Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Annual Review 2008/09)
Reporting Period: Year ended 31 March 2009
Filing Date: 16 June 2009
National Grid plc is an international electricity and gas company operating regulated infrastructure networks in the UK and the US. The 2008/09 period marked the first full year of contribution from the KeySpan acquisition. Despite a global economic recession and adverse credit market conditions, the Company reported strong financial performance, driven by regulatory revenue increases, operational efficiency, and the integration of US operations.
Key Financial Metrics
| Metric | 2008/09 | 2007/08 | Change |
|---|---|---|---|
| Revenue | £15,624m | £11,423m | +37% |
| Adjusted Operating Profit | £2,915m | £2,595m | +12% |
| Operating Profit (Reported) | £2,623m | £2,964m | -12% |
| Profit for the Year | £947m | £3,193m | -70% |
| Adjusted EPS | 50.9p | 47.8p | +6% |
| Reported EPS | 38.5p | 122.3p | -69% |
| Cash from Operations | £3,564m | £3,265m | +9% |
| Capital Expenditure | £3,242m | £3,054m | +6% |
| Net Debt | £22.7bn | £17.6bn | +£5.1bn |
| Dividend per Share | 35.64p | 33.00p | +8% |
Note: Adjusted measures exclude exceptional items, remeasurements, and stranded cost recoveries, which management cites as key indicators of business performance.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased by 37% primarily due to the first full year of KeySpan operations contributing £4.6bn in revenue and favorable exchange rate movements.
- Profit Volatility: While Adjusted Operating Profit rose 12%, Reported Operating Profit fell 12% and Reported Profit for the Year dropped significantly. This divergence is attributed to £718m in operating exceptional charges (restructuring, environmental provisions) and £443m in operating remeasurement losses related to commodity contract fair value changes.
- Debt Levels: Net debt increased by £5.1bn to £22.7bn, driven by the strengthening US dollar, funding of the capital expenditure program, and the KeySpan acquisition. Despite this, the Company issued £4.9bn in new long-term debt during the year.
- Pension Deficit: The net pension deficit widened from £0.9bn to £2.8bn due to actuarial losses on plan assets reflecting declines in global share indices, partially offset by gains on liabilities from higher discount rates.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Dividend Policy: The Board targets an 8% annual dividend increase until 2012. A final dividend of 23.00p is proposed, bringing the total to 35.64p. A scrip dividend option will be offered to shareholders.
- Investment Strategy: Planned investment for 2009/10 is £3.4bn, with a similar level expected annually until 2012 to modernize networks and replace aging assets.
- Operational Focus: Management emphasizes safety, reliability, and efficiency. The Company aims to achieve a 45% reduction in greenhouse gas emissions by 2020 and 80% by 2050.
- Cost Synergies: The Company exceeded its target for KeySpan synergy savings, achieving a run rate of $129 million by March 2009.
Risks and Contingencies
- Regulatory and Economic: Risks include delays in regulatory approvals, changes in tax/interest rates, and economic conditions affecting demand.
- Operational: Exposure to severe weather events (e.g., the December 2008 ice storm in the US) and the need to manage safety hazards in gas and electricity transmission.
- Financial: Currency fluctuations (USD/GBP) significantly impact reported results and net debt. Commodity price volatility affects remeasurement gains/losses.
- Pension Funding: The Company expects to contribute £149m to UK pension schemes and £445m to US plans in 2009/10 to address deficits.
Investor Verification Checklist
- Adjusted vs. Reported Metrics: Verify the magnitude of "exceptional items" and "remeasurements" (£718m and £443m respectively) to understand the divergence between adjusted and reported profitability.
- Net Debt Trajectory: Confirm the sustainability of the £22.7bn net debt level given the £3.4bn annual capital expenditure plan and the impact of currency fluctuations.
- Pension Deficit: Review the specific actuarial assumptions and the timeline for the £2.8bn pension deficit repayment (up to 2017 for UK schemes).
- Dividend Sustainability: Assess the ability to maintain the 8% annual dividend growth target in the context of rising interest costs and capital requirements.
- KeySpan Integration: Evaluate the realization of the promised $100m synergy savings run rate and the ongoing integration costs.