Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Annual Review 2006/07)
Reporting Period: Year ended 31 March 2007
Filing Date: 19 June 2007
National Grid operates gas and electricity transmission and distribution networks in the UK and the northeastern US. The reporting period was defined by a strategic review resulting in a refocus on core gas and electricity businesses, the sale of the UK wireless business, and the commencement of the KeySpan acquisition. Leadership transitioned from Roger Urwin to Steve Holliday as Chief Executive in January 2007.
Key Financial Metrics
| Metric | 2006/07 | 2005/06 | Change |
|---|---|---|---|
| Revenue (Continuing Operations) | £8,695m | £8,868m | Down 2% |
| Adjusted Operating Profit | £2,454m | £2,457m | Flat (-£3m) |
| Total Operating Profit | £2,513m | £2,374m | Up 6% |
| Profit Before Tax | £1,751m | £1,718m | Up 2% |
| Profit for the Year (IFRS) | £1,396m | £3,850m | Down significantly (due to discontinued ops) |
| Adjusted EPS | 47.7p | 45.5p | Up 5% |
| Basic EPS | 48.1p | 41.6p | Up 16% |
| Cash from Operations | £3,090m | £2,973m | Up 4% |
| Capital Expenditure | £2,345m | £1,907m | Up 23% |
| Net Debt | £11.8bn | £10.9bn | Increased £0.9bn |
| Dividend per Share | 28.7p | 26.1p | Up 10% |
Material Changes vs. Prior Period
- Discontinued Operations: The significant drop in "Profit for the Year" compared to 2005/06 is primarily due to the reclassification of the UK and US wireless businesses and the Basslink project as discontinued operations. The prior year included a £2.6 billion gain on the sale of regional gas networks.
- Wireless Disposal: The UK wireless business was sold on 3 April 2007 for £2.5 billion. Proceeds are intended to fund a £1.8 billion share buy-back.
- Acquisitions: Completed the acquisition of the Rhode Island gas distribution network. Announced the agreement to acquire KeySpan (pending regulatory approval).
- Operational Performance:
- Transmission: Adjusted operating profit up 9% to £1.054 billion, driven by higher allowed revenues in the UK.
- Gas Distribution: Adjusted operating profit down 9% to £480 million due to warmer UK weather reducing gas volumes, offsetting gains from the Rhode Island acquisition.
- Electricity Distribution: Adjusted operating profit up 23% to £364 million, driven by cost recoveries in New York.
- Exchange Rates: Adjusted operating profit was up £59 million on a constant currency basis, but reported flat due to a £62 million negative impact from exchange movements.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Dividend Policy: The Board aims to increase sterling dividends per ordinary share by 7% annually through March 2008.
- Investment: Entering a period of significant investment to replace ageing assets and connect new generation sources. UK transmission regulatory asset base expected to grow by 40%.
- Integration: Focus on integrating KeySpan and embedding a new operating structure organized by lines of business rather than geography.
Risks and Contingencies:
- Regulatory Approvals: Completion of the KeySpan acquisition is contingent on obtaining remaining regulatory approvals.
- Safety Performance: Lost time injuries increased to 142 (up 21% from prior year), including one contractor fatality. Management has identified safety as a top priority for improvement.
- Weather Sensitivity: Gas distribution volumes are highly sensitive to weather patterns (e.g., the warm winter in the UK reduced volumes by 8%).
- Market Volatility: Exposure to energy price fluctuations and currency exchange rates (specifically the US dollar).
Investor Verification Checklist
- KeySpan Acquisition Status: Verify the timeline and regulatory hurdles for the KeySpan deal, which is central to future growth.
- Wireless Sale Proceeds: Confirm the execution of the £1.8 billion share buy-back program using proceeds from the UK wireless sale.
- Safety Metrics: Monitor subsequent safety reports to ensure the increase in lost time injuries is reversed.
- Capital Expenditure Execution: Track the delivery of the £2.3 billion capital investment program and its impact on future regulated returns.
- US GAAP vs. IFRS: Note the significant difference in reported equity and net income between IFRS (£1.396bn profit) and US GAAP (£1.146bn net income) due to accounting treatment of the Lattice merger and regulatory assets.