Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended 31 March 2006
Filing Date: 18 May 2006
Accounting Basis: International Financial Reporting Standards (IFRS). Comparative 2005 figures have been restated to IFRS.
National Grid reported a strong operational and financial performance for the year, driven by efficiency gains in UK gas distribution, favorable results from UK capacity auctions, and sustained volume growth in the US. The company completed the sale of four UK gas distribution networks in June 2005, generating significant proceeds and reducing net debt.
Key Financial Metrics
| Metric (£ million unless stated) | 2006 | 2005 | % Change |
|---|---|---|---|
| Revenue (Continuing Operations) | 9,193 | 7,382 | +24% |
| Operating Profit (Business Performance) | 2,527 | 2,443 | +3% |
| Pre-tax Profit (Business Performance) | 1,924 | 1,740 | +11% |
| Profit from Discontinued Operations | 2,633 | 304 | N/A |
| Net Debt | 10,850 | 13,638 | -20% |
| Operating Cash Flow | 3,131 | 2,911 | +8% |
| Capital Investment | 2,100 | 1,545 (approx) | +36% |
| Earnings Per Share (Continuing Ops) | 42.8p | 36.3p | +18% |
| Dividend Per Share | 26.1p | 23.7p | +10% |
Material Changes vs. Prior Period
- Discontinued Operations: The year included a significant one-off gain of £2,633m from the disposal of four UK gas distribution networks, compared to £304m in the prior year. This transaction reduced net debt by approximately £5.8bn (proceeds) less the £2.0bn return of value to shareholders.
- Revenue Growth: Revenue from continuing activities rose by £1.8bn to £9.2bn, driven by US stranded cost recoveries and volume growth.
- Cost Reductions: UK gas distribution achieved a 35% reduction in controllable costs (real terms) since March 2002, hitting the target one year early. This year alone saw a 17% real-term reduction in controllable costs.
- Investment Increase: Capital investment in existing businesses increased by 36% to £2.1bn, focusing on UK gas and electricity transmission infrastructure and asset replacement.
- Finance Costs: Net finance costs decreased 14% to £606m (excluding exceptional items) due to lower average net borrowings following the asset sales.
Guidance, Outlook, and Risks
Outlook and Guidance
- Investment Programme: National Grid projects a £12bn investment programme over the next five years (to March 2011), with annual investment rising to approximately £2.5bn. Approximately £9bn is expected for UK regulated infrastructure.
- Dividend Policy: The Board recommends a 10% increase in the full-year dividend to 26.1p. The company retains a target of 7% annual dividend growth through March 2008.
- Acquisitions: Agreements were reached to acquire KeySpan ($7.3bn cash + $4.5bn debt) and Rhode Island gas distribution assets ($498m cash + $77m debt). These are expected to enhance earnings and cash flow in the first full year post-completion.
- Regulatory: UK transmission revenue is expected to increase by 9% in 2006/07 following a price control extension. US distribution regulatory agreements are expected to increase revenue by $150m in 2006/07 and 2007/08.
Risks and Contingencies
- Regulatory Approvals: Completion of the KeySpan and Rhode Island acquisitions is subject to regulatory and shareholder approvals, with KeySpan expected to complete in early 2007.
- Competition Investigation: Ofgem issued a Statement of Objections on 17 May 2006 regarding National Grid's domestic gas metering business, alleging a breach of the Competition Act.
- Market Risks: Forward-looking statements are subject to risks including currency fluctuations, changes in energy market prices, weather patterns affecting demand, and delays in regulatory approvals.
Key Facts for Investor Verification
- Discontinued Operations Impact: Verify the sustainability of earnings excluding the £2.6bn one-off gain from the sale of UK gas networks.
- Acquisition Integration: Monitor the progress of regulatory approvals for the KeySpan and Rhode Island acquisitions and the realization of projected synergies.
- Regulatory Environment: Track the outcome of the Ofgem investigation into the metering business and the finalization of the UK transmission price control review.
- Capital Expenditure: Confirm the execution of the £12bn five-year investment plan and its impact on future cash flows and debt levels.
- Dividend Sustainability: Assess the ability to maintain the 7% annual dividend growth target given the high capital investment requirements and potential integration costs of new acquisitions.