Business Context and Reporting Period
Company: National Grid plc
Filing Type: Form 6-K (Annual Review 2005/06)
Reporting Period: Year ended 31 March 2006
Filing Date: 20 June 2006
National Grid plc reported a strong financial performance for the year ended 31 March 2006. This was the first year the Group reported under the name "National Grid plc" following shareholder approval of the name change. The company operates as a premier network utility with core businesses in UK and US electricity and gas transmission and distribution, as well as wireless infrastructure. The financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) for the first time.
Key Financial Metrics
| Metric | 2005/06 | 2004/05 | Change |
|---|---|---|---|
| Group Revenue | £9,193m | £7,382m | +25% |
| Adjusted Operating Profit* | £2,527m | £2,443m | +3% |
| Total Operating Profit | £2,439m | £2,142m | +14% |
| Profit Before Taxation | £1,779m | £1,439m | +24% |
| Profit for the Year | £3,850m | £1,424m | +170% (incl. discontinued ops) |
| Adjusted EPS* | 46.7p | 42.3p | +10% |
| EPS (Continuing Ops) | 42.8p | 36.3p | +18% |
| Cash Generated from Operations | £3,131m | £2,911m | +8% |
| Ordinary Dividends | 26.1p | 23.7p | +10% |
| Net Debt | £10.9bn | £13.6bn | -£2.7bn |
*Excludes the impact of exceptional items and remeasurements.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased by 25% to £9,193m, driven by exchange rate movements on US operations, volume growth in the US, and the full-year contribution of the enlarged wireless infrastructure business.
- Discontinued Operations: Profit for the year was significantly boosted by £2,633m from discontinued operations, primarily comprising gains of £2,605m from the sale of four regional UK gas distribution networks in June 2005.
- Debt Reduction: Net debt decreased by £2.7 billion to £10.9 billion, largely due to debt repayments funded by the £5.8 billion proceeds from the gas network sales, partially offset by a £2 billion return of value to shareholders.
- Accounting Standards: The Group adopted IFRS for the first time. Comparative figures for 2004/05 were restated where permitted, though accounting for financial instruments (IAS 39) was not restated.
- Acquisitions: The Group announced the acquisition of KeySpan Corporation ($7.3 billion) and Southern Union Company's Rhode Island gas distribution business ($498 million).
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Investment Strategy: Total investment reached £2 billion in 2005/06, up one-third from the prior year. Management projects investment to rise to approximately £2.5 billion per annum over the next five years, with significant focus on UK regulated businesses and LNG infrastructure.
- Dividend Policy: The Board confirmed a policy to increase dividends per ordinary share by 7% nominally each year through to March 2008. A final dividend of 15.9p per share was proposed.
- Leadership Transition: Group Chief Executive Roger Urwin announced his intention to retire at the end of 2006. Steve Holliday was appointed Deputy Group Chief Executive and designated successor.
- Operational Focus: Continued emphasis on safety (27% reduction in lost time injuries), reliability (Reliability Enhancement Programme in the US), and efficiency (UK gas distribution achieved cost targets one year early).
Risks and Contingencies
- Regulatory and Approval Risks: Completion of announced US acquisitions is subject to regulatory approvals and contractual consents.
- Market and Weather Risks: Results are sensitive to unseasonable weather affecting energy demand, changes in energy market prices, and currency fluctuations.
- Integration Risks: Realizing expected synergies from the integration of KeySpan and Southern Union assets.
- Operational Risks: Potential adverse consequences from outages on energy networks and the performance of pension schemes.
Key Facts for Investor Verification
- Acquisition Status: Verify the regulatory approval status and closing dates for the KeySpan Corporation and Southern Union Company acquisitions.
- Discontinued Operations Impact: Confirm the extent to which the £2.6 billion gain from the sale of UK gas networks impacts the reported profit for the year versus continuing operations.
- IFRS vs. US GAAP: Note the significant difference between IFRS profit (£3,850m) and US GAAP net income (£1,307m) due to accounting treatment of regulatory assets and discontinued operations.
- Capital Expenditure: Monitor the execution of the projected £2.5 billion annual investment program and its impact on future cash flows and debt levels.
- Leadership Transition: Track the formal transition of CEO duties from Roger Urwin to Steve Holliday and any associated changes in strategic execution.