NGG

Business Context and Reporting Period

Company: National Grid Group plc
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended March 31, 2001
Business Overview: National Grid is an international provider of electricity and telecommunications networks. Its principal activities include operating the high-voltage transmission network in England and Wales, and transmission and distribution networks in the north-eastern United States (National Grid USA). The Group also holds interests in telecommunications joint ventures in Brazil, Poland, Argentina, and Chile, and transmission projects in Argentina and Zambia.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Turnover increased by 135% to £3,799.7m, primarily driven by the first full-year contribution from National Grid USA following the acquisitions of NEES (March 2000) and EUA (April 2000).
• Operating Profit: Underlying operating profit rose 34% to £731.9m. This was boosted by US electricity business performance (£293.6m profit) and offset by increased losses in the Brazilian telecoms joint venture, Intelig (£118.0m loss).
• Exceptional Items: Reported profit for the year (£769.0m) was significantly higher than underlying profit due to exceptional pre-tax profits of £263.0m, mainly from the partial disposal of Energis shares (£242.9m) and a tax credit of £229.5m.
• Debt and Gearing: Net debt increased by £1.25bn to £3.92bn due to acquisitions and investments in telecoms. Gearing rose to 111% from 90%.
• UK Transmission: Operating profit decreased by £36.8m to £486.3m due to revenue restrictions and lower contributions from the Transmission Services Scheme (TSS), which ended in March 2001.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Dividend Policy: The Board aims to increase dividends per share by 5% in real terms annually for the next five years. A final dividend of 9.03p is recommended, bringing the total to 15.08p.
• US Strategy: The Group is proceeding with the acquisition of Niagara Mohawk (approx. $3bn), expected to complete by end of 2001. This will double US operations and make National Grid the largest US electricity business focused on transmission and distribution.
• Telecoms: Start-up ventures (Intelig, Silica Networks) remain loss-making but are expected to reduce losses in 2001/02. The Group intends to sell its remaining stake in Energis in the short-to-medium term.
• UK Regulation: A new five-year price control began April 1, 2001, providing a stable framework for the UK transmission business.

Risks and Contingencies

• Regulatory Risk: Significant exposure to regulatory decisions in the UK, US, and EU regarding permitted revenues and rate of return.
• Acquisition Financing: Financing for the Niagara Mohawk acquisition has not yet been finalized, though the Group expects sufficient funds to be available.
• Telecoms Volatility: Intelig's performance is sensitive to market conditions and exchange rates; losses were larger than expected in the first half of the year.
• Environmental & Safety: Ongoing liabilities for decommissioning nuclear units and remediation of hazardous waste sites (manufactured gas plants) in the US.

Investor Verification Checklist

• Niagara Mohawk Acquisition: Verify the status of regulatory approvals (FERC, NY PSC) and the final financing structure for the $3bn deal.
• Intelig Losses: Monitor the trajectory of losses in the Brazilian joint venture and the effectiveness of tariff adjustments and cost-cutting measures.
• UK Transmission Revenue: Assess the impact of the new Balancing Services Incentive Scheme (BSIS) and revenue restrictions on future UK cash flows.
• Debt Servicing: Review the sustainability of the 111% gearing ratio and the ability to service increased interest costs (£250.6m) amidst potential interest rate fluctuations.
• Goodwill Amortisation: Note the significant increase in goodwill amortisation (£74.5m) due to US acquisitions and its impact on reported earnings under UK GAAP.