Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended 31 March 2008
Announcement Date: 15 May 2008
National Grid reported a very strong financial performance for the year, driven by the completion of the KeySpan acquisition in August 2007, which significantly expanded its footprint in North America. The company also executed a major portfolio restructuring, disposing of its Wireless businesses, the Basslink interconnector, and agreeing to the sale of the Ravenswood generating station. The results reflect a strategic shift toward regulated energy delivery, with a focus on organic growth through capital investment in UK and US transmission and distribution networks.
Key Financial Metrics
| Metric (£m unless stated) | 2008 | 2007 | % Change |
|---|---|---|---|
| Revenue (Continuing Ops) | 11,423 | 8,695 | 31% |
| Operating Profit (Business Performance) | 2,595 | 2,031 | 28% |
| Pre-Tax Profit (Business Performance) | 1,839 | 1,486 | 24% |
| Earnings (Business Performance) | 1,253 | 1,042 | 20% |
| Earnings Per Share (Business Performance) | 48.0p | 38.3p | 25% |
| Statutory Earnings Per Share | 60.5p | 48.1p | 26% |
| Dividend Per Share | 33.0p | 28.7p | 15% |
| Operating Cash Flow (Continuing Ops) | 3,265 | 3,090 | 6% |
| Capital Investment | 3,100 | 2,384 | 30% |
| Net Debt | 17,641 | 11,788 | 50% |
| Interest Cover | 3.2x | 3.8x | - |
Material Changes vs. Prior Period
- Acquisition Impact: The acquisition of KeySpan (completed 24 August 2007) was the primary driver of growth, contributing significantly to revenue and operating profit in the Gas Distribution and Electricity Distribution segments. On a pro forma basis (as if acquired 1 April 2007), operating profit would have been £30m higher.
- Disposals: The company generated approximately £4.6bn in proceeds from disposals, including the sale of UK Wireless (£2.5bn), US Wireless (£0.2bn), and Basslink (£0.5bn). The sale of Ravenswood was agreed for $2.9bn (approx. £1.4bn), subject to regulatory approval.
- Profitability: Operating profit for continuing operations rose 28% to £2,595m. This was driven by strong performance in Transmission and Gas Distribution, offset by a 9% decline in Electricity Distribution and Generation due to timing of rate adjustments and higher reliability spending.
- Debt Profile: Net debt increased to £17.6bn from £11.8bn, primarily due to the KeySpan acquisition, increased capital investment, and share repurchases. Interest cover decreased to 3.2x from 3.8x, consistent with management's target range of 3.0x–3.5x.
- Shareholder Returns: The company returned £1,605m to shareholders via share repurchases since April 2007. The full-year dividend was increased by 15% to 33.0p per share.
Guidance, Outlook, and Risks
Outlook and Management Commentary
Management maintains a positive outlook for 2008/09, expecting continued good operating performance in Transmission and Gas Distribution. The full-year contribution from KeySpan's gas business is expected to be heavily skewed to the second half due to seasonality. Net interest charges are expected to be significantly higher in 2008/09 due to full-year KeySpan ownership, though the effective tax rate should benefit from the reduction in the UK corporation tax rate.
Investment Strategy
The company plans to invest approximately £16bn over the six years to March 2012. In 2007/08, investment was £3.1bn, growing UK and US rate bases by 11% and 6% respectively. Future investment is expected to be financed from internal cash flow and borrowings.
Risks and Contingencies
- Regulatory Approvals: The completion of the Ravenswood sale is subject to approvals from the Federal Energy Regulatory Commission (FERC), New York Public Service Commission (NYPSC), and US anti-trust/foreign investment laws.
- Legal Proceedings: The Gas and Electricity Markets Authority (GEMA) imposed a £41.6m fine for alleged infringement of the Competition Act regarding metering contracts. National Grid has appealed the decision, and the fine is suspended pending the outcome. No provision has been made in the accounts.
- Climate Change: The company has raised its emissions reduction target to 80% by 2050 and is adopting internal carbon budgets to prepare for future legislation.
- Market Conditions: Risks include currency fluctuations, changes in interest rates, and unseasonable weather affecting energy demand.
Key Facts for Investor Verification
- Regulatory Filings: Verify the status of regulatory approvals for the Ravenswood sale and the outcome of the GEMA competition fine appeal.
- Debt Servicing: Monitor the impact of higher net interest charges in 2008/09 on cash flow and the ability to maintain interest cover within the 3.0x–3.5x target range.
- Capital Expenditure: Confirm the execution of the £16bn investment plan and the associated rate base growth in the UK and US.
- Dividend Policy: Track the delivery of the targeted 8% annual dividend increase through 2012 as outlined in the new policy.
- Stranded Costs: Note that US stranded cost recoveries (approx. £382m revenue) are excluded from core business performance and are scheduled to end in 2011.