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National Grid USA / Annual Report
Fiscal year ended March 31, 2006
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Table of contents

  • Page 1
    National Grid USA / Annual Report Fiscal year ended March 31, 2006 nation ationalgr d

  • Page 2
    Cautionary Statement This Annual Report of National Grid USA contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and ...

  • Page 3
    ... Accounting Firm 3 ...30 Consolidated Statements of Income and of Comprehensive Income ...31 Consolidated Statements of Retained Earnings ...32 Consolidated Balance Sheets ...33 Consolidated Statements of Cash Flows ...35 Notes to Consolidated Financial Statements ...36 National Grid USA / Annual...

  • Page 4
    ... Revenue: $ Operating Profit: Net Income: Total Assets: 80,636 8,605 7,384 115,612 Granite State Electric Company Electricity distribution company serving Southern New Hampshire and portions of the Connecticut River Valley 41,000 customers in 21 communities National Grid USA / Annual Report

  • Page 5
    ... The Narragansett Electric Company, Granite State Electric Company and Nantucket Electric Company Operating Revenue: $ 675,931 Operating Profit: 84,925 Net Income: 76,363 Total Assets: 2,457,579 5 National Grid Wireless Holdings, Inc. Telecommunications infrastructure companies providing services...

  • Page 6
    ... GridAmerica operations also effective November 1, 2005. New England - USGen New England Inc. (USGen) Settlement Wholesale supplier bankruptcy settlement When New England Power Company (NEP) divested its generating business in 1998, it transferred its entitlement to power procured under several long...

  • Page 7
    ... an opportunity to achieve returns in excess of traditional regulatory allowed returns. Massachusetts Electric will be allowed to include its share of earned savings in demonstrating its costs of providing service to customers from January 2010 until May 2020. 7 National Grid USA / Annual Report

  • Page 8
    ... of traditional regulatory allowed returns. New England Power Company NEP is a participating transmission owner (PTO) in New England's Regional Transmission Organization (RTO) which commenced operations effective February 1, 2005. ISO New England, Inc. (ISO) has been authorized by FERC to exercise...

  • Page 9
    ... of operations of the Company: regulatory accounting (including the collection of purchase power costs through the commodity adjustment clause and purchased gas through the gas cost collection mechanism), derivative accounting, revenue recognition, goodwill accounting, tax accounting, and pension...

  • Page 10
    ... programs, commodity purchases, transmission service and contract termination charges (CTCs). The Company recognizes changes in unbilled electric revenues in its results of operations. Pursuant to Niagara Mohawk's 2000 multi-year gas settlement (which ended December 2004, with Niagara Mohawk...

  • Page 11
    ... of assets. For fiscal 2006, the Company used an 8.25% assumed return on assets for its pension plan and an 8.05% assumed return on assets for its other post-retirement benefits plans. Discount rate. The Company bases its discount rate on two measures of rates specific to the yield curve applicable...

  • Page 12
    ... customers who have not chosen an alternative supplier, the Company procures power on their behalf. These energy procurement costs (i.e., purchased electricity expenses) are recoverable from customers and do not impact the Company's electric margin or net income. National Grid USA / Annual Report

  • Page 13
    ...to fiscal year 2004. An analysis by customer class is provided below. Electric Sales Volumes (GWh) Actual 2006 New England: Residential Commercial Industrial/Other Total - New England New York: Residential General Service Large Time-of-Use NYPA/Other Total - New York Total - New England and New York...

  • Page 14
    ... commercial campuses (educational and health care) and customers receiving discount power under special contracts and station stand-by service. New York Power Authority (NYPA) are sales generally made to large industrial loads that are supplied from the Niagara Falls Power Project through Company...

  • Page 15
    ... companies' (Massachusetts Electric, Narragansett Electric, Granite State Electric and Nantucket Electric) deferral mechanisms for the over and under collection of electricity procurement costs. Electricity is procured for customers who have not chosen an alternative energy supplier. These purchased...

  • Page 16
    ... of kWh purchased due to customers migrating to competitive electricity suppliers and less extreme weather in the current year. GAS Niagara Mohawk is also a gas distribution company that services customers in cities and towns in central and eastern New York. Niagara Mohawk's gas rate plan allows it...

  • Page 17
    ... in retail throughput (for customers purchasing gas commodity from the Company rather than an alternative provider) comparing fiscal year 2006 to fiscal year 2005 is primarily due to (i) a decrease in use-per-customer primarily resulting from increased gas prices and (ii) less extreme weather...

  • Page 18
    ...in delivery revenue comparing fiscal year 2006 to fiscal year 2005 is primarily due to lower gas throughput of residential customers. The decrease in other gas revenue is primarily related to a decrease in the gross revenue taxes collected from customers as a result of a decline in the state imposed...

  • Page 19
    ... of increased gas prices during the year. The Company's net cost per Dth, as charged to expense, increased to $7.12 in the fiscal year ended March 31, 2005 from $6.61 in the prior fiscal year. This increase in price was slightly offset by decreased purchases. 19 National Grid USA / Annual Report

  • Page 20
    ...-through items: Transmission wheeling Energy conservation expenses Total pass-through items Atypical costs: Voluntary early retirement program Pension settlement (recovery)/losses Storm costs Service quality penalties Loss on sale of properties Total atypical costs Gridcom Total other operating and...

  • Page 21
    ... energy efficiency programs. The New England retail distribution companies manage their own energy efficiency programs while the New York program is managed by the New York State Energy Research and Development Authority which assesses the Company a fee. â- National Grid USA / Annual Report

  • Page 22
    ... retirement benefit obligations other than pension cost that had been expensed in fiscal year 2004. Pension settlement losses have resulted primarily from significant lump-sum cash withdrawals made by retirees of Niagara Mohawk. The pension settlement loss recovery of $14 million reflects the PSC...

  • Page 23
    ... fiscal years ended March 31, 2006 and 2005, respectively. The table below details components of this fluctuation. Other taxes ($'s in 000's) FY06 vs FY05 2006 Property taxes New England - electric New York - electric New York - gas Total property taxes Gross receipts tax New England - electric New...

  • Page 24
    ...maturing long-term debt 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. 24 National Grid USA / Annual Report

  • Page 25
    ... to capital projects, including new information technology systems, going into service. Increased stranded cost recovery of $214 million due to (i) the resumption of the USGen agreements and (ii) in accordance with Niagara Mohawk's merger rate plan. Decrease in purchase power obligations payments of...

  • Page 26
    ... program is made up of four main categories of work: â- vegetation management - incremental tree trimming to address an increase in customer interruptions related to contacts with tree limbs; feeder hardening - upgrading the Company's worst-performing overhead electric circuits by replacing aged...

  • Page 27
    ..., Niagara Mohawk continues to believe that its accounting for the deferrals is appropriate and will continue to defer costs and revenues, as applicable, through the end of the Merger Rate Plan on December 31, 2011, subject to regulatory review and approval. 27 National Grid USA / Annual Report

  • Page 28
    ... in fiscal year 2004. For further discussion of the settlement losses (see Note F - "Employee Benefits" of the Consolidated Financial Statements). Pension and post-retirement benefits costs In August 2003, the New York State PSC approved a settlement with Niagara Mohawk following an audit that...

  • Page 29
    ... Earnings for the years ended March 31, 2006, 2005 and 2004 Consolidated Balance Sheets at March 31, 2006 and 2005 Consolidated Statements of Cash Flows for the years ended March 31, 2006, 2005 and 2004 Notes to Consolidated Financial Statements â- â- â- â- 29 National Grid USA / Annual...

  • Page 30
    ...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, 2006 and 2005, and the results of their operations...

  • Page 31
    ...GRID USA AND SUBSIDIARY COMPANIES Consolidated Statements of Income (In thousands of dollars) For the years ended March 31, 2006 2005 2004 Operating revenues: Electric Gas Total operating revenues Operating expenses: Purchased energy: Electricity purchased Gas purchased Contract termination charges...

  • Page 32
    ... beginning of period Net income Dividends on preferred stock Dividends on common stock Loss on redemption of preferred stock Other Retained earnings at end of period $ $ The accompanying notes are an integral part of these consolidated financial statements. 32 National Grid USA / Annual Report

  • Page 33
    ... cash Accounts receivable (less reserves of $149,492 and associated companies of $11,571 and $6,806, respectively) Materials and supplies, at average cost: Gas storage Other Current portion of accumulated deferred income taxes Current portion of regulatory assets Other Total current assets Other non...

  • Page 34
    ... Other Total current liabilities Other non-current liabilities: Accumulated deferred income taxes Unamortized investment tax credits Accrued Yankee nuclear plant costs Purchased power obligations Derivatives and swap contracts Accrued employee pension and other benefits Additional minimum pension...

  • Page 35
    ... non-cash expense Cash paid to pension and other retirement benefit plan trusts Changes in operating assets and liabilities: Accounts receivable, net Materials and supplies Accounts payable and accrued expenses Accrued interest and taxes Pension and postretirement regulatory assets Purchased power...

  • Page 36
    ... gas distribution subsidiaries serve approximately 3.9 million customers in New York State, Massachusetts, Rhode Island and New Hampshire. The Company's transmission subsidiaries provide electricity transmission in New York through Niagara Mohawk Power Corporation (Niagara Mohawk) and in New England...

  • Page 37
    ... programs, commodity purchases, transmission service and contract termination charges (CTCs). The Company recognizes changes in unbilled electric revenues in its results of operations. Pursuant to Niagara Mohawk's 2000 multi-year gas settlement (which ended December 2004, with Niagara Mohawk...

  • Page 38
    ... cash consists of margin accounts for hedging activity, health care claims deposits, New York State Department of Conservation securitization for certain site cleanup, and a workers' compensation premium deposits. The $65 million increase in restricted cash for the fiscal year ended March 31, 2006...

  • Page 39
    ..., (b) more information about expected future cash outflows associated with those obligations and (c) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets. National Grid USA / Annual Report

  • Page 40
    ... post-retirement benefit plans that would require employers to fully recognize the plan's funded status on the balance sheet. If adopted as proposed, the new rules would be applied retroactively to prior financial statements presented and be effective for fiscal years ending after December 15, 2006...

  • Page 41
    ...costs Pension and post-retirement benefit plans costs Additional minimum pension liability (see Note F) Yankee nuclear decommissioning costs Loss on reacquired debt Long-term portion of standard offer under-recovery of fuel costs Other Total non-current regulatory assets Current potion of regulatory...

  • Page 42
    ... for Niagara Mohawk in New York, it is called the Competitive Transition Charge (in both cases, these charges are called the CTC). 42 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 43
    ... revenues, as applicable, through the end of the Plan on December 31, 2011. Niagara Mohawk's future filings for recovery of deferred amounts are subject to regulatory review and approval. Massachusetts Electric Company and Nantucket Electric Company Under Massachusetts Electric's long-term rate plan...

  • Page 44
    ... December 2005. This credit was designed to return customers' share of the excess earnings accrued under the merger rate plan approved and implemented in 2000 governing the merger of Narragansett with Blackstone Valley Electric Company and Newport Electric Corporation. Granite State Electric Company...

  • Page 45
    ... from their purchasers, including NEP. The Company's share of the decommissioning costs is accounted for in "Purchased energy" on the income statement. Under settlement agreements, NEP is permitted to recover prudently incurred decommissioning costs through CTCs. National Grid USA / Annual Report

  • Page 46
    ... a rate increase to reflect increased costs for decommissioning, pensions and other employment benefits, increased security and insurance costs and other expenses. In aggregate, the increase amounts to approximately $396 million through 2010, NEP's share of which is included in the future estimated...

  • Page 47
    ... System Operator (NYISO) or the New England Independent System Operator (ISO-NE) at market prices. Gas Supply, Storage and Pipeline 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...

  • Page 48
    ...regulation would permit it to recover the lost revenues that result from the FERC orders. These amounts are subject to regulatory review and challenge as part of the ongoing audit of Niagara Mohawk's deferral account balance in accordance with the merger rate plan. National Grid USA / Annual Report

  • Page 49
    .... The court remanded the case back to the trial court to increase its January 2001 judgment consistent with the amount in FERC's February 2006 order. Norwood filed an appeal with the Massachusetts Supreme Judicial Court, and on June 28, 2006, the appeal was denied. National Grid USA / Annual Report

  • Page 50
    ...through purchased electricity or gas expense in the hedge months. The Company's rate agreements allow for the pass-through of the commodity costs of electricity and natural gas, including the costs of the hedging programs. Niagara Mohawk has eight indexed swap contracts, expiring in fiscal year 2009...

  • Page 51
    ... FINANCIAL STATEMENTS (continued) At March 31, 2006, Niagara Mohawk projects that it will make the following payments in connection with its swap contracts for the fiscal years 2007 through 2009 and thereafter, subject to changes in market prices and indexing provisions: Year Ended March...

  • Page 52
    ... benefit cash balance pension plan design. Under that design, pay-based credits are applied based on service time, and interest credits are applied based on an average annual 30-year Treasury bond yield. Non-union employees hired by New England-based companies prior to July 15, 2002 and New England...

  • Page 53
    ... 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 54
    ...obligations and net periodic benefit costs for the fiscal years ending March 31. Pension Benefits 2005 2006 Benefit obligations Discount rate Rate of compensation increase New England Rate of compensation increase New York Expected long-term rate of return Health care cost trend rate Initial Pre 65...

  • Page 55
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Pension Benefits The Company's net periodic benefit cost for the fiscal years ended March 31, 2006, 2005, and 2004 included the following components: (in thousands) Service cost Interest cost Expected return on plan assets Amortization of ...

  • Page 56
    ... pension plans primarily (section 401(k) employee savings fund plans) that cover substantially all employees. Employer matching contributions of approximately $11 million, $10 million, and $12 million were expensed in fiscal year 2006, 2005, and 2004, respectively. National Grid USA / Annual Report

  • Page 57
    ... FINANCIAL STATEMENTS (continued) Post-retirement Benefits Other than Pensions The Company's total net periodic benefit cost of PBOPs for the fiscal years ended March 31, 2006, 2005, and 2004 included the following components: (in thousands) Service cost Interest cost Expected return on plan assets...

  • Page 58
    ... post-retirement benefit expense and the allowance in rates for these costs. Also, the regulatory asset account includes the $52 million cost of Niagara Mohawk's Voluntary Early Retirement Program (VERP) that occurred in conjunction with its acquisition by the Company, and a post-retirement benefit...

  • Page 59
    ... amount at the statutory level. Total income taxes in the consolidated statements of income are as follows: (In thousands) Income taxes charged to operations Income taxes charged (credited) to "Other income" Total income taxes $ $ For the Year Ended March 31, 2005 2004 2006 $ 306,229 $ 269,667...

  • Page 60
    ...tax benefit Tax return true-ups Foreign tax credits unutilized Rate recovery of deficiency in deferred tax reserves Book/tax depreciation not normalized Unamortized debt discount not normalized Cost of removal Medicare act All other differences Total income taxes $ $ $ National Grid USA / Annual...

  • Page 61
    ... Alternative minimum tax Unbilled revenues Non-utilized NOL carryforward Liability for environmental 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...

  • Page 62
    ... of the Merger Rate Agreement and the utilization of alternative minimum tax credits is affected by the rules of Section 382 of the Internal Revenue Code. There were no valuation allowances for deferred tax assets deemed necessary at March 31, 2006 or 2005. 62 National Grid USA / Annual Report

  • Page 63
    ...related issuance. Granite State Electric At March 31 (In thousands) Series Note Note Note Total long-term debt Rate % 7.370 7.940 7.300 Maturity November 1, 2023 July 1, 2025 June 15, 2028 $ $ 2006 5,000 5,000 5,000 15,000 $ $ 2005 5,000 5,000 5,000 15,000 National Grid USA / Annual Report

  • Page 64
    ... Series Rate % Series B 9.260 Series C 9.410 Total long-term debt Long-term debt due within one year Total long-term debt, excluding current portion Maturity April 17, 2007 October 17, 2015 $ $ 2006 6,350 46,270 52,620 5,760 46,860 $ $ 2005 12,110 46,270 58,380 5,760 52,620 National Grid USA...

  • Page 65
    ...BFA - Business Finance Authority of the State of New Hampshire Totals - National Grid USA At March 31 (In thousands) Total long-term debt Unamortized Discount on Debt Long-term debt due within one year Total long-term debt, excluding current portion 2005 2006 $ 3,629,630 $ 4,234,355 (2,572) (2,069...

  • Page 66
    ...' long term debt was estimated based on the quoted prices for similar issues or on the current rates offered to the Company and its subsidiaries for debt of the same remaining maturity. NOTE I - SHORT-TERM DEBT NEP At March 31, 2006 and 2005, NEP had lines of credit and standby bond purchase...

  • Page 67
    ... This statement is effective for the Company for its fiscal year ended March 31, 2006. The Company has a $13 million asset retirement obligation reserve as of March 31, 2006 which does not have a material impact on the Company's results of operation or financial position. National Grid USA / Annual...