Business Context and Reporting Period
This Form 6-K filing by National Grid plc provides unaudited financial information for its indirect wholly-owned U.S. subsidiary, Niagara Mohawk Power Corporation (Niagara Mohawk), for the three months ended June 30, 2008. The filing is made to comply with covenants in a Senior Notes Indenture dated June 30, 1998, and will cease upon the repayment of those notes on October 1, 2008. Niagara Mohawk operates as a regulated energy delivery business in New York State, providing electric service to approximately 1.6 million customers and natural gas service to approximately 573,000 customers.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 | Three Months Ended June 30, 2007 |
|---|---|---|
| Total Operating Revenues | $1,012,247 | $989,065 |
| Operating Income | $54,907 | $81,118 |
| Net Income | $13,456 | $31,091 |
| Income Available to Common Shareholders | $13,191 | $30,685 |
| Net Cash Provided by Operating Activities | $304,554 | $252,616 |
| Net Cash Used in Investing Activities | $(124,237) | $(118,647) |
| Net Cash Used in Financing Activities | $(169,144) | $(134,906) |
| Cash and Cash Equivalents (End of Period) | $30,739 | $14,809 |
| Total Assets | $11,715,383 | $11,805,140 (as of March 31, 2008) |
| Total Long-Term Debt | $649,458 | $649,405 (as of March 31, 2008) |
| Long-Term Debt to Affiliates | $1,200,000 | $1,200,000 (as of March 31, 2008) |
Note: The filing does not explicitly state margin percentages; however, operating income decreased significantly despite revenue growth.
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased by approximately $17.6 million (57%) compared to the prior year period. This was driven by decreased delivery revenues and increased operating and maintenance expenses, partially offset by lower income taxes and interest expense.
- Revenue Mix: Total operating revenues increased by $23.2 million. Electric revenues rose $25.9 million due to higher purchased power costs passed through to customers ($38 million) and increased stranded cost recovery ($11 million), offset by a 2.8% decrease in metered kWh deliveries due to customer migration to competitive suppliers and milder weather. Gas revenues decreased $2.8 million due to lower commodity volumes.
- Operating Expenses: "Other operation and maintenance" expenses increased $16.3 million. Key drivers included a $6 million increase in consultant/contractor costs, a $4 million increase in bad debt expense, and $4 million in expenses related to the Voluntary Early Retirement Offer (VERO) program.
- Interest Expense: Total interest expense decreased by $8.5 million, primarily due to reduced short-term borrowing from affiliates.
- Cash Flow: Operating cash flow improved by $51.9 million to $304.6 million, largely due to changes in working capital (decrease in accounts receivable and increase in accounts payable) and tax accruals.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Proceedings:
- Follow-on Merger Credit: The New York Public Service Commission (PSC) rejected Niagara Mohawk's proposed Follow-on Merger Credit amount in May 2008, requiring a $52 million credit instead of the company's proposal. Niagara Mohawk filed a petition for rehearing on June 30, 2008. Additionally, the PSC is seeking comments on potential additional synergy savings credits of $35 million.
- Gas Rate Plan: A filing for a $95 million rate increase in natural gas delivery rates was submitted in May 2008. A decision is expected in May 2009.
- Transmission Rates: FERC approved a new formula transmission rate in July 2008, projected to increase revenues by $9.6 million, effective October 1, 2008.
- Service Quality Penalties: Under the Merger Rate Plan (MRP), the company faces potential penalties for failing to meet outage frequency targets. While no penalties were recorded for the quarter ended June 30, 2008, the company faces a potential annual penalty of $8.8 million if targets are missed, with incremental exposure of $4.4 million for subsequent years.
- Environmental Contingencies: The company is a potentially responsible party for approximately 85 sites, including 47 company-owned sites. Accrued liabilities for environmental obligations were $440 million as of June 30, 2008, with a high-end estimate of potential liabilities at $574 million.
- FERC Audit: The Federal Energy Regulatory Commission is auditing Niagara Mohawk's compliance with tariff and contract filing requirements. The audit is expected to continue through the third calendar quarter of 2008. Management does not expect a material financial impact.
- Accounting Changes: The company adopted SFAS No. 157 (Fair Value Measurements) on April 1, 2008. The adoption had no effect on net income or other comprehensive income for the quarter.
Investor Verification Checklist
- Regulatory Outcomes: Monitor the outcome of the PSC rehearing regarding the Follow-on Merger Credit and the potential additional $35 million synergy savings credit, as these directly impact future revenue recovery.
- Rate Case Approval: Verify the status and approval of the $95 million gas rate increase filing, which is critical for future gas delivery margins.
- Environmental Liabilities: Review updates on the remediation of the 85 identified sites to ensure the $440 million accrual remains sufficient against the $574 million high-end estimate.
- Debt Repayment: Confirm the repayment of the $600 million current portion of long-term debt and the $123 million short-term debt to affiliates, which are significant components of the negative working capital position.
- Customer Migration: Assess the trend of customer migration to competitive suppliers, which reduced kWh deliveries by 2.8% and continues to pressure volume-based revenues.