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, 2002 (2001/02)
Business Overview: National Grid is an international networks business primarily engaged in regulated electricity transmission in England and Wales, and electricity and gas transmission and distribution in the north-eastern US. The Group also holds interests in telecoms infrastructure and electricity transmission joint ventures in Argentina, Zambia, and Australia.

Key Financial Metrics

Note: US dollar figures are translated at average rates of £1.00 = $1.44 for P&L items and closing rates of £1.00 = $1.42 for balance sheet items.

Material Changes vs. Prior Period

• Acquisition of Niagara Mohawk: Completed on January 31, 2002, for £2.2 billion. This acquisition more than doubled the size of the US business, making National Grid the ninth largest utility in the US. It contributed £83.1 million to operating profit in the two months following acquisition.
• Turnover Growth: Group turnover increased by 16% to £4,401.0 million, driven primarily by the inclusion of Niagara Mohawk (80% of the increase).
• Operating Profit: Operating profit before exceptional items and goodwill amortisation rose 18% to £874.7 million. However, reported total operating profit fell to a loss of £129.4 million due to significant exceptional charges.
• Exceptional Items: The year included net exceptional pre-tax losses of £953.5 million, primarily due to:
  • Impairment of Latin American telecoms investments (£290.4 million).
  • Impairment of investment in Energis (£392.1 million).
  • Impairment of investment in Energis Polska (£109.8 million).
  • Foreign exchange financing charge related to the devaluation of the Argentine peso (£92.5 million).
• Debt and Gearing: Net debt increased from £3,918.2 million to £8,240.7 million, and gearing rose from 144% to 250%, largely due to the financing of the Niagara Mohawk acquisition.

Guidance, Outlook, and Risks

• Merger with Lattice: On April 22, 2002, National Grid announced a recommended merger of equals with Lattice Group plc to form National Grid Transco. Completion is expected in autumn 2002, subject to regulatory and shareholder approval. The merger aims to generate annual savings of at least £100 million.
• Dividend Policy: The Board recommends a final dividend of 9.58 pence, bringing the total to 16.04 pence (a 6.4% increase). The target is to increase dividends by 5% real per annum through March 2006.
• Strategic Shift in Telecoms: The Group is withdrawing from alternative telecoms network investments (Intelig, Silica Networks, Manquehue net) and focusing on wholly-owned infrastructure businesses (GridCom, NEESCom) that leverage existing electricity assets.
• Key Risks:
  • Regulatory Risk: Earnings depend on outperforming efficiency targets set by UK (Ofgem) and US state regulators.
  • Joint Venture Risk: Significant exposure to joint ventures, particularly Transener in Argentina, which suspended debt payments due to peso devaluation and legislative changes.
  • Operational Risk: Weather impacts on demand and potential security breaches.
  • Financial Covenants: Must maintain a 30% equity capitalisation ratio under US Public Utility Holding Company Act.

Investor Verification Checklist

• Merger Completion: Verify the status of regulatory approvals and shareholder votes for the proposed Lattice merger.
• Telecoms Write-downs: Confirm the final status of the divestment of Latin American telecoms assets and the restructuring of Energis.
• Argentine Exposure: Monitor the restructuring progress of Transener and the potential for further impairment charges related to the Argentine peso devaluation.
• US Integration: Assess the realization of integration savings from the Niagara Mohawk acquisition against the announced targets.
• Debt Servicing: Review the impact of the increased gearing (250%) on interest cover and future borrowing capacity, particularly given the 30% equity capitalisation requirement.