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National Grid USA / Annual Report
Fiscal year ended March 31, 2005

Table of contents

  • Page 1
    National Grid USA / Annual Report Fiscal year ended March 31, 2005

  • Page 2
    ...and tax rates; changes in energy market prices; federal and state regulatory developments and changes in law, regulations or regulatory policies; timing and adequacy of rate relief, including failure to recover costs currently deferred under the provisions Statement of Financial Accounting Standards...

  • Page 3
    ......4 Management's Discussion and Analysis of Financial Condition and Results of Operations Incentive Returns Under Rate Plans ...6 Critical Accounting Policies...7 Results of Operations ...9 Liquidity and Capital Resources ...20 Other Regulatory Matters ...22 Consolidated Financial Statements Report...

  • Page 4
    ... area Calendar 2005 Customer Base (approximately) Fiscal 2005 Financial information (before intercompany eliminations) ($'s in 000's) 4 Niagara Mohawk Power Corporation Electricity & Gas distribution and Electricity transmission company serving central, northern and eastern New York Massachusetts...

  • Page 5
    ... company serving Nantucket Island off Massachusetts New England Power Company Electricity transmission company serving Massachusetts, Rhode Island and New Hampshire GridAmerica LLC (1) Electricity transmission grid management serving utilities in Ohio, Indiana, Missouri, and Illinois National Grid...

  • Page 6
    ... allowed return of 10.6%. 6 Niagara Mohawk collects transmission business revenues under several Federal Energy Regulatory Commission (FERC) rate schedules and state energy delivery rates. Total transmission business revenues are determined by the state-approved 10-year rate plan. Under Niagara...

  • Page 7
    ... accounting, revenue recognition, goodwill accounting, and pension accounting. Regulatory Accounting Electric and gas utilities are subject to certain accounting standards that are generally not applicable to other business enterprises. The Company applies the provisions of Statement of Financial...

  • Page 8
    ...the New York State Public Service Commission (PSC) to establish a regulatory asset or liability for derivative instruments that did not qualify for hedge accounting and were the result of regulatory rulings. Revenue Recognition Revenues from the sale of electricity and gas to customers are generally...

  • Page 9
    ...'s electricity business encompasses the transmission, distribution, and delivery of electricity in New England and New York including stranded cost recoveries. The Company's New England distribution subsidiaries (Massachusetts Electric, Narragansett Electric, Granite State Electric and Nantucket...

  • Page 10
    ... 11.3 23.7 1.0 Electric revenue Less: Electricity purchased Amortization of stranded costs CTC and nuclear shutdown charges Other O&M - fuel for generation Other O&M - transmission expenses Other O&M - energy efficiency costs Other taxes - gross receipts tax Electric margin $ (0.5) (4.8) 2.5 (75...

  • Page 11
    ... Power for Jobs programs. Customers whose power contracts expire and who subsequently continue to purchase power from Niagara Mohawk are accounted for in either large time-of-use sales or general service sales. Other accounts are primarily Street and Highway Lighting as well as Private Area Lighting...

  • Page 12
    ... procurement (shown as a "generation" charge on the customers' bills) are adjusted to reflect actual or forecasted purchased electricity costs along with an increase or reduction for any under or over collection of prior period costs. In fiscal 2005 â- â- â- National Grid USA / Annual Report

  • Page 13
    ... has no impact on electric margin or net income due to equal offsets in purchased electricity (cost of power) and retail sales revenue (generation rate revenue). â- Other revenue consists of miscellaneous ancillary revenues such as rental income from electric properties (e.g. usage of pole space...

  • Page 14
    ... The Company's gas rate agreement also includes a weather normalization clause to mitigate the impact that unseasonable weather could have on gas margin during the peak gas sales season (winter). This normalization clause compares the 30-year historical average temperature for the National Grid USA...

  • Page 15
    ... the Company's margin. The decrease in delivery revenue comparing fiscal year 2005 to fiscal year 2004 is primarily due to lower gas throughput. â- Other gas revenue is primarily related to the recovery of costs associated with the grossreceipts tax and state income tax, which, like purchased gas...

  • Page 16
    .... Fiscal year 2005 represents a full year of the savings associated with these programs. The increase in employee benefits comparing fiscal year 2004 to fiscal year 2003 was primarily due to a decrease in the discount rate used to calculate the expense and the â- National Grid USA / Annual Report

  • Page 17
    .... The Company adjusted Niagara Mohawk's estimated allowance for doubtful accounts for customer receivable accounts with balances greater than 90 days in arrears which resulted in an additional expense of approximately $42 million in fiscal 2003. â- â- â- National Grid USA / Annual Report

  • Page 18
    ... deferred to a regulatory asset account to be amortized at a later date. The Company's revenues currently include an allowance for the amortization of these costs plus a return. The increase in the expense results primarily from scheduled amortization under Niagara Mohawk's rate plan, in which its...

  • Page 19
    ...long-term debt maturing and the early redemption of third-party debt using affiliated-company debt at lower interest rates. See "Liquidity and Capital Resources: Financing Activities" below for a detailed description of the various refinancings and redemptions. 19 National Grid USA / Annual Report

  • Page 20
    ... benefit plan trusts of approximately $171 million primarily due to a one time payment made in fiscal year 2004 related to a settlement agreement between Niagara Mohawk and the New York PSC that allows Niagara Mohawk to earn a return on its additional funding. Decrease in the change in accounts...

  • Page 21
    ...Bonds 9.26% Series B Notes Payable to affiliated companies All other long-term debt & preferred stock Company Niagara Mohawk Niagara Mohawk Niagara Mohawk Niagara Mohawk Niagara Mohawk Massachusetts Electric Massachusetts Electric Massachusetts Electric Massachusetts Electric Massachusetts Electric...

  • Page 22
    ...Construction expenditure levels for the energy delivery business are generally consistent from year to year. The following table summarizes estimated long-term contractual cash obligations of the Company: Payment due in: ($'s in millions) Long-term debt Electric purchase power commitments Gas supply...

  • Page 23
    ... earn 80 percent of the amount by which the rate of return on the pension and post-retirement benefit funds exceeds 5.34 per cent (nominal) measured as of that date. Elevated equipment voltage The PSC issued an order on January 5, 2005, requiring all electric utilities in the state to test annually...

  • Page 24
    ... Earnings for the years ended March 31, 2005, 2004 and 2003 Consolidated Balance Sheets at March 31, 2005 and 2004 Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements â- â- â- â- 24 National Grid USA / Annual...

  • Page 25
    ...balance sheets and the related consolidated statements of income, of comprehensive income, of retained earnings and of cash flows present fairly, in all material respects, the financial position of National Grid USA and its subsidiaries at March 31, 2005 and 2004, and the results of their operations...

  • Page 26
    NATIONAL GRID USA AND SUBSIDIARY COMPANIES Consolidated Statements of Income (In thousands of dollars) For the years ended March 31, 2005 2004 2003 Operating revenues: Electric Gas Total operating revenues Operating expenses: Purchased energy: Electricity purchased Gas purchased Contract ...

  • Page 27
    ... plant, at original cost: Electric plant Gas plant Common plant Construction work-in-process Total utility plant Less: accumulated depreciation and amortization Net utility plant Goodwill, net of amortization Pension intangible Other property and investments Current assets: Cash and cash equivalents...

  • Page 28
    ...Other Total current liabilities Other non-current liabilities: Accumulated deferred income taxes Unamortized investment tax credits Accrued Yankee nuclear plant costs (Note C) Purchased power obligations (Note C) Liability for swap contracts (Note E) Accrued employee pension and other benefits (Note...

  • Page 29
    ... Pension and other retirement benefit plan expense Cash paid to pension and other retirement benefit plan trusts Adjustments to goodwill Changes in operating assets and liabilities: Change in accounts receivable, net Change in materials and supplies Change in prepaid taxes Change in accounts payable...

  • Page 30
    ... (FERC) and the applicable state utility commissions of New York, Massachusetts, Rhode Island and New Hampshire. See Note B - "Rate and Regulatory Issues." NEP and Niagara Mohawk, file reports with the SEC under the Securities Exchange Act of 1934, as amended. 30 National Grid USA / Annual Report

  • Page 31
    ...from energy conservation programs, commodity purchases, transmission service and contract termination charges (CTCs). The unbilled revenue included in accounts receivable at March 31, 2005 and 2004 was approximately $154 million and $169 million, respectively. Pursuant to Niagara Mohawk's 2000 multi...

  • Page 32
    ... claims deposits, New York State Department of Conservation securitization for certain site cleanup, and a worker's compensation premium deposit. Under the Loan and Trust Agreement for the Massachusetts Development Finance Agency Tax Exempt Electric Utility Revenue Bonds (Nantucket Electric Company...

  • Page 33
    ...be accounted for using a fair-value-based method. The Standard is effective for fiscal years beginning after June 15, 2005. The adoption of this statement will not have a material impact on the Company's financial position, results of operations, or cash flows. 33 National Grid USA / Annual Report

  • Page 34
    ... the accompanying consolidated financial statements to conform to the fiscal 2005 presentation. NOTE B - RATE AND REGULATORY ISSUES The Company's regulated subsidiaries generally use the same accounting policies and practices for financial reporting purposes as non-regulated companies under US GAAP...

  • Page 35
    ... and for Niagara Mohawk in New York, it is called the Competitive Transition Charge (in both cases, these charges are called the CTC). Management believes that future cash flows from charges for electric service under existing rate plans, including the CTC, will be sufficient to recover the Company...

  • Page 36
    ... of Columbia Circuit. NEP's currently allowed ROE for transmission assets is 10.25%. Effective on the RTO operations date of February 1, 2005, NEP's transmission rates began to reflect a proposed base return on equity of 12.8%, subject to refund, plus the additional 0.5% incentive return on regional...

  • Page 37
    ... became effective on May 1, 2000. The Narragansett Electric Company In Rhode Island, Narragansett Electric's distribution rates are governed by a long-term rate plan. Between May 2000 and the end of October 2004, rates were frozen and it was permitted to retain 37 National Grid USA / Annual Report

  • Page 38
    ... historic activities of Niagara Mohawk, Massachusetts Electric, Narragansett Electric, Granite State Electric and NEP are subject to various federal, state and local environmental laws and regulations. Like most other industrial companies, our transmission and distribution companies use or generate...

  • Page 39
    ... return, in accordance with settlement agreements approved by the FERC in May 1999 and July 2000, respectively. The Yankees collect the approved costs from their purchasers, including NEP. The Company's share of the decommissioning costs is accounted for in "Purchased energy" on the income statement...

  • Page 40
    ... Commitments: In connection with its regulated gas business, Niagara Mohawk has long-term commitments with a variety of suppliers and pipelines to purchase gas commodity, provide gas storage capability and transport gas commodity on interstate gas pipelines. National Grid USA / Annual Report

  • Page 41
    ... on New York Mercantile Exchange quotes and reservation charges, when applicable. Storage and pipeline capacity commitments' amounts are based upon volumes specified in the contracts, and represent demand charges priced at current filed tariffs. At March 31, 2005, Niagara Mohawk's firm gas supply...

  • Page 42
    ... the Court upholds the FERC's orders, the Company would seek recovery under its rate plans of the station service charges not paid by the NRG Affiliates. Retail Bypass: A number of generators have complained or withheld payments associated with Niagara Mohawk's delivery of station service to their...

  • Page 43
    ... TO CONSOLIDATED FINANCIAL STATEMENTS (continued) State Collection Action: NEP filed a collection action in Massachusetts Superior Court (Worcester County) to collect the CTC, which Norwood has refused to pay, apart from the initial payment in 2004. In March 2001, the Superior Court ruled that...

  • Page 44
    ... pension liability NOTE E - DERIVATIVES AND HEDGING ACTIVITIES In the normal course of business, Niagara Mohawk is a party to derivative financial instruments (derivatives) that are principally used to manage commodity prices associated with its natural gas and electric operations. These financial...

  • Page 45
    ... hedge accounting status under SFAS 133. Cash flow hedges that are qualified under SFAS 133 are as follows: NYMEX gas futures for the purchases of natural gas and NYMEX electric swap contracts hedging the purchases of electricity. The following table represents the open positions at March 31, 2005...

  • Page 46
    ... BENEFITS Summary The National Grid USA companies have non-contributory defined benefit pension plans covering substantially all employees. With the exception of New England-based union-represented employees, employees hired on or after July 15, 2002 participate in a cash balance pension plan design...

  • Page 47
    ... management of both equity and fixed income. The rates of return for each asset class are then weighted in accordance with the plans' target asset allocation, and the resulting long-term return on asset rate is then applied to the market-related value of assets. National Grid USA / Annual Report

  • Page 48
    ...FINANCIAL STATEMENTS (continued) The benefit plans' costs (for all subsidiaries) for the past three years included the following components and used the following assumptions. (in thousands) Net periodic benefit cost, for the year ended March 31, Service cost Interest cost Expected return on plan...

  • Page 49
    ... market value of the types of assets held in the benefit plans' trusts. (in thousands) Qualified Pension Plans 2005 2004 Nonqualified Pension Plans 2005 2004 PBOP 2005 2004 Change in plan assets: Beginning balance, April 1, Actual return on plan assets Employer contributions Benefit payments...

  • Page 50
    ... FINANCIAL STATEMENTS (continued) The following benefit payments and subsidies, which reflect expected future service, as appropriate, are expected to be paid from the Company's plans. (in thousands) Qualified Pension Plans Payments Subsidies Nonqualified Pension Plans Payments Subsidies...

  • Page 51
    ...% Expected return on plan assets - PBOP Nonunion Expected return on plan assets - PBOP Union Medical trend Initial Ultimate Year ultimate is reached 5.75% 8.50% 5.75% N/A 5.75% N/A 5.75% N/A 6.75% 8.50% 10.00% 5.00% 2010 5.75% N/A 7.25% 8.75% 10.00% 5.00% 2009 National Grid USA / Annual Report

  • Page 52
    ...FINANCIAL STATEMENTS (continued) The following table provides the funded status of the benefits and the amounts recognized on the balance sheets at March 31. (in thousands) Qualified Pension Plans 2005 2004 Nonqualified Pension Plans 2005 2004 PBOP 2005...,598) National Grid USA / Annual Report

  • Page 53
    ... 2004, National Grid USA companies made two voluntary early retirement offers (VEROs). The Company expensed approximately $67.2 million of non-union VERO costs in fiscal 2004. Settlement Losses As the result of the decline in the stock market since the close of the merger with Niagara Mohawk and...

  • Page 54
    ... benefit cost Annualized expense reduction $ 2005 1,220 7,396 8,904 17,520 23,360 $ $ NOTE H - INCOME TAXES The Company and its subsidiaries participate with National Grid General Partnership (NGGP), a wholly owned subsidiary of NGT, in filing consolidated federal income tax returns. The Company...

  • Page 55
    ...using the tax rates that will be in effect when temporary differences reverse. Generally, for regulated companies, the change in tax rates may not be immediately recognized in operating results because of rate-making treatment and provisions in the Tax Reform Act of 1986. National Grid USA / Annual...

  • Page 56
    ... costs Voluntary early retirement program Bad debts Pension and other post-retirement benefits Investment tax credit Other Total deferred tax assets Deferred tax liabilities: Plant related Equity AFUDC Deferred environmental restoration costs Merger rate plan stranded costs Merger fair value pension...

  • Page 57
    ... $ Granite State Electric At March 31 (In thousands) Series Note Note Note Subtotal - Granite State Electric Rate % 7.370 7.940 7.300 Maturity November 1, 2023 July 1, 2025 June 15, 2028 $ $ 2005 5,000 5,000 5,000 15,000 $ $ 2004 5,000 5,000 5,000 15,000 National Grid USA / Annual Report

  • Page 58
    ... 31, 2004 was 2.35 percent and 1.19 percent, respectively. Hydros At March 31 (In thousands) Series Series B Series C Subtotal - Hydros Rate % 9.260 9.410 Maturity April 17, 2007 October 17, 2015 $ $ 2005 12,110 46,270 58,380 $ $ 2004 21,380 46,270 67,650 National Grid USA / Annual Report

  • Page 59
    ... mortgage bonds have been issued. As of March 31, 2005, the aggregate payments to retire maturing long term debt are as follows (in thousands): Fiscal Year Amount 2006 $ 561,820 2007 296,400 2008 213,510 2009 701,400 2010 351,400 Thereafter 2,109,825 $ 4,234,355 National Grid USA / Annual Report

  • Page 60
    ... 6.00% Series $50 par value 4.50% Series 4.64% Series $25 par value Adjustable Rate Series D Total Niagara Mohawk Niagara Mohawk Niagara Mohawk Niagara Mohawk Mass Electric Mass Electric Niagara Mohawk Niagara Mohawk New England Power Narragansett Narragansett Niagara Mohawk 57,536 137,139 94,967...

  • Page 61
    .... Management does not believe the Company has any material asset retirement obligations arising from legal obligations as defined under FAS 143. However, under the Company's current and prior rate plans it has collected through rates an implied cost of removal for its plant assets. This cost of...