FORM 425
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 425
(LOGO) NATIONAL GRID GROUP, PLC
(Exact name of registrant as specified in charter)
UNITED KINGDOM
(State or other jurisdiction of
incorporation or organization)
15 Marylebone Road, London NWI 5JD, England
(Address of principal executive offices)
Registrant's telephone number, including area code
(011 44 207 312 5600)
<PAGE>
Filed by National Grid Group plc
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 of the
Securities Exchange Act of 1934
Commission File No.: 001-02987
Subject Company: Niagara Mohawk Holdings, Inc.
THE FOLLOWING ARE PREPARED REMARKS MADE IN CONNECTION WITH AN
INTERIM RESULTS ANNOUNCEMENT FOR NATIONAL GRID GROUP PLC TO
ANALYSTS
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Interim's 2000 James Ross FINAL
Ladies and gentlemen, good morning and welcome to our half-
year results.
With me are David, who will comment on the key strategic and
operational developments and Stephen, who will take us through
the numbers. Roger Urwin, Director for the UK and Europe, and
Mike Jesanis, whom we have recently promoted to the position of
Chief Operating Officer of National Grid USA, are here to help
answer questions.
Before starting the presentation, I would like to just pay
tribute to Wob Gerretsen, our Board member for Latin America, who
died suddenly and unexpectedly last month. He was a friend as
well as a colleague and we all miss him.
Following Wob's death, we have reallocated his responsibilities.
Rick Sergel is now responsible for our electricity business in
South America, as well as North America; and Steven Marshall is
now responsible for Latin America telecoms, reporting to David.
That said, let me turn to the half-year performance.
National Grid has delivered another very strong set of results
and has continued to deliver on its strategy.
In the UK, operating performance has been fully up to
expectation. We have also accepted Ofgem's final proposals for
the next period of transmission price control.
This establishes a stable framework for the next 5 years, and we
are confident of meeting the demanding efficiency targets.
In the US, we are now a year ahead of our original plans. NEES
and EUA, now National Grid USA, were earnings enhancing
immediately following completion of the acquisitions and are
delivering a rate of return on our investment above our initial
expectations.
The acquisition of Niagara Mohawk, which we announced in
September, takes our electricity strategy another major step
forward. Upon completion, expected towards the end of next year,
we will be a top 10 US electricity business. Over half our
operating profits will come from the Northeast US, a region which
is already demonstrating its ability to deliver longer term
regulatory stability and significantly higher returns than in the
UK.
In telecoms, our strategy of leveraging our expertise in
constructing and maintaining telecoms networks, has created a
portfolio of interests, which balances risk with the potential
for substantial capital appreciation.
Energis has again reported excellent results, and we now also
have a joint venture with Energis in Poland.
In Latin America, we have three joint ventures, of which Intelig
is substantially the largest and here we are focussed on
curtailing the level of start-up losses.
Overall, these results and the strategic steps we have taken,
further increase our confidence in National Grid's future
financial strength and in its prospects for growth and greater
diversity of earnings.
We are committed to delivering sustained real growth in
dividends.
Accordingly, we are today announcing a policy of aiming to
increase dividends per share by 5% in real terms for each of the
next 5 years.
On that note, let me ask Stephen to present the financials.
Stephen
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2000 Interims - Stephen Box FINAL
Thank you James and good morning everyone.
Once again, we have produced a strong financial performance. The
results include a full 6 months of contribution from NEES and 23
weeks contribution, about 90% the period, from EUA. This has
resulted in a change in the profile of the Group's earnings which
will be further enhanced by the acquisition of Niagara Mohawk.
SLIDE: TOTAL OPERATING PROFIT
Let me start with the profit and loss account. Total operating
profit, before goodwill amortisation and exceptional integration
costs, was up 77.6 million at 358.6 million.
This includes a 148.6 million first-time contribution from
National Grid USA, which was offset by 63.8 million higher start-
up losses in Intelig and a reduction in UK transmission operating
profits of 11.1 million.
Following the acquisitions of NEES and EUA, we have provided a
much more detailed segmental analysis in the financials part of
the statement, so that you have a full breakdown of the operating
profits by business line and by geographical area.
SLIDE: UK TRANSMISSION
Turning to UK Transmission, price capped turnover was down 9
million to 429 million. Last year's first half results included
12.4 million recovery of earlier years under recoveries. We
currently estimate that we will over recover our allowed revenue
this year, by some 25.6 million. In accordance with the
accounting treatment required by FRS12 we will include that over-
recovery in this year's P&L, rather than deferring it to future
years. The 6 months results include half of this estimated over-
recovery ie 12.8 million. As ever, however, the actual outcome
for the full year will depend on what the weather is like this
winter.
We reduced transmission controllable costs by a further 3 per
cent in real terms during the period. We remain on target to
achieve an average real reduction in transmission controllable
costs of 6 per cent per annum over the current four year
regulatory period.
Operating profit from the transmission services scheme was up 2.7
million to 7.8 million. With the delay of NETA, this scheme will
now run until the end of the financial year. We do not expect
this Winter will see a repeat of the exceptional generator
bidding behaviour which last year resulted in abnormally high
second half TSS profits.
Overall, UK Transmission operating profit was down 11.1 million
to 242.8 million
SLIDE: EXCHANGE RATE SCHEDULE
Before moving on to our international operations, I would like to
explain the different US dollar to pound sterling exchange rates
used in presenting these results. The September balance sheet
uses the closing rate of 1 dollar 48, compared to 1 dollar 60 at
March. The P&L is based on the April to September average rate
of 1 dollar 50.
The weakness of sterling over the half year had a beneficial
effect on our US operating profits. In other words, with a lower
dollar/sterling exchange rate the dollar operating profits of
National Grid USA translate into a higher sterling operating
profit. On the other hand, the lower rate also has the effect of
increasing the sterling cost of US dollar interest expense and US
taxes. As our acquisitions of NEES and EUA have been fully
funded with US dollar financing, the beneficial impact at the
EBIT level has been offset at the Interest and Tax levels. The
impact of the lower dollar rate on National Grid USA's profits
has therefore not had a significant effect on our Earnings per
Share.
Where we have experienced a negative impact from exchange rates
is in relation to Brazil. The strength of the real accounted for
5.5 million of our higher Intelig losses.
SLIDE: NATIONAL GRID USA
National Grid USA is performing well ahead of expectations.
Total operating profit, before exceptional integration costs and
goodwill amortisation, was 148.6 million and included 73.9
million from distribution, reflecting higher than expected volume
growth of 3.6 per cent on a weather-corrected basis. This growth
in deliveries reflects the strong local economies in
Massachusetts and Rhode Island, where job growth over the last
year was nearly 2% and the expanded use of electricity to power
the new economy. Of the turnover figure for the US distribution
operations, approximately 65 per cent represents costs that are
passed straight through to customers.
Operating profit also included 20.5 million from Transmission,
38.9 million from the recovery of stranded costs and generation,
11 million from the US/Canada interconnector and 1.5 million from
NEESCom. This was NEESCom's first 6 monthly operating profit and
its turnover was up 300 per cent over the first half of last
year.
National Grid USA has two seasonal peaks in its business the
winter heating peak in the first calendar quarter and the summer
air-conditioning peak in the third calendar quarter. As each of
our financial half-years contains one peak, we do not expect
National Grid USA to introduce any significant seasonality into
the Group's results.
SLIDE: NATIONAL GRID USA GROUP IMPACTS
The acquisition of EUA was completed on 19th April at a cost of
414 million pounds. The net assets acquired had a provisional
fair value of 213.7 million, resulting in goodwill of 200.3
million. This has been capitalised and is being amortised
through the profit and loss account over 20 years.
The operations of NEES and EUA were successfully integrated on
1st May. The integration costs that have to be charged to the
profit and loss account under UK GAAP were 46.8 million pounds
and these have been reported as an exceptional item in this half
year.
The acquisitions of NEES and EUA were earnings enhancing after
goodwill amortisation, but before the exceptional integration
costs, for the six months ended 30th September. Effectively,
given that we owned NEES for only 10 days in March, this means
that the acquisitions have been earnings enhancing after goodwill
amortisation from day one.
The annualised nominal pre-tax return on our investment for the
six months was 9.3 per cent.
SLIDE: ASSOCIATE ENERGIS
You will have seen from its interim results last week that
Energis continues to perform extremely well, with turnover up 81
per cent to 368 million and Group EBITDA up 71 per cent to 65.5
million. Energis reported an operating profit, before goodwill
amortisation, of 6.6 million compared to a loss last year of 1.5
million. Our share of the operating profit before goodwill was
2.5 million.
We were pleased that the Government, in the pre-budget report
earlier this month, confirmed its intention to introduce new
rules which will allow relief of capital gains tax on disposals
of corporate holdings of over 20 per cent if the proceeds are
reinvested within one year prior to and three years after the
disposal. The rules are expected to become effective from April
2001.
The Government indicated that it may consider a complete
exemption from CGT on disposals of substantial holdings, rather
than rolling over the gain. This would clearly be an even better
outcome, although the additional consultation involved could
delay the effective date of the new rules by a year.
The placing of new shares by Energis in September diluted our
holding to 34.6 per cent. The value of our remaining holding is
2.8 billion pounds at yesterday's closing price. The internal
rate of return on our investment to date is now 80 per cent.
SLIDE: JOINT VENTURES
Our joint ventures are principally in telecoms, but we also have
our electricity network investments in Argentina and Zambia and
minority nuclear interests in the US. Telecoms start-up ventures
are typically loss-making in their early stages, so overall, the
joint ventures contributed a loss of 55.4 million to the Group
results.
All of our joint ventures have December year ends and we
therefore consolidate their half-year results to June into our
September numbers. For Intelig alone, because of its
materiality, we bring in an extra quarter based on management
accounts so that its results are for the same period as the
Group.
Our share of operating profit from Transener increased by 1.3
million to 6.8 million. This resulted from increased un-
regulated income, bonuses for quality of service and lower
penalty payments.
Our electricity operation in Zambia continues to perform well.
The completion in March of the privatisation of the copper mines
has already resulted in a 5 per cent increase in demand for
electricity, contributing to the 0.4 million increase in our
share of operating profit to 2.8 million, before the amortisation
of goodwill.
David will brief you on Brazil, where our share of operating
losses was 69.7 million. This is within the 75 million forecast
we announced at the beginning of September.
Our investment in Intelig to 30th September was 495 million
dollars. The sterling cost of this investment was 318.9 million
pounds, as our investments were made at an average dollar
exchange rate of 1.55.
SLIDE: CAPITAL EXPENDITURE
Turning to capital expenditure, total capex was 224 million for
the six months. UK Transmission capex was up 39.3 million to
157.6 million. Load related capex was up 23 million and non
load related up 17 million including 8 million relating to
NETA. National Grid USA capex of 60.5 million was included for
the first time.
SLIDE: NET INTEREST
Going back to the Group numbers, net interest was up 68.4
million to 98.7 million.
Net debt was much higher over the six months to 30th September
than in the equivalent period of last year. This was
principally due to the acquisitions in March and April of NEES
and EUA, which were entirely debt financed, partly offset by
the Energis placing in February this year.
The increase in net interest due to the higher net debt was
offset by two items. First, there was a one-off 17.4 million
benefit from closing out sterling fixed interest rate swaps
originally entered into as hedges for the Group's sterling
borrowings. These hedges were no longer needed as a result of
the reduction in the Group's sterling borrowings.
Second, the accounting under UK GAAP for the pension plan
surpluses in NEES and EUA at acquisition involved crediting a
notional interest return on the surpluses to net interest.
This amounted to 6.1 million for the first half. We expect a
similar benefit in the second half. Actuarial valuations of
these plans are undertaken annually. The impact of this item
on future years' results will depend on the surpluses or
deficiencies shown by these valuations.
Interest cover, excluding exceptional integration costs,
goodwill amortisation and the impact of exchangeable bonds, was
4.7 times.
SLIDE: EFFECTIVE TAX RATE
The underlying Group effective tax rate for the current year
remains at 26 per cent. The tax charge for the period,
excluding exceptionals, was 20 million lower than this
effective rate, due to the release of tax provisions relating
to prior years computations agreed with the Inland Revenue.
SLIDE: EXCEPTIONAL PROFITS
The results include post tax exceptional profits of 228.6
million net. This comprises three items. First, a 132.1
million gain, before and after tax, arising from reductions in
the Group's interest in Energis over the 6 months, primarily as
a result of Energis' placing of new shares in September.
Second, a 140 million tax credit arising from the realisation
of a capital loss for tax purposes as a result of Group
restructuring. And third, the 43.5 million of post-tax costs
associated with the integration of NEES and EUA.
SLIDE: EARNINGS AND DIVIDEND PER SHARE
Turning to Earnings per Share, I've set out five different EPS
measures in the table in your pack.
The final measure gives the best indication of our underlying
performance for the half year. It excludes exceptional items
and other one-offs, goodwill amortisation and telecoms start-up
losses. It shows an increase of just over 30% on the first
half of last year.
The two major factors in this growth were the Energis placing
in February 2000, which we indicated at the time would enhance
earnings per share by about 10 per cent,and the US
acquisitions, which I estimate have enhanced earnings before
goodwill amortisation by just under 20 percent.
The ordinary dividend is up 8.2 per cent to 6.05 pence. This
is again at the top end of our target range of 4 to 5 per cent
real growth.
SLIDE: SUMMARY
In summary, we're in great shape.
At 30th September, the proportion of our operating profits
coming from the US, before exceptional integration costs and
goodwill amortisation, was just over 35%.
Following the acquisition of Niagara Mohawk, that proportion
will increase to approximately 60%.
The increasing rates of return we expect to achieve in the US
underpin our new dividend policy, announced this morning. We
are committed to delivering sustained real dividend growth and
aim to increase dividends per share by 5 per cent real in each
of the next five years.
Now over to David
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INTERIMS 2000 - DAVID JONES FINAL : 20.11.00
Thank you Stephen, and good morning everyone.
Clearly, this is a strong set of results with considerable
progress made in both our electricity and telecoms strategies.
If I may, I shall start with telecoms, since this is the area
where we do face an issue which we flagged in our September
trading statement, namely Intelig.
Overall, our telecoms strategy is to leverage our experience in
designing, building and maintaining state-of-the-art telecoms
networks.
This started with Energis, which is now a substantial and fast
growing independent business building on its UK strength in data
and internet and extending its position into a set of connected
European markets.
In the US, NEESCom is a natural extension of our electricity
business.
Beyond Energis and NEESCom, our telecom activities are in the
form of joint ventures, where our partners provide product
development, sales and marketing skills to complement our network
skills.
In Europe, we have one such joint venture in Poland with Energis
which is on track for a service launch in Spring next year.
In Latin America, we have three joint ventures, which vary in
their nature.
In Santiago, Chile, in conjunction with Williams and MetroGas, we
have a share of Manqeheue net, a local alternative telco.
In Argentina and Chile, with Williams and Manquehue net, we are
constructing a 2600 mile plus network. Its roll-out of managed
bandwith services is scheduled from March next year.
Our third Latin American joint venture is Intelig in Brazil, and
our partners are Sprint and France Telecom.
Intelig is substantially our largest joint venture.
The opportunity in Brazil continues to be strong - the market for
voice and data services are both growing very rapdily. We have
put in place a network which provides equal and full access voice
services to comply with the national and international mirror
license requirements, and, despite a powerful incumbent,
Embratel, over 10 million callers have made use of Intelig's
system. However, start up losses have been higher than initially
budgeted. A number of factors account for this. These
include problems with the industry-wide data-base of customers,
which have prevented us from billing some of our traffic. And,
despite off-peak pricing averaging in the order of 30 per cent
higher than Embratel's, a higher than expected proportion of our
traffic has been from customers who are only making small numbers
of off-peak calls. These calls have been uneconomic to bill and
collect direct.
Intelig is addressing these problems. In part this is being done
through information systems improvements and the introduction of
co-billing arrangements with the regional telecoms operators.
These arrangements require both negotiation and software
interfaces to be built. Implementation has taken place with one
operator and negotiations continue with the other two, who are
now required by the regulator to co-operate. It is anticipated
that the benefits of full implementation will feed through to the
results by the end of the first quarter 2001. Intelig is also
planning pricing changes to discourage low-volume, low-margin
calls.
In addition to these operational improvements, we expect that the
continued rollout of Intelig's network will lead to reduced
interconnection and leased line costs. Margins will improve as
we continue the rollout of the data and internet products.
It is certainly true that the venture has suffered from the
enforced absence of Sprint for nine months. The impact of this
has been felt progressively due to the absence of their marketing
expertise and the resumption of their participation is welcomed
and will support the marketing of data services. It also means
Intelig is now pursuing the original plan of obtaining debt
financing from its equipment suppliers.
I will now turn to electricity and start with the UK.
Last month we accepted Ofgem's final proposals for our main
transmission price control which gives a stable framework for the
next five years.
These proposals assume that we can reduce controllable costs by
an average of 4 percent per annum in real terms.
This is no easy task given how much we have already done, but you
will have noted from this morning's announcement that we are
confident that we can meet these targets.
You will have seen that the DTI has just lifted the moratorium on
the building of new gas-fired power stations and has already
given approval to some 5GW. This is exactly the amount our
regulatory settlement was based upon. If any further plant is
built during the 5 year control period, the regulatory settlement
provides for increased income during the period to compensate us
for the further capital investment we would have to undertake.
Today is the day NETA was to have gone live. All I can say is
that we would have been ready! The delay, to 27 March next year,
has however, simplified the transition to the new incentive
arrangements for the system operator part of our business,
removing the need for interim arrangements. We are expecting
Ofgem's final proposals by January.
Our market services businesses are no longer core to our strategy
and none of these businesses can achieve sufficient growth to
become significant in Group terms. We have announced the first
step of disposal today with the sale of ESIS and EPFAL to Logica
for 38 million pound sterling.
Now turning to the US.
First, I am pleased to report that we have no operations in the
State of Florida. As a result, we have been able to report an
accurate and timely set of results for our US operations. In
addition our results are very clear.
This was a particularly strong performance. As you are all
aware, our goal is to improve the return on investment, from our
continuing businesses, from the 8.3% earned by NEES and EUA in
1998 to 10.5 percent by 2003/04. Led by strong growth in
electricity demand and the successful integration of NEES and
EUA, our first half return on investment was 9.3 percent, nearly
halfway toward our target.
The ROI is based on the continuing businesses but as you know we
are disposing of the non-core businesses, principally AllEnergy
and Cogenex. We are making good progress and expect the
programme of disposals to be largely complete by the end of this
quarter. In addition, the divestment of National Grid USA's
nuclear assets should be completed around the end of 2001.
Electricity prices have increased as a result of rising fuel
prices. Our regulatory settlements in all three states allow us
to increase our prices to cover these additional costs. Price
increases have been approved in Rhode Island and New Hampshire
and we are expecting Massachusetts to approve price increases
which will take effect in January.
Building on the success already achieved, we are now moving on
with the acquisition of Niagara Mohawk, which we announced in
September. Our team includes those who integrated NEES/EUA and I
am confident that they will deliver a smooth and effective
integration.
My confidence is reinforced by the fact that Mike will direct the
team in his new role as Chief Operating Officer of National Grid
USA.
On the regulatory side, we are engaged in a listening tour of
upstate New York, meeting with key governmental and non-
governmental constituencies so that we can develop a regulatory
plan which meets the needs of customers and investors.
We are targeting filing a regulatory plan in late December and
closing by the end of next year. Overall, we remain very
confident that the return on our expanded US business will be the
10.5 percent return we have indicated we will earn in New
England.
Separately, I should update you on what is happening in
transmission.
Electricity prices in the US are rising on the back of increased
gas prices, the shortage of generation and, most importantly for
us, the lack of incentives on transmission organisations to
reduce congestion costs. In the New England Power Pool alone,
congestion costs over the last year have risen virtually tenfold
to around $200 million.
We are working with the six other transmission owners in the
region and ISO-New England to develop a proposal to the FERC in
accordance with Order 2000 that would build on our UK expertise
and the collective experiences of the New England parties.
So, let me summarise.
We have delivered a strong operating and financial performance
from our electricity businesses.
We have secured regulatory stability in the UK for the next 5
years.
We have taken a further major step in the US, which will improve
the profile of the Group.
We have leveraged our experience to establish a wide ranging
telecoms portfolio.
Overall, our confidence in the financial strength and earnings
prospects of the group is increased, and
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We have accordingly announced a new dividend policy
Ladies and gentlemen, that concludes our presentation. We would
be happy to take questions.
The proxy statement/prospectus in definitive form to be
filed with the Securities and Exchange Commission (the
"SEC") by National Grid and Niagara Mohawk in connection
with the transaction will contain important information
regarding the transaction and we urge you to read it and any
other relevant documents when they become available. A free
copy of the proxy statement/prospectus and other documents
filed by the two parties with the SEC is available at the
SEC's web site at http://www.sec.gov.
