Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended 30 September 2008 (Unaudited)
Filing Date: 20 November 2008
National Grid plc reported its half-year results, reflecting a full first half of operations including the former KeySpan businesses acquired in August 2007. The company completed the sale of its Ravenswood generating station in New York City for $2.9 billion in cash. Management maintains a positive outlook for the 2008/09 financial year, stating performance is in line with expectations.
Key Financial Metrics
| Metric (£m) | Six Months Ended 30 Sep 2008 | Six Months Ended 30 Sep 2007 | % Change |
|---|---|---|---|
| Revenue | 6,072 | 4,260 | 43% |
| Operating Profit (Business Performance) | 1,079 | 1,039 | 4% |
| Operating Profit (Statutory) | 943 | 1,187 | (21)% |
| Pre-tax Profit (Business Performance) | 558 | 757 | (26)% |
| Pre-tax Profit (Statutory) | 564 | 917 | (38)% |
| Earnings (Business Performance) | 431 | 528 | (18)% |
| Earnings (Statutory) | 406 | 783 | (48)% |
| Earnings Per Share (Basic, Business Performance) | 17.4p | 19.8p | (12)% |
| Operating Cash Flow | 934 | 1,256 | (26)% |
| Net Debt | 19,756 | 16,336 | 21% Increase |
| Capital Investment | 1,600 | 1,369 | 17% |
Note: "Business Performance" excludes exceptional items, remeasurements, and stranded cost recoveries. "Statutory" includes these items.
Material Changes vs. Prior Period
- Operating Profit Growth: Core operating profit (Business Performance) increased by 4% to £1,079m, driven primarily by strong results in Gas Distribution. On a constant currency basis, this was a 2% increase.
- Statutory Decline: Statutory earnings fell significantly (48% to £406m) due to exceptional items, remeasurements on commodity contracts, and the seasonal nature of the US gas business.
- Finance Costs: Net finance costs rose 86% to £524m. This reflects an additional five months of interest charges related to the KeySpan acquisition and the utilization of cash reserves previously held for the transaction.
- Segment Performance:
- Transmission: Operating profit up 3% to £591m.
- Gas Distribution: Operating profit up 65% to £274m, largely due to new regulatory agreements in the UK and US.
- Electricity Distribution & Generation: Operating profit down 34% to £129m, impacted by timing of rate adjustments and non-cash historic transmission charges.
- Disposals: The sale of the Ravenswood generating station contributed to discontinued operations results.
Guidance, Outlook, and Risks
- Outlook: Management expects a positive full-year performance in line with expectations. Higher second-half profits in Non-Regulated businesses are expected to offset timing issues in Electricity Distribution.
- Dividends: The Board approved an 8% increase in the interim dividend to 12.64p per share. The company targets 8% annual dividend growth through 2012.
- Capital Investment: The company invested £1.6bn in the first half, on track for £3.2bn for the full year. This is expected to grow the UK regulatory asset base by over 6% and the US rate base by around 4%.
- Share Repurchases: The 2008/09 share repurchase programme is complete, returning £594m to shareholders.
- Risks and Contingencies:
- Market Volatility: Significant volatility in commodity prices and financial markets has increased credit and liquidity risks.
- Regulatory: Ongoing regulatory reviews in the UK (Ofgem "RPI-X @ 20") and US rate cases (New York, Massachusetts, New Hampshire) are critical for future revenue recovery.
- Legal: A £41.6m fine imposed by GEMA regarding metering contracts is under appeal; no provision has been made as the company contests the infringement.
- Liquidity: Despite tight credit markets, the company maintains £3bn in committed bank facilities and has raised additional long-term debt to cover projected needs.
Investor Verification Checklist
- Seasonality Impact: Verify the extent to which the decline in statutory earnings is driven by the seasonal weighting of US gas revenues (heavier in H2) versus underlying operational performance.
- Regulatory Approvals: Monitor the outcomes of pending US rate cases (Upstate NY, Rhode Island, New Hampshire, Massachusetts) which are expected to be implemented in H2 2009.
- Debt Market Access: Confirm the company's ability to refinance debt and maintain liquidity given the reported turbulence in credit markets and increased net debt levels.
- Commodity Hedging: Review the exposure to mark-to-market losses on commodity contracts and the effectiveness of regulatory cost recovery mechanisms in the US.
- Legal Appeal: Track the status of the appeal against the GEMA competition fine regarding metering contracts.