Business Context and Reporting Period
This Form 6-K filing by National Grid plc furnishes financial statements for its indirect wholly-owned U.S. subsidiary, Niagara Mohawk Power Corporation (Niagara Mohawk). The report covers the fiscal year ended March 31, 2008, with comparative data for 2007 and 2006. The filing is made to comply with a Senior Notes Indenture requirement and will cease upon the repayment of those notes on October 1, 2008. Niagara Mohawk operates as a regulated utility in New York State, providing electric service to approximately 1.62 million customers and natural gas service to approximately 576,000 customers.
Key Financial Metrics
| Metric (in thousands) | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Total Operating Revenues | $4,254,802 | $4,131,655 |
| Operating Income | $404,609 | $408,019 |
| Net Income | $203,059 | $189,577 |
| Income Available to Common Shareholders | $201,575 | $187,951 |
| Net Cash Provided by Operating Activities | $667,060 | $773,516 |
| Net Cash Used in Investing Activities | ($345,705) | ($308,391) |
| Net Cash Used in Financing Activities | ($317,535) | ($460,226) |
| Total Assets | $11,805,140 | $12,166,755 |
| Total Long-Term Debt (excl. current) | $1,849,405 | $2,449,194 |
| Current Portion of Long-Term Debt | $600,000 | $200,000 |
| Short-Term Debt to Affiliates | $291,700 | $395,300 |
Note: Margins are not explicitly calculated in the filing; however, operating income represents approximately 9.5% of total operating revenues for 2008.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by $123 million (3.0%) to $4.25 billion. Electric revenues rose $122 million, driven by a $31 million increase in Merger Rate Plan (MRP) deferral account recovery, $22 million in passed-through electricity costs, and $10 million in increased metered deliveries due to colder weather. Gas revenues remained flat, increasing only $1 million due to higher commodity costs passed through to customers.
- Profitability: Net income increased by $13.5 million (7.1%) to $203 million. This improvement was driven by a $15 million decrease in interest expense (due to debt maturities) and lower income taxes, partially offset by a $58 million increase in other operation and maintenance expenses.
- Expense Increases: Other operation and maintenance expenses rose significantly, primarily due to a $27 million increase in bad debt expense, $20 million in higher consultant/contractor costs (including tree trimming for reliability), and $12 million in Voluntary Early Retirement Offer (VERO) expenses.
- Debt Reduction: Long-term debt decreased by approximately $600 million year-over-year, reflecting scheduled maturities and repayments. However, the current portion of long-term debt increased from $200 million to $600 million due to the $600 million 7.75% Senior Notes maturing in October 2008.
Guidance, Outlook, and Risks
- Regulatory Filings: On May 23, 2008, Niagara Mohawk filed for a $95 million rate increase for its gas business, the first delivery rate increase since 1996. A decision is expected by April 2009. The filing includes proposals for revenue decoupling and expanded capital infrastructure investments.
- Capital Requirements: Estimated utility plant expenditures for fiscal year 2009 are approximately $454 million. The company is undertaking a Reliability Enhancement Program requiring significant investment.
- Liquidity: The company reported a negative working capital balance of $487 million at March 31, 2008, primarily due to the $600 million debt maturity within one year and $292 million in short-term debt to affiliates. Management states it has sufficient cash flow and borrowing capacity to fund these needs.
- Key Risks and Contingencies:
- Regulatory Asset Recovery: The company holds approximately $3.0 billion in net regulatory assets. If recovery becomes improbable, a material non-cash charge would be required.
- Service Quality Penalties: The company incurred $14.2 million in service quality penalties in 2008 due to missing electric reliability targets. Penalties can double under certain conditions.
- Environmental Liabilities: Accrued liabilities for environmental obligations were $440 million, with a potential high-end range of $580 million.
- FERC Audit: The Federal Energy Regulatory Commission is auditing Niagara Mohawk's compliance with tariff and contract filing requirements; the audit is expected to continue through the third quarter of 2008.
Investor Verification Checklist
- Debt Maturity Wall: Verify the refinancing strategy for the $600 million Senior Notes maturing on October 1, 2008, and the impact of the negative credit outlook issued by Moody's in January 2008.
- Regulatory Rate Case: Monitor the outcome of the $95 million gas rate increase filing and the potential for additional synergy savings credits mandated by the PSC regarding the KeySpan merger.
- Bad Debt Trends: Assess the sustainability of the $27 million increase in bad debt expense and the adequacy of reserves given the aging of receivables.
- Regulatory Asset Probability: Review the status of the $3.0 billion in regulatory assets to ensure continued probability of recovery under the Merger Rate Plan.
- FERC Audit Outcome: Track the results of the ongoing FERC audit regarding contract filing and records retention to determine potential for civil penalties or refunds.