National Grid PLC (NGG) 2004 Q2 法說會逐字稿

Well, a very good morning to you all, ladies and gentlemen, and welcome to our interim results presentation. With me, as has been the case for the past two years since merger, is Roger Urwin, Steve Lucas, who will make today's presentation. In the audience, we also have our Group Directors, Edward Astle, Steve Holliday, Mike Jesanis, Nick Winser, all of whom are available to join in the Q&A session. So I hope you will find opportunity to talk to them, once the formal proceedings are over.

Clearly, National Grid Transco has had an active and successful half-year. We have delivered another robust operating performance across the group, particularly from our US businesses. We have continued to drive strong growth in underlying earnings per share, up 10 percent over the same period last year. And I am also pleased to report that these results have been delivered with an improvement in our already very high standards of safety and reliability. This is a tribute to the strength, the quality and the efforts of all our people and our management team.

Strategically, as you know, we have also taken two very important steps with the agreement to sell four of our gas distribution networks and the acquisition of Crown Castle UK. Both strengthen our value delivery to shareholders, and are part of our disciplined approach to capital management. Once completed, the gas network sales will deliver our desired shape (ph) for the UK distribution business going forward, and secure a substantial premium to the regulated asset value of the networks.

It will also enable growth of 2 billion, (indiscernible) return of value to our shareholders and the repayment of 2.3 billion of debt following their completion. Since making the announcement, we are making good progress towards obtaining the required regulatory approvals to complete the sales, and anticipate completion in the second quarter of 2005.

The acquisition of Crown Castle positions us as the leading independent operator in the growth sector of wireless infrastructure. It leverages our core skill (ph), and it offers the proper potential for premium returns. The performance of Crown Castle, and progress on its integration with Gridcom in the UK are both very encouraging.

Looking ahead, continued strong operational performance across our business, both in the US and the UK, underpins our confidence in the prospects for the group. We are confident that there will be opportunities for organic investment to grow with our businesses.

As a result of this confidence, we are today announcing a 7 percent increase in the interim dividend, and we intend to lift the total dividend for the year by 20 percent, subject to completing the gas network sales. This would mean an increase of almost 40 percent in the past two years since merger. And, on top of the higher base, we remain committed to our target of raising the dividend by 7 percent each subsequent year to 2008.

As a final note before handing over to Steve and Roger, I would just like to place on record the Board's deep appreciation of all that Rick Sergel and James Ross have contributed. And as you know, Rick retired in July after providing four years of extremely valuable service to our Board as Group Director, and James has been an outstanding Deputy Chairman and, before that, Chairman of National Grid, and has now retired from the Board, as planned, last month. We wish them both very well, and are grateful for all they have achieved with us.

On that note, let me ask Steve to take us through the numbers, and then Roger to follow that by looking at the operating and strategic highlights. Thank you.

Thanks, John, and good morning to everyone. Before running through the actual results, I will go through a couple of presentational issues. In the light of (ph) the movement in the dollar compared to same period last year, we presented all operating results at constant exchange rates. All the numbers I quote are in pounds sterling, and before exceptional items and goodwill amortization, unless specifically stated otherwise.

And now, to the headlines. The highlights can be summarized very simply. On the operating line, we have continued to deliver on cost reduction, resulting in another strong performance. This is particularly clear in the US, where in the first half, we have taken a further 25 million pounds out of controllable costs. This is the main driver behind a 2 percent increase in group operating profits. We have also reduced our group interest charge, delivering a 6 percent improvement in profit before tax. With a tax rate of 25 percent, earnings per share are up 10 percent.

With that, I will now look at the main segments at the operating level, starting with UK transmission. Operating profit from UK electricity and gas transmission was 365 million pounds. At our full year's results in May, we described the new charging methodology in electricity transmission, known as Plugs. This had an adverse P&L impact in the second half of last year, but, as expected, creates a 16 million benefit in the first half of this year. There will be a similar positive effect in the second half.

We have also had an extra 14 million pounds of income on the (indiscernible) side, being mainly inflation adjustments and recovery of K (ph). Again, there will be a similar effect in the second half.

Pension deficit costs increased by 5 million pounds, reflecting a 6 million pound increase in electricity and a decrease in gas of 1 million. These numbers are derived from the three-yearly (ph) actuarial valuation of the NGG pension scheme, and the annual (ph) assessments on the gas side, and we have included further details on pensions in your packs.

Turning now to gas, TO income was down 26 million pounds, reflecting lower income from capacity auctions in this period. However, this is purely a timing effect within the year, and we are already recovering this revenue, having increased TO commodity charges for the second half. On the gas SO side, we had a 9 million run-up benefit last year from correcting previously undercharged shrinkage gas.

Turning, then, to UK gas distribution, in this segment we are managing a substantial increase in RepEx, and the great bulk of this additional expenditure was undertaken in the first half. Allowing for this, the business delivered a good result, with operating profits of 18 million pounds in the seasonally weaker first half. During the first half, we contemplated on the networks sales process having already delivered substantial cost reductions in the prior period. There was therefore little merit in incurring the associated costs to achieve further savings across all the networks, when we were uncertain about which ones we would retain. Formulary (ph) income was up 21 million pounds, largely reflecting underlying volume growth of 1.5 percent and the effect of pricing changes. The weather was slightly cooler than last year, adding 6 million pounds (indiscernible); however, it was still much warmer than the seasonal normal temperatures, which the industry uses for planning purposes. At SMT, our revenue would have been some 13 (ph) million pounds higher. Pension deficit costs were 11 million pounds lower.

To give more detail on RepEx, we expect full-year RepEx will be around 60 million higher than last year, and 52 million pounds of this increase will was incurred in the first half, bringing the half-year total to 238 million.

Finally, we had a one-off benefit in 2003, this being additional income build (ph) in distribution, as a result of the shrinkage correction which I mentioned on the transmission.

Before I turn to the US businesses, let me deal with the impact of exchange rates. On average, in this half, the dollar was 18 cents weaker than last year. This meant that last year's operating profits were 30 million pounds higher, compared to what they would have been at this year's exchange rates. As you know, around one-third of our group debt is held in dollars, and the resulting deductions in reported interest charges, together with dollar-denominated tax, means that this (indiscernible) weakness has only had a 9 million pounds earnings impact.

Moving on, then, to the US businesses. The US delivered operating profits of 288 million pounds, a 27 million increase on last year. With 2 million of this coming from transmission, the big improvement was on the distribution side. In US electricity and gas distribution, excluding standard costs, last year's operating profits, expected at this year's exchange rate, was 146 million pounds and we've beaten this by 24 million pounds, a 16 percent increase. This was despite a cool summer taking 11 million pounds off our top line. Our underlying volume growth of nearly 3 percent added 9 million pounds.

The big driver behind our results was our continued action on controllable costs, where we have taken out a further 25 million pounds in the first half. This has been focused on two important areas, personnel and bad debts. On the former, the impact of our early retirement programs, continued headcount reductions, the benefits of automatic meter reading and other integration projects have reduced operating costs by 15 million pounds in the first half alone. Our program for the management of bad debts added a benefit of 10 million pounds, mainly in New York. This brings operating profit for the half year to 170 million pounds.

Moving on, as you know, we completed the acquisition of Crown Castle's UK business at the end of August, and we will be reporting it as a single segment, together with our existing Gridcom businesses. These numbers include just one month's contribution from Crown Castle, which accounts for about half of the 9 million you see here. We are making very good progress in integrating Crown Castle with Gridcom, and are fully confident that integration savings will reach our target run rate of 18 million pounds by March '06. Indeed, we expect to be more than halfway there by March '05, only seven months after acquiring the business.

Turning, then, to our other businesses, operating profits from our other activities was 91 million pounds. Metering delivered an operating profit of 38 million pounds, the 9 million reduction reflecting a new pricing structure in the business. We have had an exceptionally strong half-year in our property segment, with 27 million of operating profits. The largest element in the other improvements relates to the turnaround in our connections business.

Below the line, we had pretax exceptional losses of 58 million pounds. We booked restructuring costs of 91 million pounds, and the analysis is shown here. In addition to the above-the-line contribution from our property business, we also had a 16 million pounds exceptional gain here from the sale of properties, and 4 million pounds profit on the sale of other fixed assets. Finally, we have sold our interest in Citelec, our Argentinian electricity JV, booking an exceptional gain of 13 million pounds.

Turning to CapEx, capital expenditure was 662 million pounds. We've again reduced CapEx on UK gas distribution, this time by 34 million pounds. CapEx on US electricity and gas distribution is also down by 34 million pounds, and represents the completion of a number of major projects last year and the impact of the weaker dollar.

The other CapEx of 167 million includes a further 73 million pounds on Basslink and 24 million on our new LNG terminal at the Isle of Grain, bringing the total incurred on these projects to date to almost 300 million pounds.

Moving on to cash flow, operating cash flow was 988 million. Due to seasonality, the first half typically accounts for one-third of our annual cash flow and, as normal, we had a working capital outflow spread across the businesses.

In transmission, the largest element is Plugs. And I've already mentioned the P&L impact. The cash effect was an outflow during this period to reflect repayments to customers, with more than corresponding inflows expected in the future. In the US, we had a seasonal outflow driven by an increase in gas inventory levels for winter heating. None of these changes reflect long-term outflows of value.

And now, to debt. I have talked about our operating (ph) cash flow, and the first item shown here is the cash impact of exceptionals. Cash interest is higher than the P&L charge, mainly due to the impact of swap terminations. Tax was higher than the same period last year, reflecting deductions arising from the (indiscernible) disposal last time.

While the dollar was weaker overall, it did recover briefly around the end of September, producing a small translational addition to debt. That brings net debt 13.4 billion, after the usual (ph) 0.5 billion seasonal outflow. The Crown Castle acquisition brings the total to around 14.5 billion pounds.

Net interest is 377 million pounds, due to continued refinancing of US and UK debt, the weaker dollar, the higher proportion of short-term debt than last year and, of course, continued active management of the overall sector (ph). As the year has progressed, rates have continued to edge up, and in the second half, we'll have the full effect of the Crown Castle debt.

The group effective tax rate was 25 percent. And the share (ph) was 9.6p, a 10 percent increase on last year. If we had add back the 50 percent of RepEx, net of tax, EPS was 12.3p for the half-year, up 14 percent.

The interim dividend per share is 8.5p, representing a 7 percent nominal increase on last year's level. Interim dividend paid to our ADR holders will be 78.65 US cents per ADR. As you know, we are planning to deliver a 20 percent increase in the total dividend for this year, and we expect that this will be paid in the final dividend.

On the accounting front, we continue to prepare for the introduction of international accounting standards for the year ending March 2006. While today is not the day to go through the detailed financial impact of IAS, we plan to say more about this early next year, and we will run a short seminar to take you through how it will affect our numbers.

Before summing up, let me say a little about our planned return of value. When we announced the successful sale of four of our gas distribution networks back in August, we said that we'd return 2 billion pounds or around 65 pence per share after the completion of the transactions. We expect to do this through a B-share scheme, and this will provide the flexibility as between capital and income for our 1.4 million shareholders. We will, of course, consolidate the ordinary shares as part of the scheme.

In summary, another very good half-year, delivering continued strong operating performance and earnings growth, with a big contribution from our US businesses. The strength of our UK performance is masked somewhat by the increase in RepEx and timing difference on auction income. Our actions on the debt front and the impact of the dollar have reduced our financing costs. And this gives us profit before tax up 6 percent and earnings per share up about 10 percent. And looking ahead, completion of the gas network sales will pay down debt and contribute (ph) a 20 percent increase in dividends, as well as a major return of value to shareholders. And with that, I'll now hand you on to Roger.

Well, thank you very much, Steve. Good morning, everyone. Clearly, another very good year or half-year. Results maintain our momentum, and demonstrate very good progress in delivering the combination of growth, consistent cash generation and growing dividends that we believe singles out National Grid Transco among utilities.

As you know, our aim is to deliver premium returns to shareholders based on three key strengths. Firstly, we manage our regulatory relations, with the aim of securing the best possible long-term incentive-based settlements, delivering benefits to both customers and for shareholders. Secondly, we strive to outperform efficiency benchmarks and regulatory cost targets through operational excellence, and to do so with the utmost attention to safety and reliability. And thirdly, we take a very disciplined approach to capital management, in the selection of both our organic and our strategic investments.

Against each of these key strengths, the first half shows very solid progress and substantial creation of value. Since the merger of National Grid and Lattice just two years ago, we've driven profits and returns by cutting the group's controllable cost base, delivering cumulative savings over the two years of almost 400 million pounds. We have generated around 6 billion pounds of operating cash flow and invested almost 4 billion pounds in these businesses. The network sales will transform a trading discount in 2002 that was approaching 10 percent to a premium for the 2004 wrap (ph) of 20 percent, creating around a billion pounds of value for the four networks we're selling. And of course, we believe the premium value of the retained networks is now very clear, as well. Following the completion of the network sales, we will have increased our dividends since merger by almost 40 percent.

Now, the US has been and continues to be a major contributor to this value story. With profits from operations up 16 percent in constant currency terms, we have clearly had an extremely successful first half, despite the impact of a cool summer. This maintains operating profit growth since our first acquisition of NEES -- New England Electric Systems -- back in 2000. We have also delivered operating cash flow of over $3 billion since completing the Niagara Mohawk acquisition in January 2002.

In addition to growing operating profit and generating strong cash flow, the low interest rate environment has created the opportunity to refinance much of our US debt. This has substantially reduced our cost of capital and, together with debt repayment, has lowered our US interest costs by $175 million a year. As a result, we are creating value in the US well above our original plans.

The key to this record has been a business model which largely avoids the cyclical nature of the economy and changes in commodity prices. Our model, based on long-term regulatory agreements which reward high levels of efficiency while improving service for customers. Our controllable costs are now down by 15 percent in real terms since March 2002, an improvement from the 10 percent we saw just last March, led by staff reductions now approaching 20 percent, our debt reductions of over 30 percent and procurement savings from the integration of the US businesses.

We have positioned ourselves to continue this record of growing operating profit. Our long-term regulatory agreements, now renewed in Rhode Island, continue into the next decade, extending the opportunity to earn premium returns. Our new 3.5-year deal with our union in New York, together with last year's New England deal, gives us the opportunity for further increases in productivity through flexible and efficient working practices, alongside the delivery of high levels of safety and service standards.

With the introduction of new state-of-the-art financial work management systems, we now have better information to manage our resources and deliver our work more effectively. We believe that our business model distinguishes us from our US peers with the ability to create premium returns, to grow them and to retain them for longer. Indeed, we can retain the benefit of these returns far longer than we can in the UK.

Which naturally takes me to the UK, where again, we have continued to deliver strong performance. Since the Grid/Lattice merger, we have cut controllable cost base and delivered total cumulative savings over the two years of almost 300 million pounds, generated 4 billion pounds of operating cash flow, and delivered returns well in excess of our regulatory targets. In transmission, which Steve has shown you, operating profit in electricity is up 10 percent, whilst in gas, the good performance is masked by a timing difference which will be recovered in the second half.

In UK transmission, an important profit kicker comes from the incentives fees in both our gas and electricity system operator roles. That enables us to benefit from taking actions to reduce costs in the interests of consumers. We expect these things to continue to reward us for cutting costs, particularly when, as in April, we act as the Great Britain system operator.

More recently, we have been working with Ofgem to introduce financial incentives in relation to electricity transmission reliability. The proposals that are currently out for consultation gives us new profit incentives to maintain higher standards for system performance. Overall, the transmission business is well-positioned to maintain premium returns. In the seasonally weak first half, gas distribution also performed strongly, where the difference in period-on-period results more than accounted for by the planned increase in RepEx in the first six months.

Following the announcement of the distribution network sales in August, we have made good progress with the regulatory approval process. In fact, we're expecting Ofgem to publish their final regulatory impact assessment in the very near future, confirming substantial customer benefits from these sales. We confidently expect completion to occur in the second quarter of next year.

We have now moved into the next phase of our Way Ahead program, which is set to deliver the targeted 35 percent real reduction in controllable costs over the period to March 2007 for the four networks that we're retaining. With 11 million connected gas users and a RAV of 5.6 billion, by our own (ph) standards these continuous networks form a major gas distribution business. With a service area that includes London, Birmingham, Manchester and Liverpool, our network covers just over a quarter of the Great Britain geography, but with more than half the gas distribution assets. We are now reshaping the structure and processes in this business. A full management team has been appointed. We have announced (indiscernible) closures to rationalize locations and to move to a centralized business model, better positioned to exploit best practice and operational synergies.

In parallel, we are developing new contractor allowances to improve the cost-effectiveness in delivery of our RepEx program. All of this underscores our confidence that we will define the new efficiency frontier in gas distribution, putting us in the best position to retain premium returns into the next cost control period.

Continuing improvements in operating efficiency and incentives for service delivery, as well as volume growth, drive short- and medium-term profits, but of course it is new investment that secures long-term growth. In our core UK businesses, we'll invest for growth through our CapEx and RepEx programs, adding to our regulatory asset base upon which we can earn returns. Since the Grid/Lattice merger, our combined UK route has grown by around 2 billion pounds. And this investment is on a clear rising trend, with further expenditure required on both electricity and gas networks. This will include the investment to accommodate renewables, connecting to the electricity transmission system, and new gas pipelines to accommodate gas flows from the new LNG terminals and interconnectors. Replacement expenditure in transmission is also rising, as more and more equipment nears the end of its life over the next decade and beyond.

Over and above these capital expenditures, we will continue to look for suitable opportunities that fit with our disciplined approach to strategic investments. The 1.1 billion acquisition of Crown Castle leverages our core skills within a great sector, and enables us to deliver a premium return over the risk-adjusted WACC that we have ascribed to this business. The integration of Crown Castle, as you have heard, is ahead of schedule, and we now expect to deliver more than half the plant annualized savings targeted for March 2006 by the end of the current financial year. Performance is on track, and with new mobile site leases, delivering good profit growth. On the broadcast side, the latest proposals from Ofcom provide the regulatory framework we have anticipated to retain and grow our broadcast business.

Our investments in Basslink and Crown Castle, our Isle of Grain LNG import project and, of course, our previous acquisitions in the US, all demonstrate the benefits of our strategy of disciplined investment for growth, utilizing our proven (ph) skills and meeting exacting evaluation criteria.

In summary, then, we have delivered another strong performance across the group, confirming the benefits of our strategy. Operational outperformance is producing profit growth and premium returns. Organic and strategic investments are adding to this for the future. Continuing regulatory management is underpinning the framework in which we continue to deliver these returns. Furthermore, the gas network sales will crystallize significant value for our shareholders. We have great confidence in our future prospects, and our dividend policy underscores that confidence.

Thank you very much. Let me hand back to John, and we will be pleased to take your questions.

Thank you very much, Roger, and now ready for your questions. Perhaps you would wait for a microphone to reach you, and very much appreciate it if you gave your name and the house you represent.

Phillip Green, Merrill Lynch. Just on the US, just trying to put the comments back together again, it's very helpful (indiscernible) performance. In terms of the dollar-denominated EBIT, obviously you're flagging that as being up about 16 percent. It would be helpful to understand, when you marry that together with the financing savings, what sort of rate of change we're seeing in the PBT in dollar terms, and secondly how the half-year might flow through to the full year. And then, the second question would be on the New York deal -- just in structural terms, what you would see as the key benefit that that deal brings to help drive those cost savings next year. Thanks.

I think Roger is an authority on PBT in the US. (multiple speakers).

Well, the simple answer is you convert -- and we obviously don't publish sector by sector PBTs -- but as you actually build in those interest rate savings, it's half on half. And it is in the high 30's, and I think that that's a good illustration of the way our US business is contributing overall to the group going forward.

I'll perhaps let Mike say a little bit about the developments that he sees going forward, and he will be talking at some length on the business later in the year. But suffice it to say, you will have seen that Mike and his team have a tough time negotiating with our New York trade unions. The outcome was a good one for us, and I think reflects a new environment going forward. It was undoubtedly one of the big challenges that we had with Niagara Mohawk, to move the workforce to a new place, offering flexibility for the future. I think we've done exactly that, and Mike and his team are very much to be congratulated.

Our labor costs are the biggest component of our cost structure. Between New England and New York, the cost represented by our labor agreements is about a third of our total controllable costs. And the agreements that we reached a year and a half ago in New England and just recently in New York are extremely important in unlocking future productivity. And they do it in several ways.

The first is that we can actually schedule our workers to when we have our work, because traditionally, the workday in the US would have been 7 to 3. And if we're scheduling work anytime other than 7 to 3, we pay 50 percent to 100 percent more for that work.

The second us where the workers work, being able to actually dispatch them to where the work is done, as opposed to having to always have local workers in a very close geographic region.

And third and perhaps the most important is the option to not have our own employees do the work, to have contractors do the work, which of course is appropriate in managing peak loads of work and handling certain specialty areas but, most importantly, having competitive pressure for every one of our workers (inaudible) helps to raise their performance. And we have seen that in particular in our call center, where they have competition. They see it every day, in terms of what their metrics are versus the metrics of the outsourced work, and it raises their game. So very important agreements. We were quite gratified that we were able to reach the agreement in New York without having a work stoppage, and we're now in the process of implementing that agreement.

And that's for 3.5 years, isn't it?

3.5 years in New York, and the agreement in New England has about 2.5 years left to run on it.

Very important aspect. Next question?

Dominic Nash from Credit Suisse First Boston. A couple questions on your wireless telecoms, if I may. Firstly, could you give us some more details on your financial performance target? You say you expect to earn a premium return on WACC. Can you just give us some more color as to whether that will be fixed or a variable amount, and when you expect to earn that? And secondly, on the management, will you be achieving this through revenue growth or through margins? And can you just give us some more flavor on what we should be focusing on as analysts?

(multiple speakers). Well, I think if Edward would like to take it, that's fine. But I think that in terms of the overall aspect of the acquisition, Dominic, we have made clear that we assess this business against a WACC significantly higher than we attribute to our regulated business, despite the fact that for the majority of our revenues, and certainly for the majority that we built into our acquisition case, they were underpinned by long-term contracts from the broadcast side, but more particularly from the mobile phone side. And in looking ahead, clearly there will be a range of contributors to the performance going forward. And I think, as we set out at the time, we saw growth factors in both parts of the business, not (ph) that we paid for, plus the clear benefit of the integration of our existing business with that of Crown Castle. To all intents and purposes, plainly, we have folded and reversed into Crown Castle our rather smaller business. And as you've heard, both from myself and from Steve, that program of integration is well ahead of schedule.

I think you all know that there are two different halves to the business -- the mobile half and the broadcast half of the business. And I think we have made it very clear that in the near term, going back to the presentation we gave you at the time of the acquisition, we see healthy growth from the mobile side of the business -- that's revenue growth -- and that is revenue growth fueled by the demand from the mobile operators for new site leases. We see that coming through well this year. Pete is actually with us, and can tell you a bit more about that if you want to hear more about that. And that is driven by the plant operators (ph) following through with, in terms of 3G rollout. I'm sure many of you will have seen the big headlines about Vodafone's global launch of 3G, which clearly includes the UK, and Orange are planning their own launch of 3G shortly, and we expect T-Mobile in '02 to be doing the same thing during next year. So we have got revenue growth coming through on the mobile side in the near term.

We also have, looking ahead in the longer term, a growth opportunity for investments in the switchover from analog to digital, where there are major investment opportunities. You may remember that we talked about the need to equip from the 80 current maps (ph) across the UK up to 1,154 to achieve national coverage by 2012, what the UK government has now decided upon in terms of the target date for digital switchover. So we have got both parts of the business with some interesting revenue dynamics. And then, on the margin side, as Roger said, we've got the cost savings that are coming through ahead of schedule in terms of integration of Crown and Gridcom.

Peter, (indiscernible)? Next question. Bobby?

It's Bobby Chada from Morgan Stanley. In the other businesses, there are a couple of significant benefits in the first half, properties up 27 versus 15 and other within other is 22 versus 8. Could you break those down a little, and explain what, if any, of it we should build into second half and sort of ongoing forecasts?

As you know, property is quite lumpy. Actually, notwithstanding the fact that it's generally a few big sales, it does turn in figures of (indiscernible) 100 million profit a year and pretty much 100 million of cash flow a year, as well, because it's all depreciated, all provided for.

The balance, though, between exceptional and trading profits has changed a bit this year, and that is where you see the contribution from property increase in the other segment, and that is above the line. You certainly can't double that as an expectation for the full year; I think it will revert to the pattern we had actually normally, which is you'd expect perhaps 10 million in the half-year on that side of the business. As far as the exceptional, I think we will see a bit more coming in; we have 16 on the exceptional line in the half-year, and I think you'll see the run rate for the full year being a bit more than that.

The reversal? No, that was mainly connections, and it's pretty much all connections. It made a loss last year and is actually a very small profit this year. So that's --

And you'd expect that sort of business performance to continue (multiple speakers)?

(Multiple speakers) last year and a small profit this year. So you certainly couldn't, then, fold in a big hike again on top of that.

It's Ian Mitchell from JP Morgan. A couple of questions on the US. First of all, on the cost cutting -- you can just confirm that the savings in the labor deal are on top of the 20 percent target, and whether there will be any extension of that 20 percent target once it is met in March 2005? And then, secondly, on investment, whether there is a change in the US outlook for investment, given the Northeast Utilities profits warning early on in the week, and maybe a comment on the potential Australia (ph), as well.

That is quite wide-ranging. Let's take the targeted in the US first of all. Do you want to say something about that, Roger?

What is clear from these results is that we will hit -- as if there was ever any doubt -- the 20 percent, and we will get there by year end. Mike has laid out, particularly in terms of our trade union agreements, the foundation that we have laid for future efficiency improvements, and those we will be pushing hard on. I certainly don't anticipate, at this point, that we will be quantifying those targets while clearly efficiencies to be got. And I have made it clear that we expect to move forward with profit growth from operations as we move forward. And clearly, the importance of the retention of those things are under our US road (ph) plants.

Turning to the investment environment in the US, that's a bit like the seasons, isn't it? It comes and it goes. Our attitude to the US, in its broadest terms, has remained very consistent, and we monitor things as they develop. I think that the consolidation in the Northeast, when you look at the structure of the electricity industry, remains something that at some point will happen, and we're well-positioned, in terms of our skills, to participate in that. We would hope that there will be continued emphasis towards a development on the transmission side, and clearly, both in Northeast and in the Midwest, we believe we are well-positioned to take advantage of those opportunities as and when they open up.

Would you like to fly to Australia, or --?

I like Australia; Sydney is one of my favorite cities. Australia has been something that we have looked at over a very long period. It is well-known that we looked at -- twice, actually -- the electricity transmission operations in Victoria. We are building Basslink; this is a 300-million-plus investment linking the island of Tasmania with the mainland. And we will continue to look at opportunities there beyond that. It's clearly quite inappropriate to say anything.

I would just underline what Roger said earlier, and that is the disciplined deployment of capital approach that pervades in the group. And I was reminded today, it's four years since this group did a transaction in the United States, when we signed (indiscernible).

Ian Turner from Deutsche Bank. Can you give us any more color on regulatory developments in Rhode Island, and sort of the roadmap going forward in terms of other interim of use (ph) in the various state jurisdictions?

I think, Mike, you might venture on that one.

The Rhode Island rate plan that we struck in 2000 had a provision in it to review the plan again in 2004, and that is what we have just gone through. And we made some adjustments to, in effect, return excess -- recalibrate the revenues back to our costs, and to align the costs with what we had actually saved.

I think there are two important elements of the agreement. The first is that the prior agreement was upheld, and we actually are able to earn not only the 10.5 percent return (inaudible) typically be allowed on our equity post tax, nominal. But the kicker to that return that was provided in the first agreement from our retention of the savings, half (ph) the savings, so that brings it up to nearly 12 percent.

But the second part, which was even more important, was here was a commission that for the first time was adopting performance-based rate-making in 2000 and readopted it in 2004. They decided not to go back to traditional cost of service rate-making, which is what is done in most states in the United States, and for most companies in the states we serve, other than ourselves. So we have been able to achieve these agreements, and now in the first time a regulatory commission had the opportunity to go back, they chose not to; they chose to stay with performance-based rates. We don't have any other reviews coming up in the near term, in either Massachusetts or New York.

Turning back to transmission regulation in the United States, I just wondered if you saw any positive developments coming out of the -- following the US election, whether you could see any rapid change in legislation or maybe some of the things promised following the blackout a year and a half ago, coming to fruition or whether there is still no sign of any material change there.

I think Roger, you should take that initially, and --

Andrew, I think it's our expectation that there will be changes in personnel. It is widely speculated that the Chairman (ph) would prefer it (ph) will change. I think we're all confident that the commission itself and the commissions that certainly have got considerable (indiscernible) are very much attuned and convinced that a regional transmission model, and it could well be that one of those commissions actually becomes the (indiscernible).

So I think that the outlook remains very much as it was. I think it is fair to say that we've been perhaps a little surprised that the August '03 blackouts blackouts did not provide a sustained impetus towards a different model. There clearly are, in various parts of the US, and it is by no means one size fits all, a number of people who -- and a number of utilities who do not favor the regional transmission model, and that is clearly not the case up in the Northeast, nor in the Midwest. So I think our view is that, post-election, our aspirations remain entirely realistic, and we will be working hard to realize it. It was never going to be something that we achieved overnight. And, Nick, if you wanted to add a bit of insight? You have been over there, not so long ago, and talked to commissions.

Both at state and federal level, the various regulatory commissioners continued to be very supportive of our model and, of course, Grid America has made a small step forward, in terms of establishing our model and showing how it can work for the last year. I think that has been well-received.

The only other thing I'd add is that whilst the energy bill didn't successfully pass, the jobs bill did have tax provisions which were favorable to the sale of transmission incorporated in that legislation. Again, that's a small step, but it is a step in the right direction as far as we see it. And it remains to be seen whether that is enough to move the sector forward towards greater independence and consolidation or not. But in a difficult environment, there are one or two promising signs, therefore.

Is there another question on this side? Yes? Peter?

Peter Hampton (ph) from Citigroup. A couple questions. Firstly, on tax, given the LDZ sales or sort of blend of the business is more US-weighted, so I guess your underlying blended tax rate probably (indiscernible) 2, 3, 4 percent for the sale. How sustainable, given that, is the effective tax rate of 25 percent? And, secondly, on the US business, did it pay a dividend in the first half of the year to the group? And what is the dividend policy from US to group going forward?

Whether or not the US paid a dividend (indiscernible) capable of paying a dividend. And obviously, we look at the disposition of funds, and we don't pay dividends unless we want to pay, for funding purposes. But we certainly can do so, and there is no tax or other impediment preventing us from doing that.

In terms of where the tax rate is headed, obviously, the mix of the group is likely to change. We've certainly given guidance in terms of the 25 percent is a good rate for the time being. I have explained to you that, whereas we can't assure that, certainly for the current year, we always have work to do. The life of tax plans has got shorter, and I'm sure that is what other companies are also saying, but we just pedal a bit faster. And so we are certainly not changing our tax guidance. I think tax reform -- a component, clearly, in terms of the impact of (indiscernible), because clearly, then, there may be some changes, but actually do have some kind of implications in terms of the P&L. But we would emphasize that we don't have any change in terms of cash.

Another question, Dominic?

Going back to Grid America, could you just clarify the deadlines for negotiating the asset transfer or the transmission assets from the other partners, and how confident are you that you will secure these assets?

Steve, would you like to --?

No, it's Nick on Grid America.

Oh, it's Grid America? I'm sorry; I didn't quite -- the acoustics are not the very best here. (Multiple speakers).

It's not that we can't see you; it's all around. Too much marble, I think, in this building.

There was a restriction, when Grid America was established --

Did anybody hear the question, unlike us?

Why don't you repeat the question?

The question was, broadly --

Or the one I'm going to answer.

Yes, in which city is Grid America? (Laughter). It was about asset transfers from member companies into the Grid America structure, and timetables for that. The timetable is open-ended, going forward, but had a restriction on utilities not putting their transmission in for -- from memory -- 18 months, I think, from the beginning of Grid America. So that has got a bit to go. We wanted the thing to settle down, first of all, to understand where it was going to play out before either side got committed to those asset transfers.

The prospects for those asset transfers going ahead will depend entirely, it seems to me, on the politics playing out. And we will just have to carry on working that, and seeing whether the independent consolidated transmission sector is going to be duly encouraged, both at state and federal level, and I'm sure that will determine whether utilities decide to contribute their assets or not.

It's Angelos Anastasiou, Williams de Broe. Just going back to Crown Castle, I was just wondering if you could make some comments on the recent Ofcom paper, on the broadcast area, and market power there and any potential impact.

Roger, why don't you lead off on that?

Firstly, the Ofcom paper which came out was the second in the sequence, so consultations with a final decision perhaps at the end of this year or early next year. It was so long ago that the first consultation came out that everybody, I think, forgot that there was one to come out.

Clearly, it was going to look at what I regularly described that we and MTO (ph) have, which is a monopoly owned by two people, because between us, we have got all the broadcast towers. In order to achieve national coverage, any broadcaster has to transmit from both sets of towers, so we have a presence on every one of their towers, and likewise, they on ours. At the time the two businesses were sold, they were regulated under a sort of RPI minus X (ph) regime, and these Ofcom proposals move away from that, and move away from that in a way that we had anticipated, and it is relatively similar, actually, to the way that we have regulation in a number of areas on the electricity transmission side, where there is the concept, effectively, of a reasonable rate of return, but that the regulator encourages us as the provider and the broadcaster as the buyer, to enter into a bilateral discussion and come to an agreement without intervention. They remain as a backstop, very much as they do when we negotiate with power stations and other projects that are connecting into the electric transmission system. So there is broad similarity, but I know Edward particularly has looked more carefully at what is a large document. But certainly, the headline is no surprises, and something that they are very familiar with.

And I've got a couple of other thoughts to add. Ofcom (indiscernible) their aim is to reduce regulation. And they also say -- and I think this is an important point -- that they are not expecting any increase in competition. Those quotes, which we found particularly interesting and we thought you might, where they say, in the case of the BBC, Ofcom consider it reasonable to expect that it will continue to prefer to use a similar supplier for analog and digital transmission. And I think that is the fundamental point; they are expecting, given the structure of the market, as Roger has said, that it is very hard for new entrants. So they are less in a situation where there is the competition between MPL on the one hand and Crown on the other. That competition is not new. There have been tenders for BBC Digital and ITV digital TV contracts back in 1998. There was a tender for the BBC Digital Radio contract in 2003. There's a tender for the BBC Digital contracts and renewals of the analog contracts, as well, coming up. And the current expectation is that it will be Crown and MPL competing.

So I think the key fact behind that, then, is to say, what is our position within the marketplace? Crown owns all of the analog transmission assets for the BBC. Crown runs the technical operations center that manages and maintains those assets in BBC. We have over 300 technical staff, we have an excellent relationship and impeccable track record with the BBC, and we also have the strength of the NGG balance sheet as confidence for the future funding of the growth CapEx opportunity in digital.

So the bottom line is no surprise, and we are as confident now as we were back in June and July.

Peter, are you happy with that answer? Anything you want to add? Okay.

Jamie Tantikoff (ph) from ABN Amro. Just a follow-on question from that one. Ofcom -- what do you think would be a reasonable -- I understand, in the dispute in Ofcom, would make an opinion on a reasonable return to be priced? And what do you expect would be a reasonable return on an Ofcom decision on those assets or on the pricing of those bilateral agreements?

Well, I haven't (indiscernible) to any particular (indiscernible); most regulators don't. But there is some precedent looking back, and the sorts of numbers that are (ph) in the 12 percent pretax bracket.

It was a 9 percent, I think, post-tax, nominal on the partial private circuits. Is that a reasonable read across, or is there a better decision you would refer us to?

I think Roger has given one of the benchmarks that are in there. And I think the key point in the Ofcom documents is that while they are removing the price cap regime, moving to self-policing, they are actually saying, as tentative guidance, that the approach they have taken hitherto will be an approach they will take into the future, as well. So, if they take away the price cap, they are actually saying the underlying return expectations will remain the same.

We will take another one to two questions. We are just through the hour now. Are there any other questions? Bobby.

Could you give an update on the Grain project, expectations for phase one to be operational, and when you think you can announce a decision about phase two?

I think we should give that one to Edward, as well.

Yes, Bobby. The Grain project is on track for phase one, and is on schedule for the first ship delivery, if indeed BB (ph) want to time it then, in April 2005. In terms of our expectations of the expansion which we referred to, we are currently testing the water with the marketplace. We will expect to be in a position to decide upon that certainly in the first half of next calendar year, possibly at the near end of that. A lot depends on where we get to, in terms of feedback from the market.

Are we all done? Thank you very much indeed for attending. Appreciate your coming. Thank you.