The National Grid Group plc Annual Report 1998 99 The National Grid Group plc Annual Report 1998/99
The National Grid Group plc National Grid House Kirby Corner Road Coventry CV4 8JY
2 Joint statement by the Chairman and the Group Chief Executive 5 Our activities
6 Electricity networks – UK transmission
11 Electricity networks – international
12 Electricity networks – USA
14 Telecoms networks
Profit before tax (£m) £445.4m
600
16 Financial review 20 The Board of Directors
21 52 Corporate governance Shareholder 24 information Directors’ remuneration 27 Directors’ report 29 Directors’ and auditors’ statements 30 The accounts 51 Five-year financial summary
591.41 1
465.52
450
445.4
300 150 2
Excluding exceptional items
0 97
Basic earnings per share (p) 22.2p
25
99
98
24.31
Figures for 1997 have not been restated to reflect the impact of FRS 12, a new accounting standard introduced in 1998/99 Figures for 1998 have been restated to reflect FRS 12
22.2
Summary of business of Annual General Meeting
Individual Savings Accounts (ISAs) for NGG shares are available.
The Annual General Meeting will be held on Thursday 22 July
Further information may be obtained from the Account Manager,
1999 in the Salamander Suite at the National Exhibition Centre,
Stocktrade, PO Box 1076, 10 George Street, Edinburgh EH2 2PZ
Birmingham. If you would like to receive a summary of the
(telephone “Grid Line”, 0131 529 0443).
business transacted at the Annual General Meeting, please contact the Shareholder Enquiry Unit (see “Enquiries” below).
Regulatory accounts NGG’s subsidiary company The National Grid Company plc is the
Enquiries
holder of the electricity transmission licence for England and
Enquiries about individual shareholder matters (including changes
Wales. NGC is required by the transmission licence to provide to
of address, lost share certificates etc) should be addressed to
the Director General of Electricity Supply accounting statements
Lloyds TSB Registrars, National Grid Team, 54 Pershore Road South,
in respect of each of its licensed businesses. Copies of these
Birmingham B22 1AD (telephone 0121 433 8000).
statements for the year ended 31 March 1999 may be obtained,
19.72
20
Individual Savings Accounts (ISAs)
15
free of charge, from the Shareholder Enquiry Unit (see “Enquiries”
Lloyds TSB Registrars’ website can be accessed on
below).
www.lloydstsb-registrars.co.uk
Unsolicited mail
Enquiries relating to National Grid’s activities should be
We are obliged by law to make our share register available to
addressed to the Shareholder Enquiry Unit, National Grid House,
other organisations and some shareholders may therefore receive
Kirby Corner Road, Coventry CV4 8JY (telephone 01203 423940).
10 5
Basic earnings per share exclude exceptional items
0 97
Ordinary dividends per share (p) 13.07p
15
A special dividend of 44.7p per share was paid during 1998
0
12
99
98
unsolicited mail. Any shareholder who wishes to limit receipt 11.13
13.07
12.07
9
of such mail should contact The Mailing Preference Service,
Information about National Grid is also available via the Internet on
Freepost 22, London W1E 7EZ. The Mailing Preference Service is
www.nationalgrid.co.uk
free to the public and will notify those organisations which
6
support its aims that unsolicited mail should not be sent to
3
individuals who have registered a preference not to receive it. 97
99
98
Audio tape version of Annual Review
Interest cover (times) 4.2x
10
For the assistance of visually-impaired shareholders, an audio
9.41
8
tape version of the Annual Review has been prepared and may be
2
7.1
obtained, free of charge, from the Shareholder Enquiry Unit (see
6
4.2
“Enquiries” below).
4 2 0 97
Gearing (%)
61% 158%
Capital expenditure (£m) £309.6m
99
98 1
2
40%
450 319.7
300
279.8
309.6
Transmission Energis-related
150 Other 0 97
98
99
The National Grid Group plc Designed and produced by Timothy Guy Design Photography by David Partner and Larry Bray News cuttings © Evening Standard, 1999 The Financial Times Limited, 1999, Utility Week, 1999 Printed by Westerham Press Typeset by Real Time Studio The paper used in this report
Cover illustration shows the creation of artificial lightning on an impulse generator at our research and development centre – full picture shown left
is produced from sustainably managed forests and is elemental chlorine free (ECF)
Highlights of the year
The year ended 31 March 1999 was an extremely active one – and a good one in which we made strides in creating further value for shareholders
Our transmission system in the UK delivered record system performance Availability and reliability of our system have never been better, breaking our own records. Customers benefit because the risk of disturbance to supplies is minimised, while the cheapest available generation can be selected, irrespective of location, thus reducing the overall cost of electricity.
We are creating a platform for growth in the USA In December, we began the process to acquire New England Electric System (NEES), an electricity company based in Massachusetts, USA, for $3.2 billion (approximately £2.0 billion). Bringing together our skills with those of NEES will provide us with an excellent platform for growth in the north-eastern USA on which to build a substantial transmission and distribution business.
We locked in value created by the huge success of Energis In January, we sold one-third of our holding in Energis, realising £1.2 billion of the value that has been created by Energis since we conceived it in 1992 and created its network. Our remaining 48 per cent economic interest ensures that our shareholders continue to participate in its future progress.
We are taking our telecoms network skills into Brazil In January, our consortium with Sprint and France Telecom won a licence to operate a new national and international telecommunications service throughout Brazil.
We created shareholder value We provided a total shareholder return of over 31 per cent between 31 March 1998 and 31 March 1999. The share price rose 98.75 pence to 451.75 pence and during the year we paid dividends of 12.49 pence per share.
Total shareholder returns
75
for the year, comprising ordinary dividends
60
and share price appreciation
45
70.1%
31.5% 30 15
13.0%
0 97
98
99
1
Joint statement by the Chairman and the Group Chief Executive
This has been an exceptional year. At home, our transmission system performed better than ever and the value of our Energis investment rose substantially. Overseas, we took two major initiatives, in the USA and Brazil, that will enable us to build substantial value for shareholders from outside our UK transmission business. Group operating performance Total operating profit rose £42.0 million to £583.3 million. We made an exceptional profit of £712.7 million after tax on the partial sale of Energis and incurred an exceptional charge of £36.3 million after tax relating to the close-out of some interest rate swaps, which will reduce our interest charges going Year 2000
forward. Excluding exceptional items, profit before tax was £445.4 million
We have given the Year 2000 issue the highest priority and all systems critical to the secure operation and control of the transmission system are now ready for the millennium date change. Monitoring of Year 2000 preparations in the electricity industry as a whole is being carried out by independent assessors on behalf of OFFER. OFFER has reported that the electricity industry’s preparations for the Year 2000 are well advanced and that, in its view, the date change will pose no threat to electricity supplies. We provide an up-to-date report on our compliance on our website.
(1998: £465.5 million) and basic earnings per share rose 12.7 per cent to 22.2 pence. The weighted average number of shares in issue during the year was down 13 per cent following the share consolidation in February 1998.
UK transmission We broke all previous records for the availability and reliability of the transmission system. It was the first full year we operated the system from a single control centre; ours is now the world’s most complex system to be managed in this way. This operational performance should be seen against the background of a further reduction in controllable costs by 4 per cent in real terms. Following the 14 per cent real reduction last year, this keeps us on track to cut controllable costs by an average of at least 6 per cent real per annum over the four years of the current price control period.
Industry reviews Following the Government’s review of the current arrangements in the electricity market, OFFER’s proposals for revised trading arrangements were published in July 1998 and endorsed in the Government’s White Paper “Conclusions of the Review of Energy Sources for Power Generation” in October 1998. We are making a significant contribution to the programme to design and develop the new market. A key objective is to ensure that system security can be maintained under the new market arrangements.
International electricity activities Our joint venture in Argentina has benefited from the skills which, as Registered Operator, we were able to bring to bear to achieve impressive improvements in its operational record. These and other improvements have placed Transener’s technical performance on a par with that of leading transmission companies around the world. The first full year of our operation of the electricity network in the Zambian Copperbelt was successful.
Proposed acquisition of NEES and EUA We have made a significant strategic step this year with our proposed acquisition of New England Electric System (NEES). NEES is an efficient, focused transmission and distribution business with a strong operational track record, which will benefit further from our core skills. It also provides an excellent platform
2
David Jefferies, Chairman (right) and David Jones, Group Chief Executive (left)
for growth in the USA, where the rapid restructuring of the electricity market is giving rise to opportunities to build a substantial transmission and distribution business. Indeed, with our support, NEES is in the process of acquiring Eastern Utility Associates (EUA), an electricity utility whose service territories are interwoven with its own. National Grid, NEES and EUA shareholders have overwhelmingly supported both these acquisitions and we are making good progress in getting the outstanding regulatory approvals. Both acquisitions will be immediately cashflow enhancing and earnings enhancing before amortisation of goodwill.
US listing We intend to list our shares on a US market later this year. This will broaden our appeal to US investors and provide a currency which may be useful in transactions in the future.
Energis Our role in the building of Energis has been quite specific and has been central to creating the business concept and sponsoring it through the early stages of operation. While these skills can be used in other start-up telecoms opportunities, they are no longer essential to Energis. We therefore consider it non-core and realised the value of one-third of our holding, which was £1.2 billion. The reduction of our economic interest to just under 50 per cent enabled Energis to qualify for the London Stock Exchange FTSE 100, while our remaining 48 per cent interest ensures that our shareholders continue to share in the future progress of Energis.
Brazil telecoms Our consortium with Sprint and France Telecom won a licence to operate national and international telecommunications services throughout Brazil. This enterprise will use our network design and development skills while the products, marketing and operational skills will be provided by our partners.
David Jones thanks David Jefferies for his huge contribution
David Jefferies has been Chairman of National Grid since 1990, when the Company was formed as part of the privatisation of the UK electricity sector. His bold and far-sighted leadership has been a key ingredient in our success – from the performance of the transmission system during a decade of major change in the industry, through the conception and development of Energis, to the growth of the Group internationally. Many of you have met him at our Annual General Meetings or on the Networking programmes and will know how much we will miss him. We thank him for his huge contribution. And David Jefferies welcomes James Ross
National Air Traffic Services Our skills in operating the vital, safety-focused and complex transmission system in real time are relevant to air traffic control and we have reaffirmed our interest in National Air Traffic Services and the opportunity it could provide to create value from these skills. We have responded to the Government’s consultation paper on the Public Private Partnership.
I am delighted to welcome James Ross to the Board. He has a wealth of experience to bring to the Group. He brings a combination of knowledge of the energy and telecoms sectors and experience in overseas markets which is ideal at this stage in our development as we expand our activities around the world.
The Board David Jefferies, Chairman, is to retire at the Annual General Meeting in July when James Ross, who was appointed Deputy Chairman on 1 March 1999, will take over as Chairman. Malcolm Williamson will also be leaving the Board at the Annual General Meeting, following his appointment as President and Chief Executive Officer of Visa International. Professor Paul Joskow, who is currently a Non-executive Director of NEES, will join the Board on completion of the NEES acquisition. We shed light on National Grid
We ran an advertising campaign during the year to highlight what National Grid does and the innovative and intelligent way in which our people do it. It focused on the complexities of keeping the lights on, the reduction in the cost of electricity, the creation of Energis and our international success based on the experience gained in the competitive electricity market in the UK. The slogan “British Brain Power” drew attention to the fact that our transmission system is a great national asset.
3
A London taxi, showing one of our advertisements
Joint statement continued
Our staff This year put great demands on our staff. Thanks to their energy and commitment, our transmission system has broken all performance records in the UK and we have taken the strategic steps to provide a platform for growth. To support the role they play in the development and success of the Group, we have vastly increased the opportunities for training and learning to ensure that we are all ready to face the challenges and opportunities as we grow and become more international.
Pensions The triennial valuation of our pension scheme has shown a surplus of £95 million at 31 March 1998. With the agreement of the Trustees, £52 million Environment
Our commitment to effective and responsible environmental management is at the heart of everything we do. We are well advanced towards implementing the ISO 14001 Environmental Management System Standard by the end of the year. You can find our annual environmental performance report on our website.
of the surplus is being allocated to improve benefits to pensioners and to fund a halving of contributions for employees and the Company for three years, starting in April 1999. National Grid continues to defend its position in long-running litigation brought by two pensioners who argue that, despite the surplus that then existed, the Group should be forced to pay additional contributions into the Scheme to fund the early payment of pensions granted to employees taking early retirement between December 1992 and February 1995. Our approach to this issue has been consistently supported by the trades unions representing the majority of our employees, and by Trustees elected by employees and pensioners. This is a complex legal issue which is to be considered by the House of Lords.
Outlook A priority in the forthcoming year is to obtain the regulatory approvals for the NEES and EUA acquisitions, which we expect within six to eight months. We will integrate the companies swiftly and move to take advantage of the consolidation opportunities provided by the changing regulatory environment and the broader skill set which we have in combination with NEES. The third regulatory review of our transmission price control will start in the Core skills
At the bottom of each page in the following review of operations, we have identified our core skills and the way in which we take advantage of them.
autumn. It will be the first such review carried out by the new regulator, who has indicated that he wishes to explore new approaches to price regulation. As we work with him, our aim will be to maintain the network’s flexibility and high standards of security and to achieve greater stability for shareholders. Our investment in Energis has created significant value for our shareholders and we are still in a position to benefit from its progress. Similarly, we expect our telecoms investment in Brazil to deliver value in the future. Elsewhere, we are continuing to explore opportunities in countries where telecoms market liberalisation and customer needs suit our skills. Our success in UK transmission and in creating Energis has provided us with the core skills and reputation to build electricity and telecoms network businesses around the world which can create value for shareholders.
Ordinary dividends The Directors are recommending a final ordinary dividend of 7.82 pence per share, which brings the total ordinary dividend for the year to 13.07 pence net per share, an increase of 8.3 per cent (5.0 per cent real). This is once again at the top end of our target range of delivering real growth in dividend per share of 4 to 5 per cent. If approved, the final dividend will be paid on 16 August 1999 to shareholders on the Company’s share register on 7 June 1999.
David Jefferies CBE, FEng Chairman
4
24 May 1999
David Jones Group Chief Executive
Our activities
We create value for shareholders by building on our skills in electricity and telecommunications networks.
Electricity networks
Telecoms networks
We are the world’s largest independent transmission company
We recognised the potential for building a national telecoms
and have nearly a decade’s experience of facilitating competition
network in England and Wales for Energis and gained telecoms
in electricity markets.
start-up skills which we are now using in Brazil.
England and Wales We transport power – we own, operate and maintain the 7,000 km high-voltage network connecting generators with distribution networks and major customers, together with the interconnectors with Scotland and France. We balance supply and demand – second by second, we call on generators to provide power that matches demand, keeping frequency and voltage stable. We provide market services to the wholesale electricity market, the Pool. Argentina We are Registered Operator and joint owner of the Transener system, at nearly 13,000 km Argentina’s main transmission system – its performance is now on a par with that of leading transmission companies around the world.
England and Wales We brought key skills to the building of Energis and have been central to creating the business concept and sponsoring it through the early stages of operation. These skills are less relevant to Energis’ future development, making it non-core for us. We have reduced our economic interest to just under 50 per cent. Brazil We have 50 per cent of a consortium which is set to become the second national and international voice and data operator in Brazil. Our role is to develop the network linking Brazil’s major cities.
Brazil We have an agreement with Electrobras, Brazil’s largest electricity utility, to pursue future transmission opportunities. Zambia We are joint owner and operator of Copperbelt Energy Corporation which supplies electricity over its high-voltage network to the mines of the Zambian Copperbelt, trading the electricity it transmits on long-term contracts in US dollars to meet demand. India We have been selected as a joint venture partner with the Karnataka Electricity Board for a 30-year concession to build, own, operate and maintain a 600 km transmission line.
USA Subject to regulatory approvals, we will acquire NEES (New England Electric System), a transmission and distribution business in New England, USA, serving 1.3 million customers. This business will benefit from our skills and experience of competitive electricity markets and will bring into the Group its own expertise in distribution.
5
Electricity networks – UK transmission
“We achieved record availability and the lowest-ever level of interruptions on our network and we are investing more to maintain this performance. Ever greater efficiency means that the transmission cost for each unit of electricity supplied in England and Wales has fallen by 35 per cent in real terms since 1990.”
Roger Urwin, Managing Director, Transmission
Transmission
Financial performance
Turnover
Operating profit
UK transmission turnover decreased by £30.6 million to £1,194.6 million.
’99
£1,194.6m
£513.8m
Turnover from price-controlled transmission charges fell by £20.5 million
’98
£1,225.2m
£519.7m
to £836.8 million, reflecting the impact of the price control and an underrecovery of revenue as a result of the mild winter. At 31 March 1999, the under-recovery of transmission use of system income amounted to £24.7 million. Charges have been set for 1999/2000 such that the full amount will be recovered in the event of an average winter. Income from connections made to our network since 1990 is not covered by the price control and increased to £74.7 million during the year, while income Analysis of turnover
Price-controlled
from other sources increased by some £2.7 million to £18.1 million. 1999 £m
1998 £m
836.8
857.3
74.7
72.7
265.0
279.8
18.1
15.4
the current price control, which ends in March 2001. The lower turnover, partially offset by a reduction in controllable and other costs, resulted in
limited to reasonable rate of return Transmission Services Scheme
following a 14 per cent reduction in real terms in the previous financial year. This keeps us on track to meet our cost reduction target over the period of
regulated by RPI-X Post-1990 connections
We reduced transmission controllable costs by 4 per cent in real terms,
a fall in UK transmission operating profit of £5.9 million to £513.8 million.
regulated by sliding scale Other unregulated
Investment in the network We increased investment in the network by 30 per cent during the year to
1,194.6 1,225.2
£294.5 million to ensure system reliability and security. Nearly half of this expenditure was used to replace obsolete equipment at substations and on overhead lines and underground cables. We will have to replace more of our assets over the coming years to ensure that as equipment ages, we can Inside our system control centre
deliver the service expected of us.
Controlling costs Overall controllable costs have been reduced by 50 per cent in real terms since privatisation. We completed the project to bring all our control centres together into a single complex. This has produced large cost reductions, culminating this year with the final savings from the closure of buildings formerly used as area control centres.
budget and over one year early.
6
1993
1999
5 650
1 425 down 38%
➧ ➧
This project initially involved the £100 million replacement of software for the energy management system, which was completed on time in 1993. Subsequently, control centres the £75 million relocation and staff restructuring project has been running costs completed within
During the year, we received four applications for new generation connections to the transmission network. The timing of almost all new generation will depend on the Government’s consent policy following its review of energy
Transmission capital expenditure Total expenditure: £294.5 million
sources for generation. There were six applications for new or strengthened connections to distribution networks. In addition, to comply with licence
D
A
A 12% New customer connections
conditions, a major reinforcement of supplies into Central London is planned to meet increased demand.
C
B
B 34% Strengthening system infrastructure C 46% Improving reliability
We are making progress in resolving the outstanding issues associated with
D 8% Other
the new North Yorkshire transmission line. Consent for the vast majority of the line was granted by the Secretary of State for Trade and Industry in March 1998 to enable us to bring our network in the north-east up to the security standards required by our transmission licence. We now propose to underground a section of the route and we are in detailed negotiation with landowners and planners in preparation for construction and operation. When
New connections and major infrastructure developments during the year
the new line is complete, we will dismantle about 30 km of existing line. We spent £8.4 million on research and development during the year, mainly aimed at improving transmission system availability and reliability, as well as devising ways to reduce the environmental impact of our operations. South Humber Bank CCGT, 527 MW
Managing environmental risk We are committed to identifying and managing our key environmental risks and seek continuous improvement in environmental performance.
Cottam development centre CCGT, 525 MW
Sutton Bridge CCGT, 772 MW
We are well advanced towards implementing the ISO 14001 Environmental Management System Standard by the end of the year. We have introduced
Seabank Power CCGT, 812 MW
Greater London infrastructure scheme
a waste management strategy company-wide which aims to cut waste management costs, reduce volumes of waste and increase re-use and recycling. Our annual environmental performance report explains our approach to environmental management and is available from the Company and on our website.
Records in
availability and reliability This year we achieved new records of system availability and reliability of electricity supplied. This benefits customers by reducing the risk that faults on our network will lead to power cuts and facilitates competition in generation, thus reducing the cost of electricity. R & D has increased system performance As well as ensuring that our system is reliable, it is important that we get the most out of our assets. We analyse day-ahead weather forecasts from the Met Office with complex software to calculate enhanced ratings on certain critical lines, enabling them to carry as much power as possible. The software takes account of wind speed, ambient temperature and solar radiation. The results have been impressive: we have achieved up to 21 per cent increases in ratings, which on some circuits can significantly ease power flow restrictions.
Winter peak system availability (%) 100
99
98.71
98.77
95
96
99.21
99.34
98
99
98.90
98
97 97
7
Electricity networks – UK transmission continued
Transmission services and ancillary services In achieving a gross profit of £11.2 million, we overcame a major challenge. For the first time in several years, imports from France were reduced for part of the year, with the result that more expensive generation in England and
generation to be used to meet demand. Reduced imports also resulted in increased power flows from north to south across the network, which led to higher than targeted transmission losses. The expansion of the market in services provided by generators, which
Generation schedules published
Bilateral contracts Direct transactions between generators and suppliers
reduce this component of transmission costs. We kept pressure on the cost of other services, such as ancillary services, which are required to maintain continuity and quality of electricity supply. We achieved this by broadening competition and managing these services more efficiently.
RETA RETA: cycle repeats every 30 minutes Power exchange - Generators and suppliers fine tune their contractual positions
Despatch day
After a review initiated by the Secretary of State for Trade and Industry, proposals were published in July 1998 as part of the Review of Electricity
Cycle repeats every 30 minutes
Day ahead prices published
Existing arrangements: cycle repeats every 24 hours
rescheduling planned network maintenance to enable the cheapest available
enable us to maintain correct voltage across the network, also helped us
Generator bids submitted (by 10.00am)
Cycle repeats every 24 hours
Futures and forward market Hedging and trading
Wales had to make up the difference. We minimised the impact of this by
Trading Arrangements (RETA) and were endorsed in the Government White Paper, “Conclusions of the Review of Energy Sources for Power Generation”, published in October 1998. The design of the new trading arrangements is now being developed through industry-wide working groups of experts led by the regulator’s office and the DTI. We are making a significant contribution to this programme and will be extensively involved in the implementation process once the new arrangements are finalised and the timetable for implementation becomes clearer.
4hrs ahead
The RETA proposals represent a fundamental shift away from the compulsory
Balancing mechanism NGC balances real-time supply and demand
wholesale electricity market introduced in 1990 towards trading arrangements based on bilateral contracts. The key features of the proposals are illustrated
Physical delivery of electricity to the network
in the diagram (left). All the key functions carried out by National Grid will still be required under the new trading arrangements, although settlement and funds administration activities may be subject to competitive tender in due course. A key objective will be to ensure that the new market preserves system security.
Creating
commercial incentives
This trace shows the huge extent to which demand for electricity fluctuated on 30 June 1998 during the match between England and Argentina in the first round of the knock-out stage of the World Cup, increasing the difficulty of balancing supply and demand.
33,000
Previous week for comparison
32,500 Half-time (2,100 MW)
31,500
Full time (1,600 MW)
End of penalties (1,500 MW)
31,000 30,500
1,000 MW drop in demand
2,200 MW drop in demand
30,000 29,500 29,000
8
Time
23.20
23.10
23.00
22.50
22.40
22.30
22.20
22.10
22.00
21.30
21.20
21.10
21.00
20.50
20.40
20.30
20.20
20.10
20.00
19.50
19.40
19.30
28,000
21.50
Extra time Half-time 200 MW Extra time Full time 400 MW
28,500
21.40
Demand (MW)
32,000
In 1994 we initiated the first of a series of Transmission Services schemes. Through negotiation with suppliers, and more recently with the regulator, these schemes provide us with financial incentives to reduce the costs of bottlenecks in the electricity system. Incentivised uplift (£m) The graph (right) shows the 571 600 478 reduction in these 500 356 336 400 328 costs since 265 300 Transmission 200 Services schemes 100 0 93/4 94/5 95/6 96/7 97/8 98/9 were introduced. Introduction of TSS
ESIS ESIS, which provides energy settlements and information services for the
At ESIS we:
Electricity Pool, provided a record level of faultless service for the England
●
automatically read 80,000 meters at customer sites every day
●
settle £170,000,000 of energy trading every week
●
distribute 6,100,000 reports every year
and Wales market as settlement system administrator. It also expanded its range of services and is increasingly making an impact in the energy market. During the year, ESIS extended its current contract with the Electricity Pool and will supply the service into the new millennium. In addition, ESIS delivered new systems on time, enabling full competition in electricity supply in England and Wales to open in September 1998. ESIS won the contract to deliver to Scottish Electricity Settlements Limited a totally new market operations service. The new system was delivered to tight timescales, allowing customers in Scotland to choose their supplier from September 1998. ESIS also won valuable Technical Assurance (Policing) and New Supplier Entry Process Co-ordination roles against strong competition in both Scotland and England.
Datum Solutions
Teldata In January 1999, we acquired Teldata in the USA at an enterprise value of £16 million. It specialises in meter data collection systems and services for electricity, gas and water utilities and their commercial and industrial customers. Its services complement those of Datum Solutions and each will benefit from the other’s R & D and market expertise.
By successfully obtaining full accreditation for meter operation, data aggregation and collection from the Electricity Pool, Datum Solutions has gained entry into the new deregulated electricity market as the largest independent service provider in the UK. Our customers include electricity suppliers PowerGen, Electricity Direct and Renewable Energy, to whom we provide agent services in the new market. We have also won contracts for data collection, including one with the major independent gas supplier and shipper Amerada Gas, which opens up opportunities in the rapidly developing gas market.
EPFAL As pool funds administrator, EPFAL daily clears funds for energy traded, which over the year amounted to a value of approximately £10 billion. The liberalisation of the electricity market has required EPFAL to develop systems and procedures to enable the redistribution of funds plus interest. This entails the funds transferred for each trading day on the whole of the supply side of the market being redistributed on at least five occasions over a 14-month period in a similar way to the original run. Every one of these operations has been performed without error.
Datum Solutions’ success in the UK’s restructured electricity market complements Teldata’s technology and market position, giving the business a unique ability to be the first in the USA to offer a complete portfolio of Market Services. Opportunities will arise in the USA as competition increases rapidly – the number of customers who can exercise choice is set to double within four years.
Serving markets Teldata and its subsidiary FirstPoint Services: ● pioneered automatic meter reading (AMR) technology ● were first to introduce customer-secure Internet access to energy data ● were first to be certified as metering services provider and meter data management and billing agency in California (one of the first States in the USA to embrace electricity industry restructuring).
Datum Solutions’ metering equipment
9
Electricity networks – UK transmission continued
Interconnectors There was a reduction in transfers across the French interconnector, but those across the Scottish interconnector increased and the availability of both links remained very high. Operating profit from the interconnectors increased by £3.3 million to £39.5 million. In March 1999, we agreed a joint venture with Manx Electricity Authority to build a 40 MW interconnector to the Isle of Man. The link is due to be commissioned in 2000. We are also studying the technical and commercial feasibility of an interconnector to Norway under a joint development agreement with Statnett, the grid operator, and Norsk Hydro, the largest electricity user in Scandinavia as well as a major generator and electricity trader. We are in the very early stages of investigating the possibility of links with Holland and Ireland. Our project management division successfully bid for unlicensed work to install 400 kV switchgear in the generator circuits at Coryton, in addition to the licensed transmission system connection work.
Project management Building on our core skill in managing the construction of our own highvoltage transmission network and Energis’ telecommunications network, we have this year completed over £52 million of work for a variety of clients. This work, which has been won as a result of competitive tendering or
Project management Unregulated turnover: £52.1 million
negotiation, covers connections to the transmission system associated with generation projects, the extension of the telecommunications network for Energis and the replacement or refurbishment of distribution installations for a number of companies within the electricity industry.
D A
A £16m Distribution B £14m Generation
C B
During the year, major new contracts have been awarded by Seabank Power
C £19m Telecoms networks
for the connection of a second generating unit at Seabank, Bristol, and by
D £3m Other
SWALEC for the replacement of their 132 kV equipment at Uskmouth in South Wales.
Connecting
markets
We run two of the world’s most successful high-capacity electricity links and we are exploring the possibilities of applying that experience and expertise elsewhere.
Scotland Scottish interconnector: nominally 1,200 MW capacity, two double circuit AC connections with England at 400 kV and 275 kV. TWh transfers: 98/99 97/98 96/97 10.9 10.0 10.3 Availability of existing interconnectors: 98/99 97/98 96/97 98.30% 95.35% 97.33%
10
Norway Norwegian interconnector: to be between 600 MW and 1,000 MW capacity, between 630 km and 860 km long – expected to be longest DC subsea cable in the world, joint development agreement signed by National Grid, Norsk Hydro and Statnett which envisages completion by 2005/06.
Isle of Man
France
Isle of Man cable: to be 40 MW capacity, 90 kV, 100 km long – believed to be the longest AC subsea cable in the world, ownership 50/50 National Grid/Manx Electricity Authority, to be completed by autumn 2000.
French interconnector: 2,000 MW capacity, 325 km of undersea DC cable. TWh transfers: 98/99 97/98 96/97 12.2 16.6 16.6 Availability: 98/99 97/98 96/97 97.36% 97.92% 97.32%
Electricity networks – international
“We made good progress in both Argentina and Zambia and are exploring other opportunities around the world which will provide the right risk-reward balance.” Argentina
Wob Gerretsen, Business Development Director
Transener has completed its first five-year tariff review, which was also the first review of a regulated electricity company since the privatisation of the electricity sector in Argentina. The new tariff results in an 8 per cent reduction in revenues but, with the performance target and other elements, the net reduction is less than 5 per cent. Connection charges have been increased, allowing Transener to improve its income from new customers. In addition, a major policy change by the regulator meant that asset
Transener Transener is the main transmission company in Argentina. We and Perez Companc, the Argentine industrial group, have joint control but, as Registered Operator, we take the lead in operations and regulatory issues.
replacement must be recognised when setting new tariffs. A five-year investment programme was also approved. The benefits will be felt in the future as the assets age.
Rising demand vs annual fault index
Penalty factors remain unchanged, but Transener has a strong record of
70
performance improvement – we again reduced faults significantly during
65
the year.
60
Right of way acquisition for the $250 million 1,300 km “Fourth Line” is
55
complete except for a short 20 km section which is subject to further
50
negotiation. However, this should not delay commissioning, which is due in
45
1.48
0.67 0.6 0.59 0.5
93
94
95
96
97
98
November 1999. The rationalisation programme resulting from the integration of Transener and Transba, the transmission system of the Province of Buenos Aires acquired
System demand (TWh) Faults per 100 km line per year
by Transener in 1997, is well advanced.
Zambia Copperbelt Energy Corporation (CEC), our joint venture in Zambia, performed well in its first full year of operation, delivering better than expected returns. The business will benefit from the privatisation of the copper mines, on which the Zambian Government has made progress.
CEC We and CINergy Global Power have equal interests in Copperbelt Energy Corporation (CEC) which supplies electricity to the mines in the Zambian Copperbelt, buying and selling the electricity on long-term contracts in US dollars.
Brazil joint venture with Sprint and France Telecom to finance, develop and operate the second national and international telecommunications network in Brazil ● agreement with Electrobras, the country’s largest electricity utility, to pursue future transmission opportunities ●
Finding the right partner
We form effective partnerships by joining forces with leading players in our chosen markets. Each partnership, whether in the public or private sector, is tailored to reflect the opportunity we are pursuing.
India joint venture with the state-owned Karnataka Electricity Board to build a 600 km transmission line ● continued work on our Utility Collaboration Agreement with PowerGrid Corporation, India’s leading transmission company ●
Transferring skills
internationally
Zambia ●
The successful application of skills and experience gained in the UK is a key ingredient in the success of these activities.
our commercial skills have greatly improved operational efficiency, reduced manpower and rationalised pay structures
Argentina ●
our operational skills have significantly reduced faults
11
Electricity networks – USA
“For NEES and our employees, this transaction represents a tremendous opportunity for growth. For our customers and the region, it is an opportunity to benefit from National Grid’s proven track record of delivering a high-quality, low cost transmission service in the competitive UK market.”
Rick Sergel, President and Chief Executive Officer, NEES
NEES On 14 December 1998, we announced that we had signed a merger agreement under which we will acquire NEES for $3.2 billion (approximately £2.0 billion). The acquisition will be wholly debt-financed and will immediately enhance cash flow per share and earnings per share before the amortisation of goodwill. NEES is one of the leading electricity utilities in the north-east USA. Its principal activities are the transmission and distribution of electricity in Massachusetts, Rhode Island and New Hampshire. This acquisition • over 4,000 route km of transmission lines • over 45,000 route km of distribution networks • serving approximately 1.3 million customers
represents a significant investment in an efficient, focused transmission and distribution business with an impressive operational track record. NEES has a high-quality management team with proven distribution expertise and we share a view of the industry’s future development in the north-east USA. This acquisition provides the right point of entry into the USA, which is the
• over 11,000 route km of transmission lines and distribution networks • serving over 300,000 customers
world’s largest energy market. The market is being restructured with the introduction of competitive energy markets and the development of new regulatory frameworks. There are strong parallels between this process and the privatisation process in the UK. New England is in the forefront of changing a regulatory system that has focused on rate of return to one incentivising efficiency to the benefit of shareholders and customers. All three States in which NEES operates have recently enacted electricity restructuring legislation and are introducing competition in generation. NEES has been proactive in changing the regulatory landscape. On 1 September 1998, NEES completed the sale of substantially all its non-nuclear generation plant. It has also negotiated a regulatory settlement
Adding value in competitive markets Our successful operation of open and non-discriminatory access to our transmission system has removed hurdles to competition, adding significant value to the competitive wholesale electricity market in England and Wales during the last decade. Since National Grid was created, regulatory action has reduced our charges by 30 per cent in real terms and we have improved the service we provide to our customers. We have invested £2.3 billion in the network and increased its capability by 23 per cent. We have achieved record network performance, while reducing controllable costs by 50 per cent in real terms. We have also significantly reduced costs to customers arising from the constraints on our system.
Electricity prices down
23% domestic consumers
12
28% industrial consumers
Maintenance on NEES’ distribution network
Energy production up
20% from independent power producers
Changes in a dynamic market
19
21
GW
GW
new generation
generation closed
which offers a stable base for a transitional period, as well as incentives to improve performance for customers and increased returns for shareholders. We will bring to NEES our skills in efficient transmission, our expertise in the evolution of incentive-based regulation and our experience of the challenges and opportunities of a competitive generation market. These will be highly
North-eastern USA
relevant to the next stage in NEES’ development. At the same time, we will be gaining NEES’ distribution expertise which together we will be able to apply internationally in the future. National Grid and NEES shareholders have overwhelmingly approved the proposed acquisition and we are making good progress with regulatory and other consents and approvals in the US and the UK. We aim to complete
New Hampshire
the transaction in the next six to eight months, at which point NEES will become a wholly-owned subsidiary of National Grid. Massachusetts
This acquisition will provide an excellent platform on which to build a substantial transmission and distribution business in the region.
EUA Rhode Island
On 1 February 1999, NEES and EUA signed a merger agreement under which NEES will acquire EUA for $634 million (approximately £396 million) and EUA will become a wholly-owned subsidiary of NEES. EUA’s principal activities are
NEES electricity distribution service area EUA electricity distribution service area
the distribution and transmission of electricity in areas of Rhode Island and south-eastern Massachusetts which are interwoven with NEES’ service territories. This acquisition will build on the acquisition of NEES in terms of scale and through benefits from consolidation synergies. NEES and EUA operate in the same environment, with the same regulators and similar regulatory settlements. Because of the close fit, there are opportunities to reduce costs. Excluding restructuring costs, the addition of EUA will immediately enhance National Grid’s cash flow per share and earnings per share before goodwill amortisation. This acquisition does not change the terms of the NEES transaction. It is also subject to a number of regulatory and other approvals. EUA shareholders have approved this acquisition and we expect completion by early 2000.
Gaining
distribution skills Investment opportunities in stand-alone transmission systems are rare. By combining NEES’ distribution expertise with our existing skills, we will be able to select from a far broader range of opportunities for investment in networks worldwide.
Customer services NEES’ state-of-the-art Customer Service and Operations Centre handles over 150,000 calls a month from 1.3 million customers across Massachusetts, New Hampshire and Rhode Island.
13
Telecoms networks – Energis
National Grid’s investment in Energis Results reported by Energis for year to 31 March
The value of our holding in Energis increased more than two-and-a-half times during the year and in January 1999 we realised the value of one-third of our
Turnover
Operating profit/(loss)
holding. We sold 60 million shares at £16.50 a share, achieving an exceptional
’99
£285.5m
£(15.8)m
Income Convertible securities or EPICs) which are mandatorily convertible
’98
£167.9m
£(33.9)m
gain of £712.7 million after tax, and issued $401.2 million of bonds (Equity Plus into Energis shares in 2003. On 31 March 1999, at market value, our remaining economic interest was worth £2.5 billion.
Report from the Energis Chief Executive Mike Grabiner, Energis’ Chief Executive, comments here on Energis’ progress: “Another year of strong sales growth increased our turnover to £285.5 million, tripled our earnings before interest, taxation, depreciation and amortisation (EBITDA) to £49.7 million and halved our loss before tax to £31.1 million. We have a strong balance sheet, a fast-growing customer base and a distinctive technological edge over competitors. We are well-placed to take advantage of booming demand for value-added data and Internet services. “Sales rose 70 per cent with strong growth in higher-value advanced services, particularly Internet and data. Our acquisition of Planet Online greatly strengthened our position in Internet services and enabled us to help Dixons launch Freeserve – which has transformed the UK home Internet access market. We continue to extend and enhance our UK network and announced a joint venture to build a major new telecommunications network in Northern Ireland. We continue to introduce new technologies which enable us to offer The reduction of our economic interest to under 50 per cent qualified Energis for inclusion in the FTSE 100 share index, widening investor appeal. Our continuing 48.3 per cent economic interest, and the EPICs which we issued during the year, will enable our shareholders to continue to participate in Energis’ progress.
new services, for example by providing a secure infrastructure for corporate Internet, intranet and extranet requirements integrated into our core network. “Major companies including Freeserve, Eurostar, Renault, Going Places, Ernst & Young, Northern Rock, Whitbread, DHL International and Amey Group have shown confidence in Energis during the year. “Quality is the key to customer loyalty. In April 1999, the Comparative Performance Indicators Report, supported by Oftel, rated Energis the UK’s most reliable national telecommunications network for the third year running,
Realising
underlining the resilience of our network.”
potential Our role in the creation of Energis has been quite specific and has been central to creating the business concept and sponsoring it through the early stages of operation. In 1993, we recognised the opportunities offered by the UK’s liberalised telecoms market and in just 18 months built an SDH network. We brought in new management with strong telecoms marketing expertise and floated Energis in December 1997 to ensure that its value was recognised.
Members of National Grid’s operational telecoms team, Tony Parkin (left) and Gary Walters (right)
14
Telecoms networks – Brazil
“This is a new era in competitive telecommunications in Brazil, and the consortium in which we have a 50 per cent interest will take a leading role in the new market. This development is in line with our strategy of creating shareholder value by exploiting our core skills, including those developed in creating and maintaining the Energis network in the UK.” In January 1999, we were awarded a licence to operate domestic, longdistance and international voice and data services throughout Brazil, in partnership with Sprint and France Telecom. The consortium will be the second long-distance and international telephony operator in Brazil, competing against Embratel/MCI, the existing national service provider, until January 2002. After that, the market will be further liberalised. The consortium has undertaken to serve all state capitals and those cities with a population of over 500,000 within a year. Present plans for investment include developing a fibre optic network of over 14,000 km, four times the size of the part of Energis’ network built by us. We will utilise the national
Wob Gerretsen, Business Development Director
“Teledensity” in Brazil Despite being one of the world’s largest economies, with average GDP growth over the last five years of 4 per cent, teledensity in Brazil (the number of telecom lines per head of population) is only 10.5 per cent. This compares with Argentina (where it is over 20 per cent), the UK (approximately 70 per cent) and the USA (over 80 per cent). An estimated five million people are on the waiting list for telephones and teledensity is expected to grow to 18 per cent by the end of 2001.
rail system to provide the backbone of the network, taking advantage of some existing telecoms capability and speeding up construction. We also intend to exploit the substantial growth in data and value-added services.
Developing networks
overseas
We have proven skills in developing telecommunications networks. We not only provided the fibre optic network for Energis but have since maintained and extended it, using mostly underground optical fibre cable routes. We have transferred these skills to Brazil, including the secondment of key people with experience of creating the Energis network.
We will link all states in Brazil within a year
The partnership We have a 50 per cent interest in the partnership, which also includes Sprint and France Telecom with 25 per cent each. In addition to our skills in the construction of networks, we bring specific experience of creating a highly successful start-up telecoms company and the financial and commercial management of international projects. Sprint, which is the third largest long-distance company in the USA, brings outstanding sales and marketing leadership and France Telecom brings its international expertise.
Rio de Janeiro at night
15
Financial review
Group results
Turnover
Taxation
Group turnover from continuing operations fell marginally from
The tax charge totalled £283.1 million and included £162.8 million
£1,519.3 million to £1,514.2 million.
relating to the net exceptional gain. The effective tax rate for the
Operating profit Total operating profit increased by £42.0 million to £583.3 million.
year, excluding the impact of exceptional items, was 27.0 per cent, compared with 28.7 per cent last year.
This reflects a £20.9 million reduction in our share of Energis’
Capital expenditure
operating loss, higher profit contributions from other activities
Capital expenditure increased to £309.6 million, compared with
(up by £16.8 million), joint ventures (up by £6.9 million) and
£233.0 million in 1997/98 (excluding £86.7 million of expenditure
interconnectors (up by £3.3 million), and a £5.9 million reduction
by Energis up to December 1997, when it ceased to be a Group
in transmission profit, which fell to £513.8 million. The increase in
undertaking). The higher level of capital expenditure reflects an
other activities profit relates primarily to the release to the profit
increase of £68.5 million in transmission spend. A detailed
and loss account of £15.2 million of provisions following the
breakdown of transmission capital expenditure is given on page 7.
implementation of FRS 12 (see page 18). Note 1 to the accounts on page 35 contains a segmental analysis
Shareholders’ returns
of the Group’s results. A commentary on the performance of
Earnings per share
individual businesses is set out on pages 6 to 15.
Basic earnings per share, excluding exceptional items, increased
Exceptional items The results for the year include two exceptional items: • a pre-tax profit of £891.8 million (£712.7 million after tax) on the sale of 60 million ordinary shares in Energis; and • a pre-tax charge of £52.6 million (£36.3 million after tax), being the cost of closing out £415 million of interest rate swaps. The close-out of the swaps, which were entered into in 1995, will have a beneficial impact on future years’ interest charges.
by 12.7 per cent to 22.2 pence. The weighted average number of shares in issue fell from 1,688.3 million in 1997/98 to 1,466.6 million as a result of the share consolidation carried out in February 1998, reflecting the return to shareholders of £768.6 million of excess capital by means of a special dividend of 44.7 pence net per ordinary share.
Ordinary dividends The Directors are recommending a final dividend of 7.82 pence per ordinary share. This will bring the total ordinary dividend for the year to 13.07 pence per share, an increase of 8.3 per cent
The exceptional gain of £107.1 million reported in 1997/98 related
over last year. The total dividend is covered 1.7 times (1997/98:
to the reduction of the Group’s interest in Energis as a consequence
1.6 times) by earnings per share excluding exceptional items and
of the issue by Energis to other investors of 75 million of its shares
will cost £192.0 million.
in December 1997.
Share price and market capitalisation
Interest
At 31 March 1999, NGG’s share price was 451.75 pence,
The net interest charge increased from £75.8 million to
compared with 353 pence on 31 March 1998, an increase of
£137.9 million. This increase reflects:
28.0 per cent. Between 1 April 1998 and 31 March 1999, daily
• a full-year charge relating to the financing cost of the £768.6 million special dividend paid in February 1998; and • the inclusion within the net interest charge of bank facility fees and interest rate option costs totalling £14.1 million relating to the proposed acquisition of NEES and costs of £7.6 million relating to the issue in February 1999 of Equity Plus Income Convertible securities (EPICs) exchangeable into Energis shares.
16
closing prices for the shares were within the range 359.0 pence to 552.75 pence. The market capitalisation of the Company at year end was £6.7 billion.
Cash flow
Capital structure
Net cash inflow from continuing operations fell marginally from
Shareholders’ funds
£615.2 million to £605.9 million.
Shareholders’ funds increased from £929.4 million to £1,744.0
Cash flow benefited significantly from the following two transactions carried out in February 1999, both relating to the Group’s shareholding in Energis: • the sale of 60 million shares in Energis, which produced net proceeds of £959.3 million; and • the issue of EPICs in the principal amount of $401.2 million, the proceeds of which were £242.6 million. Details of the EPICs, which are mandatorily exchangeable into
million. This increase comprised £809.5 million of retained profit, £5.9 million from the exercise of employee share options and an exchange adjustment of £(0.8) million.
Net debt Net debt fell from £1,465.3 million to £703.4 million, while gearing (net debt as a percentage of shareholders’ funds) fell from 158 per cent to 40 per cent. Interest cover (the number of times the net interest charge is covered by total operating profit) for the year was 4.2 times (1997/98: 7.1 times).
Energis shares, are contained in Note 18 to the accounts on
The improvements in shareholders’ funds, net debt and gearing
page 43. The profit arising on this transaction will not be
result primarily from the exceptional gain and the proceeds
recognised in the Group accounts until the EPICs are actually
generated by the sale of 60 million Energis shares in February 1999.
exchanged into Energis shares.
In addition to the debt of £242.6 million raised through the issue
Payments to the providers of finance, in the form of dividends
of the Energis EPICs, as described above, The National Grid
and interest, totalled £302.8 million net, compared with
Company plc, one of the Group’s subsidiaries, issued a 25 year
£997.6 million net in 1997/98 which included the special dividend
bond in the principal amount of £450 million at a coupon of
of £768.6 million.
5.875 per cent per annum, the net proceeds of which were
Cash absorbed as a result of net purchases of tangible fixed
£443.0 million.
assets increased from £286.4 million in 1997/98 to £312.5 million,
Credit facilities
while £25.2 million (compared with £45.3 million in 1997/98) was
During the year, the Group arranged a committed syndicated
spent to acquire fixed asset investments.
revolving credit facility of $2,750 million (£1,708 million) for the purposes of financing the NEES and EUA acquisitions, refinancing NEES and EUA borrowings and for general corporate purposes. The facility also includes the availability of an additional £250 million for use by The National Grid Company plc only. The terms and conditions include certain covenants, the principal financial covenants being that after completion of the NEES acquisition the Group will maintain a ratio of net debt to earnings before interest, taxation, depreciation and amortisation (EBITDA) of less than 4.75 and an EBITDA to net interest ratio greater than three times. As a consequence of this new facility, the previous committed Group facility was reduced to £100 million with a view to complete cancellation prior to completion of the NEES acquisition. The new facility has maturities of three years on $1,350 million and five years on the remaining portion. As at the year end, the new facility was unused and £50 million of the old £100 million facility was drawn.
17
Financial review continued
Treasury policy
Company and £242.6 million of debt exchangeable into Energis
The funding and treasury risk management of the Group is carried
shares. The maturity analysis of debt is shown in Note 18 to the
out by a central Treasury department operating under policies and
accounts on page 43.
guidelines approved by the Board. A standing committee of the Board is responsible for regular reviews and monitoring of treasury activity and for approval of specific transactions. The major financial risk faced by the Group is interest rate risk. Other potential risks and the policies applicable are described below.
The National Grid Group plc obtained its own credit rating during the year, namely a long-term AA/A1 from Standard & Poor’s and Moody’s respectively. The rating of The National Grid Company plc was maintained at AA+/Aa3. However, the ratings of both companies were placed on credit watch for a possible downgrade
The Treasury department is not operated as a profit centre. Debt
pending the completion of the NEES acquisition. These ratings
and treasury positions are managed in a non-speculative manner
mean that both the principal borrowing entities within the Group
such that all transactions in financial instruments or products are
will have ready access to the capital and bank markets for future
matched to an underlying business requirement. The Group uses
funding when needed.
off-balance sheet derivative financial instruments (derivatives) principally for reducing interest rate risk. Derivatives are not held for trading purposes.
Credit risk: At year end, the Group had £1,524.5 million of cash and deposits. The Group is exposed to the credit risk of the counterparties to these investments and on certain other financial
Risk management
instruments. The Group’s policy is to select only counterparties
Interest rate risk: In order to protect the Group from adverse
with high-quality credit ratings (namely long-term ratings of
interest rate movements, the interest rate on the debt portfolio is
AA-/Aa3 or short-term ratings of A1/P1 from Standard & Poor’s
managed through the use of fixed-rate debt, combined with the
or Moody’s respectively) and therefore it does not expect any
use of interest rate swaps, options and option-related instruments
counterparties to fail to meet their obligations.
with a view to maintaining a significant proportion of fixed rates over the medium term. The proportion at fixed rates is varied over time and within policy guidelines, depending on debt projections and market levels of interest rates. The resulting position as at 31 March 1999 is shown in Note 19 to the accounts on page 44.
Changes and developments: During the year, the underlying and prospective business requirements have changed, largely in expectation of the acquisition of NEES. The interest rate risk on the prospective US dollars to be borrowed to finance the acquisition has been hedged by the use of interest rate options.
During the year, the close-out of £415 million of swaps to pay
The currency exposure to US dollar assets which will arise will be
fixed rates which were entered into in 1995 at higher than current
hedged through US dollar borrowings drawn to complete the
interest rates gave rise to the realisation of an exceptional charge
acquisition. The liquidity risk inherent in meeting the requirement
of £52.6 million before tax.
to pay for the acquisition has been covered by the new committed
Currency risk: The Group’s exposure to currency risk is not significant at present. In general, the policy is to hedge the translation exposure on overseas currency assets through
facility described above. In addition, the longer-term liquidity position has been covered to an extent by the £450 million 25 year bond issue by The National Grid Company plc.
borrowings, currency swaps or forward foreign exchange
Following the two Energis transactions (see “Cash flow” above),
deals, to the extent of the original cost of the investment
together with the 25 year bond issue, the Group is holding cash
where practical.
balances which are higher than normal. This cash is available to
Liquidity risk: The Group seeks to ensure that all of its forecast cash needs for a period of at least 12 months ahead are fully covered by term loans drawn or committed bank facilities. Beyond this time, a prudent level of committed availability is maintained.
contribute to the Group’s liquidity needs, including the completion of the NEES acquisition. In the meantime, the counterparties with whom it is invested continue to be subject to the normal conservative credit policy.
Longer-term refinancing risk is controlled by ensuring that the
Accounting policies
amount of loans maturing in any year is not excessive, compared
The adoption during the year of a new accounting standard (FRS
to the Group’s borrowing capacity. Furthermore, the Group debt
12: Provisions, Contingent Liabilities and Contingent Assets) has
includes £458.9 million of debt exchangeable into shares of the
resulted in a change in the method of accounting for provisions.
18
This change in accounting policy, which has the effect of increasing the operating profit of Group undertakings for the year by £1.6 million compared with a decrease of £2.2 million in 1997/98, has been reflected in the accounts as a prior year adjustment in accordance with FRS 3. Details of the prior year adjustment are included in Note 22 to the accounts on page 47. The adoption of FRS 12 also resulted in the release to the profit and loss account of £15.2 million of provisions as a consequence of a revision to the accounting estimates of provisions.
Going concern Having made enquiries, the Directors consider that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and that it is appropriate to continue to adopt the going concern basis in preparing the accounts.
Year 2000 National Grid has in place a group-wide project to review its business-critical information systems and to plan and implement changes as necessary to accommodate the uncertainties associated with the Year 2000 date change. The project commenced in 1996, when a Year 2000 project co-ordination team was established with responsibility for developing an overall plan to achieve Year 2000 readiness, including the monitoring of Year 2000-related activities within operating units. Detailed progress reports are made to the Executive Committee on a regular basis and the Board is kept fully informed of progress. By June 1999, National Grid expects that 98 per cent of all computer-dependent systems, applications and equipment will be Year 2000-ready. All systems which are critical to the secure operation and control of the transmission system were declared Year 2000-ready in April 1999. National Grid estimates that the total cost of modifying or replacing systems to achieve Year 2000 readiness will be approximately £16 million, of which approximately £12 million has been spent to date. Monitoring of Year 2000 preparations in the electricity industry as a whole is being carried out by independent assessors on behalf of the industry’s regulator, OFFER. OFFER has reported that the electricity industry’s preparations for the Year 2000 date change are well advanced and that, in its view, the date change will not pose a risk to electricity supplies.
19
The Board of Directors
James Ross
David Jefferies CBE, FEng Chairman and a member of the Nominations Committee Appointed as a Director and Chairman of NGG in 1995, David Jefferies was Chairman of The National Grid Company plc from its inception until 30 March 1996. He was also Chairman of Viridian plc and Chairman of Electricity Pensions Trustee Limited. David Jefferies was previously Chairman of the London Electricity Board and Deputy Chairman of the Electricity Council. He is a Fellow of the Royal Academy of Engineering and is a past President of the Institution of Electrical Engineers. David Jefferies will retire as Chairman of NGG at the Company’s Annual General Meeting in July this year. Aged 65.
Non-executive Director, Chairman-designate and a member of the Nominations Committee Appointed as a Director of NGG on 1 March 1999, James Ross is the Chairman of The Littlewoods Organisation plc, having been Chief Executive of Cable and Wireless plc from 1992 to 1995. Prior to this, he was a Managing Director of the British Petroleum Company plc and Chairman and Chief Executive Officer of BP America. He is a Nonexecutive Director of McGraw Hill and of Datacard, both of which are based in the United States, and of Schneider based in France. James Ross is also a trustee of the Cleveland Orchestra and a Board member of the Regional Development Agency for the North West. Aged 60.
David Jones Group Chief Executive and a member of the Nominations Committee Appointed as a Director of NGG in 1995, David Jones has been a Director of The National Grid Company plc since 1994, becoming its Chief Executive in April 1994 and its Chairman in March 1996. He has been a Director of Energis since 1994 and is also a Non-executive Director of Bull Worldwide Information Systems. He was formerly Group Chief Executive of South Wales Electricity, having previously held senior engineering, commercial and management posts with the South Western and Midlands Electricity Boards. Aged 57.
Wob Gerretsen Stephen Box Finance Director Appointed as a Director of NGG and of The National Grid Company plc in August 1997. Formerly with Coopers & Lybrand, where he was a partner specialising in corporate finance. He is a Director of Energis and Chairman of the Group Trustees of the Electricity Supply Pension Scheme – National Grid Group. Aged 48.
Business Development Director Appointed as a Director of NGG and of The National Grid Company plc in 1995. Formerly with the Costain Group, where he was a Director and Chairman of Costain Engineering and Construction Limited. Prior to this, he held a number of posts within the Costain Group. Aged 57.
Malcolm Williamson
Richard Reynolds Bob Faircloth Roger Urwin Managing Director, Transmission Appointed as a Director of NGG and of The National Grid Company plc in 1995, Roger Urwin was previously Chief Executive of London Electricity plc. Prior to this, he held a number of appointments within the Central Electricity Generating Board before joining Midlands Electricity Board as Director of Engineering. He is a Nonexecutive Director of Foreign and Colonial Special Utilities Investment Trust plc and Total Oil Marine plc and is a Fellow of the Royal Academy of Engineering. Aged 53.
20
Non-executive Director, Chairman of the Remuneration Committee and a member of the Audit and Nominations Committees Appointed as a Director of NGG in 1995, Bob Faircloth was Chief Operating Officer and an Executive Director of BTR until 1995 and a Nonexecutive Director until May 1998. Before joining BTR in 1980, Bob Faircloth held a number of technical and management posts, mainly in the petrochemicals and paper industries in Canada and Europe. He is also engaged in international management consulting with involvement with international banks, industrial companies and government agencies and is a Director of the Economic Development Authority, Savannah, Georgia. Aged 62.
John Grant Non-executive Director, Chairman of the Audit Committee and a member of the Remuneration Committee Appointed as a Director of NGG in 1995, John Grant is Chief Executive of Ascot Plc. He was Finance Director of Lucas Industries plc (subsequently LucasVarity plc) from 1992 to 1996, and previously held a number of senior executive positions during 25 years with the Ford Motor Company, including Vice President, Ford of Europe, Director of Corporate Strategy, Ford US and Executive Deputy Chairman, Jaguar Cars. He is also a Non-executive Director of Torotrak plc. Aged 53.
Non-executive Director and a member of the Audit Committee Appointed as a Director of NGG in 1998, Richard Reynolds was a Director of GEC during the period from 1986 to 1995. He was Managing Director of GEC Telecommunications and became Managing Director of GPT on the merger of the GEC and Plessey telecommunications companies. He was also Chairman of GPT and is currently Chairman of the Eastern European Trade Council. He is also a Non-executive Director of Photobition and of Phonelink plc. Aged 60.
Non-executive Director and a member of the Remuneration Committee Appointed as a Director of NGG in 1995, Malcolm Williamson is President and Chief Executive Officer of Visa International. He was previously Group Chief Executive of Standard Chartered PLC, Managing Director of Girobank plc and Chief Executive of the Post Office’s banking operations. He is a member of the Council of the Industrial Society, a Director of British Invisibles and UK Chairman of the British Thai Business Group. Malcolm Williamson will retire as a Director of NGG at the Annual General Meeting in July. Aged 60.
Corporate governance
Introduction
Directors
Corporate governance is the system by which companies are
The Board NGG is led and controlled by its Board of Directors,
directed and controlled, focusing particularly on the
which meets at least eight times a year.
responsibilities of Directors for setting strategic aims, establishing financial and other policies and overseeing their implementation, and for accounting to shareholders for the performance and activities of the company. In June 1998, the London Stock Exchange appended to its Listing Rules new Principles of Good Governance and a Combined Code of Practice. These draw together recognised best practice as embodied in the final report of the Hampel Committee on Corporate Governance published in January 1998, the Code of Best Practice published by the Cadbury Committee on the Financial Aspects of Corporate Governance (December 1992) and the recommendations of the Greenbury Study Group on Directors’ Remuneration (July 1995). The new rules require listed companies to describe in their Annual Reports to shareholders how they apply the Principles of Good Governance and to report on whether they comply with the provisions of the Combined Code, giving the reasons for any noncompliance. At the same time, the London Stock Exchange has
To ensure that the direction and control of the Company are firmly in its own hands and that it is fully informed on key issues, the Board has reserved certain matters for its collective decision and/or monitoring. Board approval is required for significant new business proposals, including the establishment, acquisition and disposal of subsidiaries, and for major capital projects and transactions involving the acquisition or disposal of assets, including interests in the voting share capital of any company. The Board must approve any transaction likely to require listing particulars or a shareholder circular to be filed with the London Stock Exchange. Also reserved to the Board are matters relating to health and safety and policy issues affecting the external standing of NGG. All Directors have access to the advice and services of the Company Secretary and General Counsel and may take independent professional advice, at the Company’s expense, in the furtherance of their duties.
recognised that the Combined Code contains certain new
All Directors bring an independent judgement to bear on issues of
provisions of a continuing nature and that companies will not be
strategy, performance, resources, including key appointments,
able to confirm compliance with these provisions throughout the
and standards of conduct.
whole of the first accounting period to which the Combined Code applies.
Corporate governance in National Grid We have complied fully throughout the year with the Cadbury Code of Best Practice, as embodied in the NGG Code of Corporate Governance. Following the introduction by the London Stock Exchange of the Principles of Good Governance and the Combined Code in June 1998, we have been able to comply with the provisions of the Combined Code, subject to minor changes
All Directors receive full and appropriate briefing on first appointment, with subsequent updating as necessary. The Chairman and the Group Chief Executive There is a clear division of responsibilities between the Chairman, David Jefferies, and the Group Chief Executive, David Jones. This division of responsibilities will be maintained following the retirement in July 1999 of David Jefferies, who will be succeeded as Chairman by James Ross.
to the composition of the Nominations Committee and with the
NGG’s independent Non-executive Directors are selected and
specific exceptions identified in “Compliance with Combined
appointed for their individual business experience and their ability
Code” below. A revised NGG Code of Corporate Governance
to bring a broad perspective to their contributions to the strategic
reflecting the new rules was formally adopted in March 1999.
direction of the Group in the interests of the Company and its
The following statement reports on NGG’s application of the Principles and on our compliance with the provisions of the Combined Code. Given that the Principles and the Combined Code were not issued in final form until June 1998, the statement is necessarily transitional in nature.
shareholders; as such, they represent a strong and independent element on the Board. The requirement to identify a “senior” Non-executive Director as a channel of communication for investors could lead to confusion with the role performed by the Non-executive Chairman. For this reason, NGG does not intend to nominate a “senior” Non-executive Director.
21
Corporate governance continued
Board balance The NGG Board currently comprises four
Relations with shareholders
Executive Directors (including the Group Chief Executive,
We value the constructive relations we have developed with our
David Jones) and six Non-executive Directors (including the
investors and work hard to keep all shareholders, irrespective of
Chairman, David Jefferies). With the exception of David Jefferies,
size, informed about the Company’s policies and progress.
all the Non-executive Directors are wholly independent.
Dialogue with institutional shareholders Regular dialogue is
Supply of information Both regular and ad hoc reports and
maintained with institutional investors, fund managers and analysts,
presentations are made to the Board to ensure that it is supplied
with the aim of fostering mutual understanding of objectives.
in a timely manner with information of the quality and detail that it requires.
The Annual General Meeting We welcome the active involvement of private investors at the Annual General Meeting,
Appointments to the Board The NGG Board has delegated to
the Notice of which is posted at least 20 working days in advance.
the Nominations Committee responsibility for considering the
At each Meeting, the Chairman makes a presentation on the year’s
reappointment of existing Directors, for identifying and selecting
financial results and business activities and encourages open
potential new Directors and for proposing to the Board the
and lively discussion between shareholders and Directors.
appointment of new Directors. The Nominations Committee has
Shareholders are invited to vote separately on each resolution,
written terms of reference and meets as required on the expiry of
including the Annual Report and Accounts, and the number of
the term of appointment of any Director and on the declaration of
proxy votes lodged for and against each resolution is made
any vacancy for a Director. The members of the Nominations
available at the Meeting.
Committee are identified on page 20. Non-executive Directors are appointed by the Board and have letters of engagement for periods of up to three years.
A summary of the business carried out at the Annual General Meeting is made available to shareholders on request. We are also very proud of our innovative and highly successful
Reappointment of Directors Every Director, without exception,
Networking programme, which is designed to give individual
is required by NGG’s Articles of Association to retire by rotation at
shareholders the opportunity to meet Directors and staff and to
intervals of not less than three years and to seek reappointment
experience our operations at first hand.
by the shareholders at the Annual General Meeting. In addition, any new Director who has been appointed by the Board is required by the Articles to retire at the next Annual General Meeting and to seek reappointment by the shareholders.
Accountability and audit Financial reporting We are mindful of our responsibility for presenting a balanced and understandable assessment of National Grid’s financial position and prospects in all reports, both
Directors’ remuneration
to our own investors and to regulatory bodies. An explanation of
The Remuneration Committee of independent Non-executive Directors
the respective responsibilities of the Directors and the auditors for
has responsibility for determining, in accordance with current best
the preparation of the accounts is set out on page 29. The
practice, all aspects of the remuneration and terms and conditions
Directors set out on page 19 the basis of their view that the
of service of the Executive Directors. The Remuneration Committee
business is a going concern.
also maintains an overview of policy in relation to the remuneration and conditions of service of other senior managers and determines policy and practice in relation to equity participation schemes.
Internal control In common with all other listed companies, we are awaiting the finalisation by the Institute of Chartered Accountants of England and Wales of guidance on how we
The members of the Remuneration Committee, which has written
should meet the new requirement of the Combined Code to
terms of reference, are identified on page 20. The NGG Chairman
review the Group’s system of internal control, including financial,
and the Group Chief Executive may attend meetings of the
operational and compliance control and risk management.
Remuneration Committee at the invitation of the Committee, but
Pending finalisation of this guidance, the London Stock Exchange
are not permitted to be present during discussions on their
has confirmed that companies are able to satisfy the provision
respective remuneration. A statement on the remuneration policy
of the Combined Code in respect of internal control by reporting
adopted by the NGG Board and details of the remuneration of
on their internal financial control in accordance with the
each Director are given on pages 24 to 26.
recommendations of the Cadbury Code.
22
Accordingly, the NGG Board has reviewed the effectiveness of the
• the comparison between audit and non-audit expenditure is
Group’s system of internal financial control, recognising that any
distorted by the statutory audit fee paid by NGG, which is low
system of internal financial control can provide only reasonable,
relative to the fees paid by many companies of similar size and
and not absolute, assurance against material misstatement or loss.
turnover. This reflects the relative simplicity of NGG’s current
The Board approves the Group’s annual budget and business plan, the components of which form the financial objectives against which individual operating units are monitored. The Board exercises
structure, in which one subsidiary company, The National Grid Company plc, is responsible for the majority of turnover and profit; • substantial non-audit expenditure is associated with work
control over NGG’s business through the Executive Committee
incremental to the statutory audit or with accounting, taxation
chaired by David Jones. The Executive Committee meets monthly
and regulatory issues which are so closely allied to the
and has full delegated authority to carry out necessary actions in
mainstream audit that, in the Audit Committee’s view, it would
key areas between meetings of the full NGG Board. There is a
be contrary to NGG’s strategic and financial interests to seek
clear direct-line reporting structure to individual Directors.
advice from sources other than the external auditors;
Material risks faced by the Group have been identified and are
• other consultancy work is awarded on the basis of the skills and
kept under review by Directors. As part of the business planning
value for money offered by advisers, including the external
process, operating units are required to review relevant risks and
auditors, and all costs are subject to close scrutiny; and
to identify and implement measures to control them.
• the objectivity and independence of the external auditors is
All parts of the business are subject to review by the Group’s internal
ensured by their compliance with their own professional
audit function, which provides independent appraisal of systems
standards and by their internal procedures, including “Chinese
of control and the quality and performance of those controls.
Wall” arrangements and the regular rotation of key audit staff.
Audit Committee and auditors The NGG Board has delegated to the Audit Committee of independent Non-executive Directors authorities and duties in respect of the Group’s annual accounts and other financial reports, its system of internal control and risk management system, the scope and extent of internal audit and the activities of the external auditors. The Audit Committee, the members of which are identified on page 20, has written terms of reference and meets at least four times a year, with at least one private meeting with the external auditors. The external auditors may request additional private meetings with the Audit Committee if they consider this necessary. The Audit Committee has specific responsibility for making
Compliance with Combined Code In common with all other listed companies, NGG cannot currently comply with Provision D.2.1 of the Combined Code, which requires the Directors to carry out a review of the effectiveness of the Group’s system of internal control. Pending the finalisation of specific external guidance for Directors on this provision, NGG has continued to comply with the provisions of the Cadbury Code in respect of internal financial control. Additionally, for the reasons set out above, NGG does not intend to nominate a “senior” Non-executive Director as required by Provision A.2.1 of the Combined Code. With these specific exceptions, NGG complies with the provisions of the Combined Code.
recommendations to the Board on the appointment and remuneration of external auditors and for keeping under review the nature and extent of non-audit services provided by the external auditors. In keeping with this responsibility, the Audit Committee receives regular reports on all expenditure, with the external auditors and with the other major accountancy firms, in order to satisfy itself that value for money is obtained and that the objectivity of the statutory audit is not impaired. The Audit Committee has reviewed in detail the auditors’ remuneration set out in Note 2 to the accounts on page 36 and is satisfied that it is proper and reasonable, having regard to the following considerations:
23
Directors’ remuneration
Composition and role of the Remuneration Committee
• pensions: Executive Directors are members of the National Grid
The Remuneration Committee consists of the Non-executive
section of the Electricity Supply Pension Scheme (ESPS), to
Directors identified on page 20 and is responsible for determining
which they contribute 6 per cent of base salary per annum.
all aspects of Executive Directors’ compensation, drawing on
Its main features in respect of Executive Directors are: normal
advice from external independent remuneration consultants and
retirement at age 60; pension at normal retirement age of
internal advisers.
two-thirds final salary subject to completion of 20 years’ service
Remuneration policy The Remuneration Committee designs remuneration packages with the aim of attracting, motivating and retaining high-calibre Directors who will deliver success for shareholders and high standards of service for customers, while having due regard to the business environment in which the Group operates. Remuneration packages consist of the following elements: • basic salary: base salaries are reviewed annually taking account of market position (in the utility, construction and engineering sectors) and business and personal performance.
(although Directors may retire early from age 55 with a reduction in pension); death-in-service payment of four times pensionable salary; spouse’s pension of two-thirds Director’s pension on death; discretionary payment of dependant’s pension if there is no surviving spouse; pension increased by inflation by up to 5 per cent per annum; and for Directors affected by the “earnings cap”, the Company may provide a pension on salary above the cap on a partially funded basis. Pension benefits earned by individual Executive Directors in the 1998/99 financial year are as follows:
Age at 31 March 1999
Director’s contributions during year £000
Increase to accrued pension during year (net of inflation) £000
Accrued pension as at 31 March 19991 £000
David Jones 2
56
18
25
183
Stephen Box
48
12
7
11
Wob Gerretsen
57
11
11
107
Roger Urwin
53
11
2
112
Account is also taken of salary increases and employment conditions across the Group. The Committee will continue to review the competitiveness of salaries, taking account of the increasing size and international focus of the business. • incentives: the Remuneration Committee recognises the importance of linking rewards to business and personal performance and considers that the following incentive arrangements provide a balance between short and long-term incentives: annual bonus: a non-pensionable annual bonus up to a maximum of 40 per cent of salary can be paid for the achievement of demanding financial, personal and quality of service targets
1 Accrued pension represents the pension which would be paid annually at age 60 if the Director resigned on 31 March 1999. 2 The total accrued pension for David Jones, the highest-paid Director at 31 March 1998, was £153,233.
share match scheme: Directors are required to invest 25 per cent of any annual bonus in NGG shares. At the end of three years (provided the Director is still employed) additional shares equal to the pre-tax value of the invested shares will be awarded executive share options: non-discounted executive share options may be granted on a phased basis up to a combined maximum of four times annual base salary. Options granted in 1997 and 1998 can be exercised in full after a minimum of three years, but only if earnings per share (EPS) growth over three
• non-cash benefits: the Company provides competitive benefits such as a fully expensed car and private medical insurance to the Executive Directors. • service contracts: service contracts for Executive Directors are set at one year’s notice. The application of longer contract periods at appointment, reducing after an initial period, is considered appropriate to recruit and retain key executives. • Non-executive Directors’ remuneration: Non-executive
years exceeds RPI by 3 per cent per annum. If EPS growth
Directors receive an annual fee of £25,000, with an additional
exceeds RPI by 2 per cent over a three-year period, 50 per cent
£5,000 payable for committee chairmanship. Richard Reynolds
of each option may be exercised
receives a fee of £25,000 in respect of additional duties as a
Sharesave: Directors are eligible to participate in all-employee Sharesave schemes (subject to eligibility based on service).
member of the Supervisory Board of NGG’s joint venture in Brazil. The Non-executive Chairman and Deputy Chairman receive fees of £150,000 and £50,000 respectively.
24
Directors’ remuneration The remuneration of individual Directors for the year ended 31 March 1999 is set out below: Total emoluments (excluding pensions) 1998/99 1997/98 £000 £000
Base salary and fees £000
Annual bonus £000
Benefits £000
150
–
9
159
149
300 200 183 205 –
108 70 63 71 –
8 661 11 14 –
416 336 257 290 –
355 1722 227 264 45
27 30 31 – 4 30
– – – – – –
– – – – – –
27 30 31 – 4 30
22 25 2 8 – 25
1,160
312
108
1,580
1,294
Chairman David Jefferies (Non-executive Director)
Executive Directors David Jones Stephen Box Wob Gerretsen Roger Urwin John Uttley 3 Non-executive Directors Bob Faircloth John Grant Richard Reynolds4 Trevor Robinson 5 James Ross 6 Malcolm Williamson
1 Benefits include relocation expenses of £51,526. 2 Appointed 4 August 1997. 3 Resigned 30 June 1997. In addition to the above emoluments, John Uttley received compensation in 1997/98 for the termination of his service agreement equivalent to one year’s pay and benefits totalling £228,000 which was paid as a further contribution to the pension scheme. 4 Appointed 20 February 1998. 5 Resigned 31 July 1997. 6 Appointed 1 March 1999.
Directors’ interests in share options Directors’ interests in share options over the ordinary shares of NGG are as follows:
David Jefferies Executive
Total David Jones Executive Share Match1 Sharesave Total
Options held at 1 April 1998
Options exercised during the year
Options granted during the year
Options held at 31 March 1999
355,457 36,771 26,352 418,580
– – – Nil
– – – Nil
230,837 – 22,304 – 6,678 259,819
– – – – – Nil
– 146,906 – 5,862 – 152,768
Exercise price (p)
Date from which exercisable
Expiry date
355,457 36,771 26,352 418,580
64.6 90.2 118.9
Dec 1994 Dec 1995 Dec 1996
Dec 2001 Dec 2002 Dec 2003
230,837 146,906 22,304 5,862 6,678 412,587
280.5 375.8 100.0 in total 100.0 in total 146.0
Sep Jun Sep Jun Aug
Sep Jun Sep Jun Feb
2000 2001 2000 2001 1999
2007 2008 2004 2005 2000
25
Directors’ remuneration continued
Directors’ interests in share options continued
Stephen Box Executive Share Match1 Sharesave Total Wob Gerretsen Executive Share Match1 Sharesave Total Roger Urwin Executive Share Match1 Sharesave Total
Options held at 1 April 1998
Options exercised during the year
Options granted during the year
Options held at 31 March 1999
160,427 – – – 160,427
– – – – Nil
– 93,147 2,955 3,125 99,227
160,427 93,147 2,955 3,125 259,654
280.5 375.8 100.0 in total 312.0
Sep Jun Jun Sep
2000 2001 2001 2001
Sep Jun Jun Feb
2007 2008 2005 2002
151,515 – 10,548 – 10,648 172,711
– – – – – Nil
– 81,820 – 3,430 – 85,250
151,515 81,820 10,548 3,430 10,648 257,961
280.5 375.8 100.0 in total 100.0 in total 162.0
Sep Jun Sep Jun Feb
2000 2001 2000 2001 2001
Sep Jun Sep Jun Aug
2007 2008 2004 2005 2001
169,340 – 16,059 – 10,648 196,047
– – – – – Nil
– 91,656 – 4,047 – 95,703
169,340 91,656 16,059 4,047 10,648 291,750
280.5 375.8 100.0 in total 100.0 in total 162.0
Sep Jun Sep Jun Feb
2000 2001 2000 2001 2001
Sep Jun Sep Jun Aug
2007 2008 2004 2005 2001
Date from which exercisable
Exercise price (p)
Expiry date
1 Share Match options granted during the year relate to the annual bonus paid for the financial year ended 31 March 1998. 2 The closing mid-market price of an ordinary share in NGG on 31 March 1999, the last day of trading in the 1998/99 financial year, was 451.75p. The range during the period 1 April 1998 to 31 March 1999 was 552.75p (high) and 359.0p (low).
Directors’ beneficial interests The Directors’ beneficial interests (which include those of their families) in the ordinary shares of NGG are shown below: Ordinary shares at 31 March 1999
Ordinary shares at 1 April 1998
Options over ordinary shares at 31 March 1999
Options over ordinary shares at 1 April 1998
359,389
359,389
418,580
418,580
David Jones
96,221
92,704
412,587
259,819
Stephen Box
1,773
–
259,654
160,427
Wob Gerretsen
8,387
6,329
257,961
172,711
113,187
110,759
291,750
196,047
David Jefferies
Roger Urwin With the exception of David Jefferies, the Non-executive Directors
Each of the Executive Directors of NGG (David Jones, Stephen
have no beneficial interests in the ordinary shares of NGG. None
Box, Wob Gerretsen and Roger Urwin) is, for Companies Act
of the Directors held any non-beneficial interests in the ordinary
purposes, deemed to be a potential beneficiary under the NGG
shares of NGG.
Qualifying Employee Share Ownership Trust (“QUEST”) and
There has been no change in the beneficial interests of the Directors in the ordinary shares of NGG between 1 April 1999 and 24 May 1999.
26
thereby to have an interest in the 6,947,396 NGG ordinary shares held by the QUEST.
Directors’ report
The NGG Directors present their Report and Accounts for the
Purchase of own shares
financial year ended 31 March 1999:
The Directors are authorised to make market purchases of the
Principal activities The principal activities of the Group are the operation of the electricity transmission system in England and Wales, the procurement of ancillary services, the operation of the interconnectors with Scotland
Company’s own shares under an authority granted by the Annual General Meeting held on 24 July 1998. No such purchases were made during the year. The Directors will seek the renewal of this authority at the 1999 Annual General Meeting.
and France and the administration of settlement and funds transfer
Directors
arrangements for the Electricity Pool. Business development
The names of the Directors of NGG at 31 March 1999, with brief
activities include investments in Argentina, Zambia, Brazil and the
biographical details, are given on page 20 of this Report and
USA, the intended acquisition of New England Electric System
Accounts.
(NEES) and the development of potential opportunities elsewhere.
At no time during the year has any Director had any material
Until February 1999, NGG held a 49.9 per cent voting interest and
interest in a contract within the Group, being a contract of any
a 74.3 per cent economic interest in the telecommunications
significance in relation to the Group’s business. Details of the
operator Energis plc. Its economic interest in Energis has been
Directors’ remuneration, terms and conditions of service and
reduced to 48.3 per cent as the result of the sale of 60 million
interests in NGG shares are given in “Directors’ remuneration”
Energis shares and completion of the offering for subscription of
on pages 24 to 26 of this Report and Accounts.
14.7 million 6 per cent Equity Plus Income Convertible securities (EPICs) due 2003, which are exchangeable into Energis shares.
Employment policies National Grid has well-established arrangements, through team
A review of National Grid’s activities during 1998/99 is given on
briefing, electronic mail and an in-house newspaper, “Network”,
pages 6 to 15 of this Report and Accounts.
for communicating effectively with staff on matters of concern to
Financial results The financial results of the Group are discussed on pages 16 to 19 of this Report and Accounts.
them as employees. Regular consultation with staff and their trades union representatives takes place through the Company Council and local workplace councils. During the year special effort has been made, through communication and training, to
Dividends
foster awareness amongst staff of the business and regulatory
An interim dividend of 5.25 pence net per ordinary share was paid
factors influencing the Company’s performance and future strategy.
on 15 February 1999 to shareholders who were on the share register on 4 December 1998. The Directors are recommending a final dividend for the 1998/99 financial year of 7.82 pence net per ordinary share. Subject to approval by shareholders at the Annual General Meeting, the final dividend will be paid on 16 August 1999 to shareholders on the share register on 7 June 1999 and will bring the total ordinary dividend for the year to 13.07 pence net per share.
Share capital Changes in NGG’s ordinary share capital during the year are set out in Note 21 to the accounts.
National Grid is positive in its support of equal opportunities in recruitment, training and career development. The Company is involved with Opportunity 2000 and Race for Industry, organisations which actively promote equal opportunities. Applications for employment from disabled people are welcomed and given full and fair consideration. If any employee becomes disabled, every effort is made to continue their employment, including retraining. National Grid is giving full support to the Government’s New Deal initiative, both in the area of recruitment and through providing mentoring assistance. As sponsors of the Government-backed
Substantial shareholdings
charity “Campaign for Learning”, the Company is encouraging
As at 24 May 1999 NGG had been notified of the following
employees to develop their learning skills.
interests in 3 per cent or more of its issued share capital:
National Grid operates an employee Sharesave scheme which
HSBC Investment Bank plc* – 11.6 per cent
offers staff who take out special savings contracts the opportunity
Prudential Corporation Group of Companies – 4.9 per cent
to purchase NGG shares at a discount. At 31 March 1999, over
*NGG has been advised that, as a result of a structured transaction with HSBC James Capel, the Olayan Group has an economic exposure to the performance of NGG’s shares.
No further notifications have been received.
85 per cent of employees were participating in the Sharesave scheme.
27
Directors’ report continued
Research and development Expenditure in 1998/99 on research and development was £8.4 million, compared with £7.8 million in 1997/98.
Payment to suppliers National Grid is a signatory to the CBI Code of Prompt Payment and has implemented procedures to ensure the payment of bills in accordance with contract terms. Copies of the CBI Code of Prompt Payment may be obtained from the CBI, Centre Point, 183 New Oxford Street, London WC1A 1DU. The average creditor payment period at 31 March 1999 for The National Grid Company plc, the principal operating company within the Group, was 27 days (1998: 34 days). This would have been longer without the exceptional effect of the Easter Bank Holidays on the timing of payments.
Charitable and other donations During the year, charitable donations of £222,136 were made. No donations were made for political purposes.
Close company provisions NGG is not a close company within the meaning of the Income and Corporation Taxes Act 1988.
Auditors The auditors of NGG, PricewaterhouseCoopers, have expressed their willingness to remain in office. A resolution for their reappointment will be proposed at the Annual General Meeting.
Annual General Meeting NGG’s Annual General Meeting will be held on Thursday 22 July 1999. Details are set out in the Notice of Annual General Meeting accompanying this document. On behalf of the Board
Fiona B Smith Company Secretary and General Counsel 24 May 1999 Registered Office: National Grid House, Kirby Corner Road, Coventry CV4 8JY Registered in England and Wales: Number 2367004
28
Directors’ responsibilities in respect of the preparation of the accounts
The Directors are required by the Companies Act 1985 to prepare
They also have general responsibility for taking reasonable steps
accounts for each financial year which give a true and fair view of
to safeguard the assets of the Group and for taking reasonable
the state of affairs of the Company and of the Group as at the end
steps to prevent and detect fraud and other irregularities.
of the financial year and of the profit or loss of the Group for the financial year.
The Directors consider that, in preparing the accounts, suitable accounting policies, consistently applied and supported by
The Directors are responsible for ensuring that the Company keeps
reasonable and prudent judgements and estimates, have been
accounting records which disclose with reasonable accuracy the
used and that applicable accounting and financial reporting
financial position of the Company and which enable them to
standards have been followed.
ensure that the accounts comply with the Companies Act 1985.
Report of the auditors to the members of The National Grid Group plc
We have audited the accounts on pages 30 to 50.
Respective responsibilities of Directors and auditors The Company’s Directors are responsible for preparing the Annual Report including, as described above, the accounts. Our responsibilities, as independent auditors, are established by statute, the Auditing Practices Board, the Listing Rules of the London Stock Exchange and our profession’s ethical guidance. We report to you our opinion as to whether the accounts give a true and fair view and are properly prepared in accordance with the Companies Act. We also report to you if, in our opinion, the Directors’ report is not consistent with the accounts, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding Directors’ remuneration or transactions is not disclosed. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts.
Basis of audit opinion We have conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts.
Opinion In our opinion the accounts give a true and fair view of the state of affairs of the Company and of the Group at 31 March 1999 and of
We review whether the statement on pages 21 to 23 reflects the
the profit and cash flows of the Group for the year then ended and
Company’s compliance with those provisions of the Combined
have been properly prepared in accordance with the Companies
Code specified for our review by the London Stock Exchange and
Act 1985.
we report if it does not. We are not required to form an opinion on the effectiveness of the Company’s corporate governance procedures or its internal controls.
PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 24 May 1999
29
The accounts
Accounting policies
a
Basis of accounting The accounts are prepared under the historical cost convention as modified by the valuation of the Company’s (The National Grid Group plc) investment in National Grid Holdings Limited (see note 13), and in accordance with applicable accounting and financial reporting standards. Following adoption during the year of Financial Reporting Standard 12 “Provisions, Contingent Liabilities and Contingent Assets” (FRS12), comparative figures have been restated where applicable to comply with this standard. The impact on reported results and comparative figures is explained in note 22.
b
Basis of consolidation The Group accounts include the accounts of the Company and its subsidiary undertakings (“Group undertakings”) together with the Group’s share of the results and net assets of its associate and joint ventures (“associated undertakings”). An associated undertaking is an entity in which the Group has a long term equity interest and over which it exercises a significant influence. The accounts of Group and associated undertakings are generally made up to 31 March. However, where this has not been practical, the results of one Group undertaking (National Grid Insurance Limited) and two joint ventures have been based on their accounts to 31 December. The results of newly acquired Group and associated undertakings are included in the Group accounts from the date the Group acquires control or an equity interest which enables it to exercise a significant influence in respect of associated undertakings.
c
Goodwill Goodwill, representing the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired, is capitalised and amortised through the profit and loss account over its estimated useful economic life.
d
Foreign currencies The results of the Group’s overseas operations are translated into sterling at average rates of exchange. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date or, if hedged forward, at the rates of exchange under the related currency contract. Exchange differences arising on the translation of the opening net assets of overseas operations, the re-translation of the retained earnings of overseas operations from average to closing rates of exchange and the translation of foreign currency borrowings taken to hedge overseas assets are taken directly to reserves. All other exchange differences are taken to the profit and loss account.
e
Tangible fixed assets and depreciation Tangible fixed assets are included in the balance sheet at their cost less accumulated depreciation and after the deduction of related capital contributions. No depreciation is provided on freehold land and assets in the course of construction. Other tangible fixed assets are depreciated, principally on a straight line basis, at rates estimated to write off their book values over their estimated useful economic lives. In assessing estimated useful economic lives, which are reviewed on a regular basis, consideration is given to any contractual arrangements and operational requirements relating to particular assets. Unless otherwise determined by operational requirements, the depreciation periods for the principal categories of assets are, in general, as follows: Years
Plant and machinery Transmission plant – Towers – Substation plant, overhead lines and cables – Protection, control and communication equipment Cross-Channel link Freehold and leasehold properties Motor vehicles and office equipment
30
40 or 60 40 or 50 15 or 25 25 up to 40 3 or 5
f
Deferred taxation Deferred taxation, on accelerated capital allowances and other timing differences, is calculated on the liability method, and is provided to the extent that a tax liability is expected to become payable in the foreseeable future.
g
Stocks Stocks are stated at the lower of cost and net realisable value.
h
Turnover Turnover excludes inter-business and inter-company transactions, and is stated net of value added tax.
i
Transmission use of system income The Group’s main source of revenue, which is derived from the use of the transmission system, is subject to price regulation by reference to a formula contained in its transmission licence. This formula includes a correction factor whereby adjustments relating to over- or under-recovery of revenue in a particular year may be made in following years. With regard to any over-recovery of revenue, provision is made in the accounts in the period in which the over-recovery arises. Any underrecovery of revenue is not recognised in the accounts until the additional revenue relating to the under-recovery is received or receivable by the Group.
j
Pensions The cost of providing pensions is charged to the profit and loss account on a systematic basis, with variations from the regular pension cost being allocated over the estimated average remaining service lives of current employees.
k
Research and development Research and development expenditure is charged to the profit and loss account in the period in which it is incurred.
l
Uninsured liabilities A provision is made in the accounts in respect of estimated liabilities arising from uninsured events, which have given rise to a legal or constructive obligation. This provision is based on an evaluation of these liabilities at the balance sheet date, having regard to external advice.
m
Leases Finance lease income is allocated to accounting periods so as to give a constant rate of return on the net investment in the lease. The net investment in a finance lease is included in debtors and represents the total rentals receivable, net of finance charges, relating to future periods. Operating lease payments are charged to the profit and loss account on a straight line basis over the term of the lease.
n
Financial instruments Derivative financial instruments are used by the Group mainly for the management of its interest rate and foreign currency exposures. Amounts payable or receivable in respect of interest rate swaps or interest rate swap options are recognised in the profit and loss account over the economic lives of the agreements either within net interest or disclosed separately where deemed exceptional. Changes in the fair values of financial instruments are not recognised in the profit and loss account or balance sheet.
31
The accounts continued
Group profit and loss account for the year ended 31 March 1999
1999 Notes
£m
Turnover, including share of joint ventures Less: share of joint ventures’ turnover
page 35 page 36
Group turnover – Continuing operations – Discontinued operations 1
Operating costs
2
Operating profit/(loss) – Continuing operations – Discontinued operations Operating profit of Group undertakings Share of joint ventures’ and associate’s operating profit page 35 page 36 page 38 page 36
page 38
page 38 page 47
page 39 page 39 page 39 page 39
page 38 page 38
1 3
a
7 3
b
10 10 10
9 9
1,625.5 (16.1)
1,514.2 – 1,514.2 (931.6)
1,519.3 90.1 1,609.4 (1,069.4)
568.4 (28.4) 540.0 1.3
583.3 891.8 (137.9) (52.6)
541.3 107.1 (75.8) –
Profit on ordinary activities before taxation Taxation – excluding exceptional items Taxation – exceptional items
1,284.6 (120.3) (162.8) (283.1)
572.6 (133.5) – (133.5)
Profit on ordinary activities after taxation Dividends – ordinary Dividends – special
1,001.5 (192.0) – (192.0)
439.1 (189.2) (768.6) (957.8)
Retained profit/(loss)
809.5
(518.7)
Earnings per ordinary share – Basic, including exceptional items – Basic, excluding exceptional items – Diluted, including exceptional items – Diluted, excluding exceptional items
68.3p 22.2p 64.3p 21.7p
26.0p 19.7p 25.8p 19.5p
13.07p –
12.07p 44.70p
1999
1998 (restated) £m
Total operating profit Exceptional profit relating to Energis Net interest Exceptional cost of closing out interest rate swaps
9
10
1,568.3 (54.1)
582.6 – 582.6 0.7
8
22
1998 (restated) £m
Dividends per ordinary share – Ordinary – Special
Group statement of total recognised gains and losses for the year ended 31 March 1999 Note
page 47
22
32
£m
Profit after taxation Exchange adjustments
1,001.5 (0.8)
439.1 –
Total recognised gains and losses relating to the year Prior year adjustment
1,000.7 40.8
439.1
Total gains and losses recognised since last annual report
1,041.5
Balance sheets at 31 March 1999 Group 1999 Notes
page 39 page 40
page 40
page 42 page 42
page 42
11 12
Fixed assets Intangible assets – goodwill Tangible assets Investments Joint ventures – Share of gross assets – Share of gross liabilities Investments in joint ventures Investment in associate Other investments
13
14 15
Current assets Stocks Debtors Assets held for exchange Cash and deposits
Creditors (amounts falling due within one year) Borrowings Other creditors 16
Net current assets/(liabilities)
page 42 page 46
page 46 page 47 page 47 page 47 page 47
Total assets less current liabilities Creditors (amounts falling due after more than one year) Convertible bonds Other borrowings Other creditors 17 20
21 22 22 22 22
Provisions for liabilities and charges
Company 1999
Company 1998
£m
Group 1998 (restated) £m
£m
£m
15.1 2,890.9
– 2,711.4
– –
– –
155.8 (97.9) 57.9 258.5 10.5 326.9
– – – – 1,973.2 1,973.2
– – – – 1,973.2 1,973.2
3,139.1
3,038.3
1,973.2
1,973.2
12.7 192.5 16.6 1,524.5
12.5 321.5 – 50.0
– 2,041.1 – –
– 547.7 – 21.3
1,746.3
384.0
2,041.1
569.0
(194.8) (902.4) (1,097.2)
(351.4) (2,106.0) (2,457.4)
– (643.7) (643.7)
331.4
(713.2)
(416.3)
(74.7)
3,470.5
2,325.1
1,556.9
1,898.5
(458.9) (1,178.4) (43.6) (1,680.9) (45.6)
(449.1) (871.4) – (1,320.5) (75.2)
– – – – –
– – (445.7) (445.7) –
310.7 (239.6) 71.1 151.0 11.0 233.1
(590.6) (824.3) (1,414.9)
Net assets employed
1,744.0
929.4
1,556.9
1,452.8
Capital and reserves Called up share capital Share premium account Revaluation reserve Other reserve Profit and loss account
173.9 246.5 – – 1,323.6
173.5 232.7 – – 523.2
173.9 246.5 624.4 5.4 506.7
173.5 232.7 624.4 – 422.2
Shareholders’ funds
1,744.0
929.4
1,556.9
1,452.8
Shareholders’ funds are all equity interests except for a £1 non-equity interest in called up share capital held on behalf of the Crown (see note 21). Debtors include amounts falling due after more than one year of £52.3m (1998: £81.6m) for the Group and £15.9m (1998: £26.6m) for the Company. The accounts on pages 30 to 50 inclusive were approved by the Board of Directors on 24 May 1999 and were signed on its behalf by: D G Jefferies CBE, FEng S J Box FCA
Chairman
Finance Director
33
The accounts continued
Group cash flow statement for the year ended 31 March 1999
Notes page 48, 49
24 a,f
Net cash inflow from operating activities Dividends from joint ventures
page 49
page 48
page 48
24 f
24 b 24 c
page 49
24 d,e
24 d,e
34
627.2
3.1
–
26.6 (58.3) 0.4
Net cash outflow for returns on investments and servicing of finance
(119.7)
(31.3)
Taxation Corporate tax paid – including advance corporation tax
(154.9)
(138.2)
Capital expenditure Payments to acquire tangible fixed assets Receipts of capital contributions Receipts from disposals of tangible fixed assets
(329.7) 11.9 5.3
(306.8) 15.4 5.0
Net cash outflow for capital expenditure
(312.5)
(286.4)
(13.1) (12.1) 959.3 – 934.1
(45.3) – – 203.1 157.8
(183.1) – (183.1)
(197.7) (768.6) (966.3)
772.9
(637.2)
Acquisitions and disposals Payments to acquire investments in joint ventures Acquisition of Group undertaking Receipt from sale of Energis shares Net cash inflow as a consequence of the Energis flotation Net cash inflow from acquisitions and disposals
Management of liquid resources (Increase)/decrease in short term deposits
(1,482.3)
217.0
Net cash (outflow)/inflow from the management of liquid resources
(1,482.3)
217.0
Financing Issue of ordinary shares
page 49
605.9
18.2 (137.9) –
Net cash inflow/(outflow) before management of liquid resources and financing
24 d,e
1998 £m
Returns on investments and servicing of finance Interest received Interest paid Dividends received from fixed asset investment
Equity dividends paid – Ordinary – Special
page 49
1999 £m
5.4
5.8
New borrowings Borrowings repaid
717.7 (35.5)
707.4 (209.3)
Increase in borrowings
682.2
498.1
Net cash inflow from financing
687.6
503.9
Movement in cash and overdrafts
(21.8)
83.7
Notes to the accounts
1
Segmental analysis
Turnover
Total sales 1999 £m
Sales between businesses 1999 £m
Sales to third parties 1999 £m
Total sales 1998 £m
Sales between businesses 1998 £m
Sales to third parties 1998 £m
Turnover, including share of joint ventures Less: share of joint ventures’ turnover
1,603.0 (54.1)
34.7 –
1,568.3 (54.1)
1,692.4 (16.1)
66.9 –
1,625.5 (16.1)
Group turnover
1,548.9
34.7
1,514.2
1,676.3
66.9
1,609.4
Continuing operations: Transmission Interconnectors Ancillary services Other activities
1,194.6 75.8 116.6 161.9
16.8 – – 17.9
1,177.8 75.8 116.6 144.0
1,225.2 75.7 118.7 153.7
19.3 0.1 – 34.6
1,205.9 75.6 118.7 119.1
Discontinued operations – Energis
1,548.9 –
34.7* –
1,514.2 –
1,573.3 103.0
54.0* 12.9
1,519.3 90.1
Group turnover
1,548.9
34.7
1,514.2
1,676.3
66.9
1,609.4
*Sales between businesses includes sales to discontinued operations of £nil (1998: £18.4m).
Group turnover is, with minor exceptions, in respect of sales made in Europe. The share of joint ventures’ turnover is in respect of transmission, distribution and supply of electricity of which £23.3m (1998: £12.6m) relates to sales in Latin America and £30.8m (1998: £3.5m) to sales in Africa. Operating profit 1999 £m
Operating profit 1998 (restated) £m
Continuing operations: Transmission Interconnectors Ancillary services Other activities
513.8 39.5 0.2 29.1
519.7 36.2 0.2 12.3
Discontinued operations – Energis
582.6 –
568.4 (28.4)
Operating profit of Group undertakings
582.6
540.0
Joint ventures Associate – Energis
12.3 (11.6)
5.4 (4.1)
0.7
1.3
583.3
541.3
Share of joint ventures’ and associate’s operating profit Total operating profit Unallocated net liabilities Net assets employed
Net assets 1999 £m
2,429.1 181.5 (1.9) 122.2
Net assets 1998 (restated) £m
2,205.7 191.8 (5.8) 67.5
–
–
71.1 151.0
57.9 258.5
(1,209.0) 1,744.0
(1,846.2) 929.4
The operating profit relating to other activities includes £15.2m (1998: £nil) relating to a revision of accounting estimates of provisions resulting from the implementation of FRS 12 (see note 22). The operating profit of Group undertakings and the operating loss of the associate, which is in respect of the provision of telecommunications services, arise, with minor exceptions, in Europe. The operating profit of joint ventures is in respect of transmission, distribution and supply of electricity of which £8.5m (1998: £4.9m) arises in Latin America and £3.8m (1998: £0.5m) arises in Africa. The analysis of net assets by business segment excludes inter-business balances. Unallocated net liabilities include net borrowings, taxation, interest, dividends, certain provisions and investment in own shares. None of these items have been allocated to any business segment. Net assets employed are located in Europe, with the principal exceptions of £51.4m (1998: £42.2m) located in Latin America; £15.3m (1998: £15.7m) located in Africa; and £15.1m (1998: £nil) located in North America.
35
The accounts continued
Notes to the accounts – continued
2
Operating costs
Continuing operations 1999
Discontinued operations
Total
1999
1998
1999
£m
1998 (restated) £m
£m
£m
£m
1998 (restated) £m
Total operating costs* Charged from – Continuing operations – Discontinued operations
931.6
969.3
–
131.4
931.6
1,100.7
– –
– (12.9)
– –
(18.4) –
– –
(18.4) (12.9)
External operating costs
931.6
956.4
–
113.0
931.6
1,069.4
Comprising: Depreciation Payroll costs (note 4) Purchases of electricity Rates Transmission services scheme direct costs Other operating charges
127.9 114.7 112.5 99.4 254.0 223.1
126.8 109.7 114.5 96.3 269.7 239.4
– – – – – –
32.8 14.6 – 2.2 – 63.4
127.9 114.7 112.5 99.4 254.0 223.1
159.6 124.3 114.5 98.5 269.7 302.8
931.6
956.4
–
113.0
931.6
1,069.4
8.4
7.8
– 3.0
28.2 3.0
0.4 2.1 0.9 0.9 0.3
0.4 1.2 1.8 0.5 1.5
4.2
5.0
4.6
5.4
*Including charges between continuing and discontinued operations.
Operating costs include: Research and development costs Operating lease rentals – Plant and machinery – Other Auditors’ remuneration – Statutory audit fees (Company £6,500 (1998: £6,000)) – Acquisition activity, including due diligence – Stock exchange related – Regulatory related services – Other
Auditors’ remuneration in respect of non-statutory audit fees includes £0.4m (1998: £5.0m) in respect of services provided by Coopers & Lybrand prior to the appointment of PricewaterhouseCoopers. 3
Exceptional items
a
Exceptional profit relating to Energis The 1999 exceptional profit of £891.8m (£712.7m after taxation) resulted from the sale of 60 million shares in Energis plc, an associated undertaking. The 1998 exceptional profit of £107.1m (£107.1m after taxation) related to the reduction in the Group’s interest in Energis as a consequence of the issue by Energis of 75 million shares to other investors.
b
Exceptional cost of closing out interest rate swaps The charge of £52.6m (£36.3m after taxation) relates to the cost of closing out £415.0m of interest rate swaps.
36
1999 £m
1998 £m
Payroll costs: Wages and salaries Social security costs Other pension costs
116.5 10.2 10.3
125.2 11.2 11.4
Less: amounts capitalised
137.0 (22.3)
147.8 (23.5)
114.7
124.3
1999 Number
1998 Number
3,628 –
3,689 529
3,628
4,218
4
Payroll costs and employees
a
b
Average number of persons employed by the Group: Continuing operations Discontinued operations
The vast majority of the continuing operations employees are employed either directly or indirectly in transmission. 5
Directors’ emoluments and interests in shares Details of Directors’ emoluments and interests in shares are included on pages 24 to 26.
6
Pensions Substantially all of the Group’s employees are members of the Electricity Supply Pension Scheme (“the Scheme”), a defined benefit scheme. The assets of the Scheme are held in a separate trustee administered fund. The Scheme is divided into sections, one of which is the Group’s section. The latest full actuarial valuation of the Group’s section of the Scheme was carried out by Bacon & Woodrow, Consulting Actuaries, as at 31 March 1998 and the results of this valuation have been used as the basis for assessing pension cost. The attained age method was used for the valuation and the principal actuarial assumptions adopted were that the real annual rate of return on investments would average 4.0%; that the real annual rate of increase in dividends would average 0.25%; that real annual increases in salary would average 1.0%; and that pensions would increase in line with inflation at 4.5% per annum. The total market value of the assets relating to the Group’s section of the Scheme at 31 March 1998 was £1,298.2m and the actuarial value of the assets represented approximately 111% of the actuarial value of the benefits that had accrued to members, after allowing for future salary increases. The pension cost for the year ended 31 March 1999 charged to operating profit of £10.3m (1998: £11.4m) represents the regular pension cost of £12.4m (1998: £12.9m) less a variation from the regular pension cost totalling £2.1m (1998: £1.5m) of which £1.5m (1998: £1.5m) relates to the partial release of a pension provision. In addition, net interest includes a credit of £3.7m (1998: £nil) in respect of the notional interest element of the variation from the regular pension cost. Included in debtors is a pension prepayment of £7.5m (1998: £0.4m) representing the excess of the amount funded over the pension cost for the year.
37
The accounts continued
Notes to the accounts – continued
7
1999 £m
1998 £m
Bank loans and overdrafts Other
20.3 128.1
20.0 76.8
Interest payable and similar charges Interest receivable and similar income
148.4 (28.1)
96.8 (27.1)
Joint ventures Associate
120.3 7.0 10.6
69.7 3.6 2.5
137.9
75.8
Net interest
Interest payable and similar charges includes bank facility fees and interest rate option costs totalling £14.1m (1998: £nil) relating to the proposed acquisition of New England Electric System (NEES) and costs of £7.6m (1998: £nil) relating to the issue of the 6% mandatorily exchangeable bonds 2003. Details relating to the exceptional cost of closing out interest rate swaps are contained in note 3(b).
8
1999 £m
1998 £m
United Kingdom corporation tax at 31% (1998: 31%) Overseas taxation
280.1 1.0
131.8 1.1
Joint ventures Associate
281.1 2.4 (0.4)
132.9 0.6 –
283.1
133.5
120.3 162.8
133.5 –
283.1
133.5
Taxation
Comprising: Taxation – excluding exceptional items Taxation – relating to exceptional items (note 3)
The tax charge for the year has been reduced by £28.5m (1998: £17.9m) in respect of accelerated capital allowances and other timing differences on which, in accordance with the Group’s accounting policy, no deferred taxation has been provided.
9
Dividends Ordinary dividends – Interim, paid 15 February 1999 – Proposed final, payable 16 August 1999
Special dividend
38
1999 pence per share
1998 pence per share
1999
1998
£m
£m
5.25 7.82
4.83 7.24
76.9 115.1
83.0 106.2
13.07
12.07
192.0
189.2
–
44.70
–
768.6
192.0
957.8
10
Earnings per ordinary share
Basic, including exceptional items Exceptional items after taxation – Profit relating to Energis (note 3) – Cost of closing out interest rate swaps (note 3)
Earnings per share 1999
Profit after taxation 1999
Weighted average number of shares 1999
pence
£m
68.3
1,001.5
Weighted average number of shares 1998
million
Earnings per share 1998 (restated) pence
Profit after taxation 1998 (restated) £m
1,466.6
26.0
439.1
1,688.3
– –
(6.3) –
(107.1) –
– –
million
(48.6) 2.5
(712.7) 36.3
Basic, excluding exceptional items Dilutive impact of employee share options Dilutive impact of 4.25% exchangeable bonds 2008
22.2 (0.2) (0.3)
325.1 – 20.2
1,466.6 11.3 110.3
19.7 (0.1) (0.1)
332.0 – 2.4
1,688.3 9.9 13.0
Diluted, excluding exceptional items Exceptional items after taxation – Profit relating to Energis (note 3) – Cost of closing out interest rate swaps (note 3)
21.7
345.3
1,588.2
19.5
334.4
1,711.2
44.9 (2.3)
712.7 (36.3)
– –
6.3 –
107.1 –
– –
Diluted, including exceptional items
64.3
1,588.2
25.8
441.5
1,711.2
1,021.7
The weighted average number of shares in issue during the year excludes the shares held by a Qualifying Employee Share Trust. Earnings per ordinary share, excluding exceptional items, are provided in order to reflect the underlying performance of the Group. 11
Intangible fixed assets – goodwill Group
Cost £m
Amortisation £m
Net book value £m
At 1 April 1998 Addition Exchange adjustment Charge for the year
– 14.9 0.4 –
– – – (0.2)
– 14.9 0.4 (0.2)
At 31 March 1999
15.3
(0.2)
15.1
Teldata Inc., a Group undertaking, was acquired in January 1999 and the acquisition method of accounting has been adopted. Goodwill arising on this acquisition, which comprises cash consideration of £12.6m plus the fair value of the net liabilities acquired of £2.3m, is being amortised over 10 years, being its estimated useful economic life.
39
The accounts continued
Notes to the accounts – continued
12
Tangible fixed assets
Group
Land and buildings £m
Plant and machinery £m
Assets in the course of construction £m
Motor vehicles and office equipment £m
Total £m
Cost at 1 April 1998 Capital expenditure Acquisition of Group undertaking Disposals Reclassifications
126.2 0.7 0.5 (11.5) 1.8
3,799.5 4.8 0.4 (20.5) 182.4
213.2 285.6 – – (186.9)
122.0 18.5 1.3 (16.6) 2.7
4,260.9 309.6 2.2 (48.6) –
Cost at 31 March 1999
117.7
3,966.6
311.9
127.9
4,524.1
Depreciation at 1 April 1998 Acquisition of Group undertaking Charge for the year Disposals
26.3 0.1 2.3 (9.7)
1,435.2 0.1 111.6 (18.9)
– – – –
88.0 0.3 14.0 (16.1)
1,549.5 0.5 127.9 (44.7)
Depreciation at 31 March 1999
19.0
1,528.0
–
86.2
1,633.2
Net book value at 31 March 1999
98.7
2,438.6
311.9
41.7
2,890.9
Net book value at 31 March 1998
99.9
2,364.3
213.2
34.0
2,711.4
The net book values of plant and machinery and assets in the course of construction at 31 March 1999 are stated after deducting capital contributions of £90.6m (1998: £82.6m).
13
The net book value of land and buildings comprises:
Group 1999 £m
Group 1998 £m
Freehold Long leasehold (over 50 years) Short leasehold (under 50 years)
65.7 31.2 1.8
66.2 32.4 1.3
98.7
99.9
Fixed asset investments
Group Unlisted joint Listed ventures associate (Group’s share of net assets) £m £m
Company
Other investments
Total
Group undertakings
£m
£m
£m
At 1 April 1998 Exchange adjustment Additions Disposals Transfer to assets held for exchange Share of retained loss Other movements
57.9 0.4 13.1 – – (0.3) –
258.5 – – (67.5) (16.6) (21.8) (1.6)
10.5 – 5.3 (4.8) – – –
326.9 0.4 18.4 (72.3) (16.6) (22.1) (1.6)
1,973.2 – 1,973.2 (1,973.2) – – –
At 31 March 1999
71.1
151.0
11.0
233.1
1,973.2
The market value of the investment in the listed associate at 31 March 1999 was £2,504.0m (1998: £1,216.3m).
40
13
Fixed asset investments continued The other investments relate to 7.0m (1998: 8.8m) 1113⁄17p ordinary shares in The National Grid Group plc, held by a Qualifying Employee Share Trust (“QUEST”) for the purpose of satisfying certain obligations under the Sharesave scheme. The carrying value of £11.0m (market value £31.6m) represents the exercise amounts receivable in respect of these shares which were issued at market value by the Company to the QUEST. Funding is provided to the QUEST by The National Grid Company plc, the Group’s principal operating subsidiary. The QUEST has waived its rights to dividends on these shares. Group undertakings During the year, the Company acquired all of the ordinary shares in National Grid Holdings Limited in exchange for all of the shares then held by the Company in Group undertakings which included The National Grid Company plc. The carrying value of the investment in National Grid Holdings Limited represents the value attributed to the initial investment in The National Grid Company plc, which was acquired for no consideration and was based on a pro forma net asset value at the date of acquisition, plus all additional investments at cost. The principal Group undertakings included in the Group accounts are listed below. These undertakings are wholly-owned and, unless otherwise indicated, are incorporated in Great Britain. Principal activity
National Grid Holdings Limiteda The National Grid Company plcb NGG Telecoms Limitedb NG Investments Limited (Incorporated in Jersey)b ESIS Limitedb Datum Solutions Limitedb National Grid International Limitedb Energy Pool Funds Administration Limitedb National Grid Insurance Limited (Incorporated in Guernsey)b a
Issued ordinary share capital held by The National Grid Group plc.
b
Issued ordinary share capital held by Group undertakings.
Holding company Transmission of electricity in England and Wales Holding company Investment company Operator of the Settlement System Electricity metering services Holding company Pool Funds Administrator Insurance
Principal joint ventures and associate Group holding
Country of incorporation and operation
Compañia Inversora En Transmicion Electrica CITELEC S.A. (c) Copperbelt Energy Corporation Plc (c)
41.25% ordinary shares 38.9% ordinary shares
Argentina Zambia
Bonari Holding Limitada (c) Energis plc (d)
50.0% ordinary shares 48.3% ordinary shares
Brazil Great Britain
Principal activity
Transmission of electricity Transmission, distribution and supply of electricity Telecommunications Telecommunications
The investments in the joint ventures (c) and associate (d) are held by Group undertakings. The Group’s holding of shares in Energis plc recorded in the table above represents the Energis plc shares held within fixed asset investments, but not those included within assets held for exchange (see note 15). At 31 March 1999, 6.0m Energis plc shares (book value: £6.4m; market value: £105.7m), included within fixed asset investments, had been loaned to a financial institution under the terms of a stock lending agreement. This agreement provides for a fee to be paid to the Group and the loan of shares is secured by an equivalent value of readily marketable securities.
41
The accounts continued
Notes to the accounts – continued
14
Debtors
Group 1999 £m
Group 1998 £m
Company 1999 £m
Company 1998 £m
Amounts falling due within one year: Trade debtors Amounts owed by Group undertakings Amounts owed by an associate Amounts owed by a joint venture Other debtors Advance corporation tax Prepayments and accrued income
62.9 – 11.6 0.7 33.5 – 31.5
70.0 – 6.2 0.6 11.3 122.3 29.5
– 2,012.5 – – 12.7 – –
– 521.1 – – – – –
140.2
239.9
2,025.2
521.1
52.3 – –
55.0 – 26.6
– 15.9 –
– – 26.6
52.3
81.6
15.9
26.6
192.5
321.5
2,041.1
547.7
Amounts falling due after more than one year: Amounts owed by an associate Amounts owed by Group undertakings Advance corporation tax
The amounts owed by an associate include a net investment in a finance lease amounting to £55.3m (1998: £57.8m) of which £3.0m (1998: £2.8m) falls due within one year and £52.3m (1998: £55.0m) falls due after more than one year. 15
Assets held for exchange The assets held for exchange of £16.6m (1998: £nil) represent the carrying value of 14.7m (1998: nil) shares in Energis plc which are held to satisfy obligations under the 6% mandatorily exchangeable bonds 2003, as explained in note 18. The voting rights in respect of 12.2m of these shares are vested in the bondholders.
Group 1999 16
Creditors (amounts falling due within one year) Borrowings (note 18) Trade creditors and accruals Amounts owed to Group undertakings Amounts owed to an associate Corporation tax Social security and other taxes Proposed dividend Other creditors
17
Creditors (amounts falling due after more than one year) Borrowings (note 18) Amounts owed to a Group undertaking Other creditors
42
Company 1999
Company 1998
£m
Group 1998 (restated) £m
£m
£m
590.6 308.3 – 11.0 289.3 20.4 115.1 80.2
194.8 357.4 – 26.2 322.5 17.7 106.2 72.4
351.4 2.5 1,981.7 – – – 115.1 6.7
– 0.3 464.2 – 72.9 – 106.2 0.1
1,414.9
1,097.2
2,457.4
643.7
Group 1999 £m
Group 1998 £m
Company 1999 £m
Company 1998 £m
1,637.3 – 43.6
1,320.5 – –
– – –
– 445.7 –
1,680.9
1,320.5
–
445.7
18
Group 1999 £m
Group 1998 £m
Company 1999 £m
Company 1998 £m
24.2 85.5 85.3 150.0 242.6 3.0
1.5 103.0 90.3 – – –
108.8 – – – 242.6 –
– – – – – –
590.6
194.8
351.4
–
50.0 458.9 443.1 238.7 217.9 197.6 26.2 – 4.9
50.0 449.1 – 238.5 207.5 197.6 26.2 150.0 1.6
– – – – – – – – –
– – – – – – – – –
1,637.3
1,320.5
–
–
Total borrowings
2,227.9
1,515.3
351.4
–
Amounts falling due after more than one year are repayable as follows: In more than one year, but not more than two years In more than two years, but not more than five years In more than five years – other than by instalments
197.8 298.8 1,140.7
150.0 223.8 946.7
– – –
– – –
1,637.3
1,320.5
–
–
Borrowings Amounts falling due within one year: Bank overdrafts Bank loans Commercial paper 7.375% bonds 1999 6% mandatorily exchangeable bonds 2003 Other loans
Amounts falling due after more than one year: Bank loan 2003 4.25% exchangeable bonds 2008 5.875% bonds 2024 8.0% bonds 2006 European Investment Bank Swiss franc loan 2004 5.5% US dollar bonds 2001 Zero coupon bonds 2002 7.375% bonds 1999 Other loans
The interest rates shown above are those contracted on the underlying borrowing before taking into account interest rate and currency swaps. In February 1999, the Company issued 14.7m Equity Plus Income Convertible Securities (“EPICs”) in the form of 6% mandatorily exchangeable bonds 2003 (“exchangeable bonds”) in the aggregate principal amount of US dollar 401.2m. Concurrent with this transaction, an equal amount has been lent by the Company to a Group undertaking on terms similar to the Company’s obligations under the EPICs offering, save that this amount is non-interest bearing. The EPICs are exchangeable, subject to certain exceptions, on or prior to 26 April 2003 at the option of the holder of the bonds (“bondholders”) into ordinary shares of Energis plc, an associated undertaking (see note 15). If the EPICs are redeemed at the option of the bondholders prior to 3 May 2003, the Group will deliver 0.8333 Energis plc shares per EPICs. On 3 May 2003, the number of Energis plc shares to be delivered by the Group in respect of each EPICs is dependent upon the Energis plc share price at that date and ranges from a maximum of one, if the share price is £16.50 or less, to a minimum of 0.8333 if the share price is £19.80 or more. The 4.25% exchangeable bonds 2008 (“the Bonds”) are exchangeable on or prior to 8 February 2008 at the option of the holder, into ordinary shares of the Company at the exchange price of 417p per ordinary share. After 17 February 2003, the Group has the right to redeem the Bonds at any time in whole (but not in part) at the principal amount outstanding, including any redemption premium. Unless earlier redeemed, exchanged or purchased, the Bonds will be redeemed on 17 February 2008 at their principal amount plus a premium (together the Redemption Price, being £1,209.31 per £1,000 principal amount of Bonds). When a bondholder elects to exchange bonds for ordinary shares, the Group has the option to pay an amount equal to the cash value of the ordinary shares that would otherwise have been issued by the Company. For the purposes of the maturity analysis of borrowings shown above, early exchange of the Bonds has not been anticipated and the Bonds have been classified as repayable in more than five years.
43
The accounts continued
Notes to the accounts – continued
19
Financial instruments The Group’s treasury policies and credit facilities are described on pages 17 and 18 of the Financial review. Short term debtors and creditors have been excluded from the following disclosures, which relate to the Group and are after taking account of interest rate and currency swaps where applicable. Currency and interest rate composition of financial liabilities at 31 March 1999
Total £m
Non-interest bearing £m
Variable rate £m
Fixed rate £m
Weighted average interest rate for fixed rate liabilities %
Weighted average period for which rate is fixed Years
Sterling US dollars
2,189.7 38.2
1.5 –
930.0 37.0
1,258.2 1.2
6.92 8.00
6.5 0.5
Borrowings Other financial liabilities (all sterling)
2,227.9 43.9
1.5 –
967.0 0.3
1,259.4 43.6
6.92 5.34
6.5 3.2
2,271.8
1.5
967.3
1,303.0
6.87
6.4
Other financial liabilities predominantly relates to other creditors due after more than one year. Substantially all of the variable rate borrowings are subject to interest rates which fluctuate with LIBOR for the appropriate currency at differing premiums. In calculating the weighted average number of years for which interest rates are fixed, swaps which are cancellable at the option of the swap provider are taken to have a life based on the earliest date at which they can be cancelled. Currency and interest rate composition of financial assets at 31 March 1999
Sterling US dollars Other currencies
Total £m
Non-interest bearing £m
Variable rate £m
Fixed rate £m
Weighted average interest rate for fixed rate assets %
Weighted average period for which rate is fixed Years
1,589.6 3.3 0.5
16.6 – –
1,520.7 3.3 0.5
52.3 – –
11.50 – –
6.1 – –
1,593.4
16.6
1,524.5
52.3
11.50
6.1
Financial assets comprise cash and deposits of £1,524.5m, assets held for exchange of £16.6m and a net investment in a finance lease falling due after more than one year of £52.3m. Cash and deposits earn interest at local prevailing rates for maturity periods generally not exceeding 12 months. The non-interest bearing assets held for exchange are expected to be realised on redemption of the 6% mandatorily exchangeable bonds 2003 as described in note 18.
Maturity of financial liabilities at 31 March 1999 In In In In
one year or less more than one year, but not more than two years more than two years, but not more than five years more than five years
£m
590.9 208.0 319.9 1,153.0 2,271.8
44
19
Financial instruments continued Fair values of financial instruments at 31 March 1999
Book value £m
Fair value £m
Cash and deposits Total borrowings
1,524.5 (2,227.9)
1,524.5 (2,334.2)
Net borrowings Other financial liabilities* Net investment in finance lease Assets held for exchange
(703.4) (43.6) 52.3 16.6
(809.7) (43.6) 62.0 248.8
Net financial liabilities* Financial instruments held to manage interest rate and currency profile: Interest rate swaps Interest rate swap options Forward currency contracts and cross currency swaps
(678.1)
(542.5)
– – (0.3)
(4.8) 0.3 (68.4)
*Excluding forward currency contracts (book value: £0.3m).
Market values, where available, have been used to determine fair values. Where market values are not available, fair values, with the exception of assets held for exchange, have been calculated by discounting cash flows at prevailing interest rates. The fair value of the assets held for exchange is deemed to be the fair value attributed to the 6% mandatorily exchangeable bonds 2003 to which the assets relate (see note 15).
Gains and losses on hedges
Gains £m
Losses £m
Net gain/ (loss) £m
Unrecognised gains and (losses) on hedges at 1 April 1998 Gains and (losses) arising in the current year
3.7 5.3
(99.8) (34.4)
(96.1) (29.1)
Losses arising in prior years recognised in the current year Losses arising in the current year recognised in the current year
9.0 – – –
(134.2) 33.3 19.3 52.6
(125.2) 33.3 19.3 52.6
Unrecognised gains and (losses) on hedges at 31 March 1999
9.0
(81.6)
(72.6)
Of which: Gains and (losses) expected to be recognised in the next year Gains and (losses) expected to be recognised in subsequent years Gains and (losses) not expected to be recognised in the profit and loss account
0.4 8.3 0.3
(18.3) (56.0) (7.3)
(17.9) (47.7) (7.0)
The net losses of £7.0m which are not expected to be recognised relate predominantly to the option component of an interest rate swap. Since it is not anticipated that the instrument will be traded, the related loss is not expected to be recognised in the profit and loss account. £63.1m of the unrecognised total net losses of £72.6m are offset by currency exchange gains on the related borrowings. Borrowing facilities The Group had a committed but undrawn borrowing facility of £50.0m at the year end which expires in June 2003. In addition to this facility, the Group has an undrawn borrowing facility for £1,958m (as described in the Financial review – see page 17) which becomes available upon completion of certain conditions precedent, the principal condition being the repayment and cancellation of the June 2003 facility. £1,366m of this facility includes the further condition that the proposed acquisition of NEES is completed.
45
The accounts continued
Notes to the accounts – continued
20
Provisions for liabilities and charges Group
Uninsured liabilities £m
Pensions £m
Other £m
Total provisions £m
At 1 April 1998 – as previously reported Prior year adjustment (note 22)
71.7 (24.7)
16.7 –
19.5 (8.0)
107.9 (32.7)
At 1 April 1998 – as adjusted Paid or becoming current Released in the year
47.0 (6.3) (15.2)
16.7 – (1.5)
11.5 (6.6) –
75.2 (12.9) (16.7)
At 31 March 1999
25.5
15.2
4.9
45.6
The uninsured liabilities provision relates to estimated liabilities relating to uninsured events, principally of an environmental nature. The assessment of this liability is subject to periodic reviews, which may result in the amount being revised. It is currently estimated that substantially all of this provision will be utilised within the next five years. Other provisions include severance and other restructuring provisions of £4.5m (1998: £10.9m). Deferred taxation The maximum potential tax liability computed at 30% (1998: 31%), arising principally from accelerated capital allowances for which no provision has been made, amounts to £589.2m (1998: £550.4m) for the Group and £nil (1998: £nil) for the Company.
21
Share capital Ordinary shares of 1113⁄17p each
Allotted, called up and fully paid
Authorised millions
£m
millions
£m
At 1 April 1998 Shares issued during the year
2,125.0 –
250.0 –
1,474.4 3.5
173.5 0.4
At 31 March 1999
2,125.0
250.0
1,477.9
173.9
1 £1 special rights redeemable preference share The total consideration received by the Company in respect of shares issued during the year was £14.2m. Employees paid £0.3m and £13.9m was received from the QUEST, which represented contributions from Group undertakings. The special rights redeemable preference share (“the Special Share”), held on behalf of the Crown, was vested in the Secretary of State for Trade and Industry with effect from 5 July 1992. It is redeemable at any time at par at the option of the holder, after consulting the Company. The Special Share does not carry any rights to vote at general meetings but entitles the holder to receive notice of and to attend and speak at such meetings. Certain matters, in particular the alteration of the Articles of Association of the Company, require the prior written consent of the holder of the Special Share. The Special Share confers no right to participate in the capital or profits of the Company, except that on a winding-up the Special Shareholder is entitled to repayment of £1 in priority to other shareholders.
46
21
Share capital continued Sharesave Executive scheme share scheme millions millions
Options to subscribe for ordinary shares of 11 ⁄17p each 13
At 1 April 1998 Granted Lapsed Shares issued to satisfy options At 31 March 1999
Exercisable between 1 April 1999 and: Option price per ordinary share
Total millions
11.2 2.3 (1.1) (3.4)
3.4 1.5 (0.1) (0.1)
14.6 3.8 (1.2) (3.5)
9.0
4.7
13.7
28 Feb 2004
18 Dec 2008
95.1p to 312.0p
64.6p to 490.0p
In addition to the above, 0.1m (1998: 0.1m) options relating to the share match scheme were outstanding. The consideration receivable by the Company in respect of these options will be the market price of the shares at the date the shares are issued. In respect of the vast majority of Sharesave scheme options outstanding at 31 March 1999, the consideration receivable by the Company from the QUEST will be the market price of the shares at the date the shares are issued to satisfy the share options. 22
Reserves
Group
Company
Share premium account £m
Profit and loss account £m
Share premium account £m
Revaluation reserve £m
Other reserve £m
Profit and loss account £m
At 1 April 1998 – as previously reported Prior year adjustment
232.7 –
482.4 40.8
232.7 –
624.4 –
– –
422.2 –
At 1 April 1998 – as adjusted Exchange adjustments Unrealised profit arising on intra-group sale of a Group undertaking Ordinary shares issued during the year Transfer on issue of certain shares under the Sharesave scheme Retained profit for the year
232.7 –
523.2 (0.8)
232.7 –
624.4 –
– –
422.2 –
– 5.5
– –
– 13.8
– –
5.4 –
– –
8.3 –
(8.3) 809.5
– –
– –
– –
– 84.5
At 31 March 1999
246.5
1,323.6
246.5
624.4
5.4
506.7
The Company has not presented its own profit and loss account as permitted by Section 230 of the Companies Act 1985. Of the Group profit after taxation, £276.5m (1998: £1,167.9m), which includes dividends received and receivable from Group undertakings amounting to £293.8m (1998: £1,165.6m), is attributable to the Company. Prior year adjustment The adoption of FRS 12 has resulted in a change in the method of accounting for provisions. This change in accounting policy, which has the effect of increasing operating profit of Group undertakings for the year ended 31 March 1999 by £1.6m, has been reflected in the accounts as a prior year adjustment in accordance with FRS 3. As a result, shareholders’ funds at 31 March 1998 have been increased by £40.8m and the comparative amount of operating profit of Group undertakings for the year ended 31 March 1998 has been reduced by £2.2m. A change in accounting estimates as a result of implementing FRS 12 is recorded in note 1.
47
The accounts continued
Notes to the accounts – continued
1999 23
Reconciliation of movement in shareholders’ funds Profit on ordinary activities after taxation Dividends – Ordinary – Special
£m
1998 (restated) £m
1,001.5
439.1
(192.0) – (192.0)
(189.2) (768.6) (957.8)
Issue of ordinary shares Exchange adjustments
809.5 5.9 (0.8)
(518.7) 16.2 –
Net increase/(decrease) in shareholders’ funds Shareholders’ funds at start of year
814.6 929.4*
(502.5) 1,431.9
Shareholders’ funds at end of year
1,744.0
929.4
1999 £m
1998 (restated) £m
Operating profit of Group undertakings
582.6
540.0
Depreciation charge Profit on disposal of tangible fixed assets Decrease/(increase) in stocks Increase in debtors (Decrease)/increase in creditors Decrease in provisions Other
127.9 (2.5) 0.2 (13.0) (60.6) (29.6) 0.9 23.3
159.6 (4.1) (3.4) (35.2) 20.7 (49.0) (1.4) 87.2
Net cash inflow from operating activities
605.9
627.2
1999 £m
1998 £m
*Originally £888.6m before adding prior year adjustment of £40.8m. 24
a
b
Group cash flow statement Reconciliation of operating profit to net cash inflow from operating activities
Acquisition of Group undertaking Payments to acquire Group undertaking (note 11) Cash balances of Group undertaking acquired
c
Net cash inflow as a consequence of the Energis flotation Additional investment in Energis Repayment of indebtedness by Energis to the Group Cash balances of Energis
The additional investment of £60.0m was used by Energis to repay indebtedness to the Group.
48
(12.6) 0.5
– –
(12.1)
–
1999 £m
1998 £m
– – –
(60.0) 272.9 (9.8)
–
203.1
24
Group cash flow statement continued
d
Reconciliation of net cash flow to movement in net debt
Year ended 31 March 1999 £m
Movement in cash and overdrafts Net cash outflow/(inflow) from the management of liquid resources Increase in borrowings Change in net debt resulting from cash flows Certificates of tax deposit surrendered Net debt acquired on acquisition of a Group undertaking Other non-cash movements Movement in net debt in the year Net debt at start of year Net debt at end of year
Year ended 31 March 1998 £m
(21.8) 1,482.3 (675.2)*
83.7 (217.0) (487.9)*
785.3 (8.7) (4.2) (10.5)
(621.2) – – 2.9
761.9 (1,465.3)
(618.3) (847.0)
(703.4)
(1,465.3)
*Net of £7.0m (1998: £10.2m) costs relating to the issue of long term debt.
Liquid resources comprise deposits.
e
Analysis of changes in net debt
At 1 April 1998 £m
Cash at bank and in hand* Bank overdrafts
0.7 (1.5)
Deposits*
49.3
Borrowings due after one year Borrowings due within one year
Cash flow £m
0.9 (22.7) (21.8) 1,482.3
(1,320.5) (193.3)
(458.0) (217.2) (675.2)†
(1,465.3)
785.3
Non-cash movements £m
Other movements £m
At 31 March 1999 £m
– –
– –
–
(8.7)
1,522.9
151.6 (151.6)
(10.4) (4.3)
(1,637.3) (566.4)
–
(23.4)
(703.4)
1.6 (24.2)
†Net of £7.0m costs relating to the issue of long term debt. *Cash and deposits per the balance sheet £1,524.5m (1998: £50.0m). f
25
a
Net cash inflow from operating activities and net cash outflow for capital expenditure include £nil (1998: £12.0m) and £nil (1998: £86.5m) respectively relating to discontinued operations. Commitments and contingencies
Future capital expenditure Contracted for but not provided
b
Group 1999 £m
Group 1998 £m
Associate and joint ventures 1999 £m
126.4
188.4
14.5
Associate and joint ventures 1998 £m
25.9
Proposed acquisition The Company has entered into an agreement, subject to regulatory and shareholder approvals to purchase the entire share capital of NEES for approximately £2bn. Should the Company decide not to proceed with the acquisition, a compensatory payment of US dollar 100m (approximately £62m) may become payable to NEES.
49
The accounts continued
Notes to the accounts – continued
25
Commitments and contingencies continued
c
Lease commitments At 31 March 1999, the Group’s operating lease commitments for the financial year ending 31 March 2000 amounted to £3.0m (1998: £2.1m) and are analysed by lease expiry date as follows: Land and buildings
Within one year Between two and five years After five years
1999 £m
1998 £m
0.1 1.2 1.7
– 0.3 1.8
3.0
2.1
d
Property clawback Arrangements have been implemented which entitle HM Government to a proportion of certain property gains accruing to the Group as a result of actual or deemed disposals occurring between 31 March 1990 and 31 March 2000.
e
Guarantees and performance bonds A Group undertaking has issued performance bonds in the ordinary course of business amounting to £11.1m (1998: £11.1m) and has issued guarantees in respect of the contractual performance of an associate up to £17.1m (1998: £19.1m). The Company has guaranteed borrowings amounting to £218.7m (1998: £208.4m) of a Group undertaking.
f
Litigation On 7 February 1997, the Pensions Ombudsman published his final determination in a case brought by two former employees of a Group undertaking (The National Grid Company plc) concerning the use of the surplus shown by the actuarial valuation of that company’s section of the Electricity Supply Pension Scheme at 31 March 1992. The Pensions Ombudsman’s determination requires that The National Grid Company plc should contribute to its pension scheme the amounts payable under two of the provisions of that scheme, which were not paid to the scheme whilst the scheme was in surplus, together with interest. On 10 June 1997, the appeal by The National Grid Company plc against the Pensions Ombudsman’s determination was upheld in the High Court. Following this decision, a further appeal was made by the former employees to the Court of Appeal. On 10 February 1999, the Court of Appeal confirmed that the members of the Electricity Supply Pension Scheme had no property rights in any surplus revealed by an actuarial valuation. However, the judgement concluded that the company was not entitled unilaterally to cancel any accrued liabilities. This judgement did not determine whether the company should be required to make any payment to the pension scheme and a further hearing is being held with a view to resolving this and other related issues. At 31 March 1999, it is estimated that the potential liability is unlikely to exceed £7.8m (representing its unpaid contributions) plus interest at a rate which is also an issue to be determined at the further hearing. Pending the outcome of the further hearing, no amount has been provided in these accounts in respect of this issue.
26
Related party transactions Transactions with an associate and a joint venture, which were in the normal course of business, were as follows:
Sales: Services supplied Finance lease rentals Purchases: Services received Tangible fixed assets
50
Amounts owed by and owed to an associate and a joint venture are given in notes 14 and 16 respectively.
1999 £m
1998 £m
31.3 9.0
16.6 2.3
15.3 21.9
4.6 20.6
Five-year financial summary
1999 £m
Group profit and loss account Group turnover – Continuing operations – Discontinued operations
1997
1996
1995
£m
£m
£m
1,519.3 90.1 1,609.4 (1,069.4)
1,369.5 88.0 1,457.5 (795.6)
1,381.8 105.2 1,487.0 (805.3)
1,304.4 123.9 1,428.3 (750.0)
582.6 – 582.6 0.7
568.4 (28.4) 540.0 1.3
716.1 (54.2) 661.9 –
729.1 (47.4) 681.7 –
656.5 21.8 678.3 –
Total operating profit Exceptional items Net interest
583.3 839.2 (137.9)
541.3 107.1 (75.8)
661.9 – (70.5)
681.7 (24.6) (40.6)
678.3 (33.3) (34.4)
Profit before taxation Taxation
1,284.6 (283.1)
572.6 (133.5)
591.4 (176.2)
616.5 (194.2)
610.6 (175.8)
Profit after taxation Dividends – Ordinary – Other
1,001.5 (192.0) – (192.0)
439.1 (189.2) (768.6) (957.8)
415.2 (190.7) – (190.7)
422.3 (175.0) (1,560.8) (1,735.8)
434.8 (162.0) – (162.0)
Retained profit/(loss)
809.5
(518.7)
224.5
(1,313.5)
272.8
3,038.3 (713.2) (1,395.7)
2,979.1 (605.5) (984.7)
2,809.1 (425.2) (1,281.7)
2,882.0 (378.5) (531.3)
1,744.0
929.4
1,388.9
1,102.2
1,972.2
703.4
1,465.3
847.0
1,254.5
199.1
605.9 309.6
627.2 319.7
846.6 279.8
897.2 253.5
902.1 366.6
3,628 –
3,689 529
3,837 577
3,950 615
4,302 569
26.0p 19.7p 25.8p 19.5p 12.07p 1.6 7.1 158%
24.3p 24.3p 24.2p 24.2p 11.13p 2.2 9.4 61%
25.0p 26.4p 24.7p 26.2p 10.27p 2.6 16.8 114%
Operating costs Operating profit/(loss) – Continuing operations – Discontinued operations Operating profit of Group undertakings Share of joint ventures’ and associate’s operating profit
Summary Group balance sheet Fixed assets Net current assets/(liabilities) Long term creditors and provisions Shareholders’ funds Net debt
Other key data Net cash inflow from operating activities Capital expenditure Average number of persons employed by the Group – Continuing operations (number) – Discontinued operations (number) Earnings per ordinary share – Basic, including exceptional items – Basic, excluding exceptional items – Diluted, including exceptional items – Diluted, excluding exceptional items Ordinary dividends per share Dividend cover* – ordinary dividends (times) Interest cover (times) Gearing
1,514.2 – 1,514.2 (931.6)
1998 (restated) £m
3,139.1 331.4 (1,726.5)
68.3p 22.2p 64.3p 21.7p 13.07p 1.7 4.2 40%
25.8p 27.7p 25.4p 27.3p 9.60p 2.9 19.7 10%
*Excluding exceptional items.
The figures for 1995 to 1997 inclusive have not been restated to reflect the impact of FRS 12.
51
Shareholder information
Analyses of shareholdings as at 24 May 1999
Distribution of shares by type of shareholder
Banks Nominee companies1 Insurance companies Pension funds Other corporate bodies Electricity companies2 Other limited and public companies Individuals
Number of shareholders
Shares
% of issued share capital
174 12,344 39 46 562 8 920 794,740
476,651 1,112,728,450 145,009,762 4,859,643 11,585,712 977,090 20,822,268 181,576,589
0.03 76.22 9.81 0.33 0.78 0.07 1.41 11.35
808,833
1,478,036,165
100.00
Number of shareholders
Shares
% of issued share capital
497,548 239,002 37,226 30,184 2,355 1,422 317 438 139 202
34,745,164 50,044,307 25,396,198 60,051,226 15,836,789 28,361,134 22,773,371 100,707,211 97,463,941 1,042,656,824
2.35 3.39 1.72 4.06 1.08 1.92 1.54 6.81 6.59 70.54
808,833
1,478,036,165
100.00
Distribution of shares by size of holding
1 – 99 100 – 499 500 – 999 1,000 – 4,999 5,000 – 9,999 10,000 – 49,999 50,000 – 99,999 100,000 – 499,999 500,000 – 999,999 1,000,000 and above
1 Nominee companies typically hold shares on behalf of banks, insurance companies, investment trusts, pension funds and PEP and ISA investors. 2 In accordance with NGG’s Articles of Association, no holder of a licence under the Electricity Act 1989 or Pool member, no affiliate of either, and no group of companies of which a regional electricity company is a member, has an interest of 1 per cent or more in the voting share capital of NGG.
Financial calendar 25 May 1999
1998/99 preliminary results and recommended final dividend announced
1 June 1999
NGG shares go ex-dividend
7 June 1999
Record date for NGG final dividend
22 July 1999
Annual General Meeting
16 August 1999 30 November 1999 6 December 1999 10 December 1999 17 January 2000
52
1998/99 final dividend paid to qualifying shareholders 1999/2000 interim results and interim dividend announced NGG shares go ex-dividend Record date for 1999/2000 interim dividend 1999/2000 interim dividend paid to qualifying shareholders
2 Joint statement by the Chairman and the Group Chief Executive 5 Our activities
6 Electricity networks – UK transmission
11 Electricity networks – international
12 Electricity networks – USA
14 Telecoms networks
Profit before tax (£m) £445.4m
600
16 Financial review 20 The Board of Directors
21 52 Corporate governance Shareholder 24 information Directors’ remuneration 27 Directors’ report 29 Directors’ and auditors’ statements 30 The accounts 51 Five-year financial summary
591.41 1
465.52
450
445.4
300 150 2
Excluding exceptional items
0 97
Basic earnings per share (p) 22.2p
25
99
98
24.31
Figures for 1997 have not been restated to reflect the impact of FRS 12, a new accounting standard introduced in 1998/99 Figures for 1998 have been restated to reflect FRS 12
22.2
Summary of business of Annual General Meeting
Individual Savings Accounts (ISAs) for NGG shares are available.
The Annual General Meeting will be held on Thursday 22 July
Further information may be obtained from the Account Manager,
1999 in the Salamander Suite at the National Exhibition Centre,
Stocktrade, PO Box 1076, 10 George Street, Edinburgh EH2 2PZ
Birmingham. If you would like to receive a summary of the
(telephone “Grid Line”, 0131 529 0443).
business transacted at the Annual General Meeting, please contact the Shareholder Enquiry Unit (see “Enquiries” below).
Regulatory accounts NGG’s subsidiary company The National Grid Company plc is the
Enquiries
holder of the electricity transmission licence for England and
Enquiries about individual shareholder matters (including changes
Wales. NGC is required by the transmission licence to provide to
of address, lost share certificates etc) should be addressed to
the Director General of Electricity Supply accounting statements
Lloyds TSB Registrars, National Grid Team, 54 Pershore Road South,
in respect of each of its licensed businesses. Copies of these
Birmingham B22 1AD (telephone 0121 433 8000).
statements for the year ended 31 March 1999 may be obtained,
19.72
20
Individual Savings Accounts (ISAs)
15
free of charge, from the Shareholder Enquiry Unit (see “Enquiries”
Lloyds TSB Registrars’ website can be accessed on
below).
www.lloydstsb-registrars.co.uk
Unsolicited mail
Enquiries relating to National Grid’s activities should be
We are obliged by law to make our share register available to
addressed to the Shareholder Enquiry Unit, National Grid House,
other organisations and some shareholders may therefore receive
Kirby Corner Road, Coventry CV4 8JY (telephone 01203 423940).
10 5
Basic earnings per share exclude exceptional items
0 97
Ordinary dividends per share (p) 13.07p
15
A special dividend of 44.7p per share was paid during 1998
0
12
99
98
unsolicited mail. Any shareholder who wishes to limit receipt 11.13
13.07
12.07
9
of such mail should contact The Mailing Preference Service,
Information about National Grid is also available via the Internet on
Freepost 22, London W1E 7EZ. The Mailing Preference Service is
www.nationalgrid.co.uk
free to the public and will notify those organisations which
6
support its aims that unsolicited mail should not be sent to
3
individuals who have registered a preference not to receive it. 97
99
98
Audio tape version of Annual Review
Interest cover (times) 4.2x
10
For the assistance of visually-impaired shareholders, an audio
9.41
8
tape version of the Annual Review has been prepared and may be
2
7.1
obtained, free of charge, from the Shareholder Enquiry Unit (see
6
4.2
“Enquiries” below).
4 2 0 97
Gearing (%)
61% 158%
Capital expenditure (£m) £309.6m
99
98 1
2
40%
450 319.7
300
279.8
309.6
Transmission Energis-related
150 Other 0 97
98
99
The National Grid Group plc Designed and produced by Timothy Guy Design Photography by David Partner and Larry Bray News cuttings © Evening Standard, 1999 The Financial Times Limited, 1999, Utility Week, 1999 Printed by Westerham Press Typeset by Real Time Studio The paper used in this report
Cover illustration shows the creation of artificial lightning on an impulse generator at our research and development centre – full picture shown left
is produced from sustainably managed forests and is elemental chlorine free (ECF)
The National Grid Group plc Annual Report 1998 99 The National Grid Group plc Annual Report 1998/99
The National Grid Group plc National Grid House Kirby Corner Road Coventry CV4 8JY
