Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Annual Review 2007/08)
Reporting Period: Year ended 31 March 2008
Filing Date: 17 June 2008
National Grid is an international electricity and gas company primarily operating in the UK and the northeastern US. The 2007/08 period was defined by the acquisition of KeySpan Corporation (completed August 2007), which made National Grid the second-largest electricity and gas company in the US by customer numbers. The company also exited non-core businesses, including wireless infrastructure and the Basslink interconnector, to focus on regulated transmission and distribution networks.
Key Financial Metrics
| Metric | 2007/08 | 2006/07 | Change |
|---|---|---|---|
| Revenue (Continuing Operations) | £11,423m | £8,695m | +31.4% |
| Adjusted Operating Profit | £2,595m | £2,031m | +27.8% |
| Operating Profit (Reported) | £2,964m | £2,513m | +17.9% |
| Profit for the Year | £3,199m | £1,396m | +129.2% |
| Adjusted EPS | 48.0p | 38.3p | +25.3% |
| Reported EPS (Continuing Ops) | 60.5p | 48.1p | +25.8% |
| Cash from Operations | £3,265m | £3,090m | +5.7% |
| Capital Expenditure | £3,053m | £2,345m | +30.2% |
| Net Debt | £17.6bn | £11.8bn | +£5.8bn |
| Dividend per Share | 33.0p | 28.7p | +15.0% |
Note: Adjusted figures exclude exceptional items, remeasurements, and stranded cost recoveries. Profit for the year includes £1,618m from discontinued operations.
Material Changes vs. Prior Period
- Acquisition Impact: The KeySpan acquisition contributed £2,498m in revenue and £324m in adjusted operating profit for the seven and a quarter months it was held. This drove the majority of the growth in revenue and operating costs.
- Discontinued Operations: Significant profit of £1,618m was recognized from discontinued operations, primarily due to the sale of UK and US wireless businesses and the Basslink interconnector, compared to £86m in the prior year.
- Debt Levels: Net debt increased by £5.8 billion to £17.6 billion, principally due to the cash consideration and assumed debt from the KeySpan acquisition.
- Exceptional Items: Net operating exceptional charges were £242 million, including £133 million in restructuring costs related to KeySpan integration and £92 million in environmental provisions.
- Share Repurchases: The company spent £1,516 million on share repurchases in 2007/08, compared to £169 million in 2006/07.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Dividend Policy: The Board proposes a 15% dividend increase for 2007/08. The target is to increase dividends by 8% per annum from 2008/09 to 2011/12.
- Investment Strategy: Capital investment is at a record rate, with plans to grow UK and US asset bases by over 35% and 25% respectively by 2012.
- Operating Model: The company is implementing a "one National Grid" operating model to standardize processes and achieve efficiencies across UK and US operations.
- Climate Change: National Grid has raised its commitment to reduce greenhouse gas emissions from 60% to 80% by 2050.
Risks and Contingencies
- Regulatory Risk: Results are heavily dependent on regulatory approvals and price controls in the UK and US.
- Integration Risk: Success depends on integrating KeySpan to realize expected synergies.
- Operational Risks: Exposure to severe weather, energy market price fluctuations, and currency exchange rates.
- Safety: While lost time injuries fell to 88, the injury frequency rate remained static, which management views as a disappointment.
Key Facts for Investor Verification
- KeySpan Integration: Verify the progress of integrating KeySpan operations and the realization of the targeted $200 million in synergy savings (only $38 million achieved to date).
- Debt Servicing: Assess the impact of the increased net debt (£17.6bn) on interest cover and future refinancing needs.
- Discontinued Operations: Confirm the final proceeds and tax implications of the Ravenswood generation station sale ($2.9 billion) agreed in March 2008.
- Capital Expenditure: Monitor the execution of the record capital investment program (£3.05bn) and its impact on cash flow.
- Dividend Sustainability: Evaluate the ability to sustain the new 8% annual dividend growth target given the higher debt load and regulatory environment.