Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended 31 March 2010
Filing Date: 20 May 2010
Overview: National Grid reported strong operational and financial performance for the 2009/10 fiscal year. The company operates regulated electricity and gas transmission and distribution networks in the UK and US, alongside non-regulated activities including metering and LNG operations. The results reflect progress in US rate cases, disciplined capital investment, and cost efficiencies.
Key Financial Metrics
| Metric (£m, unless stated) | 2010 | 2009 | % Change |
|---|---|---|---|
| Revenue (Continuing Operations) | 13,988 | 15,624 | (11%) |
| Operating Profit (Business Performance) | 3,121 | 2,915 | 7% |
| Pre-tax Profit (Business Performance) | 1,974 | 1,770 | 12% |
| Earnings (Business Performance) | 1,418 | 1,250 | 13% |
| Earnings Per Share (Business Performance) | 57.4p | 50.2p | 14% |
| Operating Cash Flow (Continuing Ops) | 4,146 | 3,336 | 24% |
| Capital Investment | 3,300 | 3,300 | 0% |
| Net Debt | 22,139 | 22,673 | (2%) |
| Dividend Per Share (Full Year) | 38.49p | 35.64p | 8% |
Note: Business performance results exclude exceptional items, remeasurements, and stranded cost recoveries. Statutory results showed higher growth due to favorable one-off items in 2010 compared to 2009.
Material Changes vs. Prior Period
- Profit Growth: Pre-tax profit increased by 12% and earnings per share by 14% on a business performance basis, driven by strong results in Transmission and Electricity Distribution/Generation.
- Revenue Decline: Total revenue decreased by 11% primarily due to the weakening US dollar against sterling and lower volumes in US gas distribution.
- Segment Performance:
- Transmission: Operating profit rose 13% (constant currency), driven by UK regulated income increases and incentive scheme performance.
- Gas Distribution: Operating profit fell 11% due to timing items and a one-off Long Island property tax recovery in the prior year.
- Electricity Distribution & Generation: Operating profit surged 41%, aided by rate increases in Long Island Generation and the absence of severe storms that impacted the prior year.
- Non-Regulated: Operating profit increased 125% to £146m, led by Metering and Grain LNG businesses.
- Debt Reduction: Net debt decreased to £22.1bn from £22.7bn, reflecting strong operating cash flow and the impact of exchange rates.
Guidance, Outlook, and Risks
Outlook and Guidance
- 2010/11 Expectations: Management expects continued growth across all businesses. UK regulated revenues are subject to RPI-X indexation (0.2% average increase).
- Capital Investment: Planned investment for 2010/11 is approximately £3.9bn. A five-year capital investment plan targets £22bn in aggregate.
- Dividend Policy: The Board recommends an 8% increase in the full-year dividend. The policy of 8% annual growth is reaffirmed until 2012.
- Financing: A fully underwritten rights issue to raise £3.2bn (after expenses) was announced to fund capital investment and maintain credit ratings.
Management Commentary
CEO Steve Holliday highlighted strong operational performance, reliability improvements in the UK and US, and synergy savings from the KeySpan integration exceeding $150m run rate. The company is confident in its strategy to deliver growth through regulatory development and efficiency.
Risks and Contingencies
- Regulatory Appeals: National Grid is appealing a Rhode Island Public Utilities Commission decision regarding Narragansett Electric rates. It is also evaluating exit options for New Hampshire gas and electricity distribution businesses due to unattractive returns.
- Legal Proceedings:
- UK Competition Fine: A fine of £15m (reduced from £41.6m) regarding metering contracts was paid in April 2010; the company is appealing to the Supreme Court.
- US DOJ Settlement: A proposed settlement of $12m with the US Department of Justice regarding KeySpan antitrust issues is pending court approval.
- Class Action: A putative class action lawsuit in New York alleges overpayment for electricity due to a 2006 swap transaction; management believes the claims are without merit.
- Ofgem Investigation: An ongoing investigation into potential misreporting of mains replacement activity in the UK Gas Distribution business.
Investor Verification Checklist
- Regulatory Outcomes: Monitor the status of the Rhode Island Supreme Court appeal and the New Hampshire exit strategy evaluation.
- Capital Raise: Verify the execution and terms of the £3.2bn rights issue.
- Legal Liabilities: Track the final resolution of the UK Supreme Court appeal regarding the competition fine and the US DOJ settlement approval.
- Rate Case Filings: Watch for decisions on the upstate New York Electric ($369m) and Massachusetts Gas ($106m) rate case filings expected in late 2010.
- Exchange Rate Sensitivity: Assess the impact of the US dollar/sterling exchange rate on future reported revenues and profits given the significant US exposure.