31 March 2000 reflecting a higher level of investment in gas distribution and gas transmission.
At 31 March 2003, future capital expenditure contracted for but not provided in the accounts amounted to £148 million. It is expected that this capital expenditure commitment will be financed from the Group’s operational cash flow and credit facilities as required.
Net debt and gearing
Net debt fell slightly from £5,177 million at 31 March 2002 to £5,164 million at 31 March 2003. Gearing at 31 March 2003, calculated as net debt at that date expressed as a percentage of net assets shown by the balance sheet, amounted to 76% down from 77% at the start of the year. By comparison, the gearing ratio adjusted for the inclusion of the businesses at their estimated regulatory asset values (‘adjusted gearing ratio’), amounted to 37% at 31 March 2003 down from 39% at the start of the year.
The Group believes that this adjusted ratio is a more relevant measure of ‘gearing’ than one based on book values alone, as the book values do not reflect the economic earning value of those assets.
A reconciliation of the adjustments necessary to calculate adjusted net assets is shown in the table below:
| Adjustments to net assets | 2003 | 2002 |
| £m | £m | |
| Net assets per balance sheet | 1,649 | 1,586 |
| Adjustment for increase in | ||
| regulatory values | 7,060 | 6,660 |
| Adjusted net assets | 8,709 | 8,246 |
An analysis of debt is provided in note 17 to the accounts on page 33, and a reconciliation of the movement in net debt from 1 April 2002 to 31 March 2003 is provided in note 23(c) to the accounts on page 39.
Both short and long-term cash flow forecasts are produced frequently to assist in identifying the liquidity requirements of the Group. These are supplemented by a financial headroom position that is supplied to the Finance Committee of the National Grid Transco Board regularly to demonstrate funding adequacy for at least a 12-month period. The Group also maintains a minimum level of committed facilities in support of that objective.
Credit facilities and unutilised
Commercial Paper and Medium Term
Note Programmes
At 31 March 2003, Transco had a US$1.25 billion Euro Commercial Paper Programme (unutilised); a US$2.5 billion US Commercial Paper Programme (unutilised); a US$0.5 Extendible Commercial Note Programme (unutilised) and a Euro Medium Term Note Programme of €7.0 billion (€2.3 billion unissued).
At 31 March 2003, Transco had £0.62 billion of short term (364 day) committed facilities (undrawn); £0.6 billion of long term committed facilities (undrawn) and £1.1 billion (£0.9 billion undrawn) of uncommitted borrowing facilities.
Treasury policy
The funding and treasury risk management of the Group is carried out on its behalf by a central department operating under policies and guidelines approved by the Board of National Grid Transco. The Finance Committee, a committee of the Board of National Grid Transco, is responsible for regular review and monitoring of treasury activity and for approval of specific transactions, the authority for which may be delegated. The National Grid Transco group has a
Treasury function that raises all of the funding for the National Grid Transco group and manages interest rate and foreign exchange rate risk.
There is a separate financing programme for Transco. All significant issues in relation to the funding of Transco are approved by the Finance Committees of both National Grid Transco and Transco.
The Treasury function is not operated as a profit centre. Debt and treasury positions are managed in a non-speculative manner, such that all transactions in financial instruments or products are matched to an underlying current or anticipated business requirement. The use of derivative financial instruments is controlled by policy guidelines set by the Board of National Grid Transco. Derivatives entered into in respect of gas commodities are used in support of the business operational requirements and the policy regarding their use is explained below.
Details of the maturity, currency and interest rate profile of the Group’s borrowings as at 31 March 2003 are shown in note 18 to the accounts on pages 34 and 35.
The Group’s financial position enables it to borrow on the wholesale capital and money markets and most of its borrowings are through public bonds and commercial paper. These borrowings contain no restrictive covenants.
The Group places surplus funds on the money markets usually in the form of short term fixed deposits which are invested with approved banks and counterparties. Details of the Group’s short term investments as at 31 March 2003 are shown in note 18 to the accounts on page 35.
Transco plc has a credit rating of A2/A. It is a condition of the regulatory ring-fence around Transco plc that it uses reasonable endeavours to maintain an investment grade credit rating. This rating means that Transco should have ready access to the capital and money markets for future funding when necessary.
The main risks arising from the Group’s financing activities are set out below. The Board of National Grid Transco and the Finance Committee of that Board reviews and agrees policies for managing each risk and they are summarised below.
Refinancing risk management
The Board of National Grid Transco mainly controls refinancing risk by limiting the amount of financing obligations (both principal and interest) arising on borrowings in any 12-month and 36-month period.
Operating and Financial Review continued
This policy restricts the Group from having an excessively large amount of debt to refinance in a given time-frame. During the year, a mixture of short term debt and long term debt was issued.
Interest rate risk management
The interest rate exposure of the Group arising from its borrowings and deposits is managed by the use of fixed and floating rate debt, interest rate swaps, swaptions and forward rate agreements. The Group’s interest rate risk management policy is to seek to minimise total financing costs (ie interest costs and changes in the market value of debt) subject to constraints so that even with large movements in interest rates, neither the interest cost nor the total financing cost can exceed pre-set limits.
The performance of the Treasury function in interest rate risk management is measured by comparing the actual total financing costs of its debt with those of a passively-managed benchmark portfolio.
Foreign exchange risk management
The Group has a policy of hedging certain contractually committed foreign exchange transactions over a prescribed minimum size. It covers 75% of such transactions expected to occur up to six months in advance and 50% of transactions in the 6 to 12 month period in advance. Cover generally takes the form of forward sale or purchase of foreign currencies and must always relate to underlying operational cash flows.
Counterparty risk management
Counterparty risk arises from the investment of surplus funds and from the use of derivative instruments. The Finance Committee of the Board of National Grid Transco has agreed a policy for managing such risk, which is controlled through credit limits, approvals and monitoring procedures.
Derivative financial instruments held for purposes other than trading
As part of its business operations, the Group is exposed to risks arising from fluctuations in interest rates and exchange rates. The Group uses off-balance sheet derivative financial instruments (derivatives) to manage exposures of this type and, as such, they are a useful tool in reducing risk. The Group’s policy is not to use derivatives for trading purposes. Derivative transactions can, to varying degrees, carry both counterparty and market risk.
The Group enters into interest rate swaps to manage the composition of floating and fixed rate debt, and so hedge the exposure of borrowings to interest rate movements. The Group enters into foreign currency swaps to manage the currency composition of borrowings and so hedge
the exposure to exchange rate movements. Certain agreements are combined foreign currency and interest rate swap transactions. Such agreements are known as cross-currency swaps.
The Group enters into forward rate agreements to hedge interest rate risk on short-term debt and money market investments. Forward rate agreements are commitments to fix an interest rate that is to be paid or received on a notional deposit of specified maturity, commencing at a future specified date.
Valuation and sensitivity analysis
The Group calculates the fair value of debt and derivative instruments by discounting all future cash flows by the market yield curve at the balance sheet date. In the case of instruments with optionality, the Black’s variation of the Black-Scholes model is used to calculate fair value.
For debt and derivative instruments held, the Group utilises a sensitivity analysis technique to evaluate the effect that changes in relevant rates or prices will have on the market value of such instruments.
As at 31 March 2003, the potential change in the fair value of the aggregation of long-term debt and derivative instruments was £56 million (2002: £66 million) assuming a 10% change in the level of interest rates. The Group has no material exposure to changes in foreign currency rates.
Commodity price hedging
In the normal course of business the Group is party to commodity derivatives. These include gas futures, gas options and gas forwards that are used to manage commodity prices and system capacity associated with its natural gas transportation operations. This includes the buying back of capacity rights already sold in accordance with the Group’s UK gas transporter licence and Network Code obligations.
These financial exposures are monitored and managed as an integral part of the Group’s financial risk-management policy. At the core of this policy is a condition that the Group will engage in activities at risk only to the extent that those activities fall within commodities and financial markets to which it has a physical market exposure in terms and volumes consistent with its core business. The Group does not issue or intend to hold derivative instruments for trading purposes, and only holds such instruments consistent with its licence and regulatory obligations in the UK.
Transco is obliged to sell through a series of auctions, a pre-determined quantity of transmission system entry capacity for
every day in the year. Where system constraints on a day reduce available capacity to below the level of gas to be flowed, Transco is required to buy back system entry capacity. Forward and option contracts are used to reduce the risk and exposure to on the day entry capacity prices.
| 2003 £m | 2002 £m | |
| Future capital expenditure | ||
| contracted for but not provided | 148 | 170 |
| Total operating lease | ||
| committments | 174 | 133 |
| Third party contingencies | 13 | 441 |
| Other commitments and | ||
| contingencies | 73 | 70 |
Commitments, contingencies and litigation
The Group’s commitments and contingencies outstanding at 31 March are summarised in the table below:
It is proposed to meet these commitments from the operating cash flows and from existing credit facilities, as necessary. Details of the nature of the commitments and contingencies, including an analysis of the ageing of commitments, are shown in note 25 to the accounts on page 40.
Details of material litigation to which the Group was a party as at 31 March 2003 are set out below
As a result of a fatal accident at Larkhall, Lanarkshire in December 1999 in which four people died, the Company has been served with proceedings alleging breach of section 3 of the Health and Safety at Work Act 1974. On indictment, the maximum penalty under section 3 is an unlimited fine.
Critical accounting policies
The Group accounts are prepared in accordance with UK GAAP, which are described on pages 20 to 21 of the accounts. Management are required to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenue, expenses and the disclosure of contingent assets and liabilities in the accounts. The following matters are considered to have a critical impact on the accounting policies adopted by the Group.
Estimated asset economic lives
The adoption of particular asset economic lives in respect of tangible fixed assets can materially affect the reported amounts for goodwill amortisation and depreciation of tangible fixed assets.
The economic lives of tangible fixed assets are disclosed in ‘Accounting policies – d) tangible fixed assets and depreciation’. The adoption of particular economic lives involves the exercise of judgement, and can materially impact the profit and loss account. For the year ended 31 March 2003, the Group profit and loss account reflected depreciation of tangible fixed assets amounting to £385 million. Impairment of fixed assets Fixed asset investments and tangible fixed assets are reviewed for impairment in accordance with UK GAAP. Future events could cause these assets to be impaired, resulting in an adverse effect on the future results of the Group. Reviews for impairments are carried out under UK GAAP in the event that circumstances or events indicate the carrying value of fixed assets may not be recoverable. Examples of circumstances or events that might indicate that impairment had occurred include: a pattern of losses involving the fixed asset; a decline in the market value for a particular fixed asset; and an adverse change in the business or market in which the fixed asset is involved. When a review for impairment is carried out under UK GAAP, the carrying of the asset, or group of assets, if it is not reasonably practicable to identify cash flows arising from an individual fixed asset, are compared to the recoverable amount of that asset or group of assets. The recoverable amount is determined as being the higher of the expected net realisable value or the present value of the expected cash flows attributable to that asset or assets. The discount rate used to determine the present value is an estimate of the rate the market would expect on an equally risky investment, and is calculated on a pre-tax basis. Estimates of future cash flows relating to particular assets or groups of assets involve exercising a significant amount of judgement. During the year ended 31 March 2003, reviews for impairments were carried out in respect of LNG storage and metering assets. Replacement expenditure represents the cost of planned maintenance on mains and services assets, the vast majority relating to the Group’s UK gas distribution business. This expenditure is principally undertaken to maintain the safety of the gas network in the UK and is written off to the profit and loss account as incurred, because such expenditure does not enhance the performance of those assets. If such expenditure in the future were considered to enhance these assets, it would be capitalised and treated as an addition to | tangible fixed assets, thereby significantly affecting the reporting of future results. The total amount charged to the profit and loss account in respect of replacement expenditure during the year ended 31 March 2003 was £405 million. This accounting policy only materially affects the results of the UK gas distribution segment. Turnover includes an assessment of energy and transportation services supplied to customers between the date of the last meter reading and the year-end. Changes to the estimate of the transportation services supplied during this period would have an impact on the reported results of the Group. Turnover in respect of transportation services supplied comprises amounts invoiced to shippers plus an estimate for transportation services supplied but not yet invoiced, which substantially represents the transportation services supplied in respect of the last month of the year. The estimated element of turnover is determined as the total of commodity services supplied, calculated from the actual volume of gas transported at estimated weighted average prices, based on recent history and the value of capacity services supplied, which are contracted amounts. This estimate affects the UK gas distribution and UK gas transmission segments. Under UK GAAP, the Group is not permitted to and has not recognised any liability for amounts received or receivable from customers in excess of the maximum amount allowed for the year under regulatory agreements that will result in an adjustment to future prices. Pensions The substantial majority of the Group’s employees are members of the Lattice Group Pension Scheme (the Scheme). The Group recognises pension costs in its profit and loss account as they are charged to the Group by Lattice. The charge from Lattice comprises the regular pension cost of the Group’s employees and variations from the regular pension cost in respect of the effect of any surplus or deficit attributable to the Group. A new UK accounting standard (FRS 17) will replace existing GAAP. As the Group’s share of the assets and liabilities of the Scheme cannot be reasonably identified, the Scheme will be treated as a defined contributions scheme for the purposes of FRS 17. However, FRS 17 may significantly change the amount of pension costs charged to the Group by Lattice. Pensions are inherently long term, and future experience may differ from the | actuarial assumptions used to determine the net charge for pensions. As explained on page 9 in ‘Pension accounting’, as a result of the deterioration of world stock markets, illustrating that the Group’s actual experience has differed from actuarial assumptions, the Board of National Grid Transco has suspended the continuing amortisation of pension surpluses with effect from 1 October 2002. Note 7 to the accounts on page 29 describes the principal assumptions that have been used to determine the pension charges in accordance with current UK GAAP. The calculation of any charge relating to pensions is clearly dependent on the assumptions used, which reflects the exercise of judgement. Management exercises that judgement having regard to independent actuarial advice. Restructuring costs The application of UK GAAP measurement principles results in the recognition of restructuring costs, mainly redundancy related, when the Group is irrevocably committed to the expenditure, with the main features of any restructuring plan being communicated to affected employees. If material, these costs are recognised as exceptional. Restructuring costs recognised by the Group are referred to in ‘Exceptional items’ for each year discussed above. Derivative financial instruments With the exception of indexed linked swap contracts, UK GAAP applies a ‘historical cost’ and ‘hedge accounting’ model to these ‘derivatives’. Substantially, this model results in gains and losses arising on ‘derivatives’ being recognised in the profit and loss account or statement of total recognised gains and losses at the same time as the gain or loss on the item being hedged is recognised. The application of a ‘fair value’ model would result in ‘derivatives’ being marked to market. Depending upon whether the ‘derivatives’ were deemed to have a hedging relationship, this may or may not result in the recognition, in the profit and loss account or statement of total recognised gains and losses relating to these derivatives at the same time, as any related gains or losses on underlying economic exposures. Note 18 to the accounts on pages 34 to 36 gives a significant amount of detail relating to the Group’s financial instruments. This includes the identification |
|
Operating and Financial Review continued
of the difference between the ‘carrying value’ and ‘fair value’ of the Group’s financial instruments, including ‘derivatives’.
Environmental liabilities Provision is made for liabilities arising from statutory decontamination costs of old gas manufacturing sites owned by the Group. The calculation of this provision is based on estimated cash flows relating to those costs discounted at an appropriate discount rate where the impact of discounting is material. The total costs and the timing of cash flows relating to environmental liabilities are based on management estimates, and include the use of external consultants. There may be variances from these amounts that could materially affect future results.
Related party transactions
The Group provides services to and receives services from its related parties. In the year ended 31 March 2003, the Group charged £43 million and received charges of £394 million from its related parties. Further details relating to related parties are contained within note 24 to the accounts on page 40.
Changes and developments
Any significant changes and developments that have occurred since 31 March 2003 have been noted in this Annual Report and Form 20-F 2002/03. Otherwise, there have been no significant changes or developments since 31 March 2003.
Going concern
Having made enquiries, the Directors consider that the Company and the Group have adequate resources to continue in business for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing the accounts.
US GAAP
The accounts have been prepared in accordance with UK GAAP which differs in certain significant respects from US GAAP. The US accounting information in note 29 to the accounts on pages 46 to 50 gives a summary of the main differences between the amounts determined in accordance with the Group’s accounting policies (based on UK GAAP) and those determined in accordance with US GAAP. In addition, summary income statements, summary balance sheets, summary cash flows and a reconciliation of net income and equity shareholders’ funds from UK to US GAAP are provided in note 28 to the accounts, on pages 41 to 46.
Under US GAAP, acquisition accounting principles have been applied to the business combination of National Grid and Lattice, including Transco. Under UK GAAP, the business combination does not impact on the accounts of Transco, with any difference
between the book value of assets acquired and the purchase consideration being dealt with in the consolidated accounts of National Grid Transco.
Under US GAAP, National Grid is viewed as the acquirer of Lattice, including Transco, and as a result, the separately identifiable net assets attributable to Transco have been fair valued at the date of acquisition on 21 October 2002 and this value recognised (‘pushed down’) in the accounts of Transco. Note 29 to the accounts on page 46 details the principal adjustments made to the book values at that date. In addition, because the net assets of Transco must be valued at the purchase price of Transco, goodwill is recognised.
Under UK GAAP, the Group charges to the profit and loss account replacement expenditure on certain components of plant and equipment, which is principally undertaken to repair and to maintain the safety of the pipeline system. Under US GAAP, such expenditure is capitalised and depreciated over the assets’ useful lives. This treatment results in higher operating profits in the UK gas distribution segment on a US GAAP basis compared to UK GAAP.
Because the reflection of the fair value of assets acquired and related goodwill, together with the difference in treatment of replacement expenditure, have fundamentally affected the comparison of UK GAAP results with US GAAP, the following is a discussion of the impact the application of US GAAP has had on the results, which should be read in conjunction with the review of the business results given on pages 3 to 6 and the rest of this financial review.
US GAAP operating profit for the 12 months ended 31 March 2003 at £1,015 million is £225 million higher than UK GAAP operating profit. This increase is primarily due to the different treatment of replacement expenditure partly offset by the increase in depreciation resulting from the application of fair values to tangible fixed assets at the date of Merger.
US GAAP operating profit for the 12 months ended 31 March 2002 at £1,144 million is £304 million higher than UK GAAP operating profit. This increase is primarily due to the different treatment of replacement expenditure.
US GAAP operating profit for the 3 months ended 31 March 2001 is £48 million higher and for the 12 months ended 31 December 2000 £153 million higher than UK GAAP operating profit. These increases are primarily due to the different treatment of replacement expenditure.
A full tabulation of the operating results and other segmental information under US GAAP is shown in note 28 to the accounts on pages 41 to 46.
Note 28 to the accounts on pages 41 to 43 shows summary income statements and reconciliation of summary income statements for the 12 months ended 31 March 2003, the 12 and 15 months ended 31 March 2002, the 3 months ended 31 March 2001 and the 12 months ended 31 December 2000. The results for the 12 months ended 31 March 2003 are further analysed between the period up to the date of acquisition and the period after the date of acquisition.
These statements have reconciled the impact that all material US GAAP adjustments have had on the UK GAAP income statement, including the impact of the inclusion of acquisition (purchase accounting) adjustments under US GAAP.
The principal adjustments to UK GAAP net income that have had a net impact in arriving at US GAAP net income are shown on page 45. Explanations for the principal reasons giving rise to differences between UK and US GAAP are shown in note 29 on pages 46 to 50.
The treatment of the business combination of Lattice, including Transco, as an acquisition by National Grid and the application of ‘push down’ accounting by Transco, has resulted in the recognition of provisional goodwill amounting to £3,793 million as a result of allocating provisional fair values to the separately identifiable net assets of Transco at the date of acquisition. A description of the purchase allocation process undertaken is shown in note 29 to the accounts on pages 46 and 47.
The £8,382 million increase in equity shareholders’ funds at 31 March 2003 from £1,649 million under UK GAAP to £10,031 million under US GAAP is primarily a consequence of the application of acquisition accounting principles.
A summary US GAAP balance sheet at 31 March 2002 and 31 March 2003 is shown in note 28 to the accounts on page 44, which reflects the impact of the incorporation of the Transco related net assets at fair value on the date of acquisition.
During 2002/03 the Group adopted the following US GAAP accounting standards:
| • | SFAS144 ‘Accounting for the Impairment or Disposal of Long-Lived Assets’; |
| • | SFAS145 ‘Recession of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No.13 and Technical Corrections’; |
| • | SFAS146 ‘Accounting for Costs associated with Exit or Disposal activities’; |
| • | SFAS 148 ‘Accounting for Stock Based Compensation – Transition and Disclosure – An Amendment of FAS 123’; and |
| • | FASB Interpretation (FIN) 45 |
Details of the effect of adopting these accounting standards can be seen in note 29 to the accounts on page 50.
Inflation
The Group’s operating costs may be affected by inflation both in terms of potential cost increases and in terms of the regulatory revenue control, which is influenced by, amongst other things, movements in the UK Retail Price Index. While higher inflation would tend to increase the Group’s cost base, this impact would be more than offset by increased revenue allowed under the Group’s regulated revenue controls.
In recent years, inflation in the UK has been relatively stable and has not significantly affected the period under review.
Seasonality
Gas distribution charges are partly based on the volume of gas transported, which can vary on a seasonal basis. Typically 60% of total revenue is recognised in the second half of the year. Gas transmission services are principally provided as rights to system capacity, which typically results in a relatively constant revenue stream over the course of the financial year.
Euro
In January 2002, the euro was introduced as the cash currency in 12 European Union countries. This has had minimal impact on the operations of the Group. The UK may introduce the euro at a later date requiring sterling to convert irrevocably into the euro. The Group will continue to monitor and upgrade the progress already made on assessing the implications of the introduction of the euro for the Group.
 | Directors’ Report and Operating and Financial Review Risk Factors | ||||
National Grid Transco, Transco’s ultimate parent company, has established an internal process for the review of and response to actual and potential risks facing the National Grid Transco group. This internal process includes an Audit Committee, a Risk and Responsibility Committee and a Finance Committee. Transco does not have a separate Audit Committee or Risk and Responsibility Committee, these roles being undertaken by National Grid Transco on behalf of Transco. Details of these committees may be found in the Annual Report and Accounts of National Grid Transco. Significant Risks Law and Regulation Safety and environmental | handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials, and the health and safety of employees and the general public. Breach of these laws and regulations could expose the Group to claims for financial compensation, to adverse regulatory consequences and/or otherwise damage the Group’s relationship with its stakeholders. This area of the Group’s business is subject to increasing regulation and/or changes in the legal requirements within which it operates. Operational performance Business performance Commodity risk and security of supply | Internal controls Business development Financial management Interest rates Foreign currency exchange/foreign operations Technological change | |||
| Directors’ Report and Operating and Financial Review General Information |  | ||||
Incorporation Material interests Substantial shareholders Employee policy Research and development Payment to suppliers |
| to ensure the payment of invoices in accordance with contract terms. Copies of the CBI Prompt Payment Code may be obtained from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU. The average creditor payment period at 31 March 2003 was 28 days. Donations No donations were made in the UK and EU for the purposes of the Political Parties, Elections and Referendums Act 2000. Directors’ remuneration Transco does not have a Remuneration Committee, Transco’s Directors being remunerated in line with the policy developed by The National Grid Transco Remuneration Committee, details of which may be found in that company’s Annual Report and Accounts. |
| Directors’ interests None of the Directors (nor any person connected with them) has a beneficial interest or non-beneficial interest in the share capital of the Company. None of the Directors (nor any person connected with them) holds any interest in any other securities, including options over the Company’s shares, of the Company. Directors’ service contracts | |
| Directors’ beneficial interests | ||||||||||||||||
| Beneficial interests | Lattice Long Term Incentive Scheme | |||||||||||||||
| ordinary shares | notional allocation of shares | |||||||||||||||
| At | At | Converted to | ||||||||||||||
| 1 April 2002 | 1 April 2002 | Transferred to | National Grid | |||||||||||||
| or on | At | or on | participant on | Lapsed on | Transco shares | At | ||||||||||
| appointment | 31 Mar 2003 | appointment | Allocated | Merger | Merger | on Merger | 31 Mar 2003 | |||||||||
| Colin Buck | 13,685 | (i) | 13,685 | – | – | – | – | – | – | |||||||
| Jim O’Sullivan | – | (i) | – | – | – | – | – | – | – | |||||||
| Rob Verrion | 96,952 | (ii) | 54,561 | 236,157 | (ii) | 2,405 | (ii) | 49,895(ii) | ,(iii) | 33,265(ii) | ,(iii) | 155,402(ii) | ,(iii) | 58,275 | ||
| Tony Wray | 30,573 | (ii) | 24,810 | 143,643 | (ii) | – | 86,180(ii) | ,(iv) | 57,463(ii) | ,(iv) | – | – | ||||
| Unless otherwise indicated, interests are in shares in National Grid Transco plc, Transco’s ultimate parent undertaking. | |
| (i) | As at date of appointment. |
| (ii) | Shares in Lattice Group plc (beneficial interests in ordinary shares acquired pursuant to the Lattice All Employee Share Ownership Plan). Any holdings of interests in Lattice shares were converted into National Grid Transco shares at the rate of 0.375 National Grid Transco shares for each Lattice share, at the date of the Merger. |
| (iii) | Rob Verrion held a notional allocation of shares in Lattice pursuant to the Lattice Long Term Incentive Scheme and under the terms of the Merger, allocations made under the Lattice Long Term Incentive Scheme were partially transferred to him net of tax and partially re-allocated to him as National Grid Transco shares. |
| (iv) | Tony Wray held a notional allocation of shares in Lattice pursuant to the Lattice Long Term Incentive Scheme and under the terms of the Merger, allocations made under the Lattice Long Term Incentive Scheme were transferred to him net of tax. |
Directors’ interests in share options
| Beneficial | Weighted | |||||||||||||||
| holding at | average | |||||||||||||||
| 1 April 2002 | Beneficial | exercise price | ||||||||||||||
| or on | holding at | per share | ||||||||||||||
| appointment | Lapsed | Granted | Exercised | 31 Mar 2003 | (pence) | Normal exercise period | ||||||||||
| Colin Buck | 55,702 | (i) | – | – | – | 55,702 | 474 | Jun 2001 | Jun 2012 | |||||||
| Jim O’Sullivan | – | (i) | – | 16,358 | – | 16,358 | 426 | Dec 2005 | Dec 2012 | |||||||
| Rob Verrion | 8,209 | (ii) | 8,209 | (ii) | 26,106 | – | 26,106 | 420 | Mar 2004 | Dec 2012 | ||||||
| Tony Wray | 8,209 | (ii) | 8,209 | (ii) | 19,658 | – | 19,658 | 416 | Mar 2004 | Dec 2012 | ||||||
| Unless otherwise indicated, options are over shares in National Grid Transco plc, Transco’s ultimate parent undertaking. | |
| (i) | As at date of appointment. |
| (ii) | Options over shares in Lattice Group plc. |
| (iii) | On his appointment, Colin Buck also held interests in shares of National Grid Transco plc pursuant to the National Grid Group Share Matching Plan, he had purchased 733 shares at a price of £4.7825 per share and 980 shares at a price of £5.795 per share and received a matching option over 1,223 shares and 1,634 shares respectively each at an exercise price of £1. Under the terms of the Plan, he may exercise his share matching option between three and ten years following the said purchases. Details of the Plan are given in the Annual Report and Accounts of National Grid Transco plc. |
| General Information continued | ||||
| Date of contract | Notice period | |||
| Executive Directors | ||||
| Colin Buck | October 2002 | 12 months | ||
| Jim O’Sullivan | May 2002 | 12 months | ||
| Rob Verrion | July 1999 | 12 months | ||
| Tony Wray | August 2000 | 12 months | ||
| by the Remuneration Committee to recruit certain key executives. The contracts of Colin Buck, Jim O’Sullivan, Rob Verrion and Tony Wray provide for 12 month’s paid notice upon termination of employment. Auditors During the year, National Grid Transco’s auditors, PricewaterhouseCoopers, converted to a Limited Liability Partnership. PricewaterhouseCoopers therefore resigned on 31 March 2003 and the Board appointed PricewaterhouseCoopers LLP to fill the vacancy. Special notice having been given, a resolution for their re-appointment will be proposed at the Annual General Meeting. Evaluation of disclosure controls and procedures Within the 90 day period prior to the filing date of this report, the Company carried out an evaluation under the supervision and with the participation of its management, including the Chief Operating Officer, as acting Chief Executive, and the Finance Director, of the effectiveness of the design and operation of the Group’s disclosure controls and procedures. Based upon and as of that evaluation, the Chief Operating Officer and the Finance Director concluded that the disclosure controls and procedures are effective in all material respects to ensure that the information required to be disclosed in the reports that Transco files and submits under the US Securities Exchange Act of 1934, as amended, is recorded, processed, summarised and reported as and when required. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. | Statement of Directors’ responsibilities for preparing the financial statements The Directors are required by the Companies Act 1985 to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of the profit or loss of the Group for the financial year. The Directors consider that in preparing the financial statements detailed in the following sections, the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates and all applicable accounting standards have been followed: Accounting policies, Accounts, Notes to the Accounts and Operating and Financial Review. The Company has complied with UK disclosure requirements in this report in order to present a consistent picture to all shareholders. The Directors have responsibility for ensuring that the Company keeps accounting records which disclose with reasonable accuracy the financial position of the Company and of the Group and which enable them to ensure that the financial statements comply with the Companies Act 1985. The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and to detect fraud and other irregularities. |
| The Directors, having prepared the financial statements, have requested the Auditors to take whatever steps and to undertake whatever inspections they consider appropriate for the purposes of enabling them to give their audit report. Annual General Meeting The Annual General Meeting will be held at 10am on 18 July 2003 at 31 Homer Road, Solihull, West Midlands B91 3LT. On behalf of the Board Alison Kay Company Secretary 9 June 2003 Registered Office: 1-3 Strand, London WC2N 5EH Registered in England and Wales No. 2006000 |
| Independent Auditors’ Report to the Members of Transco plc |  | ||||
We have audited the financial statements which comprise the Group Profit and Loss Account, the Group and Company Balance Sheet, the Group Cash Flow Statement, the Group Statement of Total Recognised Gains and Losses and the related notes, except for the unaudited information presented therein. Respective responsibilities of directors and auditors Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and United Kingdom Auditing Standards issued by the Auditing Practices Board and Auditing Standards generally accepted in the United States. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements have been properly prepared in accordance with the United Kingdom Companies Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law is not disclosed. We read the other information contained in the Annual Report and Form 20-F and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. The other information comprises only the Directors’ report, the Chairman’s statement, the Business Review and the Operating and Financial Review. | Basis of audit opinion We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. United Kingdom opinion United States opinion | Accounting principles generally accepted in the United Kingdom differ in certain significant respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of the net income for the year ended 31 March 2003, the 15 month period ended 31 March 2002 and for the year ended 31 December 2000 and consolidated shareholders’ equity at 31 March 2003 and 31 March 2002, all expressed in pounds sterling, as shown in the summary of differences between the United Kingdom and United States generally accepted accounting principles set out in note 28 to the accounts. PricewaterhouseCoopers LLP | |||
Accounting Policies
a) Basis of preparation of accounts
The accounts are prepared under the historical cost convention and in accordance with applicable UK accounting and financial reporting standards.
The accounts have been prepared in accordance with UK GAAP, which differs in certain respects to US GAAP. A summary of the results under US GAAP is shown in note 28 to the accounts and explanation of the main differences between UK and US GAAP is set out in note 29.
The preparation of accounts in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accounts and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
b) Basis of consolidation
The Group accounts include the accounts of the Company and all its subsidiary undertakings, (‘Group undertakings’).
The results of newly acquired Group undertakings are included in the Group accounts from the date the Group acquires control. The results of Group undertakings are included in the Group accounts up to the date that control is relinquished.
Transco plc has been ring-fenced for regulatory purposes. The ring-fence requires Transco to meet a number of regulatory conditions including restrictions on fund raising, business activities, dividend payments and granting of guarantees.
Earnings per share information has not been presented in these accounts as the Company, being an indirectly held wholly owned subsidiary undertaking of National Grid Transco plc, does not have publicly traded equity.
c) Foreign currencies
Assets and liabilities in foreign currencies are generally translated at the rates of exchange ruling at the balance sheet date. In respect of certain assets or liabilities that are matched by an exact and directly related forward exchange derivative, then the relevant asset or liability is translated at the rate of exchange under the related derivative.
d) Tangible fixed assets and depreciation
Tangible fixed assets are included in the balance sheet at their cost less accumulated depreciation. Costs include
payroll costs incurred which are directly attributable to the construction of tangible fixed assets.
Tangible fixed assets include assets in which the Group’s interest comprises legally protected statutory or contractual rights of use.
Additions represent the purchase or construction of new assets, extensions to, or significant increases in, the capacity of tangible fixed assets.
Contributions received towards the cost of tangible fixed assets are included in creditors as deferred income and credited on a straight-line basis to the profit and loss account over the life of the assets.
No depreciation is provided on freehold land and assets in the course of construction. Other tangible fixed assets are depreciated on a straight-line basis at rates estimated to write off their book values over their estimated useful economic lives. In assessing estimated useful economic lives, which are reviewed on a regular basis, consideration is given to any contractual arrangements and operational requirements relating to particular assets. Unless otherwise determined by operational requirements, the depreciation periods for the principal categories of tangible fixed assets are, in general, as shown below.
| Years | |
| Freehold and leasehold buildings | up to 50 |
| Plant and machinery: | |
| Mains and services | 55 to 65 |
| Regulating equipment | 30 to 50 |
| Gas storage | 40 |
| Meters | 10 to 15 |
| Motor vehicles and | |
| office equipment | 3 to 10 |
e) Impairment of fixed assets
Impairments of fixed assets are calculated as the difference between the carrying values of the net assets of income generating units, including where appropriate, investments, and their recoverable amounts. Recoverable amount is defined as the higher of net realisable value or estimated value in use at the date the impairment review is undertaken. Net realisable value represents the amount that can be generated through the sale of assets. Value in use represents the present value of expected future cash flows discounted on a pre-tax basis, using the estimated cost of capital of the income generating unit.
Impairment reviews are carried out if there is some indication that impairment may have occurred, or where otherwise required to ensure that fixed assets are not carried above their estimated recoverable
amounts. Impairments are recognised in the profit and loss account, and where material are disclosed as exceptional.
f) Replacement expenditure
Replacement expenditure represents the cost of planned maintenance of mains and services assets by replacing or lining sections of pipe. This expenditure is principally undertaken to repair and to maintain the safety of the network and is written off as incurred. Expenditure that enhances the performance of mains and services assets is treated as an addition to tangible fixed assets.
g) Deferred taxation
Deferred taxation is provided in full on all material timing differences, with certain exceptions. No provision for deferred taxation is made for any timing differences on non-monetary assets arising from fair value adjustments, except where there is a binding agreement to sell the assets concerned. However, no provision is made where it is more likely than not that any taxable gain will be rolled over into replacement assets.
Deferred tax balances have not been discounted.
h) Stocks
Stocks are stated at cost less provision for deterioration and obsolescence.
i) Environmental costs
Environmental costs, based on discounted future estimated expenditures expected to be incurred, are provided for in full. The unwinding of the discount is included within the profit and loss account as a financing charge.
j) Turnover
Turnover primarily represents the amounts derived from the transportation of natural gas and the provision of related services. Turnover includes an assessment of transportation services supplied to customers between the date of the last meter reading and the year end, excludes inter-business and inter-company transactions, and is stated net of value added tax. Where revenues received or receivable exceed the maximum amount permitted by regulatory agreement and adjustments will be made to future prices to reflect this over-recovery, no liability is recognised.
k) Pensions
The substantial majority of the Group’s employees are members of the Lattice Group Pension Scheme (the Scheme). The Group recognises pension costs in its profit and loss account as they are charged to the Group by Lattice. The charge from Lattice comprises the regular pension cost
of the Group’s employees and variations from the regular pension cost in respect of any surplus or deficit attributable to the Group. The interest element of any surplus or deficit attributable to the Group is included within the profit and loss account as a financing charge. l) Leases m) Financial instruments All transactions are undertaken or maintained to provide a commercial hedge of the interest or currency risks associated with the Group’s underlying business activities and the financing of those activities. Amounts payable or receivable in respect of interest rate swaps are recognised in the profit and loss account over the economic lives of the agreements or underlying position being hedged, either within net interest or disclosed separately where deemed exceptional. | Termination payments made or received in respect of derivatives are spread over the shorter of the life of the original instrument or the life of the underlying exposure in cases where the underlying exposure continues to exist. Where the underlying exposure ceases to exist, any termination payments are taken to the profit and loss account. Those derivatives, relating both to interest rates and/or currency exchange, that are directly associated with a specific transaction and exactly match the underlying cash flows relating to the transaction are accounted for on the basis of the combined economic result of the transaction including the related derivative. n) Restructuring costs o) Research and development |  |
Group Profit and Loss Account
| Notes | 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||||||
| £m | £m | £m | £m | £m | ||||||||||||
| Group turnover – continuing operations | 2(a) | 3,037 | 2,980 | 942 | 3,922 | 2,975 | ||||||||||
| Operating costs – continuing operations | 3 | (2,247 | ) | (2,140 | ) | (491 | ) | (2,631 | ) | (1,902 | ) | |||||
| Operating profit | ||||||||||||||||
| – Before exceptional items – continuing operations | 2(b) | 936 | 940 | 451 | 1,391 | 1,114 | ||||||||||
| – Exceptional items – continuing operations | 4(a) | (146 | ) | (100 | ) | – | (100 | ) | (41 | ) | ||||||
| Total operating profit | 2(b) | 790 | 840 | 451 | 1,291 | 1,073 | ||||||||||
| Merger costs – continuing operations | 4(b) | (8 | ) | – | – | – | – | |||||||||
| Profit on disposal of fixed asset investments | 4(b) | 1 | – | – | – | 4 | ||||||||||
| Profit/(loss) on disposal of tangible fixed assets – continuing operations | 4(b) | (6 | ) | 9 | 1 | 10 | (19 | ) | ||||||||
| Net interest | 8 | (322 | ) | (332 | ) | (86 | ) | (418 | ) | (360 | ) | |||||
| Profit on ordinary activities before taxation | 455 | 517 | 366 | 883 | 698 | |||||||||||
| Taxation | ||||||||||||||||
| – Excluding exceptional items | 9 | (189 | ) | (188 | ) | (112 | ) | (300 | ) | (228 | ) | |||||
| – Exceptional items | 9 | 41 | 32 | – | 32 | 8 | ||||||||||
| 9 | (148 | ) | (156 | ) | (112 | ) | (268 | ) | (220 | ) | ||||||
| Profit for the period | 307 | 361 | 254 | 615 | 478 | |||||||||||
| Dividends | 10 | (244 | ) | (352 | ) | (102 | ) | (454 | ) | (352 | ) | |||||
| Profit transferred to profit and loss account reserve | 21 | 63 | 9 | 152 | 161 | 126 | ||||||||||
Details of the restatement of the results for prior periods are provided in note 1 to the accounts, on page 25.
Group Statement of Total Recognised Gains and Losses
| Notes | 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||||||
| £m | £m | £m | £m | £m | ||||||||||||
| Profit for the period | 307 | 361 | 254 | 615 | 478 | |||||||||||
| Total recognised gains for the period | 307 | 361 | 254 | 615 | 478 | |||||||||||
| Prior year adjustment: | ||||||||||||||||
Accounting for deferred tax on an undiscounted basis | 1 | (623 | ) | |||||||||||||
| Total gains and losses recognised since last annual report | (316 | ) | ||||||||||||||
Details of the restatement of the results for prior periods are provided in note 1 to the accounts, on page 25.
Balance Sheets at 31 March
| Group | Company | ||||||||||||
| Notes | 2003 £m | 2002 Restated £m | 2003 £m | 2002 Restated £m | |||||||||
| Fixed assets | |||||||||||||
| Tangible assets | 11 | 7,783 | 7,540 | 7,785 | 7,543 | ||||||||
| Investments | 12 | – | – | 16 | 875 | ||||||||
| 7,783 | 7,540 | 7,801 | 8,418 | ||||||||||
| Current assets | |||||||||||||
| Stocks | 13 | 31 | 34 | 31 | 34 | ||||||||
| Debtors (amounts falling due within one year) | 14 | 305 | 465 | 298 | 465 | ||||||||
| Debtors (amounts falling due after more than one year) | 14 | 2,241 | 2,076 | 2,241 | 2,076 | ||||||||
| Current asset investments | 7 | 3 | 206 | 209 | |||||||||
| 2,584 | 2,578 | 2,776 | 2,784 | ||||||||||
| Creditors (amounts falling due within one year) | |||||||||||||
| Borrowings | 17, 18 | (1,089 | ) | (952 | ) | (580 | ) | (951 | ) | ||||
| Other creditors | 15 | (1,120 | ) | (1,017 | ) | (1,633 | ) | (1,899 | ) | ||||
| (2,209 | ) | (1,969 | ) | (2,213 | ) | (2,850 | ) | ||||||
| Net current assets/(liabilities) | 375 | 609 | 563 | (66 | ) | ||||||||
| Total assets less current liabilities | 8,158 | 8,149 | 8,364 | 8,352 | |||||||||
| Creditors (amounts falling due after more than one year) | |||||||||||||
| Borrowings | 17, 18 | (4,082 | ) | (4,228 | ) | (2,838 | ) | (2,619 | ) | ||||
| Other creditors | 16 | (977 | ) | (928 | ) | (2,424 | ) | (2,742 | ) | ||||
| (5,059 | ) | (5,156 | ) | (5,262 | ) | (5,361 | ) | ||||||
| Provisions for liabilities and charges | 19 | (1,450 | ) | (1,407 | ) | (1,450 | ) | (1,407 | ) | ||||
| Net assets employed | 1,649 | 1,586 | 1,652 | 1,584 | |||||||||
| Capital and reserves | |||||||||||||
| Called up share capital | 20 | 45 | 45 | 45 | 45 | ||||||||
| Share premium account | 21 | 204 | 204 | 204 | 204 | ||||||||
| Capital redemption reserve | 21 | 1,332 | 1,332 | 1,332 | 1,332 | ||||||||
| Profit and loss account | 21 | 68 | 5 | 71 | 3 | ||||||||
| Equity shareholders’ funds | 1,649 | 1,586 | 1,652 | 1,584 | |||||||||
Details of the restatement of the balance sheets at 31 March 2002 are provided in note 1 to the accounts, on page 25.
Commitments and contingencies are shown in note 25, page 40.
The accounts on pages 20 to 50 inclusive were approved by the Board on 9 June 2003 and were signed on its behalf by:
Steve Holliday Chief Executive
Colin Buck Finance Director
| 12 months | 12 months | 3 months | 15 months | 12 months | ||||||||||||
| ended | ended | ended | ended | ended | ||||||||||||
| 31 Mar 2003 | 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2002 | 31 Dec 2000 | ||||||||||||
| Restated | Restated | Restated | Restated | |||||||||||||
| Unaudited | Unaudited | |||||||||||||||
| Notes | £m | £m | £m | £m | £m | |||||||||||
| Net cash inflow from operating activities before | ||||||||||||||||
| exceptional items | 23(a | ) | 1,454 | 1,224 | 1,129 | 2,353 | 1,468 | |||||||||
| Expenditure relating to exceptional items | (135 | ) | (11 | ) | (1 | ) | (12 | ) | (4 | ) | ||||||
| Net cash inflow from operating activities | 1,319 | 1,213 | 1,128 | 2,341 | 1,464 | |||||||||||
| Returns on investments and servicing of finance | ||||||||||||||||
| Interest received and similar income | 17 | 3 | 2 | 5 | 2 | |||||||||||
| Interest paid and similar charges | (326 | ) | (302 | ) | (67 | ) | (369 | ) | (385 | ) | ||||||
| Net cash outflow for returns on investments and servicing of finance | (309 | ) | (299 | ) | (65 | ) | (364 | ) | (383 | ) | ||||||
| Taxation | ||||||||||||||||
| Corporation tax paid | (62 | ) | (205 | ) | (35 | ) | (240 | ) | (191 | ) | ||||||
| Capital expenditure | ||||||||||||||||
| Payments to acquire tangible fixed assets | (617 | ) | (787 | ) | (158 | ) | (945 | ) | (610 | ) | ||||||
| Receipts from disposal of tangible fixed assets | 12 | 31 | 5 | 36 | 4 | |||||||||||
| Net cash outflow for capital expenditure | (605 | ) | (756 | ) | (153 | ) | (909 | ) | (606 | ) | ||||||
| Acquisitions and disposals | ||||||||||||||||
| Receipts from disposal of investments | 1 | 13 | – | 13 | 7 | |||||||||||
| Equity dividends paid | (337 | ) | (361 | ) | (71 | ) | (432 | ) | (400 | ) | ||||||
| Net cash inflow/(outflow) before management of liquid resources and financing | 7 | (395 | ) | 804 | 409 | (109 | ) | |||||||||
| Management of liquid resources | ||||||||||||||||
| (Increase)/decrease in short-term deposits | (4 | ) | 1 | 54 | 55 | 210 | ||||||||||
| Net cash inflow from management of liquid resources | 23(b) | (c) | (4 | ) | 1 | 54 | 55 | 210 | ||||||||
| Financing | ||||||||||||||||
| (Decrease)/increase in borrowings | 23(b) | (c) | (8 | ) | 550 | (850 | ) | (300 | ) | (173 | ) | |||||
| Loan to parent undertaking | (165 | ) | – | – | – | – | ||||||||||
| Funding of special pension contribution | 193 | (193 | ) | – | (193 | ) | – | |||||||||
| Funding movement on Demerger of Lattice from BG Group plc | – | – | – | – | 78 | |||||||||||
| Net cash inflow from financing | 20 | 357 | (850 | ) | (493 | ) | (95 | ) | ||||||||
| Net increase/(decrease) in cash and overdrafts | 23(b) | (c) | 23 | (37 | ) | 8 | (29 | ) | 6 | |||||||
Details of the restatement of the cash flows for prior periods are provided in note 1 to the accounts, on page 25.
Notes to the Accounts
| 1. | Changes to accounting policies and basis of segmental analysis The interest credit related to the amortisation of pension scheme surplus, which was previously included within operating costs, is now included within net interest. Deferred tax, which was previously provided on a discounted basis, is now provided on an undiscounted basis. The effect of these two changes on prior years is set out below. |
| 12 months | 3 months | 15 months | 12 months | ||||||
| ended | ended | ended | ended | ||||||
| 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2002 | 31 Dec 2000 | ||||||
| Unaudited | Unaudited | ||||||||
| £m | £m | £m | £m | ||||||
| Profit and loss account | |||||||||
| Total operating profit: | |||||||||
| Reclassification of pensions interest | (4 | ) | (3 | ) | (7 | ) | (10 | ) | |
| Net Interest: | |||||||||
| Reclassification of pensions interest | 4 | 3 | 7 | 10 | |||||
| Taxation: | |||||||||
| Accounting for deferred tax on an undiscounted basis | (26 | ) | (14 | ) | (40 | ) | (47 | ) | |
| Decrease in profit for the period | (26 | ) | (14 | ) | (40 | ) | (47 | ) | |
| Cash flow statement | |||||||||
| Net cash inflow from operating activities: | |||||||||
| Reclassification of pensions interest | (4 | ) | (3 | ) | (7 | ) | (10 | ) | |
| Returns on investments and servicing of finance: | |||||||||
| Reclassification of pensions interest | 4 | 3 | 7 | 10 | |||||
| 2002 | |||||||||
| At 31 March | £m | ||||||||
| Balance Sheet | |||||||||
| Provisions for liabilities and charges: | |||||||||
| Accounting for deferred tax on an undiscounted basis | (623 | ) | |||||||
| The change in treatment of the interest credit related to the amortisation of pension scheme surplus has reduced operating profit and net interest payable for the 12 months to 31 March 2003 both by £1m. It is not practicable to estimate the effect on the results for the year ended 31 March 2003 of ceasing to discount the deferred tax provision. The classifications used for the disclosure of financial information within the following headings have been changed: operating costs (note 3); payroll costs (note 5(a)); tangible fixed assets (note 11); debtors (note 14) and creditors (notes 15 and 16). Segmental analysis |
| |||||||
Notes to the accounts continued
| 2. | Segmental analysis |
| The basis for the preparation of segmental information is set out in note 1. In the segmental analysis of turnover and operating profit for the 12 months ended 31 March 2002 and the 15 months ended 31 March 2002, the repayment of £267m of surplus entry capacity auction revenue, that was rebated to shippers through distribution tariffs, has been reported within the UK gas transmission segment. A geographical analysis of results and assets is not provided as Transco’s operations are all undertaken in the UK for UK customers. |
| a) Turnover | |||||||||||
| 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||
| £m | £m | £m | £m | £m | |||||||
| Continuing operations | |||||||||||
| UK gas distribution: | |||||||||||
| – external customers | 2,042 | 2,013 | 701 | 2,714 | 2,049 | ||||||
| – other segments | 47 | – | – | – | – | ||||||
| UK gas transmission – external customers | 567 | 528 | 137 | 665 | 509 | ||||||
| Other activities – external customers | 428 | 439 | 104 | 543 | 417 | ||||||
| 3,084 | 2,980 | 942 | 3,922 | 2,975 | |||||||
| Less: intra-segment sales | (47 | ) | – | – | – | – | |||||
| Group turnover | 3,037 | 2,980 | 942 | 3,922 | 2,975 | ||||||
| Approximately 50% of the Group’s turnover for the year ended 31 March 2003 amounting to approximately £1.5bn derives from a single customer, the Centrica Group. The majority of this turnover is in the UK gas distribution segment with lesser amounts in other activities and the UK gas transmission segment. | |
| b) Operating profit | |||||||||||
| 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||
| £m | £m | £m | £m | £m | |||||||
| Before exceptional items | |||||||||||
| Continuing operations | |||||||||||
| UK gas distribution | 554 | 548 | 363 | 911 | 659 | ||||||
| UK gas transmission | 274 | 238 | 70 | 308 | 255 | ||||||
| Other | 108 | 154 | 18 | 172 | 200 | ||||||
| 936 | 940 | 451 | 1,391 | 1,114 | |||||||
| After exceptional items | |||||||||||
| Continuing operations | |||||||||||
| UK gas distribution | 443 | 504 | 363 | 867 | 627 | ||||||
| UK gas transmission | 255 | 185 | 70 | 255 | 249 | ||||||
| Other | 92 | 151 | 18 | 169 | 197 | ||||||
| 790 | 840 | 451 | 1,291 | 1,073 | |||||||
| c) Total and net assets | ||||||||||
| Total assets | Net assets | |||||||||
| at 31 March | 2003 | 2002 Restated | 2003 | 2002 Restated | ||||||
| £m | £m | £m | £m | |||||||
| Continuing operations | ||||||||||
| UK gas distribution | 4,998 | 4,736 | 3,480 | 3,394 | ||||||
| UK gas transmission | 1,957 | 1,907 | 1,638 | 1,578 | ||||||
| Other | 1,070 | 1,110 | 997 | 1,050 | ||||||
| 8,025 | 7,753 | 6,115 | 6,022 | |||||||
| Unallocated | 2,324 | 2,365 | (4,466 | ) | (4,436 | ) | ||||
| 10,349 | 10,118 | 1,649 | 1,586 | |||||||
| The analysis of total assets and net assets by business segment excludes inter-business balances. Unallocated total assets include amounts owed by fellow subsidiary undertakings, prepaid financing charges and current asset investments. Unallocated net liabilities include net amounts owed by fellow subsidiary undertakings, net borrowings, taxation, interest and dividends. | ||||||||||
| 2. | Segmental analysis (continued) | ||||||||||
| d) Other segmental information | |||||||||||
| 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||
| £m | £m | £m | £m | £m | |||||||
| Capital expenditure | |||||||||||
| Continuing operations | |||||||||||
| UK gas distribution | 380 | 455 | 69 | 524 | 312 | ||||||
| UK gas transmission | 182 | 239 | 30 | 269 | 216 | ||||||
| Other | 84 | 124 | 48 | 172 | 130 | ||||||
| 646 | 818 | 147 | 965 | 658 | |||||||
| Depreciation | |||||||||||
| Continuing operations | |||||||||||
| UK gas distribution | 185 | 176 | 45 | 221 | 178 | ||||||
| UK gas transmission | 68 | 68 | 18 | 86 | 64 | ||||||
| Other | 132 | 127 | 30 | 157 | 90 | ||||||
| 385 | 371 | 93 | 464 | 332 | |||||||
| Capital expenditure comprises additions to tangible fixed assets. | |||||||||||
| 3. | Operating costs | ||||||||||
| 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||
| £m | £m | £m | £m | £m | |||||||
| Depreciation | 385 | 371 | 93 | 464 | 332 | ||||||
| Payroll costs (note 5(a)) | 439 | 484 | 118 | 602 | 433 | ||||||
| Purchases of gas | 108 | 112 | 39 | 151 | 82 | ||||||
| Rates | 235 | 231 | 56 | 287 | 213 | ||||||
| Replacement expenditure | 405 | 368 | 64 | 432 | 249 | ||||||
| Exceptional operating items | 146 | 100 | – | 100 | 41 | ||||||
| Other operating charges | 529 | 474 | 121 | 595 | 552 | ||||||
| 2,247 | 2,140 | 491 | 2,631 | 1,902 | |||||||
| Operating costs include: | |||||||||||
| Research and development costs | 8 | 12 | 5 | 17 | 19 | ||||||
| Operating lease rentals: | |||||||||||
| Plant and machinery | 15 | 17 | 5 | 22 | 16 | ||||||
| Other | 14 | 16 | 4 | 20 | 18 | ||||||
| Auditors’ remuneration: | |||||||||||
| Statutory audit services | |||||||||||
| annual audit (i) | 0.4 | 0.6 | 0.1 | 0.7 | 0.7 | ||||||
| regulatory reporting | 0.2 | 0.2 | – | 0.2 | 0.3 | ||||||
| Other non-audit services (ii) | 3.1 | 3.5 | 0.4 | 3.9 | 0.7 | ||||||
| (i) | The audit fee for the Group and the Company are not materially different. | |
| (ii) | Other non-audit services includes £2.2m paid to the consulting business unit of PricewaterhouseCoopers which was sold to IBM United Kingdom Limited on 30 September 2002. |
Notes to the accounts continued
| 4. | Exceptional Items | ||||||||||
| a) Operating | |||||||||||
| 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Unaudited | 3 months ended 31 Mar 2001 Unaudited | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | |||||||
| £m | £m | £m | £m | £m | |||||||
| Continuing operations | |||||||||||
| Restructuring costs (i) | 100 | 50 | – | 50 | – | ||||||
| Merger costs (ii) | 46 | – | – | – | – | ||||||
| Impairment of tangible fixed assets (iii) | – | 50 | – | 50 | – | ||||||
| Demerger costs (iv) | – | – | – | – | 41 | ||||||
| 146 | 100 | – | 100 | 41 | |||||||
| (i) | Relates to costs incurred in business reorganisations (£70m after tax, 12 months and 15 months ended 31 March 2002: £39m after tax). | |
| (ii) | Represents employee and property costs associated with the Merger of National Grid and Lattice (£39m after tax). | |
| (iii) | The impairment charge for the 12 months and 15 months ended 31 March 2002 relates to the write-down of LNG storage assets (£35m after tax). | |
| (iv) | Costs for the 12 months ended 31 December 2000 that arose as a direct result of the Demerger of Lattice from BG Group (£32m after tax). | |
| b) Non-operating | |||||||||||
| 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Unaudited | 3 months ended 31 Mar 2001 Unaudited | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | |||||||
| £m | £m | £m | £m | £m | |||||||
| Continuing operations | |||||||||||
| Merger costs (v) | 8 | – | – | – | – | ||||||
| Profit on disposal of investments (vi) | (1 | ) | – | – | – | (4 | ) | ||||
| Loss/(profit) on disposal of tangible fixed assets (vii) | 6 | (9 | ) | (1 | ) | (10 | ) | 19 | |||
| 13 | (9 | ) | (1 | ) | (10 | ) | 15 | ||||
| (v) | The after tax cost of the Merger was £6m. | |
| (vi) | The after tax profit on disposal of fixed asset investments was £1m (12 months ended 31 December 2000 £4m). | |
| (vii) | The after tax loss or profit on disposal of tangible fixed assets was a £4m loss (12 months ended 31 March 2002: £15m profit, 3 months ended 31 March 2001: £1m profit, 15 months ended 31 March 2002: £16m profit and 12 months ended 31 December 2000: £19m loss). |
| 5. | Payroll costs and employees | ||||||||||
| a) Payroll costs | |||||||||||
| 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||
| £m | £m | £m | £m | £m | |||||||
| Wages and salaries | 402 | 441 | 111 | 552 | 449 | ||||||
| Social security costs | 31 | 37 | 9 | 46 | 35 | ||||||
| Pension costs | 71 | 68 | 11 | 79 | 29 | ||||||
| 504 | 546 | 131 | 677 | 513 | |||||||
| Less: Amounts capitalised | (9 | ) | (39 | ) | (9 | ) | (48 | ) | (43 | ) | |
| Payroll costs included in replacement expenditure | (56 | ) | (23 | ) | (4 | ) | (27 | ) | (18 | ) | |
| Payroll costs included in exceptional items | – | – | – | – | (19 | ) | |||||
| 439 | 484 | 118 | 602 | 433 | |||||||
| b) Number of employees | |||||||
| 12 months ended 31 Mar 2003 Average Number | 15 months ended 31 Mar 2002 Average Number | 12 months ended 31 Dec 2000 Average Number | |||||
| Continuing operations | |||||||
| United Kingdom | 13,489 | 14,532 | 14,261 | ||||
| 31 Mar 2003 Number | 31 Mar 2002 Number | ||||||
| Continuing operations | |||||||
| United Kingdom | 12,397 | 14,161 | |||||
| 6. | Directorss’ emolument | ||||||||||
| The aggregate amount of emoluments paid to Directors in respect of qualifying services for the 12 months ended 31 March 2003 was £2,015,408 (12 months ended 31 March 2002: £2,775,566; 3 months ended 31 March 2001: £535,476; 15 months ended 31 March 2002: £3,311,042 and 12 months ended 31 December 2000: £3,111,741). The amount paid in respect of compensation for loss of office in the 12 months ended 31 March 2003 was £nil (12 months ended 31 March 2002: £164,769; 3 months ended 31 March 2001: £nil; 15 months ended 31 March 2002: £164,769; and 12 months ended 31 December 2000: £nil). Directors’ emoluments include amounts in respect of accrued bonus which had not yet been approved at the date of these accounts. | |||||||||||
| A number of the current Directors are also directors and employees of National Grid Transco plc or a subsidiary undertaking of that company and are paid by these companies. Prior to the Demerger, a number of the Directors were also directors and employees of BG Group plc or a subsidiary undertaking of that company and were paid by those companies. The amount disclosed includes an amount recharged by National Grid Transco plc or a subsidiary undertaking of National Grid Transco plc for these Directors and an amount recharged by BG Group plc or a subsidiary undertaking of BG Group plc prior to the Demerger. | |||||||||||
| As at 31 March 2003, retirement benefits were accruing to 11 Directors under a defined benefit scheme. The aggregate emoluments for the highest paid Director were £332,241 for the 12 months ended 31 March 2003 (12 months ended 31 March 2002: £430,791; 3 months ended 31 March 2001: £94,699; 15 months ended 31 March 2002: £525,490; and 12 months ended 31 December 2000: £372,746) and total accrued annual pension at 31 March 2003 for the highest paid Director was £91,700 (31 March 2002: £87,800 and 31 December 2000: £266,600). | |||||||||||
| Details of Directors’ interests in shares are contained on page17. | |||||||||||
| 7. | Pensions | ||||||||||
| Pension cost | |||||||||||
| Transco participates in the Lattice Group Pension Scheme (the Scheme). Lattice Group plc charges its subsidiary undertakings with an allocation of the total Scheme cost. The costs in respect of the Scheme are set out below: | |||||||||||
| 12 months | 12 months | 3 months | 15 months | 12 months | |||||||
| ended | ended | ended | ended | ended | |||||||
| 31 Mar 2003 | 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2002 | 31 Dec 2000 | |||||||
| Restated | Restated | Restated | Restated | ||||||||
| Unaudited | Unaudited | ||||||||||
| £m | £m | £m | £m | £m | |||||||
| Charged against operating profit | 71 | 68 | 11 | 79 | 29 | ||||||
| Charged/(credited) within net interest | 1 | (4 | ) | (3 | ) | (7 | ) | (10 | ) | ||
| Total cost | 72 | 64 | 8 | 72 | 19 | ||||||
| The amount charged by Lattice Group plc to Transco includes a credit in respect of the amortisation of a pensions surplus recognised at the last actuarial valuation of the Scheme as at 31 March 2001. As a result of the deterioration in world stock markets, if a formal actuarial valuation of the Scheme were carried out, this would in all likelihood reveal a deficit. The continuing recognition of a surplus in these circumstances is incompatible with this position. Consequently, Lattice Group plc has suspended the recognition of any further pension surplus amortisation with effect from 1 October 2002. As a result of this action operating profit is reduced by £8m and net interest charge increased by £1m compared with the ongoing recognition of such a surplus. | |||||||||||
| There were no outstanding or prepaid pension contributions at 31 March 2003 (31 March 2002: £nil). | |||||||||||
| Pension Scheme | |||||||||||
| Substantially all of the Group’s employees are members of the Scheme. The Scheme provides final salary defined benefits for employees who joined the Lattice Group up to 31 March 2002. A defined contribution section was added to this scheme from 1 April 2002 for employees joining the Lattice Group from that date. | |||||||||||
| The scheme is self-administered and funded to cover pension liabilities in respect of service up to the balance sheet date. It is subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employer’s contributions which, together with the specified contributions payable by the employees and proceeds from the scheme’s assets, are expected to be sufficient to fund the benefits payable under the scheme. | |||||||||||
| The latest full actuarial valuation of the Scheme was carried out by Watson Wyatt LLP as at 31 March 2001. The projected unit method was used and the principal actuarial assumptions adopted were that the annual rate of inflation and pensions increases would be 2.3%; that future real increases in pensionable earnings would be 1.9%; that the annual real rate of return on existing investments would be 2.9%; and that the real annual rate of return on future contributions would be 3.7%. Excluding assets and liabilities attributable to BG Group members who left the scheme on 4 July 2001, the aggregate market value of the Scheme’s assets was £11,963m and the actuarial value of the assets represented approximately 104% of the actuarial value of benefits due to members calculated on the basis of pensionable earnings and service as at 31 March 2001 on an ongoing basis and allowing for projected increases in pensionable earnings and pensions. | |||||||||||
| The results of the actuarial valuation carried out as at 31 March 2001 showed that based on long-term financial assumptions the contribution rate required to meet future benefit accrual was 26.6% of pensionable earnings (23.6% employers and 3% employees) though employers’ contributions could have been maintained at the level of 3% until March 2004. Employers’ contributions were however increased from 3% to 8.5% with effect from 1 January 2002. This contribution rate will be reviewed when the next independent actuarial valuation is carried out, which will be as at 31 March 2003. | |||||||||||
| FRS 17, Retirement Benefits | |||||||||||
| On 20 November 2002, the Accounting Standards Board introduced a new accounting standard FRS 17 ‘Retirement Benefits’, replacing SSAP 24 ‘Accounting for Pension Costs’. FRS 17 is fully effective for periods beginning on or after 1 January 2005, though disclosures are required in the financial years prior to its full implementation. As Transco’s share of the underlying assets and liabilities of the Scheme cannot be identified separately, Transco would account for pensions under FRS 17 as if the Scheme were a defined contributions scheme and is not required to make the full disclosures under FRS 17. The pension charge incurred by Transco in the 12 months ended 31 March 2003 amounted to £115m of which £43m related to redundancies. Lattice has not yet determined the methodology which it would use to charge pensions costs to its subsidiary undertakings following the full adoption of FRS 17. | |||||||||||
Notes to the accounts continued
| 8. | Net Interest | ||||||||||
| 12 months | 12 months | 3 months | 15 months | 12 months | |||||||
| ended | ended | ended | ended | ended | |||||||
| 31 Mar 2003 | 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2002 | 31 Dec 2000 | |||||||
| Restated | Restated | Restated | Restated | ||||||||
| Unaudited | Unaudited | ||||||||||
| £m | £m | £m | £m | £m | |||||||
| Bank loans and overdrafts | 5 | 3 | 1 | 4 | 8 | ||||||
| Other | 331 | 328 | 84 | 412 | 351 | ||||||
| 336 | 331 | 85 | 416 | 359 | |||||||
| Unwinding of discount on provisions | 6 | 6 | 2 | 8 | 6 | ||||||
| Interest payable and similar charges | 342 | 337 | 87 | 424 | 365 | ||||||
| Interest receivable and similar income | (20 | ) | (5 | ) | (1 | ) | (6 | ) | (5 | ) | |
| 322 | 332 | 86 | 418 | 360 | |||||||
| Interest payable and similar charges includes £7m (12 months ended 31 March 2002: £3m; 3 months ended 31 March 2001: £nil; 12 months ended 31 December 2001: £nil) relating to the loss incurred on the repurchase of debt during the year. | |
| 9. | Taxation |
| 12 months | 12 months | 3 months | 15 months | 12 months | |||||||
ended | ended | ended | ended | ended | |||||||
31 Mar 2003 | 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2002 | 31 Dec 2000 | |||||||
| Restated | Restated | Restated | Restated | ||||||||
| Unaudited | Unaudited | ||||||||||
£m | £m | £m | £m | £m | |||||||
| United Kingdom | |||||||||||
| – Corporation tax at 30% on income for the period | 135 | 134 | 100 | 234 | 191 | ||||||
| – Adjustment in respect of prior periods | (5 | ) | – | – | – | – | |||||
| – Deferred tax: timing differences | 18 | 22 | 12 | 34 | 29 | ||||||
| 148 | 156 | 112 | 268 | 220 | |||||||
| Comprising: | |||||||||||
| Taxation – excluding exceptional items | 189 | 188 | 112 | 300 | 228 | ||||||
| Taxation – exceptional items | (41 | ) | (32 | ) | – | (32 | ) | (8 | ) | ||
| 148 | 156 | 112 | 268 | 220 | |||||||
| A reconciliation of the UK corporation tax rate to the effective tax rate of the Group is as follows: | |
| % of profit before taxation | |||||||||||
| 12 months | 12 months | 3 months | 15 months | 12 months | |||||||
| ended | ended | ended | ended | ended | |||||||
| 31 Mar 2003 | 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2002 | 31 Dec 2000 | |||||||
| Restated | Restated | Restated | Restated | ||||||||
| Unaudited | Unaudited | ||||||||||
| UK corporation tax rate | 30.0 | 30.0 | 30.0 | 30.0 | 30.0 | ||||||
| Effect on tax charge of: | |||||||||||
| Origination and reversal of timing differences | (3.1 | ) | (7.1 | ) | (3.3 | ) | (5.7 | ) | (3.8 | ) | |
| Permanent differences | 1.6 | 0.9 | 0.7 | 0.8 | 0.2 | ||||||
| Current tax charge | 28.5 | 23.8 | 27.4 | 25.1 | 26.4 | ||||||
| Deferred taxation: origination and reversal of timing differences | 3.1 | 7.1 | 3.3 | 5.7 | 3.8 | ||||||
| Effective tax rate before prior year adjustments and exceptional items | 31.6 | 30.9 | 30.7 | 30.8 | 30.2 | ||||||
| Adjustments in respect of prior years | (0.8 | ) | – | – | – | – | |||||
| Effective tax rate before exceptional items | 30.8 | 30.9 | 30.7 | 30.8 | 30.2 | ||||||
| Exceptional items | 1.7 | (0.7 | ) | (0.1 | ) | (0.4 | ) | 1.3 | |||
| Effective tax rate after exceptional items | 32.5 | 30.2 | 30.6 | 30.4 | 31.5 | ||||||
| Factors that may affect future tax charges | |
| Transco has brought forward non-trading debits of £75m (31 March 2002: £75m) which may reduce tax payments in future years. | |
| No provision has been made for deferred tax on gains recognised on the sale of properties where potentially taxable gains have been rolled over into replacement assets. Such tax would become payable only if the replacement asset were sold without it being possible to claim roll-over relief. The total amount not provided for is £46m (31 March 2002: £46m). At present, it is not envisaged that any tax will become payable in the foreseeable future. | |
| 10. | Dividends |
12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Unaudited | 3 months ended 31 Mar 2001 Unaudited | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | |||||||
| £m | £m | £m | £m | £m | |||||||
| Ordinary shares: | |||||||||||
| Interim dividend | 244 | 259 | 102 | 361 | 281 | ||||||
| Proposed final dividend | – | 93 | – | 93 | 71 | ||||||
| 244 | 352 | 102 | 454 | 352 | |||||||
| Transco plc is prohibited from declaring a dividend or other distribution unless it has certified to Ofgem that it is in compliance in all material respects with certain regulatory obligations, including a requirement to ensure it has sufficient financial resources and facilities to enable it to carry on its business and a requirement to use all reasonable endeavours to maintain an investment grade rating. | |
| 11. | Tangible fixed assets The Group |
| Land and buildings | Plant and machinery | Assets in the course of construction | Motor vehicles and office equipment | Total | |||||||
| £m | £m | £m | £m | £m | |||||||
| Cost at 1 April 2002 (restated) | 73 | 9,945 | 247 | 688 | 10,953 | ||||||
| Additions | 8 | 257 | 307 | 74 | 646 | ||||||
| Disposals | – | (24 | ) | – | (136 | ) | (160 | ) | |||
| Reclassifications | (6 | ) | 325 | (317 | ) | (2 | ) | – | |||
| Cost at 31 March 2003 | 75 | 10,503 | 237 | 624 | 11,439 | ||||||
| Depreciation at 1 April 2002 (restated) | (16 | ) | (2,915 | ) | – | (482 | ) | (3,413 | ) | ||
| Charge for the year | (3 | ) | (304 | ) | – | (78 | ) | (385 | ) | ||
| Disposals | – | 10 | – | 132 | 142 | ||||||
| Reclassifications | (1 | ) | – | – | 1 | – | |||||
| Depreciation at 31 March 2003 | (20 | ) | (3,209 | ) | – | (427 | ) | (3,656 | ) | ||
| Net book value at 31 March 2003 | 55 | 7,294 | 237 | 197 | 7,783 | ||||||
| Net book value at 31 March 2002 (restated) | 57 | 7,030 | 247 | 206 | 7,540 | ||||||
| The Company |
| Land and buildings | Plant and machinery | Assets in the course of construction | Motor vehicles and office equipment | Total | |||||||
| £m | £m | £m | £m | £m | |||||||
| Cost at 1 April 2002 (restated) | 73 | 9,948 | 247 | 688 | 10,956 | ||||||
| Additions | 8 | 257 | 307 | 73 | 645 | ||||||
| Disposals | – | (24 | ) | (136 | ) | (160 | ) | ||||
| Reclassifications | (6 | ) | 325 | (317 | ) | (2 | ) | – | |||
| Cost at 31 March 2003 | 75 | 10,506 | 237 | 623 | 11,441 | ||||||
| Depreciation at 1 April 2002 (restated) | (16 | ) | (2,915 | ) | – | (482 | ) | (3,413 | ) | ||
| Charge for the year | (3 | ) | (304 | ) | – | (78 | ) | (385 | ) | ||
| Disposals | – | 10 | – | 132 | 142 | ||||||
| Reclassifications | (1 | ) | – | – | 1 | – | |||||
| Depreciation at 31 March 2003 | (20 | ) | (3,209 | ) | – | (427 | ) | (3,656 | ) | ||
| Net book value at 31 March 2003 | 55 | 7,297 | 237 | 196 | 7,785 | ||||||
| Net book value at 31 March 2002 (restated) | 57 | 7,033 | 247 | 206 | 7,543 | ||||||
| The classification of tangible fixed assets has been revised in line with that of National Grid Transco (note 1). The classification of balances at 1 April 2002 has been restated accordingly. Previously, tangible fixed assets were classified under the headings: land and buildings; mains and services; gas storage; plant and machinery; meters; and motor vehicles and office equipment. | |
| The net book value of land and buildings comprises: | |
| 2003 | 2002 | ||||
| At 31 March | £m | £m | |||
| Freehold | 51 | 53 | |||
| Long leasehold | 2 | 2 | |||
| Short leasehold | 2 | 2 | |||
| 55 | 57 | ||||
Notes to the accounts continued
| 12. | Fixed asset investments | ||
| The Group | |||
| The Group has £nil fixed asset investments as at 31 March 2003 (2002: £nil). | |||
| The Company | |||
| Shares in subsidiary | |||
| undertakings | |||
| £m | |||
| At 1 April 2002 | 875 | ||
| Additions | 1 | ||
| Disposals | (860 | ) | |
| Cost at 31 March 2003 | 16 | ||
| The disposals in the year reflect the disposal of British Transco Finance (No 4) Limited at a profit of £1m, subsequent to a call option in the equity of British Transco Finance (No 4) Limited sold in a prior period. | |||
| 13. | Stocks | ||||
| The Group and the Company | |||||
| 2003 | 2002 | ||||
| At 31 March | £m | £m | |||
| Raw materials and consumables | 31 | 34 | |||
| 14. | Debtors | |||||||||
| The Group | The Company | |||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||
| Restated | Restated | |||||||||
| At 31 March | £m | £m | £m | £m | ||||||
| Amounts falling due within one year | ||||||||||
| Trade debtors | 27 | 20 | 27 | 20 | ||||||
| Amounts owed by fellow subsidiary undertakings | 11 | 200 | 4 | 200 | ||||||
| Other debtors | 24 | 24 | 24 | 24 | ||||||
| Prepayments and accrued income | 243 | 221 | 243 | 221 | ||||||
| 305 | 465 | 298 | 465 | |||||||
| Amounts falling due after more than one year | ||||||||||
| Amounts owed by parent undertaking | 2,241 | 2,076 | 2,241 | 2,076 | ||||||
| Total debtors | 2,546 | 2,541 | 2,539 | 2,541 | ||||||
| The classification of debtors has been revised in line with that of National Grid Transco (note 1). Comparatives have been restated accordingly and £134m of unbilled income at 31 March 2002 previously reported within trade debtors, is now included within prepayments and accrued income. | ||||||||||
| Debtors are stated net of provisions for doubtful debts of £11m (2002: £9m). Amounts charged for doubtful debts against profit were £4m (15 months ended 31 March 2002: £2m credit). | ||||||||||
| 15. | Creditors (amounts falling due within one year) | |||||||||
| The Group | The Company | |||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||
| Restated | Restated | |||||||||
| At 31 March | £m | £m | £m | £m | ||||||
| Borrowings (note 17) | 1,089 | 952 | 580 | 951 | ||||||
| Trade creditors and accruals | 310 | 236 | 310 | 236 | ||||||
| Amounts owed to Group undertakings | – | – | 544 | 912 | ||||||
| Amounts owed to fellow subsidiary undertakings | 252 | 95 | 252 | 95 | ||||||
| Corporation tax | – | 50 | – | 47 | ||||||
| Social security and other taxes | 165 | 168 | 165 | 168 | ||||||
| Proposed dividend | – | 93 | – | 93 | ||||||
| Other creditors | 193 | 181 | 162 | 154 | ||||||
| Deferred income | 200 | 194 | 200 | 194 | ||||||
| 2,209 | 1,969 | 2,213 | 2,850 | |||||||
| 16. | Creditors (amounts falling due after more than one year) |
| The Group | The Company | |||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||
| Restated | Restated | |||||||||
| At 31 March | £m | £m | £m | £m | ||||||
| Borrowings (note 17) | 4,082 | 4,228 | 2,838 | 2,619 | ||||||
| Amounts owed to Group undertakings | – | – | 1,447 | 1,814 | ||||||
| Deferred income | 977 | 928 | 977 | 928 | ||||||
| 5,059 | 5,156 | 5,262 | 5,361 | |||||||
| 17. | Borrowings |
| The Group | The Company | |||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||
| Restated | Restated | |||||||||
| At 31 March | £m | £m | £m | £m | ||||||
| Amounts falling due within one year: | ||||||||||
| Bank loans and overdrafts | 189 | 131 | 189 | 131 | ||||||
| Commercial paper | – | 8 | – | 8 | ||||||
| Bonds | 515 | 443 | 36 | 443 | ||||||
| Borrowings from fellow subsidiary undertakings | 349 | 353 | 349 | 352 | ||||||
| Other loans | 36 | 17 | 6 | 17 | ||||||
| 1,089 | 952 | 580 | 951 | |||||||
| Amounts falling due after more than one year: | ||||||||||
| Bonds | 4,030 | 4,177 | 2,786 | 2,568 | ||||||
| Other loans | 52 | 51 | 52 | 51 | ||||||
| 4,082 | 4,228 | 2,838 | 2,619 | |||||||
| Total borrowings | 5,171 | 5,180 | 3,418 | 3,570 | ||||||
| Total borrowings are repayable as follows: | ||||||||||
| In one year or less | 1,089 | 952 | 580 | 951 | ||||||
| More than one year, but not more than two years | 643 | 508 | 193 | 81 | ||||||
| More than two years, but not more than three years | 199 | 531 | 45 | 51 | ||||||
| More than three years, but not more than four years | 888 | 80 | 677 | 40 | ||||||
| More than four years, but not more than five years | 236 | 936 | 228 | 719 | ||||||
| More than five years – other than by instalments | 2,116 | 2,173 | 1,695 | 1,728 | ||||||
| 5,171 | 5,180 | 3,418 | 3,570 | |||||||
Notes to the accounts continued
| 17. | Borrowings (continued) |
| The principal items included within Bonds are listed below. Unless otherwise indicated, these instruments were outstanding at both 31 March 2002 and 31 March 2003. |
| Issuer | Description of instrument (notional amount) | |
| British Transco Finance (No 5) Limited | GBP 115 million Floating Rate Instruments due 2006 | |
| British Transco Finance Inc | USD 300 million 6.625% Fixed Rate Instruments due 2018 | |
| British Transco International Finance BV | USD 500 million 6.125% Fixed Rate Instruments due 2003 | |
| British Transco International Finance BV | ITL 150,000 million 10.75% Fixed Rate Instruments due 2003 | |
| British Transco International Finance BV | USD 250 million 6.25% Fixed Rate Instruments due 2003 | |
| British Transco International Finance BV | USD 300 million 6.0% Fixed Rate Instruments due 2004 | |
| British Transco International Finance BV | USD 350 million 6.625% Fixed Rate Instruments due 2004 | |
| British Transco International Finance BV | ITL 250,000 million 5.25% Fixed Rate Instruments due 2005 | |
| British Transco International Finance BV | USD 350 million 7.0% Fixed Rate Instruments due 2006 | |
| British Transco International Finance BV | FRF 2,000 million 5.125% Fixed Rate Instruments due 2009 | |
| British Transco International Finance BV | USD 1,500 million Zero Coupon Bond due 2021 | |
| Transco plc* | JPY 55,000 million Floating Rate Instruments due 2002 | |
| Transco plc* | GBP 200 million 8.125% Fixed Rate Instruments due 2003 | |
| Transco plc | EUR 650 million 5.25% Fixed Rate Instruments due 2006 | |
| Transco plc | GBP 250 million 6.125% Fixed Rate Instruments due 2006 | |
| Transco plc | GBP 250 million 8.875% Fixed Rate Instruments due 2008 | |
| Transco plc | AUD 500 million 7.0% Fixed Rate Instruments due 2008 | |
| Transco plc | GBP 300 million 5.375% Fixed Rate Instruments due 2009 | |
| Transco plc | GBP 250 million 6.0% Fixed Rate Instruments due 2017 | |
| Transco plc | GBP 275 million 8.75% Fixed Rate Instruments due 2025 | |
| Transco plc | GBP 50 million 6.2% Fixed Rate Instruments due 2028 | |
| Transco plc | GBP 200 million 5.625% Fixed Rate Instruments due 2007 | |
| * Matured during the 12 months ended 31 March 2003 | ||
| 18. | Financial instruments | |
| The Group’s treasury policy, including details of the nature, terms and credit risk associated with financial instruments with off-balance sheet risk is described on pages 11 to 12. | ||
| Fixed rate liabilities | |||||||||||
| At 31 March 2003 | Weighted | ||||||||||
| average | |||||||||||
| Weighted | period | ||||||||||
| Variable | average | for which | |||||||||
| Total | rate | Fixed rate | interest rate | rate is fixed | |||||||
| £m | £m | £m | % | Years | |||||||
| Sterling | |||||||||||
| Borrowings | 5,171 | 2,488 | 2,683 | 6.1 | 5 | ||||||
| Other financial liabilities | 20 | 20 | – | – | – | ||||||
| 5,191 | 2,508 | 2,683 | 6.1 | 5 | |||||||
| At 31 March 2002 | |||||||||||
| Sterling – Borrowings | 5,180 | 1,878 | 3,302 | 6.1 | 7 | ||||||
Substantially all of the variable rate borrowings are subject to interest rates which fluctuate with LIBOR (London Interbank Offered Rate).
In calculating the weighted average number of years for which interest rates are fixed, swaps which are cancellable at the option of the swap provider are taken to have a life based on the earliest date at which they can be cancelled.
| 18. | Financial instruments (continued) |
| Currency and interest rate composition of financial assets | |
| The currency and interest rate composition of the Group’s financial assets are shown in the table below after taking account of currency and interest rate swaps. |
Fixed rate assets | |||||||||||
Total | Non-interest bearing | Fixed rate | Weighted average interest rate | Weighted average period for which rate is fixed | |||||||
| At 31 March 2003 | £m | £m | £m | % | Years | ||||||
| Sterling | 3 | – | 3 | 4.0 | 0 | ||||||
| US dollars | 2 | – | 2 | 1.1 | 0 | ||||||
| Other currencies | 2 | – | 2 | 2.5 | 0 | ||||||
| Cash and investments | 7 | – | 7 | – | – | ||||||
| Other financial assets (sterling) | 2,241 | 2,241 | – | – | – | ||||||
| 2,248 | 2,241 | 7 | – | – | |||||||
| At 31 March 2002 | Restated | Restated | |||||||||
| Sterling | 2 | – | 2 | 3.4 | 0 | ||||||
| US dollars | 1 | – | 1 | 1.8 | 0 | ||||||
| Cash and investments | 3 | – | 3 | – | – | ||||||
| Other financial assets (sterling) | 2,076 | 2,076 | – | – | – | ||||||
| 2,079 | 2,076 | 3 | – | – | |||||||
The maturity profile of the Group’s financial liabilities and assets are shown in the tables below after taking into account currency and interest rate swaps.
| Maturity of financial liabilities at 31 March | 2003 £m | 2002 £m | |||
| In one year or less | 1,093 | 952 | |||
| More than one year, but not more than two years | 647 | 508 | |||
| More than two years, but not more than three years | 203 | 531 | |||
| More than three years, but not more than four years | 892 | 80 | |||
| More than four years, but not more than five years | 240 | 936 | |||
| More than five years | 2,116 | 2,173 | |||
| 5,191 | 5,180 | ||||
2003 | 2002 Restated | ||||
| Maturity of financial assets at 31 March | £m | £m | |||
| In one year or less | 7 | 3 | |||
| No maturity date | 2,241 | 2,076 | |||
| 2,248 | 2,079 | ||||
Fair values of financial instruments at 31 March | 2003 | 2002 | ||||||||
Book value £m | Fair value £m | Book value Restated £m | Fair value Restated £m | |||||||
| Financial instruments held or issued to finance the Group’s operations: | ||||||||||
| Short-term borrowings | (1,089 | ) | (1,093 | ) | (952 | ) | (952 | ) | ||
| Long-term borrowings | (4,174 | ) | (4,677 | ) | (4,403 | ) | (4,805 | ) | ||
| Financial assets | 2,248 | 2,248 | 2,079 | 2,079 | ||||||
| Financial instruments held to manage the interest rate and currency profile: | ||||||||||
| Interest rate swaps | – | 62 | – | 25 | ||||||
| Forward foreign currency contracts and cross currency swaps | 92 | 313 | 175 | 248 | ||||||
| Market values, where available, have been used to determine fair values. Where market values are not available, fair values have been calculated by discounting future cash flows at prevailing interest rates. | ||||||||||
Notes to the accounts continued
| 18. | Financial instruments (continued) |
| The notional principal amounts relating to financial instruments held to manage interest rate and currency profile for interest rate swaps and forward rate agreements, foreign currency contracts and cross-currency swaps, amounted to £3,846m (2002: £6,553m) and £3,428m (2002: £3,654m) respectively. |
Unrecognised gains £m | Unrecognised losses £m | Unrecognised net gain £m | Deferred gains £m | Deferred losses £m | Deferred net(loss) £m | ||||||||
| Gains and (losses) on hedges at 1 April 2002 | 157 | (59 | ) | 98 | 29 | (85 | ) | (56 | ) | ||||
| (Gains)/losses arising in previous years recognised in the year | (38 | ) | 32 | (6 | ) | (7 | ) | 14 | 7 | ||||
| Gains/(losses) arising in previous years not recognised in the year | 119 | (27 | ) | 92 | 22 | (71 | ) | (49 | ) | ||||
| Gains/(losses) arising in the year | 227 | (36 | ) | 191 | 12 | (13 | ) | (1 | ) | ||||
| Gains and (losses) on hedges at 31 March 2003 | 346 | (63 | ) | 283 | 34 | (84 | ) | (50 | ) | ||||
| Of which: | |||||||||||||
| Gains and (losses) expected to be recognised within one year | 2 | (1 | ) | 1 | 6 | (12 | ) | (6 | ) | ||||
| Gains and (losses) expected to be recognised after one year | 344 | (62 | ) | 282 | 28 | (72 | ) | (44 | ) | ||||
2003 £m | 2002 £m | ||||
| In one year or less | 622 | 623 | |||
| More than one year, but not more than two years | – | 24 | |||
| More than two years, but not more than three years | 600 | – | |||
| More than three years, but not more than four years | – | 600 | |||
| More than five years | – | 39 | |||
| 1,222 | 1,286 | ||||
| 19. | Provisions for liabilities and charges | ||||
| The Group and the Company |
Environmental £m | Deferred taxation £m | Restructuring £m | Total £m | ||||||
| At 31 March 2002 (as previously reported) | 102 | 635 | 47 | 784 | |||||
| Restatement of opening balances: | |||||||||
| Accounting for deferred tax on an undiscounted basis (note 1) | – | 623 | – | 623 | |||||
| At 31 March 2002 (restated) | 102 | 1,258 | 47 | 1,407 | |||||
| Additions | – | 18 | 154 | 172 | |||||
| Utilised | (10 | ) | – | (125 | ) | (135 | ) | ||
| Unwinding of discount | 6 | – | – | 6 | |||||
| At 31 March 2003 | 98 | 1,276 | 76 | 1,450 | |||||
At 31 March 2003, £20m of the total restructuring provision (2002: £nil) consisted of provisions for costs in respect of surplus leasehold properties. The expected payment dates for property restructuring costs remain uncertain.
Deferred taxation comprises:
| Provided | ||||||
| At 31 March | 2003 | 2002 Restated | ||||
£m | £m | |||||
| Accelerated capital allowances | 1,277 | 1,269 | ||||
| Other timing differences | (1 | ) | (11 | ) | ||
| 1,276 | 1,258 | |||||
| 20. | Share capital |
Number of shares | Number of shares | ||||||||
| At 31 March | 2003 millions | 2002 millions | 2003 £m | 2002 £m | |||||
| Authorised | |||||||||
| Ordinary shares of 1 2/15p each | 6,052 | 6,052 | 69 | 69 | |||||
| Allotted and fully paid | |||||||||
| Ordinary shares of 1 2/15p each | 3,944 | 3,944 | 45 | 45 | |||||
| 21. | Reserves |
| The Group | The Company | |||||||||||||
Share premium account £m | Capital redemption reserve £m | Profit and loss account reserve £m | Share premium account £m | Capital redemption reserve £m | Profit and loss account reserve £m | |||||||||
| At 31 March 2002 (as previously reported) | 204 | 1,332 | 628 | 204 | 1,332 | 626 | ||||||||
| Restatement of opening balances: | ||||||||||||||
| Accounting for deferred tax on an undiscounted basis (note 1) | – | – | (623 | ) | – | – | (623 | ) | ||||||
| At 31 March 2002 (restated) | 204 | 1,332 | 5 | 204 | 1,332 | 3 | ||||||||
| Retained profit for the year | – | – | 63 | – | – | 68 | ||||||||
| At 31 March 2003 | 204 | 1,332 | 68 | 204 | 1,332 | 71 | ||||||||
| 22. | Reconciliation of movement in equity shareholders’ funds |
| The Group | 12 months ended 31 Mar 2003 | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | ||||||
£m | £m | £m | £m | £m | |||||||
| Profit for the period | 307 | 361 | 254 | 615 | 478 | ||||||
| Dividends | (244 | ) | (352 | ) | (102 | ) | (454 | ) | (352 | ) | |
| Net increase in equity shareholders’ funds | 63 | 9 | 152 | 161 | 126 | ||||||
| Equity shareholders’ funds at the start of the period | 1,586 | 1,577 | 1,425 | 1,425 | 1,299 | ||||||
| Equity shareholders’ funds at the end of the period | 1,649 | 1,586 | 1,577 | 1,586 | 1,425 | ||||||
Notes to the accounts continued
| 23. | Group cash flow statement |
| a) Reconciliation of operating profit to net cash inflow from operating activities before exceptional items |
12 months ended 31 Mar 2003 £m | 12 months ended 31 Mar 2002 Restated Unaudited £m | 3 months ended 31 Mar 2001 Restated Unaudited £m | 15 months ended 31 Mar 2002 Restated £m | 12 months ended 31 Dec 2000 Restated £m | |||||||
| Total operating profit | 790 | 840 | 451 | 1,291 | 1,073 | ||||||
| Exceptional operating items | 146 | 100 | – | 100 | – | ||||||
| Depreciation | 385 | 371 | 93 | 464 | 332 | ||||||
| Decrease/(increase) in stocks | 3 | (15 | ) | 4 | (11 | ) | 7 | ||||
| (Increase)/decrease in debtors | (31 | ) | (1 | ) | 234 | 233 | 43 | ||||
| Increase/(decrease) in creditors | 161 | (71 | ) | 347 | 276 | 13 | |||||
| Cash inflow from operating activities before exceptional items | 1,454 | 1,224 | 1,129 | 2,353 | 1,468 | ||||||
12 months ended 31 Mar 2003 £m | 12 months ended 31 Mar 2002 Unaudited £m | 3 months ended 31 Mar 2001 Unaudited £m | 15 months ended 31 Mar 2002 £m | 12 months ended 31 Dec 2000 £m | |||||||
| Movement in cash and overdrafts | 23 | (37 | ) | 8 | (29 | ) | 6 | ||||
| Net cash inflow from the management of liquid resources | 4 | (1 | ) | (54 | ) | (55 | ) | (210 | ) | ||
| Decrease/(increase) in borrowings | 8 | (550 | ) | 850 | 300 | 173 | |||||
| Change in net debt resulting from cash flows | 35 | (588 | ) | 804 | 216 | (31 | ) | ||||
| Other non-cash movements | (22 | ) | (56 | ) | (6 | ) | (62 | ) | (34 | ) | |
| Movement in net debt in the period | 13 | (644 | ) | 798 | 154 | (65 | ) | ||||
| Net debt at the start of the period | (5,177 | ) | (4,533 | ) | (5,331 | ) | (5,331 | ) | (5,266 | ) | |
| Net debt at the end of the period | (5,164 | ) | (5,177 | ) | (4,533 | ) | (5,177 | ) | (5,331 | ) | |
| 23. | Group cash flow statement (continued) |
| At 1 Jan 2000 £m | Cash Flow £m | Non-cash Movements £m | Other Movements £m | At 31 Dec 2000 £m | |||||||
| Cash at bank and in hand | 1 | – | – | – | 1 | ||||||
| Bank overdrafts | (14 | ) | 6 | – | – | (8 | ) | ||||
| 6 | |||||||||||
| Current asset investments | 267 | (210 | ) | – | 1 | 58 | |||||
| Borrowings due within one year | (1,816 | ) | 361 | (544 | ) | (13 | ) | (2,012 | ) | ||
| Borrowings due after one year | (3,704 | ) | (188 | ) | 544 | (22 | ) | (3,370 | ) | ||
| 173 | |||||||||||
| (5,266 | ) | (31 | ) | – | (34 | ) | (5,331 | ) | |||
| At 1 Jan 2001 £m | Cash Flow Unaudited £m | Non–cash Movements Unaudited £m | Other Movements Unaudited £m | At 31 Mar 2001 Unaudited £m | |||||||
| Cash at bank and in hand | 1 | – | – | – | 1 | ||||||
| Bank overdrafts | (8 | ) | 8 | – | – | – | |||||
| 8 | |||||||||||
| Current asset investments | 58 | (54 | ) | – | – | 4 | |||||
| Borrowings due within one year | (2,012 | ) | 1,067 | (8 | ) | (6 | ) | (959 | ) | ||
| Borrowings due after one year | (3,370 | ) | (217 | ) | 8 | – | (3,579 | ) | |||
| 850 | |||||||||||
| (5,331 | ) | 804 | – | (6 | ) | (4,533 | ) | ||||
| At 1 Apr 2001 Unaudited £m | Cash Flow Unaudited £m | Non-cash Movements Unaudited £m | Other Movements Unaudited £m | At 31 Mar 2002 £m | |||||||
| Cash at bank and in hand | 1 | (1 | ) | – | – | – | |||||
| Bank overdrafts | – | (36 | ) | – | – | (36 | ) | ||||
| (37 | ) | ||||||||||
| Current asset investments | 4 | (1 | ) | – | – | 3 | |||||
| Borrowings due within one year | (959 | ) | 509 | (468 | ) | 2 | (916 | ) | |||
| Borrowings due after one year | (3,579 | ) | (1,059 | ) | 468 | (58 | ) | (4,228 | ) | ||
| (550 | ) | ||||||||||
| (4,533 | ) | (588 | ) | – | (56 | ) | (5,177 | ) | |||
| At 1 Jan 2001 £m | Cash Flow £m | Non-cash Movements £m | Other Movements £m | At 31 Mar 2002 £m | |||||||
| Cash at bank and in hand | 1 | (1 | ) | – | – | – | |||||
| Bank overdrafts | (8 | ) | (28 | ) | – | – | (36 | ) | |||
| (29 | ) | ||||||||||
| Current asset investments | 58 | (55 | ) | – | – | 3 | |||||
| Borrowings due within one year | (2,012 | ) | 1,576 | (476 | ) | (4 | ) | (916 | ) | ||
| Borrowings due after one year | (3,370 | ) | (1,276 | ) | 476 | (58 | ) | (4,228 | ) | ||
| 300 | |||||||||||
| (5,331 | ) | 216 | – | (62 | ) | (5,177 | ) | ||||
| At 1 Apr 2002 £m | Cash Flow £m | Non-cash Movements £m | Other Movements £m | At 31 Mar 2003 £m | |||||||
| Cash at bank and in hand | – | – | – | – | – | ||||||
| Bank overdrafts | (36 | ) | 23 | – | – | (13 | ) | ||||
| 23 | |||||||||||
| Current asset investments | 3 | 4 | – | – | 7 | ||||||
| Borrowings due within one year | (916 | ) | 395 | (543 | ) | (12 | ) | (1,076 | ) | ||
| Borrowings due after one year | (4,228 | ) | (387 | ) | 543 | (10 | ) | (4,082 | ) | ||
| 8 | |||||||||||
| (5,177 | ) | 35 | – | (22 | ) | (5,164 | ) | ||||
Notes to the accounts continued
| 24. | Related party transactions |
12 months ended 31 Mar 2003 £m | 15 months ended 31 Mar 2002 £m | 12 months ended 31 Dec 2000 £m | |||||
| Sales: | |||||||
| Supply of common services and materials | 42 | 6 | 1 | ||||
| Investment in subsidiary undertaking | – | 10 | – | ||||
| Tangible fixed assets | 1 | 26 | 20 | ||||
| Purchases of services: | |||||||
| Pensions costs other than payments to the Group Pension Schemes | 42 | 50 | 9 | ||||
| Corporate services | 27 | 47 | 63 | ||||
| Insurance premiums and services | 14 | 19 | 15 | ||||
| Property rentals and services | 27 | 29 | 32 | ||||
| Technical services | 37 | 56 | 37 | ||||
| Vehicle leasing and management | 32 | 47 | 37 | ||||
| Operational services | 22 | – | – | ||||
| Purchase of tangible fixed assets: | |||||||
| Motor vehicles and office equipment | 24 | 48 | 16 | ||||
| Construction services | 169 | 5 | 4 | ||||
| 25. | Commitments and contingencies |
| Land and buildings | Other | Total | ||||||||||||
| At 31 March | 2003 £m | 2002 £m | 2003 £m | 2002 £m | 2003 £m | 2002 £m | ||||||||
| Expiring: | ||||||||||||||
| In one year or less | 2 | – | 5 | 2 | 7 | 2 | ||||||||
| In more than one year, but not more than five years | – | 3 | 7 | 8 | 7 | 11 | ||||||||
| In more than five years | 13 | 9 | – | – | 13 | 9 | ||||||||
| 15 | 12 | 12 | 10 | 27 | 22 | |||||||||
| At 31 March | 2003 £m | 2002 £m | |||
| Amounts due: | |||||
| In one year or less | 27 | 22 | |||
| In more than one year, but not more than two years | 20 | 18 | |||
| In more than two years, but not more than three years | 14 | 11 | |||
| In more than three years, but not more than four years | 13 | 10 | |||
| In more than four years, but not more than five years | 13 | 9 | |||
| In more than five years | 87 | 63 | |||
| 174 | 133 | ||||
| 25. | Commitments and contingencies (continued) |
c) Third party contingencies During the year ended 31 March 2003, Transco was released from financial guarantees given as part of the Centrica demerger in 1997 as to the performance by Centrica of certain long-term interruptible gas supply contracts. d) Other commitments and contingencies e) Parent company loan guarantees on behalf of Group undertakings f) Larkhall prosecution | |
| 26. | Ultimate parent company |
| Transco plc’s immediate parent company is Transco Holdings plc. The ultimate parent company, and controlling party, is National Grid Transco plc, which is registered in England and Wales. Both Transco Holdings plc and National Grid Transco plc consolidate the accounts of Transco plc. Copies of the consolidated accounts of Transco Holdings plc and copies of the consolidated accounts of National Grid Transco plc may be obtained from the Company Secretary, 1-3 Strand, London WC2N 5EH. | |
| 27. | Principal subsidiary undertakings |
| The principal subsidiary undertakings included in the Group accounts at 31 March 2003 are listed below. These undertakings are wholly-owned. | |
| Country of operation | |||
| as at 31 March 2003 | and incorporation | Principal activity | |
| Transco Metering Services Limited | UK | Gas metering services | |
| British Transco International Finance B.V. | The Netherlands | Financing | |
| British Transco Finance Inc. | USA | Financing | |
| British Transco Capital Inc. | USA | Financing | |
| A full list of all Group and associated undertakings will be attached to the Company’s Annual Return to be filed with the Registrar of Companies. | |
| 28. | Summary US GAAP income statement, balance sheet, notes and associated reconciliations |
| The Group prepares its consolidated accounts in accordance with United Kingdom Generally Accepted Accounting Principles (UK GAAP), which differs in certain respects from United States Generally Accepted Accounting Principles (US GAAP). | |
| The most significant difference between UK and US GAAP is that, under UK GAAP, the combination of National Grid Group and Lattice, including Transco, has been accounted for as a merger (pooling of interests), while under US GAAP this transaction is accounted for as an acquisition (purchase accounting) of Lattice, including Transco, by National Grid. Consequently, under UK GAAP, the assets and liabilities of Transco are stated on a historical cost basis for all periods presented, but under US GAAP are presented at their fair value as at 21 October 2002 for periods ending after that date. | |
| The income statements and balance sheets below are presented in a US GAAP format. The balance sheet as at 31 March 2003 includes the fair value of the acquired assets and liabilities of Transco prepared under US GAAP. A summary of the principal differences between UK and US GAAP are shown in note 29. | |
Notes to the accounts continued
| 28. | Summary US GAAP income statement, balance sheet, notes and associated reconciliations (continued) |
| Summary US GAAP income statement |
| 12 months ended 31 Mar 2003 Pre- acquisition | 12 months ended 31 Mar 2003 Post acquisition | 12 months ended 31 Mar 2003 Total | 12 months ended 31 Mar 2002 Unaudited | 3 months ended 31 Mar 2001 Unaudited | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | ||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||
| Turnover | 1,375 | 1,646 | 3,021 | 2,980 | 942 | 3,922 | 2,975 | |||||||||||||||
| Operating costs: | ||||||||||||||||||||||
| Depreciation | (261 | ) | (311 | ) | (572 | ) | (479 | ) | (107 | ) | (586 | ) | (390 | ) | ||||||||
| Payroll costs | (266 | ) | (196 | ) | (462 | ) | (490 | ) | (120 | ) | (610 | ) | (471 | ) | ||||||||
| Purchases of gas | (52 | ) | (56 | ) | (108 | ) | (112 | ) | (39 | ) | (151 | ) | (82 | ) | ||||||||
| Rates | (130 | ) | (105 | ) | (235 | ) | (231 | ) | (56 | ) | (287 | ) | (213 | ) | ||||||||
| Other operating charges | (365 | ) | (264 | ) | (629 | ) | (524 | ) | (121 | ) | (645 | ) | (593 | ) | ||||||||
| (1,074 | ) | (932 | ) | (2,006 | ) | (1,836 | ) | (443 | ) | (2,279 | ) | (1,749 | ) | |||||||||
| Operating profit | 301 | 714 | 1,015 | 1,144 | 499 | 1,643 | 1,226 | |||||||||||||||
| Non-operating expenses | (3 | ) | (10 | ) | (13 | ) | 9 | 1 | 10 | (15 | ) | |||||||||||
| Profit before interest | 298 | 704 | 1,002 | 1,153 | 500 | 1,653 | 1,211 | |||||||||||||||
| Net interest expense | (62 | ) | (80 | ) | (142 | ) | (338 | ) | 28 | (310 | ) | (364 | ) | |||||||||
| Profit on ordinary activities before taxation | 236 | 624 | 860 | 815 | 528 | 1,343 | 847 | |||||||||||||||
| Taxation | (74 | ) | (198 | ) | (272 | ) | (267 | ) | (125 | ) | (392 | ) | (207 | ) | ||||||||
| Net income for the period | 162 | 426 | 588 | 548 | 403 | 951 | 640 | |||||||||||||||
Consolidated statement of comprehensive income and changes in shareholders’ equity under US GAAP | ||||||||||||||||
| 12 months ended 31 Mar 2003 Pre- acquisition | 12 months ended 31 Mar 2003 Post acquisition | 12 months ended 31 Mar 2003 Total | 12 months ended 31 Mar 2002 Unaudited | 3 months ended 31 Mar 2001 Unaudited | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | ||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||
| Net income | 162 | 426 | 588 | 548 | 403 | 951 | 640 | |||||||||
| Exchange adjustments | 6 | – | 6 | 12 | (31 | ) | (19 | ) | – | |||||||
| Comprehensive income | 168 | 426 | 594 | 560 | 372 | 932 | 640 | |||||||||
| Dividends | (217 | ) | (120 | ) | (337 | ) | (361 | ) | (71 | ) | (432 | ) | (400 | ) | ||
| Increase in equity resulting from ‘push down’ accounting from the Merger | – | 5,602 | 5,602 | – | – | – | – | |||||||||
| Shareholders’ equity at beginning of period | 4,172 | 4,123 | 4,172 | 3,973 | 3,672 | 3,672 | 3,432 | |||||||||
| Shareholders’ equity at end of period | 4,123 | 10,031 | 10,031 | 4,172 | 3,973 | 4,172 | 3,672 | |||||||||
| 28. | Summary US GAAP income statement, balance sheet, notes and associated reconciliations (continued) |
| Reconciliation of summary income statement to US GAAP |
| 12 months ended 31 March 2003 | Pre-acquisition period | Post-acquisition period | Total | ||||||||||||||||||||
| UK GAAP | US GAAP adjustments | UK GAAP | UK GAAP | US GAAP adjustments | US GAAP | US GAAP | |||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||
| Turnover | 1,383 | (8 | ) | 1,375 | 1,654 | (8 | ) | 1,646 | 3,021 | ||||||||||||||
| Operating costs | |||||||||||||||||||||||
| Depreciation | (214 | ) | (47 | ) | (261 | ) | (171 | ) | (140 | ) | (311 | ) | (572 | ) | |||||||||
| Payroll costs | (251 | ) | (15 | ) | (266 | ) | (188 | ) | (8 | ) | (196 | ) | (462 | ) | |||||||||
| Purchases of gas | (52 | ) | – | (52 | ) | (56 | ) | – | (56 | ) | (108 | ) | |||||||||||
| Rates | (130 | ) | – | (130 | ) | (105 | ) | – | (105 | ) | (235 | ) | |||||||||||
| Replacement expenditure | (239 | ) | 239 | – | (166 | ) | 166 | – | – | ||||||||||||||
| Other operating charges | (365 | ) | – | (365 | ) | (310 | ) | 46 | (264 | ) | (629 | ) | |||||||||||
| (1,251 | ) | 177 | (1,074 | ) | (996 | ) | 64 | (932 | ) | (2,006 | ) | ||||||||||||
| Operating profit | 132 | 169 | 301 | 658 | 56 | 714 | 1,015 | ||||||||||||||||
| Non-operating expenses | (3 | ) | – | (3 | ) | (10 | ) | – | (10 | ) | (13 | ) | |||||||||||
| Profit before interest | 129 | 169 | 298 | 648 | 56 | 704 | 1,002 | ||||||||||||||||
| Net interest expense | (169 | ) | 107 | (62 | ) | (153 | ) | 73 | (80 | ) | (142 | ) | |||||||||||
| Profit/(loss) on ordinary activities before taxation | (40 | ) | 276 | 236 | 495 | 129 | 624 | 860 | |||||||||||||||
| Taxation | 11 | (85 | ) | (74 | ) | (159 | ) | (39 | ) | (198 | ) | (272 | ) | ||||||||||
| Net income for the period | (29 | ) | 191 | 162 | 336 | 90 | 426 | 588 | |||||||||||||||
| 15 months ended 31 March 2002 | 12 months ended 31 March 2002 | 3 months ended 31 March 2001 | Total | ||||||||||||||||||||
| UK GAAP Restated Unaudited £m | US GAAP adjustments Unaudited £m | US GAAP Unaudited £m | UK GAAP Restated Unaudited £m | US GAAP adjustments Unaudited £m | US GAAP Unaudited £m | US GAAP £m | |||||||||||||||||
| Turnover | 2,980 | – | 2,980 | 942 | – | 942 | 3,922 | ||||||||||||||||
| Operating costs | |||||||||||||||||||||||
| Depreciation | (421 | ) | (58 | ) | (479 | ) | (93 | ) | (14 | ) | (107 | ) | (586 | ) | |||||||||
| Payroll costs | (484 | ) | (6 | ) | (490 | ) | (118 | ) | (2 | ) | (120 | ) | (610 | ) | |||||||||
| Purchases of gas | (112 | ) | – | (112 | ) | (39 | ) | – | (39 | ) | (151 | ) | |||||||||||
| Rates | (231 | ) | – | (231 | ) | (56 | ) | – | (56 | ) | (287 | ) | |||||||||||
| Replacement expenditure | (368 | ) | 368 | – | (64 | ) | 64 | – | – | ||||||||||||||
| Other operating charges | (524 | ) | – | (524 | ) | (121 | ) | – | (121 | ) | (645 | ) | |||||||||||
| (2,140 | ) | 304 | (1,836 | ) | (491 | ) | 48 | (443 | ) | (2,279 | ) | ||||||||||||
| Operating profit | 840 | 304 | 1,144 | 451 | 48 | 499 | 1,643 | ||||||||||||||||
| Non-operating expenses | 9 | – | 9 | 1 | – | 1 | 10 | ||||||||||||||||
| Profit before interest | 849 | 304 | 1,153 | 452 | 48 | 500 | 1,653 | ||||||||||||||||
| Net interest expense | (332 | ) | (6 | ) | (338 | ) | (86 | ) | 114 | 28 | (310 | ) | |||||||||||
| Profit on ordinary activities before taxation | 517 | 298 | 815 | 366 | 162 | 528 | 1,343 | ||||||||||||||||
| Taxation | (156 | ) | (111 | ) | (267 | ) | (112 | ) | (13 | ) | (125 | ) | (392 | ) | |||||||||
| Net income for the period | 361 | 187 | 548 | 254 | 149 | 403 | 951 | ||||||||||||||||
| 12 months ended 31 December 2000 | UK GAAP Restated £m | US GAAP adjustments £m | US GAAP £m | |||||||
| Turnover | 2,975 | – | 2,975 | |||||||
| Operating costs | ||||||||||
| Depreciation | (332 | ) | (58 | ) | (390 | ) | ||||
| Payroll costs | (433 | ) | (38 | ) | (471 | ) | ||||
| Purchases of gas | (82 | ) | – | (82 | ) | |||||
| Rates | (213 | ) | – | (213 | ) | |||||
| Replacement expenditure | (249 | ) | 249 | – | ||||||
| Other operating charges | (593 | ) | – | (593 | ) | |||||
| (1,902 | ) | 153 | (1,749 | ) | ||||||
| Operating profit | 1,073 | 153 | 1,226 | |||||||
| Non-operating expenses | (15 | ) | – | (15 | ) | |||||
| Profit before interest | 1,058 | 153 | 1,211 | |||||||
| Net interest expense | (360 | ) | (4 | ) | (364 | ) | ||||
| Profit on ordinary activities before taxation | 698 | 149 | 847 | |||||||
| Taxation | (220 | ) | 13 | (207 | ) | |||||
| Net income for the year | 478 | 162 | 640 | |||||||
Notes to the accounts continued
| 28. | Summary US GAAP income statement, balance sheet, notes and associated reconciliations (continued) |
| Summary US GAAP balance sheet |
2003 | 2002 | ||||
| At 31 March | £m | £m | |||
| Assets | |||||
| Current assets | |||||
| Marketable securities | 7 | 3 | |||
| Accounts and notes receivable | 27 | 20 | |||
| Inventories | 31 | 34 | |||
| Amounts owed by related parties | 11 | 200 | |||
| Prepaid expenses | 655 | 619 | |||
| Total current assets | 731 | 876 | |||
| Goodwill | 3,793 | – | |||
| Property, plant and equipment | 13,582 | 10,255 | |||
| Amounts owed by related parties | 2,241 | 2,076 | |||
| Total assets | 20,347 | 13,207 | |||
| Liabilities and shareholders’ equity | |||||
| Cash overdrafts | 13 | 36 | |||
| Accounts payable | 341 | 244 | |||
| Short-term borrowings | 1,076 | 1,021 | |||
| Income taxes | – | 50 | |||
| Other accrued liabilities | 670 | 659 | |||
| Amounts owed to related parties | 252 | 95 | |||
| Total current liabilities | 2,352 | 2,105 | |||
| Long-term borrowings and capital lease obligations | 4,504 | 4,408 | |||
| Other liabilities | 135 | 114 | |||
| Deferred income taxes | 3,325 | 2,408 | |||
| Total liabilities | 10,316 | 9,035 | |||
| Shareholders’ equity | |||||
| Common stock | 45 | 45 | |||
| Paid in surplus arising from purchase accounting | 9,680 | – | |||
| Additional paid in capital | – | 1,536 | |||
| Retained earnings | 306 | 2,610 | |||
| Other comprehensive income/(loss) | – | (19 | ) | ||
| Equity shareholders’ funds | 10,031 | 4,172 | |||
| Total liabilities and shareholders’ equity | 20,347 | 13,207 | |||
Segmental information under US GAAP | ||||||||||||||||
| A geographical analysis of results and assets is not provided as Transco’s operations are all undertaken in the UK for UK customers. | ||||||||||||||||
| 12 months | 12 months | 12 months | 12 months | 3 months | 15 months | 12 months | ||||||||||
| ended | ended | ended | ended | ended | ended | ended | ||||||||||
| 31 Mar 2003 | 31 Mar 2003 | 31 Mar 2003 | 31 Mar 2002 | 31 Mar 2001 | 31 Mar 2002 | 31 Dec 2000 | ||||||||||
| Pre- | Post | Total | ||||||||||||||
| acquisition | acquisition | Unaudited | Unaudited | |||||||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||||
| Turnover by business segment: | ||||||||||||||||
| Continuing operations | ||||||||||||||||
| UK gas distribution | 850 | 1,239 | 2,089 | 2,013 | 701 | 2,714 | 2,049 | |||||||||
| UK gas transmission | 287 | 264 | 551 | 528 | 137 | 665 | 509 | |||||||||
| Other | 254 | 174 | 428 | 439 | 104 | 543 | 417 | |||||||||
| Sales between businesses | (16 | ) | (31 | ) | (47 | ) | – | – | – | – | ||||||
| 1,375 | 1,646 | 3,021 | 2,980 | 942 | 3,922 | 2,975 | ||||||||||
| Operating profit by business segment: | ||||||||||||||||
| Continuing operations | ||||||||||||||||
| UK gas distribution | 187 | 567 | 754 | 865 | 425 | 1,290 | 860 | |||||||||
| UK gas transmission | 113 | 96 | 209 | 184 | 70 | 254 | 242 | |||||||||
| Other | 1 | 51 | 52 | 95 | 4 | 99 | 124 | |||||||||
| 301 | 714 | 1,015 | 1,144 | 499 | 1,643 | 1,226 | ||||||||||
| Fixed assets | Goodwill | |||||||||
31 Mar 2003 £m | 31 Mar 2002 £m | 31 Mar 2003 £m | 31 Mar 2002 £m | |||||||
| Analysis by business sector: | ||||||||||
| Continuing operations | ||||||||||
| UK gas distribution | 10,152 | 7,162 | 3,040 | – | ||||||
| UK gas transmission | 2,480 | 1,685 | 753 | – | ||||||
| Other | 950 | 1,408 | – | – | ||||||
| 13,582 | 10,255 | 3,793 | – | |||||||
| 28. | Summary US GAAP income statement, balance sheet, notes and associated reconciliations (continued) |
| 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. | |||||||||||||||||||||
12 months ended 31 Mar 2003 Pre- acquisition | 12 months ended 31 Mar 2003 Post acquisition | 12 months ended 31 Mar 2003 Total | 12 months ended 31 Mar 2002 Restated Unaudited | 3 months ended 31 Mar 2001 Restated Unaudited | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | |||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | |||||||||||||||
| Net income under UK GAAP | (29 | ) | 336 | 307 | 361 | 254 | 615 | 478 | |||||||||||||
| Adjustments to conform with US GAAP | |||||||||||||||||||||
| Deferred taxation | (85 | ) | (39 | ) | (124 | ) | (111 | ) | (13 | ) | (124 | ) | 13 | ||||||||
| Share option schemes | (15 | ) | (8 | ) | (23 | ) | (6 | ) | (2 | ) | (8 | ) | (38 | ) | |||||||
| Tangible fixed assets – acquisition by National Grid Transco | – | (148 | ) | (148 | ) | – | – | – | – | ||||||||||||
| Replacement expenditure | 239 | 166 | 405 | 368 | 64 | 432 | 249 | ||||||||||||||
| Tangible fixed assets – replacement expenditure | (47 | ) | – | (47 | ) | (58 | ) | (14 | ) | (72 | ) | (58 | ) | ||||||||
| Financial instruments: | |||||||||||||||||||||
| FAS 133 transition adjustment | – | – | – | – | 49 | 49 | – | ||||||||||||||
| Other | 107 | 73 | 180 | (6 | ) | 65 | 59 | (4 | ) | ||||||||||||
| Recognition of income | (8 | ) | (8 | ) | (16 | ) | – | – | – | – | |||||||||||
| Merger costs | – | 8 | 8 | – | – | – | – | ||||||||||||||
| Restructuring – acquisition by National Grid Transco | – | 46 | 46 | – | – | – | – | ||||||||||||||
| Total US GAAP adjustments | 191 | 90 | 281 | 187 | 149 | 336 | 162 | ||||||||||||||
| Net income under US GAAP | 162 | 426 | 588 | 548 | 403 | 951 | 640 | ||||||||||||||
| 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. | |||||||
31 Mar 2003 | 31 Mar 2002 | ||||||
| Restated | |||||||
£m | £m | ||||||
| Equity shareholders’ funds under UK GAAP | 1,649 | 1,586 | (i) | ||||
| Adjustments to conform with US GAAP | |||||||
| Tangible fixed assets – replacement expenditure | 166 | 3,661 | |||||
| Tangible fixed assets – acquisition by National Grid Transco | 6,621 | – | |||||
| Deferred taxation | (2,049 | ) | (1,150 | ) | |||
| Share option schemes | (31 | ) | (8 | ) | |||
| Ordinary dividends | – | 93 | |||||
| Financial instruments: | |||||||
| FAS 133 transition adjustment | – | (150 | ) | ||||
| Other | (96 | ) | 140 | ||||
| Severance liabilities | (6 | ) | – | ||||
| Recognition of income | (16 | ) | – | ||||
| Goodwill – acquisition by National Grid Transco | 3,793 | – | |||||
| Total US GAAP adjustments | 8,382 | 2,586 | |||||
| Equity shareholders’ funds under US GAAP | 10,031 | 4,172 | |||||
| i) Previously reported as £2,209m before adjustment of £623m relating to the change in accounting policy for deferred tax (see note 1, page 25). | |||||||
| 28. | Summary US GAAP income statement, balance sheet, notes and associated reconciliations (continued) |
| Group cash flow statement | |
| The Group accounts include a cash flow statement prepared in accordance with UK Financial Reporting Standard 1, ‘Cash Flow Statements (revised 1996)’ (FRS 1(revised)), the objectives and principles of which are substantially the same as US Statement of Financial Accounting Standards 95 ‘Statement of Cash Flows’ (SFAS 95) under US GAAP. The principal differences between FRS 1 (revised) and SFAS 95 relate to the classification of items within the cash flow statement and the definition of cash and cash equivalents. Under UK GAAP cash flows are classified under nine standard headings whereas US GAAP only requires presentation of cash flows from three activities: operating activities, investing activities and financing activities. | |
| Under US GAAP, in contrast to UK GAAP, cash and cash equivalents do not include bank overdrafts, but do include investments with original maturities of three months or less. | |
| Set out below is a summary of the Group cash flow statement under US GAAP: | |
12 months ended 31 Mar 2003 Pre- acquisition | 12 months ended 31 Mar 2003 Post acquisition | 12 months ended 31 Mar 2003 Total | 12 months ended 31 Mar 2002 Unaudited | 3 months ended 31 Mar 2001 Unaudited | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | |||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | |||||||||||||||
| Net cash provided by operating activities | 39 | 910 | 949 | 709 | 1,028 | 1,737 | 890 | ||||||||||||||
| Investing activities: | |||||||||||||||||||||
| Payments to acquire tangible fixed assets | (333 | ) | (284 | ) | (617 | ) | (787 | ) | (158 | ) | (945 | ) | (610 | ) | |||||||
| Receipts from disposal of investments | 1 | – | 1 | 13 | – | 13 | 7 | ||||||||||||||
| Other | – | 12 | 12 | 31 | 5 | 36 | 4 | ||||||||||||||
| Net cash used in investing activities | (332 | ) | (272 | ) | (604 | ) | (743 | ) | (153 | ) | (896 | ) | (599 | ) | |||||||
| Net cash (used in)/provided by financing activities | 293 | (638 | ) | (345 | ) | 33 | (875 | ) | (842 | ) | (291 | ) | |||||||||
| Net decrease in cash and cash equivalents | – | – | – | (1 | ) | – | (1 | ) | – | ||||||||||||
| Cash and cash equivalents at the beginning of the period | – | – | – | 1 | 1 | 1 | 1 | ||||||||||||||
| Cash and cash equivalents at the end of the period | – | – | – | – | 1 | – | 1 | ||||||||||||||
| Reconciliation of US GAAP to UK GAAP cash flow headings | |
| i) Net cash provided by operating activities comprises net cash inflow from operating activities, returns on investments and servicing of finance, excluding costs relating to the issue of debt, and taxation. ii) Net cash used in investing activities comprise capital expenditure, acquisitions and disposals and the component of management of liquid resources which comprises deposits with an original maturity of more than three months. iii) Net cash (used in)/provided by financing activities comprises equity dividends paid, financing, including costs relating to the issue of debt, and movements in bank overdrafts. | |
| 29. | Principal differences between UK and US accounting principles The principal differences between UK and US GAAP, as applied in preparing the Group accounts under US GAAP, are set out below. |
| Acquisition (purchase) accounting adjustments Under US GAAP purchase accounting, the purchase price of Lattice by National Grid Transco is allocated to the acquired assets and liabilities of Lattice, including Transco, and the assets and liabilities of Transco are reported at those revised values. | |
| In order to determine the allocation of purchase price related to the acquired assets and liabilities of Transco under US GAAP purchase accounting, the cost of acquisition of Lattice has been calculated using the market value of the shares issued, the fair value of vested options exchanged and direct external acquisition costs and then allocated to the fair value of net assets acquired. As a result of the fair value exercise, increases in the value of Transco’s tangible fixed assets, financial instruments, and restructuring provisions were recognised, together with the recognition of appropriate deferred taxation effects. The difference between the cost of acquisition attributable to Transco and the fair value of the separable assets and liabilities of Transco has been recorded as goodwill. Additional depreciation in respect of the fair value of tangible fixed assets will be recorded over their respective useful economic lives. | |
| The adjustments to the assets and liabilities of Transco to reflect the fair values and allocation of the excess purchase consideration over the fair values of net assets acquired, based on management’s best estimates of fair value, are discussed below. The fair value adjustments to UK gas distribution, and UK gas transmission fixed assets, the restructuring provision and the related deferred tax thereon are provisional and may be subject to revision during the year ending 31 March 2004. | |
| a) The total purchase consideration for Lattice was calculated by multiplying the number of National Grid shares issued to Lattice shareholders for all outstanding Lattice shares by the average fair value of National Grid shares. The average fair value of National Grid shares was calculated over a period of five business days, including two days prior and to two days subsequent to the announcement of the merger on 22 April 2002. | |
| The total purchase consideration also included the fair value of Lattice vested options exchanged for vested options in National Grid Transco. The total number of Lattice vested options was multiplied by the respective fair value of each of the ordinary shares and American Depositary Receipt plans determined at 22 April 2002. | |
| The total purchase consideration of Lattice has been allocated to the individual businesses of Lattice, including Transco, using estimated business valuations prepared by external advisers to the Merger. | |
| 29. | Principal differences between UK and US accounting principles (continued) |
| b) The increase in the fair value of £6,769m of tangible fixed assets relates to UK gas distribution and UK gas transmission. It was determined by calculating the value in use of these business segments. Value in use represents the present value of expected future cash flows discounted on a pre-tax basis, using the estimated cost of capital. Future cash flows are based on a five year plan, projected out to perpetuity. The fair value of other tangible fixed assets, comprising gas metering assets, was determined using management’s estimate of their depreciated replacement costs, based on current costs of replacing meters and expected remaining useful economic lives. | |
| c) Restructuring costs (£60m) represent the costs being incurred in respect of the integration of activities within the newly merged National Grid Transco group and relate primarily to redundancy and property relocation costs. | |
| d) Deferred tax has been computed on the excess of the fair value over book value, other than for goodwill, using the applicable statutory UK tax rates. | |
| e) The portion of goodwill arising on the Merger that the Directors at National Grid Transco deem to relate to Transco has been ‘pushed down’ and recognised in the Transco accounts. | |
| Deferred taxation Under UK GAAP, deferred taxation is provided in full on all material timing differences with certain exceptions, as outlined in Accounting policies –Deferred taxation. Under US GAAP, deferred tax is provided in full, using the liability method, and requires the recognition of deferred taxation on all timing differences except for non-tax deductible goodwill. | |
| The deferred tax liability under US GAAP is analysed as follows: |
| 2003 | 2002 | ||||
| £m | £m | ||||
| Deferred taxation liabilities: | |||||
| Excess of book value over taxation value of fixed assets | 3,313 | 2,375 | |||
| Other temporary differences | 74 | 95 | |||
| Deferred taxation assets: | |||||
| Other temporary differences | (62 | ) | (62 | ) | |
| 3,325 | 2,408 | ||||
| Analysed as follows: | |||||
| Current | 29 | – | |||
| Non-current | 3,296 | 2,408 | |||
| 3,325 | 2,408 | ||||
| Pensions Since 1999, Transco has operated under a multi-employer pension scheme, the Lattice Group Pension Scheme, which is held by Lattice Group plc, an intermediate holding company of Transco. As such, no adjustment is required under US GAAP and the fair value of the pension liability at the date of the Merger has not been pushed down into the Transco accounts. | |
| Share option schemes As permitted under UK GAAP, no cost is accrued for share options awarded under the Sharesave scheme where the exercise price of the options is below the market value at the date of grant. In respect of the grant of options under the Executive scheme, no cost is accrued under UK GAAP, as the exercise price is equivalent to the market value at the date of grant. | |
| Under US GAAP, a charge is made against net income based on the fair value of grants in accordance with SFAS 123 ‘Accounting for Stock Based Compensation’. Disclosures are provided in accordance with SFAS 123 and SFAS 148 ‘Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of FAS No. 123’. | |
Notes to the accounts continued
| 29. | Principal differences between UK and US accounting principles (continued) | ||||||||||
| Movements in share options held by Transco employees are analysed as follows: | |||||||||||
| National Grid | |||||||||||
| National Grid | BG Group | Transco | |||||||||
| Transco | Lattice Group | BG Group | Executive | Executive | |||||||
| Sharesave | Sharesave | Sharesave | Share | Share | |||||||
| Scheme | Scheme | Scheme | Scheme | Scheme | |||||||
| options | options | options | options | options | |||||||
| m | m | m | m | m | |||||||
| Outstanding at 1 January 2000 | – | – | 52 | 1 | – | ||||||
| Granted | – | 65 | – | – | – | ||||||
| Exercised | – | – | (32 | ) | (1 | ) | – | ||||
| Lapsed | – | – | (19 | ) | – | – | |||||
| Outstanding at 31 December 2000 | – | – | 1 | – | – | ||||||
| Exercisable at 31 December 2000 | – | – | – | – | – | ||||||
| Option price range at 31 December 2000 (£) | – | 1.18 | 1.36-2.85 | 0.74 | – | ||||||
| Option price range for exercise options (£) | – | – | 1.36-2.85 | 1.75-2.36 | – | ||||||
| Outstanding at 1 January 2001 | – | 65 | 1 | – | – | ||||||
| Granted | – | 9 | – | – | – | ||||||
| Exercised | – | – | – | – | – | ||||||
| Transferred | – | (2 | ) | – | – | – | |||||
| Lapsed | – | (2 | ) | – | – | – | |||||
| Outstanding at 31 March 2002 | – | 70 | 1 | – | – | ||||||
| Exercisable at 31 March 2002 | – | – | – | – | – | ||||||
| Option price range at 31 March 2002 (£) | – | 1.18-1.29 | 1.36-2.85 | 0.74 | – | ||||||
| Option price range for exercise options (£) | – | 1.18 | 1.36-2.85 | 0.74 | – | ||||||
| Outstanding at 1 April 2002 | – | 70 | 1 | – | – | ||||||
| Granted | – | – | – | – | – | ||||||
| Exercised | – | – | * | – | – | ||||||
| Lapsed | – | (2 | ) | * | – | – | |||||
| Outstanding at 21 October 2002 | – | 68 | * | – | – | ||||||
| Transferred to National grid Transco options | – | (63 | ) | – | – | – | |||||
| Granted | 24 | – | – | – | * | ||||||
| Exercised | – | (1 | ) | * | – | – | |||||
| Lapsed | (1 | ) | (3 | ) | * | – | – | ||||
| Outstanding at 31 March 2003 | 23 | 1 | * | – | * | ||||||
| Exercisable at 31 March 2003 | – | 1 | – | – | – | ||||||
| Option price range at 31 March 2003 (£) | 3.145-3.44 | 1.18-1.29 | 2.40 | – | 4.3425 | ||||||
| Option price range for exercise options (£) | – | 1.18-1.29 | – | – | – | ||||||
| * Less than 0.5 million |
| The average fair value of the options granted during each of the three financial years ended 31 March 2003 are estimated as follows: | |||||||
| 12 months | 15 months | 12 months | |||||
| ended | ended | ended | |||||
| 31 Mar 2003 | (i) | 31 Mar 2002 | (ii) | 31 Dec 2000 | (ii) | ||
| Where the exercise price is less than the market price at the date of grant | 123.0 | p | 129.0 | p | 118.0 | p | |
| Where the exercise price is equal to the market price at the date of grant | 50.0 | p | – | – | |||
| The fair value of the options granted are estimated using the Black-Scholes European option pricing model using the following principal assumptions: | |||||||
| 12 months | 15 months | 12 months | |||||
| ended | ended | ended | |||||
| 31 Mar 2003 | (i) | 31 Mar 2002 | (ii) | 31 Dec 2000 | (ii) | ||
| Dividend yield (%) | 3.5 | 5.0 | 4.7 | ||||
| Volatility (%) | 35.0 | 35.0 | 34.0 | ||||
| Risk-free investment rate (%) | 4.4 | 5.4 | 5.4 | ||||
| Average life (years) | 4.0 | 4.0 | 4.0 | ||||
| i) In respect of National Grid Transco shares. ii) In respect of Lattice shares. | |||||||
| The compensation cost charged is £23m for the 12 months ended 31 March 2003 (12 months ended 31 March 2002: £6m; 3 months ended 31 March 2001: £2m; 15 months ended 31 March 2002: £8m; and 12 months ended 31 December 2000: £nil). | |||||||
| On Demerger, BG Group plc incurred costs of £38m in the 12 months ended 31 December 2000, in addition to PAYE and National Insurance costs, relating to the termination of the BG Employee Sharesave Scheme. For US reporting purposes only, a proportion of this charge is attributable to Transco. Neither Transco nor its then ultimate parent company, Lattice Group plc, incurred any cash outflow in relation to this transaction and it was accounted for as a capital contribution with a nil net impact on US reported shareholders’ funds. | |||||||
| 29. | Principal differences between UK and US accounting principles (continued) Ordinary dividends |
| Under UK GAAP, final ordinary dividends are provided for in the year in respect of which they are proposed by the Board of Directors for approval by the shareholders. Under US GAAP, dividends are not provided until declared. | |
| Tangible fixed assets – replacement expenditure Under UK GAAP the Group charges to the profit and loss account replacement expenditure on certain components of plant and equipment, which is principally undertaken to repair and to maintain the safety of the pipeline system. Under US GAAP such expenditure is capitalised and depreciated over the assets’ useful lives. At the date of the Merger, the accumulated adjustment to tangible fixed assets in respect of replacement expenditure amounting to £3,853m was subsumed into the fair value of the tangible fixed assets at that date. | |
| Financial instruments Under UK GAAP, gains and losses on swap terminations and swaption premiums are capitalised and amortised over the life of the underlying hedged instrument. Under US GAAP, such realised gains and losses have been taken to the income statement immediately. | |
| Under UK GAAP, derivative financial instruments that qualify for hedge accounting are recorded at their historical cost, if any, and are not re-measured. Any related monetary assets or liabilities, including foreign currency borrowings are translated at the hedged rate. In addition, under UK GAAP, it is permissible to hedge account for the net assets of overseas operations with hedging instruments denominated in currencies other than the functional currencies of the overseas operations. | |
| Under US GAAP, as required by SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’, all derivative financial instruments, including derivatives embedded within other contracts, are required to be recognised in the balance sheet as either assets or liabilities and measured at fair value. SFAS 133 only permits hedge accounting in specific circumstances, where the hedge is identified as one of three types: fair value, cash flow, or foreign currency exposures of net investments in foreign operations. Provided that it can be demonstrated that the hedge is highly effective and the relevant hedging criteria have been met, then in respect of fair value hedges, both the change in fair value of the derivative and hedged item are reflected in net income in the period of the change; for cash flow hedges and hedges of foreign currency exposures of net investments in foreign operations, changes in fair value are reflected through other comprehensive income. In the event that the conditions for hedge accounting are not met, then changes in the fair value of a derivative are reflected in net income. | |
| The primary differences that arise between UK GAAP and US GAAP result from the different criteria that are applied under UK GAAP and US GAAP to permit the use of hedge accounting, and the application of different measurement criteria. | |
| Recognition of income Under US GAAP, income is recognised in the period that the service is provided up to the maximum revenue allowed under the terms of the relevant regulatory regime. Under UK GAAP, any income received or receivable in excess of the maximum revenue allowed for the period, under the terms of the relevant regulatory regime, is recognised as income, where prices would be reduced in a future period. | |
| Severance and integration costs Under UK GAAP, severance costs are provided for in the accounts if it is determined that a constructive or legal obligation has arisen from a restructuring programme where it is probable that it will result in the outflow of economic benefits and the costs involved can be estimated with reasonable accuracy. Under US GAAP, severance costs are recognised when the employees accept the severance offer. In addition, where the number of employees leaving results in a significant reduction in the accrual of pension benefits for employees’ future service (a curtailment under US GAAP), the effects are reflected as part of the cost of such termination benefits. Accordingly, timing differences between UK GAAP and US GAAP arise on the recognition of such costs. | |
| Goodwill – acquisition by National Grid Transco Under UK GAAP the combination of National Grid and Lattice, including Transco, has been accounted for as a merger (pooling of interests) while under US GAAP this transaction is accounted for as an acquisition (purchase accounting) of Lattice, including Transco, by National Grid. In accordance with US GAAP, goodwill arising on the purchase has been capitalised, but is not amortised. | |
| Restructuring – acquisition by National Grid Transco Under US GAAP certain reorganisation costs relating to an acquired entity are included in liabilities in determining the fair value of net assets acquired. Under UK GAAP such costs are not recognised as liabilities of the acquired entity at the date of acquisition and are treated as post acquisition costs. | |
| Other differences between UK and US GAAP The Group reviews all long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under UK GAAP, recognition of impairment is determined on the basis of discounted future cash flows attributable to income generating units. Under US GAAP, impairments of long-lived assets are determined in accordance with SFAS 144 ‘Accounting for the impairment or disposal of long-lived assets’ and are recognised on the basis of undiscounted future cash flows and measured on the basis of discounted future cash flows. This difference has no effect on the Group accounts for the three years ended 31 March 2003. | |
| Under UK GAAP, assets in the balance sheet are presented in ascending order of liquidity and the balance sheet is analysed between net assets and shareholders’ funds. Under US GAAP, assets in the balance sheet are presented in descending order of liquidity and the balance sheet is analysed between total assets and liabilities and shareholders’ funds – see note 28. | |
Notes to the accounts continued
| 29. | Principal differences between UK and US accounting principles (continued) New US Accounting Standards adopted during 2002/03 Transco has adopted either in whole or in part the following US GAAP Statements of Financial Accounting Standards (SFAS) which were issued by the Financial Accounting Standards Board (FASB) during the year: |
| SFAS 144 ‘Accounting for the Impairment or Disposal of Long Lived Assets’; SFAS 145 ‘Rescission of FASB statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections’; SFAS 146 ‘Accounting for costs associated with Exit or Disposal Activities’; SFAS 148 ‘Accounting for Stock Based Compensation – Transition and Disclosure – An amendment of FAS No. 123’; FASB Interpretation (FIN) 45 – Guarantors accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others. | |
| SFAS 144 replaces SFAS 121, but does not fundamentally alter the required accounting for either the recognition and measurement of the impairment of long-lived assets to be held and used or for the measurement of long-lived assets to be disposed of by sale. As a consequence, in this regard the application of this accounting standard has had no impact on the Group. SFAS 144 also supersedes the accounting and reporting provisions of Accounting Principles Board No. 30 (APB 30), principally with regard to the reporting of discontinued operations. The Group accounts have been prepared in accordance with SFAS 144, and the associated accounting and disclosures obligations complied with accordingly. | |
| SFAS 145 amends a number of accounting standards. These provisions have been complied with in the preparation of the Group accounts and have not had any material impact on the results or financial condition of the Group. | |
| SFAS 146 has addressed significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. These provisions have been complied with in the preparation of the Group accounts and have not had any material impact on the results or financial condition of the Group. | |
| SFAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of SFAS 123 ‘Accounting for Stock-Based Compensation’. Prior to the adoption by the Group of SFAS 148, the Group had continued to account for Stock compensation costs in accordance with APB 25. The Group adopted the retroactive restatement method of accounting, resulting in the restatement of the income statement and balance sheet under US GAAP for each period presented. | |
| FIN 45 elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued, and also requires the recording of liabilities at fair value associated with the issuance of any guarantees since 31 December 2002. The disclosure provisions of FIN 45 have been considered in the identification and reporting of obligations in the Group accounts and the measurement provisions have similarly been considered in respect of any guarantees issued since 21 December 2002. | |
| New US Accounting Standards and pronouncements not yet effective SFAS 143 requires entities to record the fair value of an ‘asset retirement obligation’ arising in the period from legal obligations associated with the disposal of tangible fixed assets. This standard is applicable to the Group with effect from 1 April 2003. The application of this standard is not expected to have any material impact on the results or financial condition of the Group. | |
| On January 17, 2003, the FASB issued Interpretation No. 46, (FIN 46) ‘Consolidation of Variable Interest Entities’ (VIE). Under FIN 46, certain entities labelled ‘Variable Interest Entities’, must be consolidated by the ‘primary beneficiary’ of the entity. The primary beneficiary is generally defined as the party exposed to the majority of the risks and rewards arising from the VIE. For VIEs in which a significant variable interest is held that is not a majority interest, certain disclosures are required. Full implementation of this interpretation to pre-existing entities is required from 1 July 2003; FIN 46 is applicable to any new VIEs with effect from 1 February 2003, but the Company has not entered into any arrangements that meet the definition of VIE since this date. | |
| SFAS 149 ‘Amendment of Statement 133 on Derivative Instruments and Hedging Activities’ clarifies the circumstances in which a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component. In addition, the statement amends the definition of an underlying to conform to language used in FIN 45 ‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others’, and certain other existing pronouncements. The statement is effective prospectively for contracts entered into or modified, and for hedging relationships designated, after 30 June 2003. The application of this standard is not expected to have a material impact on the results or the financial condition of the Group. | |
Five Year Financial Record (unaudited) | ||||||||||||||||
| Profit and loss account | ||||||||||||||||
12 months ended 31 Mar 2003 | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | 12 months ended 31 Dec 1999 Restated | 12 months ended 31 Dec 1998 Restated | ||||||||||||
£m | £m | £m | £m | £m | ||||||||||||
| Turnover, including share of joint ventures | 3,037 | 3,922 | 2,975 | 4,671 | 4,480 | |||||||||||
| Less: share of joint ventures turnover | – discontinued operations | – | – | – | (63 | ) | (6 | ) | ||||||||
| Group turnover | – continuing operations | 3,037 | 3,922 | 2,975 | 3,058 | 3,062 | ||||||||||
| Group turnover | – discontinued operations | – | – | – | 1,550 | 1,412 | ||||||||||
| Group turnover | 3,037 | 3,922 | 2,975 | 4,608 | 4,474 | |||||||||||
| Operating costs | – continuing operations | (2,247 | ) | (2,631 | ) | (1,902 | ) | (1,769 | ) | (1,769 | ) | |||||
| – discontinued operations | – | – | – | (1,277 | ) | (1,119 | ) | |||||||||
| (2,247 | ) | (2,631 | ) | (1,902 | ) | (3,046 | ) | (2,888 | ) | |||||||
| Operating profit of Group undertakings | – continuing operations | 790 | 1,291 | 1,073 | 1,289 | 1,293 | ||||||||||
| Operating profit of Group undertakings | – discontinued operations | – | – | – | 273 | 293 | ||||||||||
| 790 | 1,291 | 1,073 | 1,562 | 1,586 | ||||||||||||
| Share of joint ventures’ operating profits | – discontinued operations | – | – | – | 94 | 53 | ||||||||||
| Operating profit | ||||||||||||||||
| – before exceptional items – continuing operations | 936 | 1,391 | 1,114 | 1,309 | 1,293 | |||||||||||
| – before exceptional items – discontinued operations | – | – | – | 367 | 346 | |||||||||||
| – exceptional items – continuing operations | (146 | ) | (100 | ) | (41 | ) | (20 | ) | – | |||||||
| Total operating profit | 790 | 1,291 | 1,073 | 1,656 | 1,639 | |||||||||||
| Non-operating exceptional costs – continuing operations | (8 | ) | – | – | – | – | ||||||||||
| Profit/(loss) on disposal of fixed asset investments – continuing operations | 1 | – | 4 | (669 | ) | 45 | ||||||||||
| Profit/(loss) on disposal of tangible fixed assets – continuing operations | (6 | ) | 10 | (19 | ) | 36 | 101 | |||||||||
| Share of profit on disposals in joint ventures – discontinued operations | – | – | – | 1 | 4 | |||||||||||
| Net interest | (322 | ) | (418 | ) | (360 | ) | (418 | ) | (405 | ) | ||||||
| Profit on ordinary activities before taxation | 455 | 883 | 698 | 606 | 1,384 | |||||||||||
| Taxation | ||||||||||||||||
| – excluding exceptional items | (189 | ) | (300 | ) | (228 | ) | (374 | ) | (414 | ) | ||||||
| – exceptional items | 41 | 32 | 8 | – | – | |||||||||||
| Profit on ordinary activities after taxation | 307 | 615 | 478 | 232 | 970 | |||||||||||
| Minority interest | – | – | – | (14 | ) | (8 | ) | |||||||||
| Profit for the period | 307 | 615 | 478 | 218 | 962 | |||||||||||
| Balance sheet | |||||||||||||||
31 Mar 2003 | 31 Mar 2002 Restated | 31 Dec 2000 Restated | 31 Dec 1999 Restated | 31 Dec 1998 Restated | |||||||||||
£m | £m | £m | £m | £m | |||||||||||
| Fixed assets | 7,783 | 7,540 | 7,121 | 6,820 | 11,112 | ||||||||||
| Current assets | 2,584 | 2,578 | 2,681 | 2,878 | 1,620 | ||||||||||
| Creditors: amounts falling due within one year | (2,209 | ) | (1,969 | ) | (2,752 | ) | (2,520 | ) | (3,445 | ) | |||||
| Net current assets/(liabilities) | 375 | 609 | (71 | ) | 358 | (1,825 | ) | ||||||||
| Total assets less current liabilities | 8,158 | 8,149 | 7,050 | 7,178 | 9,287 | ||||||||||
| Creditors: amounts falling due after more than one year | (5,059 | ) | (5,156 | ) | (4,240 | ) | (4,525 | ) | (4,062 | ) | |||||
| Provisions for liabilities and charges | (1,450 | ) | (1,407 | ) | (1,385 | ) | (1,392 | ) | (2,866 | ) | |||||
| Net assets | 1,649 | 1,586 | 1,425 | 1,261 | 2,359 | ||||||||||
| Transco shareholders’ funds | 1,649 | 1,586 | 1,425 | 1,261 | 2,225 | ||||||||||
| Minority interest | – | – | – | – | 134 | ||||||||||
| Total shareholders’ funds | 1,649 | 1,586 | 1,425 | 1,261 | 2,359 | ||||||||||
| Five Year Financial Record (unaudited) Cash flow statement | |||||||||||
12 months ended 31 Mar 2003 | 15 months ended 31 Mar 2002 Restated | 12 months ended 31 Dec 2000 Restated | 12 months ended 31 Dec 1999 Restated | 12 months ended 31 Dec 1998 Restated | |||||||
£m | £m | £m | £m | £m | |||||||
| Operating cash inflow before exceptional items | 1,454 | 2,353 | 1,468 | 1,562 | 2,355 | ||||||
| Net expenditure relating to exceptional items | (135 | ) | (12 | ) | (4 | ) | (31 | ) | (67 | ) | |
| Net cash inflow from operating activities | 1,319 | 2,341 | 1,464 | 1,531 | 2,288 | ||||||
| Dividends from joint ventures and associates | – | – | – | 3 | 2 | ||||||
| Net cash outflow from returns on investments and servicing of financing | (309 | ) | (364 | ) | (383 | ) | (381 | ) | (395 | ) | |
| Net cash outflow from taxation | (62 | ) | (240 | ) | (191 | ) | (373 | ) | (527 | ) | |
| Net cash outflow from capital expenditure and financial investment | (605 | ) | (909 | ) | (606 | ) | (828 | ) | (995 | ) | |
| Net cash flow from acquisitions and disposals | 1 | 13 | 7 | (667 | ) | 1 | |||||
| Equity dividends paid | (337 | ) | (432 | ) | (400 | ) | (348 | ) | (327 | ) | |
| Net cash inflow/(outflow) before management of liquid resources | 7 | 409 | (109 | ) | (1,063 | ) | 47 | ||||
| Net cash inflow/(outflow) from management of liquid resources | (4 | ) | 55 | 210 | 9 | 336 | |||||
| Net cash inflow/(outflow) from financing activities | 20 | (493 | ) | (95 | ) | 1,093 | (395 | ) | |||
| Net increase/(decrease) in cash in period | 23 | (29 | ) | 6 | 39 | (12 | ) | ||||
| Selected US GAAP information | |||||||||||
12 months ended 31 Mar 2003 | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | 12 months ended 31 Dec 1999 | 12 months ended 31 Dec 1998 | |||||||
| £m | £m | £m | £m | £m | |||||||
| Group turnover | 3,021 | 3,992 | 2,975 | 4,608 | 4,474 | ||||||
| Net income | 588 | 951 | 640 | 230 | 1,026 | ||||||
31 Mar 2003 £m | 31 Mar 2002 £m | 31 Dec 2000 £m | 31 Dec 1999 £m | 31 Dec 1998 £m | |||||||
| Total assets | 20,347 | 13,207 | 13,004 | 12,669 | 15,737 | ||||||
| Equity shareholders’ funds | 10,031 | 4,172 | 3,672 | 3,394 | 4,452 | ||||||
| Exchange rate information The following table sets forth for the periods and the dates indicated certain information concerning the Noon Buying Rate expressed in US dollars per £1.00. | |||||||||||
12 months ended 31 Mar 2003 | 15 months ended 31 Mar 2002 | 12 months ended 31 Dec 2000 | 12 months ended 31 Dec 1999 | 12 months ended 31 Dec 1998 | |||||||
| High | 1.65 | 1.48 | 1.65 | 1.68 | 1.72 | ||||||
| Low | 1.43 | 1.41 | 1.40 | 1.55 | 1.61 | ||||||
| Period end | 1.58 | 1.42 | 1.50 | 1.62 | 1.66 | ||||||
| Average* | 1.55 | 1.43 | 1.51 | 1.61 | 1.66 | ||||||
| * The average of the Noon Buying Rates on the last business day of each month during the period. | |||||||||||
High ($) | Low ($) | ||||
| October 2002 | 1.57 | 1.54 | |||
| November 2002 | 1.59 | 1.54 | |||
| December 2002 | 1.61 | 1.56 | |||
| January 2003 | 1.65 | 1.60 | |||
| February 2003 | 1.65 | 1.57 | |||
| March 2003 | 1.61 | 1.56 | |||
| April 2003 | 1.60 | 1.55 | |||
| May 2003 | 1.65 | 1.59 | |||
| June 2003 to 6 June | 1.66 | 1.63 | |||
Glossary of terms
| Term used in annual report | US equivalent or brief description |
| Accounts | Financial statements |
| Acquisition accounting | Purchase accounting |
| Allotted | Issued |
| Associate | Equity investment |
| Called up share capital | Common stock issued and fully paid |
| Capital allowances | Tax term equivalent to US tax depreciation allowances |
| Creditors | Accounts payable (or payables) |
| Debtors | Accounts receivable (or receivables) |
| Equity shareholders’ funds | Shareholders’ equity |
| Finance lease | Capital lease |
| Financial year | Fiscal year |
| Fixed asset investments | Non-current investments |
| Freehold | Ownership with absolute rights in perpetuity |
| Freehold land | Land owned |
| Group accounts | Consolidated financial statements |
| Interest receivable | Interest income |
| Interest payable | Interest expense |
| Joint venture | Equity investment |
| Net asset value | Book value |
| Operating profit | Net operating income |
| Pension scheme | Pension plan |
| Profit | Income (or earnings) |
| Profit and loss account (reserve) | Retained earnings |
| Profit and loss account | Income statement |
| Profit for the year | Net income |
| Provision for doubtful debts | Allowance for bad and doubtful accounts receivable |
| Provisions | Long-term liabilities other than debt and specific accounts payable |
| Rates | UK property taxes |
| Reconciliation of movements in equity shareholders’ funds | Statement of changes in stockholders’ equity |
| Reserves | Stockholders’ equity other than common stock |
| Share capital | Ordinary shares, capital stock or common stock issued and fully paid |
| Share premium account | Additional paid-in capital relating to proceeds of sale of stock in excess of par value or paid-in surplus (not distributed) |
| Stocks | Inventories |
| Tangible fixed assets | Property, plant and equipment |
| Turnover | Revenues (or sales) |
British Gas Trading
A subsidiary undertaking of Centrica plc.
Company
Transco plc.
Demerger
The demerger of Lattice Group plc from BG Group plc which became effective on 23 October 2000.
Group
Transco and/or its subsidiary undertakings or any of them as the context requires.
GWh
Gigawatt hours. 106 kWh.
HSE
Health and Safety Executive.
kWh
Kilowatt hours.
Lattice or Lattice Group
Lattice Group plc and/or its subsidiary undertakings or any of them as the context requires immediately prior to the completion of the Merger.
Licence
The Gas Transporters Licence treated as granted under section 7 of the Gas Act 1986, as amended, to Transco by which Transco is authorised to transport gas.
LNG
Liquefied natural gas.
m
Million
mcm
Million cubic metres.
Merger
The merger of National Grid and Lattice which became effective on 21 October 2002.
National Grid or National Grid Group
National Grid Group plc and/or its subsidiary undertakings or any of them as the context requires immediately prior to the completion of the Merger.
National Grid Transco
National Grid Transco plc and/or its subsidiary undertakings or any of them as the context requires.
NTS
Transco’s UK national gas transmission system.
Ofgem
The Office of Gas and Electricity Markets which on 16 June 1999 became the new name for the combined Office of Electricity Regulation and Office of Gas Supply.
Pence or p
United Kingdom (UK) currency.
Pound(s) sterling or £
United Kingdom (UK) currency.
SEC
United States Securities and Exchange Commission.
SecondSite Properties
A subsidiary undertaking of National Grid Transco, which prior to the Merger was called Lattice Properties.
Ordinary shares
Ordinary shares of 12 /15 pence each in the capital of Transco.
TWh
Terawatt hours. 109 kWh.
Transco
Transco plc and/or its subsidiary undertakings or any of them as the context requires.
US dollars, US$ or $
United States (US) currency.
Investor Information
| Control of registrant The Company is a wholly owned subsidiary of Transco Holdings plc, which itself is a wholly owned subsidiary of Lattice Group plc. Lattice Group plc is a wholly owned subsidiary undertaking of National Grid Transco plc. National Grid Transco is a public limited company listed on the London Stock Exchange and registered in England and Wales. The Company’s share capital consists of ordinary shares with a nominal value of 1 2/15 pence each. There are no arrangements the operation of which may at a subsequent date result in a change of control. Nature of Trading Market The Company is the guarantor of $300 million of 6.625% Guaranteed Notes due 2018 (the ‘Notes’). The Notes are listed on the New York Stock Exchange, which is the only trading market for the Notes. The table below sets out, for the periods indicated, the trading history of the Notes on the New York Stock Exchange, showing the high and low sale prices as a percentage of their nominal value from their date of issue: | right to be a holder of, or to vote in respect of the Notes under English law currently in force or in the Company’s Memorandum and Articles of Association. |
| High (%) | Low (%) | |||
| 1999 | 104.59 | 87.88 | ||
| 2000 | 91.88 | 83.83 | ||
| First quarter | 90.78 | 85.25 | ||
| Second quarter | 91.63 | 83.83 | ||
| Third quarter | 89.82 | 85.81 | ||
| Fourth quarter | 91.88 | 86.86 | ||
| 2001 First quarter | 97.65 | 91.00 | ||
| 2001/02 | 93.43 | 87.72 | ||
| First quarter | 96.40 | 92.90 | ||
| Second quarter | 100.96 | 93.60 | ||
| Third quarter | 103.39 | 89.41 | ||
| Fourth quarter | 93.43 | 87.72 | ||
| 2002/03 | 93.53 | 88.66 | ||
| First quarter | 93.53 | 88.66 | ||
| Second quarter | 101.41 | 92.22 | ||
| Third quarter | 106.34 | 94.69 | ||
| December 2002 | 99.71 | 96.89 | ||
| January 2003 | 99.15 | 96.40 | ||
| February 2003 | 100.51 | 98.12 | ||
| March 2003 | 110.81 | 100.44 | ||
| Fourth quarter | 110.81 | 96.40 | ||
| April 2003 | 110.55 | 108.01 | ||
| May 2003 | 116.73 | 109.45 | ||
| June 2003 to 4 June 2003 | 115.23 | 114.44 | ||
| Exchange controls and other limitations affecting security holders There are no UK foreign exchange controls currently in force that restrict the import or export of capital or that affect the remittance of interest or other payments to holders of the Notes who are non-residents of the United Kingdom. There are no limitations relating to non-residents of the United Kingdom on the | The Articles of Association (Articles) of the Company and applicable English law contain, among others, provisions to the following effect: Directors | ||
| 1 | General Unless otherwise determined by ordinary resolution of the Company, there must be at least four Directors. A Director need not be a shareholder, | ||
but a Director who is not a shareholder can still attend and speak at shareholders’ meetings. The Directors can appoint any Director to any other executive office on which they decide. So far as the relevant English law allows, they can decide on the terms of these appointments. At each annual general meeting any Director who was elected or last re-elected a Director at or before the annual general meeting held in the third calendar year before the current year shall automatically retire from office. A retiring Director is eligible for re-election. Provisions of the relevant English legislation regarding the age limit of Directors do not apply to the Company. |
| 2 | Directors’ interests Unless otherwise provided in the Articles, a Director cannot cast a vote on any contract arrangement or any other kind of proposal in which he knows he has a material interest. For this purpose, interests of a person who is connected with a Director under section 346 of the Companies Act 1985 are added to the interests of the Director himself. Interests purely as a result of an interest in the Company’s shares, debentures or other securities are disregarded. In relation to an alternate Director, an interest of his appointor shall be treated as an interest of the alternate Director in addition to any interest which the alternate Director has in his own right. A Director may not be included in the quorum of a meeting in relation to any resolution on which he is not allowed to vote. |
| 3 | Borrowing powers So far as the relevant English law allows, the Directors can exercise all the powers of the Company to (i) borrow money, (ii) issue debentures and other securities and (iii) give any form of guarantee and security for any debt, liability or obligation of the Company or of any third party. |
| The Directors must limit the borrowings of the Company and exercise all powers of control exercisable by the Company in relation to its subsidiary undertakings so as to ensure that the total amount of all borrowings by the Accounting Group (as defined in the Articles) outstanding at any time will not exceed an amount which is equal to 0.7 times the aggregate of (a) the amount paid up on the share capital of the Company and (b) the total of the capital and revenue reserves of the Accounting Group, including, excluding |
Shareholder meetings
There are two types of meetings of shareholders, annual general meetings (AGM) and extraordinary general meetings (EGM). The Company must hold an AGM in each year and not more than 15 months from the previous AGM. The Directors will decide when and where to hold the AGM. Any other general meeting is known as an EGM.
The Directors can decide to call an EGM at any time. In addition, an EGM must be called by the Directors within 21 days in response to a requisition by shareholders under the relevant English law. When an EGM is called, the Directors must decide when and where to hold the EGM. At least 21 clear days’ notice in writing (or, where the relevant legislation permits, by electronic mail) must be given for every AGM and for any other meeting where it is proposed to pass a special resolution or to pass some other resolution of which special notice under the Companies Act 1985 has been given to the Company. For every other general meeting at least 14 clear days’ notice in writing must be given.
There must be a quorum present at every general meeting. Unless provided otherwise in the Articles, a quorum is two people who are entitled to vote. A resolution that is put to the vote at a general meeting will be decided by a show of hands, unless a poll is demanded when, or before, the result of the show of hands is declared by the Chairman.
Transfer of shares
Unless otherwise provided in the Articles or the terms of issue of any shares, any shareholder may transfer any or all of his shares. However, the Directors can refuse to register a transfer (i) in certificated form, if such shares are not fully paid-up or the evidence of entitlements to such shares is missing; (ii) if it is in respect of more than one class of shares; or (iii) if it is in favour of more than four persons jointly. However, if any of those shares have been admitted to the Official List of the London Stock Exchange, the Directors cannot refuse to register a transfer if this would stop dealings in the shares from taking place on an open and proper basis.
If the Directors decide not to register a transfer, they must notify the person to whom the shares were to be transferred
within two months. The Directors can decide to suspend the registration of transfers by closing the Register, but the Register cannot be closed for more than 30 days per year.
Share capital
The Company’s authorised share capital is £68,586,392.031 3/15, consisting of 6,051,740,474 ordinary shares of 1 2/15p each.
| Shareholders’ rights | |
| 1 | Voting rights |
| When a shareholder is entitled to attend a general meeting and vote, he or his authorised representative has only one vote on a show of hands. Where there is a poll, subject to the Articles, a shareholder who is entitled to be present and to vote has one vote for every share which he holds. | |
| To decide who can attend or vote at a general meeting, the notice of the meeting can give a time by which people must be entered on the Register, which must not be more than 48 hours before the meeting. Unless provided otherwise in the Articles, the only people who can attend or vote at general meetings are shareholders who have paid the Company all calls, and all other sums, relating to the shares which are due at the time of the meeting. | |
| 2 | Restrictions on Shareholders’ rights |
| If a shareholder has been properly served with a notice under section 212 of the Companies Act 1985 requiring information about interests in shares, and has failed to supply such information within 14 days of the notice, then (subject to the Articles and unless the Directors otherwise decide) the shareholder is not (for so long as the default continues) entitled to vote, or to exercise any other right in relation to a meeting as holder of the shares in relation to which the default occurred (Default Shares). | |
| Where the Default Shares represent 0.25% or more of the existing shares of a class, the Directors can, in their absolute discretion, by notice to the shareholder direct that (i) any dividend or other money which would otherwise be payable on the Default Shares shall be retained by the Company (without any liability to pay interest when the dividend or money is finally paid to the shareholder) and (ii) no transfer of any of the shares held by the shareholder will be registered unless the shareholder is not himself in default as regards supplying the information required and the shareholder proves, to the satisfaction of the Directors, that no |
| person in default as regards supplying such information is interested in any of the shares the subject of the transfer. | |
| 3 | Variation of rights |
| If the Company’s share capital is split into different classes of shares, subject to the relevant English law or the approval of an extraordinary resolution passed at a separate meeting of that class, the special rights which are attached to any of these classes can be varied or abrogated. Alternatively, the holders of at least three-quarters of the existing shares of the class (by nominal value) can give their consent in writing. |
Alteration of share capital
The shareholders can by ordinary resolutions (i) increase the Company’s authorised share capital; (ii) consolidate and then divide all or any of the Company’s share capital into shares of a larger nominal amount than the existing shares; (iii) subject to the relevant English law, sub-divide some or all of the Company’s shares into shares which are of a smaller nominal amount than is fixed in the Memorandum; (iv) determine that, as between the shares resulting from such a sub-division, any of them may have any preference or advantage as compared with the others; and (v) cancel any shares which have not been taken, or agreed to be taken, by any person at the date of the resolution and reduce the amount of the Company’s share capital by the amount of the cancelled shares.
The shareholders can, subject to the relevant English law, pass a special resolution to reduce the Company’s authorised share capital in any way or reduce any capital redemption reserve, share premium account or other undistributable reserve in any way.
The Company can, subject to the relevant English law, buy back or agree to buy back in the future, any shares of any class. However, if the Company has existing shares which are admitted to the Official List of the London Stock Exchange and which are convertible into the class of equity shares to be repurchased, then the Company can only buy back equity shares of that class if either the terms of issue of the convertible shares permit the Company to buy back equity shares or the buy-back, or agreement to buy-back, has been approved by an extraordinary resolution passed by such holders.
Dividends
The shareholders can declare final or interim dividends by ordinary resolution. No dividend can exceed the amount recommended by the Directors. No interim dividend shall be paid on shares which
carry deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrears.
The Directors can recommend the shareholders to pass an ordinary resolution to direct all or part of a dividend to be paid by distributing specific assets. The Directors must give effect to such a resolution.
Any dividend which has not been claimed for twelve years may be forfeited and belong to the Company if the Directors so decide.
Winding up
If the Company is wound up, the liquidator can, with the authority of an extraordinary resolution, divide among the shareholders all or part of the assets of the Company or transfer any part of the assets to trustees on trust for the benefit of the shareholders. No past or present shareholder can be compelled to accept any shares or other property under the Articles which carries a liability.
Rights of foreign shareholders
There are no specific limitations imposed by the relevant English law or the Articles on the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities. However, as a consequence of the rights of the UK Secretary of State for Trade and Industry pursuant to the special rights share which he holds in Lattice Group plc, the Articles provide that Transco may not, inter alia, without the prior written consent of its ultimate holding company, create or issue shares other than shares following the issue of which its ultimate holding company directly or indirectly will own the full legal and beneficial interest in, and control, shares in the capital of Transco carrying at least 85% of the voting rights exercisable at general meetings of Transco.
Notification of interest in shares
Section 198 of the Companies Act 1985 requires any shareholder, subject to exceptions, who acquires an interest of 3% or more or, in the case of certain interests, 10% or more in the shares to notify the Company of his interest within two business days following the day on which the obligation to notify arises. After the 3% or 10%, as the case may be, level is exceeded, similar notification must be made in respect of the whole percentage figure increases or decreases.
In addition, section 212 of the Companies Act 1985 enables the Company, by notice in writing, to require a shareholder whom in the Company’s knowledge or reasonable beliefs is, or has been at any time during the three years immediately preceding the notice, interested in shares to indicate whether or not that is the case, and to give such further information as may be required relating to such interest and any other interest in the shares of which such shareholder is aware.
| Cross Reference to Form 20-F | |||
| Item | Page | ||
| PART 1 | |||
| 1 | Identity of Directors, Senior Management and Advisers | n/a | |
| 2 | Offer Statistics and Expected Timetable | n/a | |
| 3 | Key Information | ||
| A | Selected Financial Data | ||
| Financial summary | 52 | ||
| Dividends | 31 | ||
| Exchange Rates | 52 | ||
| B | Capitalisation and Indebtedness | n/a | |
| C | Reasons for the Offer and Use of Proceeds | n/a | |
| D | Risk Factors | 16 | |
| 4 | Information on the Company | ||
| A | History and Development of the Company Overview of Transco | 3 | |
| History and development of the business | 3 | ||
| Incorporation | 17 | ||
| Operating and Financial Review | 8 | ||
| B | Business Overview | ||
| Chairman’s Statement | 2 | ||
| Business Review | 3 | ||
| Operating and Financial Review | 8 | ||
| C | Organisational Structure | ||
| Note 26 Ultimate parent company | 41 | ||
| Note 27 Principal subsidiary undertakings | 41 | ||
| D | Property, Plant and Equipment | ||
| UK Gas distribution | |||
| Background information | 3 | ||
| Fixed assets | 4 | ||
| UK Gas transmission | |||
| Background information | 4 | ||
| Fixed assets | 5 | ||
| 5 | Operating and Financial Review and Prospects | ||
| A | Operating Results Operating and Financial Review | 8 | |
| B | Liquidity and Capital Resources Liquidity and Capital Resources | 10 | |
| C | Research and Development, Patents and Licences, etc. Research and Development | 17 | |
| D | Trend Information | ||
| Business Review | 3 | ||
| Operating and Financial Review | 8 | ||
| Changes and developments | 14 | ||
| E | Reserved | ||
| F | Reserved | ||
| G | Reserved | ||
| Item | Page | ||
| 6 | Directors, Senior Management and Employees | ||
| A | Directors and Senior Management Board of Directors | 7 | |
| B | Compensation | ||
| Note 6 Directors’ emoluments | 29 | ||
| Note 7 Pensions | 29 | ||
| C | Board Practices | ||
| Directors’ service contracts | 18 | ||
| D | Employees | ||
| Note 5 Payroll costs and employees | 28 | ||
| E | Share Ownership | ||
| Directors’ interests | 17 | ||
| Employee share ownership | 6 | ||
| Note 29 Employee share options | 48 | ||
| 7 | Major Shareholders and Related Party Transactions | ||
| A | Major Shareholders | ||
| Note 20 Share capital | 37 | ||
| B | Related Party Transactions | ||
| Related party transactions | 14 | ||
| Note 14 Debtors | 32 | ||
| Note 15 Creditors | 32 | ||
| Note 16 Creditors | 33 | ||
| Note 17 Borrowings | 33 | ||
| Note 24 Related party transactions | 40 | ||
| C | Interests of Experts and Counsel | n/a | |
| 8 | Financial Information | ||
| A | Consolidated Statements and Other Financial Information Directors’ responsibilities for preparing the financial statements | 18 | |
| Independent Auditors’ report | 19 | ||
| Accounting policies | 20 | ||
| Group profit and loss account | 22 | ||
| Balance sheets | 23 | ||
| Group cash flow statement | 24 | ||
| Notes to the accounts | 25 | ||
| Dividend policy | n/a | ||
| B | Significant Changes Changes and developments | 14 | |
| 9 | The Offer and Listing Details | ||
| A | Offer and Listing Details Market prices | 55 | |
| B | Plan of Distribution | n/a | |
| C | Markets Trading markets for Guaranteed Notes | 55 | |
| D | Selling Shareholders | n/a | |
| E | Dilution | n/a | |
| F | Expenses of the Issue | n/a | |
| Item | Page | ||
| 10 | Additional Information | ||
| A | Share Capital | ||
| Note 20 Share capital | 37 | ||
| B | Memorandum and Articles of Association | ||
| Memorandum and Articles of Association | 55 | ||
| C | Material Contracts | ||
| Material Contracts | n/a | ||
| D | Exchange Controls | ||
| Exchange Controls | n/a | ||
| E | Taxation | ||
| Taxation | n/a | ||
| F | Dividends and Paying Agents | n/a | |
| G | Statement by Experts | n/a | |
| H | Documents on Display | ||
| Documents on Display | n/a | ||
| I | Subsidiary Information | n/a | |
| 11 | Quantitative and Qualitative Disclosures About Market Risk | ||
| Refinancing risk management | 11 | ||
| Interest rate risk management | 12 | ||
| Foreign exchange risk management | 12 | ||
| Counterparty risk management | 12 | ||
| 12 | Description of Securities Other than Equity Securities | ||
| A | Debt Securities | n/a | |
| B | Warrants and Rights | n/a | |
| C | Other Securities | n/a | |
| D | American Depositary Shares | n/a | |
| PART II | |||
| 13 | Defaults, Dividend Arrearages and Delinquencies | ||
| Defaults, Dividend Arrearages and Delinquencies | n/a | ||
| 14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | n/a | |
| 15 | Controls and Procedures | ||
| Evaluation of disclosure controls and procedures | 18 | ||
| 16 | Reserved | ||
| PART III | |||
| 17 | Financial Statements | ||
| See Item 18 | |||
| 18 | Financial Statements | ||
| Directors’ responsibilities for preparing the financial statements | 18 | ||
| Independent Auditors’ Report | 19 | ||
| Accounting policies | 20 | ||
| Group profit and loss account | 22 | ||
| Balance sheets | 23 | ||
| Group cash flow statement | 24 | ||
| Notes to the accounts | 25 | ||
| 19 | Exhibits | ||
| Exhibits | n/a | ||
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| TRANSCO PLC | ||
| By: | /s/ Colin Buck | |
| Colin Buck | ||
| Date: June 25, 2003 | Finance Director | |
CERTIFICATIONS
I, Steven Holliday, certify that:
1. I have reviewed this annual report on Form 20-F of Transco plc;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: June 25, 2003 | /s/ Steven Holliday | |
| Steven Holliday | ||
| Chief Executive |
I, Colin Buck, certify that:
1. I have reviewed this annual report on Form 20-F of Transco plc;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: June 25, 2003 | /s/ Colin Buck | |
| Colin Buck | ||
| Finance Director |
Exhibit Index
| Exhibit | Description | |||
| 1 | Memorandum and Articles of Association of Transco plc (Exhibits 1.1 and 1.2 to Transco Form 20-F dated June 5, 2002 File No. 1-14826) | Incorporated by reference | ||
| 2(a) | Indenture dated March 15, 1988 (Exhibit 4.1 to Amendment No 1 to Transco Registration Statement on Form F-2 dated March 16, 1988 File No. 33-020435) | Incorporated by reference | ||
| 4(c)(i) | National Grid Executive Share Option Plan 2002 (Exhibit 4(c) to National Grid Group Form 20-F dated June 21, 2002 File No. 1-14958) | Incorporated by reference | ||
| 4(c)(ii) | National Grid Group Share Matching Plan 2002 (Exhibit 4(c) to National Grid Group Form 20-F dated June 21, 2002 File No, 1-14958) | Incorporated by reference | ||
| 4(c)(iii) | National Grid Transco Performance Share Plan 2002 (Exhibit 4(c)(iii) to National Grid Transco Form 20-F dated June 11, 2003 File No, 1-14958) | Incorporated by reference | ||
| 4(c)(iv) | National Grid Executive Share Option Plan 2000 (Exhibit 4C to National Grid Group S-8 dated July 26, 2001 File No. 333-65968) | Incorporated by reference | ||
| 4(c)(v) | National Grid Executive Share Option Scheme (Exhibit 4D to National Grid Group S-8 dated 26 July 2001 File No. 333-65968) | Incorporated by reference | ||
| 4(c)(vi) | Lattice Long Term Incentive Scheme (Exhibit 4(c)(vi) to National Grid Transco Form 20-F dated June 11, 2003 File No. 1-14958) | Incorporated by reference | ||
| 8 | List of Subsidiaries | Filed herewith | ||
| 12(a) | Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
