Business Context and Reporting Period
Company: National Grid PLC
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended March 31, 2006
Jurisdiction: England and Wales
Business Overview: National Grid operates electricity and gas transmission and distribution networks in the United Kingdom and the United States. The company owns approximately 4,300 miles of high-pressure gas transmission pipelines in the UK and 14,000 circuit miles of transmission lines in the US. Following the sale of four regional UK gas distribution networks in June 2005, the company retained a UK gas distribution system of approximately 82,000 miles.
Key Financial Metrics
Financial data is presented below in millions of pounds sterling (£m) unless otherwise noted. The company reports under both IFRS and US GAAP.
IFRS Results (Year Ended March 31)
| Metric | 2006 | 2005 |
|---|---|---|
| Turnover | 9,193 | 7,382 |
| Total Operating Profit | 2,439 | 2,142 |
| Profit for the Year (Continuing Operations) | 1,217 | 1,120 |
| Profit for the Year (Total) | 3,850 | 1,424 |
| Basic EPS (Continuing Operations) | 42.8 pence | 36.3 pence |
| Basic EPS (Total) | 135.6 pence | 46.2 pence |
| Total Assets | 25,924 | 27,560 |
| Net Assets | 3,493 | 2,121 |
| Dividends Paid per Share | 25.4 pence | 20.37 pence |
US GAAP Results (Year Ended March 31)
| Metric | 2006 | 2005 |
|---|---|---|
| Turnover | 9,216 | 7,424 |
| Operating Profit | 1,810 | 1,804 |
| Net Income (Continuing Operations) | 711 | 1,037 |
| Net Income (Total) | 1,307 | 1,304 |
| Basic EPS (Continuing Operations) | 26.2 pence | 38.3 pence |
| Basic EPS (Total) | 48.2 pence | 48.2 pence |
| Total Assets | 32,287 | 37,274 |
| Net Assets | 9,788 | 10,629 |
Liquidity and Capital Structure
- Share Capital: 2,719,699,118 Ordinary Shares outstanding as of March 31, 2006.
- Dividends: Proposed dividend for the year was 26.1 pence per share (approx. $0.467).
- Borrowing Powers: Directors are empowered to borrow up to four times share capital and reserves, subject to shareholder approval. A resolution was proposed to replace this with a fixed limit of £30 billion.
- Cash Flow: Specific cash flow figures are not provided in the text; the filing incorporates the Group Cash Flow Statement by reference.
Material Changes and Unusual Items
- Significant Profit Increase (IFRS): Total profit for the year under IFRS surged to £3,850m in 2006 from £1,424m in 2005. This increase is largely attributable to the treatment of the sale of UK gas distribution networks and the associated B-share scheme, which generated significant gains recognized in the total profit figure but excluded from continuing operations.
- Continuing Operations Performance: Profit from continuing operations under IFRS increased modestly to £1,217m (from £1,120m). Under US GAAP, net income from continuing operations decreased to £711m (from £1,037m), reflecting different accounting treatments for the disposals and pension costs.
- Disposals: The company completed the sale of four regional UK gas distribution networks (Scotland, South of England, Wales, and West/North of England) on June 1, 2005. This resulted in a £2 billion return of cash to shareholders via a B-share scheme and share consolidation.
- Legal Settlements:
- Larkhall Accident: Subsidiary Transco plc was fined £15m for health and safety breaches related to a 1999 fatal accident.
- Cavendish Mill Accident: Transco was fined £1m for a 2001 fatal accident; this was reduced to £250,000 on appeal in March 2006.
- Acquisition Activity: On February 25, 2006, National Grid agreed to acquire KeySpan Corporation for $42.00 per share (approx. £24.00). The merger is contingent on regulatory and shareholder approvals.
Outlook, Risks, and Management Commentary
- Forward-Looking Statements: The filing includes a cautionary statement regarding forward-looking information. Actual results may differ due to regulatory approvals, weather patterns, energy market prices, currency fluctuations, and integration risks.
- Key Risks:
- Delays or failure to complete the KeySpan acquisition and realize expected synergies.
- Regulatory changes in the UK and US affecting pricing and investment returns.
- Performance of pension schemes and regulatory treatment of pension costs.
- Operational risks including outages on gas pipelines and electricity networks.
- Currency fluctuations between the Pound Sterling and US Dollar.
- Management Commentary: The filing incorporates the "Operating and Financial Review" by reference. Management emphasizes the strategic importance of the US expansion and the successful divestiture of UK distribution assets to return capital to shareholders.
Investor Verification Checklist
- Acquisition Status: Verify the current status of the KeySpan Corporation merger, including regulatory approvals and integration progress.
- Accounting Differences: Review Notes 37 and 38 of the financial statements to understand the material differences between IFRS and US GAAP, particularly regarding the £2.4bn difference in total profit between the two standards.
- Pension Obligations: Examine Note 9 regarding pensions and other post-retirement benefits to assess the impact of regulatory changes on future costs.
- Regulatory Environment: Monitor UK and US regulatory decisions regarding price controls and investment allowances for transmission and distribution networks.
- Legal Contingencies: Confirm that the fines related to the Larkhall and Cavendish Mill accidents have been fully settled and assess any remaining litigation risks.