Business Context and Reporting Period
This Form 6-K filing, dated November 14, 2007, presents unaudited financial information for Niagara Mohawk Power Corporation, an indirect wholly-owned U.S. subsidiary of National Grid plc. The report covers the three and six months ended September 30, 2007. The filing is submitted to comply with indenture requirements for the Company's outstanding 7 3/4% Series of Senior Notes, which are scheduled for repayment on October 1, 2008. Niagara Mohawk operates as a regulated utility providing electric transmission/distribution and natural gas distribution in New York State.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2007 | 3 Months Ended Sept 30, 2006 | 6 Months Ended Sept 30, 2007 | 6 Months Ended Sept 30, 2006 |
|---|---|---|---|---|
| Total Operating Revenues | $961,503 | $979,866 | $1,950,568 | $1,895,049 |
| Operating Income | $103,223 | $135,574 | $184,341 | $219,836 |
| Net Income | $46,921 | $82,224 | $78,012 | $111,193 |
| Income Available to Common Shareholders | $46,515 | $81,818 | $77,200 | $110,381 |
| Operating Cash Flow (6 Months) | $295,942 (2007) vs $455,011 (2006) | |||
| Long-Term Debt | $1,249,300 (Sept 30, 2007) | |||
| Short-Term Debt to Affiliates | $512,600 (Sept 30, 2007) | |||
| Cash and Cash Equivalents | $14,813 (Sept 30, 2007) |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased by approximately $35 million for the three months and $33 million for the six months ended September 30, 2007, compared to the prior year. This decline was primarily driven by increased bad debt expense and higher service quality penalties.
- Revenue Fluctuations:
- Electric: Revenues decreased $8 million in the quarter due to lower sales volumes (milder weather and customer migration to competitive suppliers) but increased $44 million for the six-month period due to Merger Rate Plan (MRP) deferral recoveries and higher stranded cost revenues.
- Gas: Revenues decreased $10 million in the quarter due to lower gas prices and usage, but increased $11 million for the six months due to colder weather driving higher volumes.
- Expense Increases: "Other operation and maintenance" expenses rose by $50 million (quarter) and $64 million (six months). Key drivers included:
- Bad Debt: Increased reserves due to older receivables.
- Service Quality Penalties: Accruals for failing to meet electric reliability targets, including a doubled penalty rate for outage frequency.
- VERO Costs: $6 million in expenses related to the Voluntary Early Retirement Offer program.
- Cash Flow: Net cash provided by operating activities dropped significantly to $296 million for the six months ended September 30, 2007, from $455 million in the prior year, largely due to changes in working capital and tax timing.
Guidance, Outlook, Risks, and Unusual Items
- Regulatory Risks (SFAS 71): The Company relies on SFAS No. 71 to defer costs for future recovery. If regulatory assets are deemed not probable of recovery due to lower revenues or higher costs, a material non-cash charge would be required. The Company currently believes recovery is probable under the MRP.
- Service Quality Penalties: The New York State Public Service Commission (PSC) doubled the annual penalty for outage frequency to $8.8 million and added incremental exposure for consecutive failures. The Company recorded $14.5 million in service quality expenses for the six months ended September 30, 2007.
- Rate Adjustments: The Company filed a third CTC reset proposing reduced deferral account recoveries ($124 million/year vs. $136 million/year) to accelerate credits to customers from the KeySpan merger synergy savings. A PSC order is expected in December 2007.
- Environmental Contingencies: The Company faces potential liabilities for approximately 86 sites, primarily former manufactured gas plants. Accrued liabilities were $397 million as of September 30, 2007, with a high-end estimate of $519 million. The Company expects to recover these costs through rates.
- Acquisition Integration: National Grid completed the acquisition of KeySpan Corporation on August 24, 2007. Niagara Mohawk is incurring integration costs and VERO expenses related to this transaction.
- Accounting Changes: The Company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on April 1, 2007, resulting in an adjustment to retained earnings and changes in how interest on uncertain tax positions is classified.
Investor Verification Checklist
- Regulatory Asset Recovery: Verify the probability of recovering the $4.1 billion in regulatory assets under the current Merger Rate Plan and the impact of potential load reductions.
- Service Quality Performance: Monitor future outage frequency metrics to assess exposure to the doubled $8.8 million annual penalty and incremental penalties.
- Bad Debt Trends: Review the aging of receivables and the adequacy of reserves, given the recent increase in bad debt expense.
- Environmental Liabilities: Assess the status of remediation at the 86 identified sites and the likelihood of cost recovery from ratepayers versus the $519 million high-end liability estimate.
- Debt Maturity: Confirm the repayment schedule for the Senior Notes due October 1, 2008, and the Company's liquidity position to meet this obligation.