================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------------
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
Date: 14th December 2001
NATIONAL GRID GROUP plc
(Registrant's Name)
15 Marylebone Road
London
NW1 5JD
(Registrant's Address)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3- 2(b) under the Securities Exchange Act of
1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorised.
NATIONAL GRID GROUP plc
By: /s/ David Forward
Name: David C Forward
Title: Assistant Secretary
Date: 14th December 2001
NATIONAL GRID GROUP PLC
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
99(a) Circular regarding Scheme of Arrangement Filed herewith
99(b) Listing Particulars Filed herewith
99(c) Summary Listing Particulars Filed herewith
Exhibit 99(a)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. PART II OF
THIS DOCUMENT COMPRISES AN EXPLANATORY STATEMENT IN COMPLIANCE WITH SECTION
426 OF THE COMPANIES ACT 1985. If you are in any doubt as to the action you
should take, you should immediately consult your stockbroker, bank manager,
solicitor, accountant or other independent financial adviser duly authorised
under the Financial Services and Markets Act 2000.
If you have sold or otherwise transferred all of your National Grid Shares or
National Grid ADSs, you should send this document, together with the
accompanying documents, at once to the purchaser or transferee, or to the
stockbroker, bank or other agent through or to whom the sale or transfer was
effected for transmission to the purchaser or transferee. The distribution of
this document in jurisdictions other than the UK may be restricted by law and
therefore persons into whose possession this document comes should inform
themselves about and observe such restrictions. Any failure to comply with
these restrictions may constitute a violation of the securities laws of any
such jurisdiction.
N M Rothschild & Sons Limited, which is regulated in the UK by the Financial
Services Authority, is acting exclusively as financial adviser to National
Grid and as financial adviser and sponsor to New National Grid and for no one
else in connection with the Scheme, the Acquisition and the proposed listing
of the New National Grid Shares on the Official List and their admission to
trading on the London Stock Exchange's market for listed securities and will
not be responsible to anyone other than National Grid and New National Grid
for providing the protections afforded to customers of N M Rothschild & Sons
Limited or for providing advice in relation to the Scheme, the Acquisition,
the proposed listing or admission to trading.
--------------------------------------------------------------------------------
[LOGO] NATIONAL GRID
Scheme of Arrangement
to establish
New National Grid plc
as the holding company of
National Grid Group plc
under section 425 of the Companies Act 1985
--------------------------------------------------------------------------------
Your attention is drawn to the letter from the Chairman of National Grid set
out on pages 9 to 11 of this document which recommends you to vote in favour
of the proposals at the Court Meeting and the Scheme EGM referred to below.
Notices convening the Court Meeting and the Scheme EGM of National Grid to be
held in the Butterworth Hall, Warwick Arts Centre, Coventry CV4 7AL on
7 January 2002 commencing, respectively, at 11.00 a.m., and 11.15 a.m. (or, if
later, immediately following the conclusion or adjournment of the Court
Meeting) are set out on pages 53 to 62 of this document. The doors to the
Court Meeting will be open from 9.30 a.m. and you are advised to time your
journey to enable you to arrive in good time for the start of the Meeting. A
map showing the location of Warwick Arts Centre is printed on the reverse of
the enclosed attendance card. Free car parking will be available as shown on
the map. Free shuttle buses will run between Warwick Arts Centre and the
parking area and between Warwick Arts Centre and Coventry railway station.
Whether or not you intend to be present at the meetings, please complete and
return the Forms of Proxy accompanying this document as soon as possible and
in any event so as to arrive no later than 11.00 a.m. for the Court Meeting
and 11.15 a.m. for the Scheme EGM on 5 January 2002 (although the Form of
Proxy for the Court Meeting (Card A) may be handed to the Chairman before the
start of the Meeting). Alternatively, you may appoint a proxy using the
internet by logging on to the website at www.sharevote.co.uk. If you have
registered for a Shareview portfolio, you may also appoint a proxy by logging
on to the website at www.shareview.co.uk and clicking on "Company Meetings".
Full details of the procedures are given on the websites. Further details on
the action you should take are set out in section 16 of Part II of this
document. A holder of National Grid ADSs should complete the voting
instruction card in relation to the voting rights attached to the National
Grid Shares represented by their National Grid ADSs and return the card to
The Bank of New York, Proxy Department, New York, NY 10203-0399, USA as soon
as possible and in any event by 5.00 p.m. (New York time) on 3 January 2002.
If you hold your National Grid ADSs through a bank, broker or other financial
institution, you should consult with that institution to determine the
deadline by which your voting instructions must be returned.
Listing Particulars dated 10 December 2001 relating to New National Grid have
been prepared in accordance with the Listing Rules made under section 74 of
the Financial Services and Markets Act 2000. A copy of the Listing Particulars
has been delivered to the Registrar of Companies in England and Wales for
registration as required by section 83 of that Act. The Listing Particulars
are available as set out in section 15 of Part II of this document.
New National Grid and National Grid have been advised that the New National
Grid Shares to be issued pursuant to the Scheme will be exempt from the
registration requirements of the US Securities Act of 1933, as amended, by
virtue of section 3(a)(10) thereof and, as a consequence, the New National
Grid Shares to be issued pursuant to the Scheme have not been registered under
that Act. The New National Grid Shares to be issued pursuant to the
Acquisition and represented by the New National Grid ADSs have been registered
under the US Securities Act of 1933, as amended.
CONTENTS
Page
Outline expected timetable 3
Definitions 4
Part I: Letter from the Chairman 9
1. Introduction 9
2. Effect of the Scheme 9
3. Reasons for the Scheme 10
4. Acquisition of Niagara Mohawk 10
5. Action to be taken 10
6. Recommendation 11
Part II: Explanation of the Scheme and its effects 12
1. Introduction 12
2. Summary of the Scheme 12
3. Reduction of the share capital of New National Grid 13
4. Implementation of the Scheme 13
5. Effect of the Scheme 14
6. Changes to the National Grid Articles 15
7. Directors 15
8. Taxation 15
9. Listing, dealings, share certificates, ADS
certificates and settlement 15
10. Memorandum and Articles of Association of New
National Grid 16
11. Employee share schemes 16
12. Overseas shareholders 17
13. Consents and meetings 17
14. Authorities relating to New National Grid 19
15. Listing Particulars 19
16. Action to be taken 19
17. Further information 20
Part III: Scheme of Arrangement 21
Part IV: Additional information 25
1. Introduction 25
2. Incorporation and activity of New National Grid 25
3. Share capital 25
4. Substantial shareholdings 28
5. Summary of the principal differences between the
New National Grid Articles and the National
Grid Articles 29
6. Directors, Secretary and Proposed Directors of New
National Grid 30
7. Directors' interests in National Grid and New
National Grid 33
8. Options over National Grid Shares 36
9. Effect of the Scheme on the National Grid Share
Schemes 37
10. Proposed New National Grid Share Plans 39
11. Long-term incentive plans operated by Niagara Mohawk 47
12. UK taxation 48
13. US taxation 49
14. Summary of conditions of use of the internet proxy
appointment and voting instruction service 51
15. Additional information 52
16. Documents available for inspection 52
Part V: Notices of meetings 53
1. Notice of Court Meeting 53
2. Notice of Scheme EGM 55
Instructions on completing Forms of Proxy 63
2
OUTLINE EXPECTED TIMETABLE
All times in this document are London times unless otherwise stated
3 January 2002 5.00 p.m. (New York time): Latest
time for receipt by the Depositary
of voting instruction cards in
respect of the National Grid
ADSs(1)
5 January 2002 11.00 a.m.: Latest requested time
for receipt of Forms of Proxy for
the Court Meeting (Card A)(2)
11.15 a.m.: Latest time for receipt
of Forms of Proxy for the Scheme
EGM (Card B)
7 January 2002 11.00 a.m.: Court Meeting
11.15 a.m.: Scheme EGM(3)
Early 2002 Court Hearing of the Petition to
sanction the Scheme(4)
Early 2002 Scheme Record Date, which will be
the last day of dealings in
National Grid Shares and National
Grid ADSs, and which will be the
business day before the Scheme
Effective Date(4)
Early 2002 Scheme Effective Date:(4)
8.00 a.m.: Dealings in New National
Grid Shares issued pursuant to the
Scheme commence on the London Stock
Exchange
8.00a.m.: Crediting of New
National Grid Shares to CREST
accounts
9.30 a.m. (New York time): Dealings
in New National Grid ADSs arising
from the Scheme commence on the
NYSE
Early 2002 Despatch of New National Grid Share
certificates within ten business
days after the Scheme Effective
Date(4)
Notes:
(1) If you hold your National Grid ADSs through a bank, broker or other
financial institution, you should consult with that institution to
determine the deadline by which your voting instructions must be returned.
(2) Forms of Proxy for the Court Meeting (Card A) not returned by this time
may be handed to the Chairman of the Court Meeting before the start of the
meeting.
(3) To commence at the time specified or, if later, immediately following the
conclusion or adjournment of the Court Meeting.
(4) The actual dates for these events in 2002 will be set by reference to the
date on which the SEC approves the Acquisition and upon agreement with the
Court. Following receipt of the SEC approval of the Acquisition, the dates
will be notified to National Grid Shareholders by announcement to the
Regulatory News Service of the London Stock Exchange. The Acquisition must
complete after, but within a reasonable time of, the Scheme becoming
effective in order to obtain the desired tax treatment for Niagara Mohawk
Shareholders.
FORWARD-LOOKING STATEMENTS
This document contains certain statements that are neither reported financial
results nor other historic information. These statements are forward-looking
statements within the meaning of section 27A of the US Securities Act of 1933,
as amended, and section 21E of the US Securities Exchange Act of 1934, as
amended. These forward-looking statements rely on a number of assumptions
concerning future events and are subject to a number of risks and
uncertainties, many of which are outside of the control of National Grid and
New National Grid, that could cause actual results to differ materially from
those expressed in or implied by such statements. For a more detailed
description of these assumptions, risks and uncertainties, please see National
Grid's filings with the SEC (and in particular the "Risk Factors" and
"Operating and Financial Review" sections in its most recent annual report on
Form 20-F). Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document.
National Grid has no intention and undertakes no obligation to update or
revise any forward-looking statements in light of new information, future
events or circumstances after the date of this document, except as required by
the Listing Rules.
3
DEFINITIONS
The following definitions apply throughout this document (except in Part III
which contains separate definitions) unless the context requires otherwise:
"Acquisition" the acquisition of Niagara Mohawk
by the National Grid Group
pursuant to the Merger Agreement
"Act" the Companies Act 1985, as amended
"Admission" the admission of the New National
Grid Shares to (i) the Official
List; and (ii) trading on the
London Stock Exchange's market for
listed securities becoming
effective in accordance with,
respectively, the Listing Rules
and the Admission and Disclosure
Standards
"Admission and Disclosure the requirements contained in the
Standards" publication "Admission and
Disclosure Standards" containing,
inter alia, the admission
requirements to be observed by
companies seeking admission to
trading on the London Stock
Exchange's market for listed
securities
"ADR" an American depositary receipt
"ADS" an American depositary share
"Board" or "Directors" the board of directors of National
Grid or, following the Scheme
becoming effective, of New
National Grid (as the context
requires) listed in section 6.1 of
Part IV of this document
"business day" any day other than a Saturday or
Sunday on which banks are
generally open for business in
England and Wales
"Capitalisation Shares" the new ordinary shares of 11 13/17
pence each in the capital of
National Grid created pursuant to
sub-clause 2.2.1 of the Scheme
"certificated" or "in certificated where a share or other security is
form" not in uncertificated form
"Closing Price" the closing middle market
quotation of a National Grid Share
as derived from the Daily Official
List
"Combined Group" the National Grid Group as
enlarged by the Niagara Mohawk
Group following the Acquisition
"Company" or "National Grid" National Grid Group plc
"Companies" National Grid and National Grid
Company
"Completion" the closing of the Acquisition
following satisfaction or waiver
of the conditions attaching to the
Acquisition and the delivery of
certificates of merger for filing
with the Department of State of
the State of New York and the
Secretary of State of the State of
Delaware in accordance with the
Merger Agreement
"Court" the High Court of Justice of
England and Wales
"Court Hearing" the hearing of the Petition by the
Court
"Court Meeting" the meeting of National Grid
Shareholders convened by direction
of the Court pursuant to section
425 of the Act for 11.00 a.m. on
7 January 2002, to consider and,
if thought fit, approve the
Scheme, including any adjournment
thereof, notice of which is
contained in Part V of this
document
"Court Order" the Order of the Court sanctioning
the Scheme under section 425 of
the Act and confirming the
reduction of the share capital of
National Grid provided for by
clause 2 of the Scheme under
section 137 of the Act
4
"CREST" a relevant system (as defined in
the CREST Regulations) in respect
of which CRESTCo Limited is the
operator (as defined in the CREST
Regulations)
"CREST Regulations" the Uncertificated Securities
Regulations 2001 (SI 2001 No.
3755) as from time to time amended
"Daily Official List" the Daily Official List of the
London Stock Exchange
"Depositary" The Bank of New York, 101 Barclay
Street, New York, NY 10286, USA
"Electronic Communications Order" the Companies Act 1985 (Electronic
Communications) Order 2000
"Exchange Rate" the (L):$ Bank of England official
closing exchange rate published
daily on Reuters at 4.00 p.m.
"Exchangeable Bonds" the (L)460 million 4.25 per cent.
unsecured exchangeable bonds due
2008 issued by National Grid
Company and exchangeable into
National Grid Shares (or,
following the Scheme becoming
effective, New National Grid
Shares)
"Exchangeable Bonds Trust Deed" a supplemental trust deed dated 10
December 2001 between National
Grid Company, New National Grid,
National Grid and The Law
Debenture Trust Corporation p.l.c.
(the "Trustee") relating to the
substitution of New National Grid
for National Grid as the issuer of
shares under the exchange right in
relation to the Exchangeable Bonds
"Financing Documents" (a) a credit agreement dated
22 November 2001 between
New National Grid (as
borrower and guarantor),
National Grid (as borrower
and guarantor), NGG
Finance plc (as borrower),
various arrangers, HSBC
Investment Bank plc as
facility agent, HSBC Bank
(USA) Inc. as swingline
agent and various banks
and financial institutions
as lenders for various
facilities totalling $2.3
billion; and
(b) a letter agreement dated
20 November 2001 between
New National Grid,
National Grid Company,
National Grid and the
European Investment Bank
("EIB"), setting out the
terms under which a
guarantee to be given by
New National Grid in
respect of the obligations
of National Grid Company
under a finance contract
for (L)200 million between
EIB and National Grid
Company will become
effective
"Forms of Proxy" the forms of proxy for use at the
Court Meeting (Card A) and the
Scheme EGM (Card B) which
accompany this document (and "Form
of Proxy" shall mean either of
them)
"Group" or "National Grid Group" National Grid (or, following the
Scheme becoming effective, New
National Grid) and its subsidiary
undertakings (and "member of the
Group" and "member of the National
Grid Group" shall be construed
accordingly)
"Listing Particulars" the listing particulars dated
10 December 2001 relating to New
National Grid prepared in
accordance with the Listing Rules
"Listing Rules" the listing rules of the UK
Listing Authority, made under
section 74 of the Financial
Services and Markets Act 2000
"London Stock Exchange" London Stock Exchange plc
"Merger Agreement" the agreement and plan of merger
and scheme of arrangement, dated
as of 4 September 2000 and amended
as of 1 December 2000 entered
5
into between National Grid, New
National Grid, Grid Delaware,
Inc., a wholly-owned subsidiary of
New National Grid, and Niagara
Mohawk
"National Grid" or "Company" National Grid Group plc
"National Grid ADRs" ADRs of National Grid, evidencing
National Grid ADSs
"National Grid ADSs" ADSs of National Grid, each of
which represents five National
Grid Shares
"National Grid Articles" the Articles of Association of
National Grid as from time to time
amended
"National Grid Company" The National Grid Company plc, a
wholly-owned subsidiary of
National Grid, which, inter alia,
owns and operates the high voltage
electricity transmission system in
England and Wales
"National Grid Group" or "Group" National Grid (or, following the
Scheme becoming effective, New
National Grid) and its subsidiary
undertakings (and "member of
National Grid Group" and "member
of the Group" shall be construed
accordingly)
"National Grid Share Schemes" the existing employee share
schemes and incentive plans
operated by National Grid
comprising the Executive Share
Option Scheme (1990), Executive
Share Option Plan 2000, Savings
Related Share Option Scheme
(1990), 1999 Savings Related Share
Option Scheme, Share Matching
Scheme (1996), Profit Sharing
Scheme (1990), 1999 US Employee
Stock Purchase Plan, Incentive
Compensation Plan, National Grid
USA Incentive Thrift Plans and
Deferred Compensation Plan
"National Grid Shareholders" holders of National Grid Shares
"National Grid Shares" or "Shares" ordinary shares of 11 13/17 pence
each in the capital of National
Grid
"National Grid Special Share" the special rights non-voting
redeemable preference share of
(L)1 in the capital of National
Grid held by the Special
Shareholder
"National Grid USA" National Grid USA, a wholly-owned
subsidiary of National Grid and
the US holding company which owns
National Grid's US electricity
operations
"New B Share" the new B share of (L)1 in the
capital of National Grid created
pursuant to sub-clause 2.2.1 of
the Scheme
"New National Grid" New National Grid plc, which
following implementation of the
Scheme, will be the new holding
company of National Grid
"New National Grid ADRs" ADRs of New National Grid,
evidencing New National Grid ADSs
"New National Grid ADSs" ADSs of New National Grid, each of
which will represent five New
National Grid Shares
"New National Grid Articles" the Articles of Association of New
National Grid
"New National Grid Shareholders" holders of New National Grid
Shares
"New National Grid Share Plans" the proposed new employee share
plans summarised in section 10 of
Part IV of this document and
comprising the National Grid
Executive Share Option Plan 2002,
National Grid Employee Share
Ownership Plan 2002 and the
associated UK Trust, National Grid
Savings Related Share Option Plan
2002, National Grid Employee Stock
Purchase Plan 2002, National Grid
Share Matching Plan 2002, National
Grid USA Incentive Thrift Plans I
and II, National Grid
6
Employee Trust 2002 and National
Grid Qualifying Employee Share
Ownership Trust (No. 2) 2002
"New National Grid Shares" ordinary shares of 10 pence each
in the capital of New National
Grid
"New National Grid Special Share" the special rights non-voting
redeemable preference share of
(L)1 in the capital of New
National Grid to be issued to the
Special Shareholder pursuant to
the Scheme
"Niagara Mohawk" Niagara Mohawk Holdings, Inc.
"Niagara Mohawk Group" Niagara Mohawk and its subsidiary
undertakings (and "member of the
Niagara Mohawk Group" shall be
construed accordingly)
"Niagara Mohawk Shareholders" holders of Niagara Mohawk Shares
"Niagara Mohawk Shares" shares of Niagara Mohawk common
stock
"NYSE" New York Stock Exchange, Inc.
"Official List" the Official List of the UK
Listing Authority
"Petition" the petition to the Court to
sanction the Scheme
"Proposed Directors" William E. Davis and Dr Bonnie G.
Hill
"Registrar of Companies" the Registrar of Companies in
Cardiff
"Remuneration Committee" a committee of the Board comprised
exclusively of Non-executive
Directors responsible for
reviewing the remuneration
arrangements of Executive
Directors and senior executives of
the Group
"Rothschild" N M Rothschild & Sons Limited
"Scheme" or "Scheme of Arrangement" the scheme of arrangement under
section 425 of the Act set out in
Part III of this document, in its
original form or with or subject
to any modification thereof or
addition thereto or condition
approved or imposed by the Court
"Scheme ADSs" all National Grid ADSs in issue at
4.00 p.m. (New York time) on the
Scheme Record Date
"Scheme Circular" this document dated 10 December
2001
"Scheme Effective Date" the date and time at which an
office copy of the Court Order is
registered by the Registrar of
Companies and the Scheme becomes
effective, expected to be in early
2002
"Scheme EGM" the extraordinary general meeting
of National Grid Shareholders to
be held at 11.15 a.m. (or, if
later, immediately following the
conclusion or adjournment of the
Court Meeting) on 7 January 2002,
including any adjournment thereof,
notice of which is contained in
Part V of this document
"Scheme Record Date" the business day immediately
preceding the Scheme Effective
Date
"Scheme Shareholder" a holder of Scheme Shares
"Scheme Shares" (a) all National Grid Shares
in issue at the date of
the Scheme being 10
December 2001;
(b) all (if any) additional
National Grid Shares in
issue 48 hours prior to
the Court Meeting; and
(c) all (if any) further
National Grid Shares which
may be in issue
immediately prior to the
confirmation by the Court
of the reduction of
capital provided for under
the Scheme in respect of
which the original or any
subsequent holders shall
be bound or shall have
agreed in writing to be
bound by the Scheme
7
"SDRT" stamp duty reserve tax
"SEC" US Securities and Exchange
Commission
"Secretary of State" the UK Secretary of State for
Trade and Industry
"Special Shareholder" the holder of the National Grid
Special Share or the New National
Grid Special Share, as the context
so requires, being currently the
Secretary of State
"Statutes" the provisions of every statute
for the time being in force
concerning companies and affecting
New National Grid
"Sterling" or "(L)" the lawful currency for the time
being in the UK
"Treaty" the US-UK Income Tax Convention
"UK" the United Kingdom of Great
Britain and Northern Ireland
"UK Listing Authority" the United Kingdom Listing
Authority
"UK Trust" the Rules and Trust Deed of the
National Grid Employee Share
Ownership Plan 2002 (UK Plan)
"uncertificated" or recorded on the relevant register
"in uncertificated form" as being held in uncertificated
form in CREST, and title to which,
by virtue of the CREST
Regulations, may be transferred by
means of CREST
"Undertaking" the consent to the Scheme and the
undertaking to be bound by its
terms executed by New National
Grid in favour of National Grid
and dated 10 December 2001
"US" the United States of America, its
territories and possessions, any
State of the United States of
America and the District of
Columbia, and all other areas
subject to its jurisdiction
"US dollars" or "$" the lawful currency for the time
being in the US
"US person" a US person, as defined in
Regulation S under the US
Securities Act of 1933, as amended
8
PART I
[LOGO] NATIONAL GRID
National Grid Group plc
15 Marylebone Road
London
NW1 5JD
10 December 2001
To National Grid Shareholders, holders of National Grid ADSs, the Special
Shareholder and, for information only, to participants in the National Grid
Share Schemes
Dear Shareholder,
Introduction of a new holding company to be effected
by means of a scheme of arrangement
1. Introduction
You will recall that I wrote to you on 2 January 2001 to inform you of
National Grid's proposed acquisition of Niagara Mohawk and to seek your
approval of the Acquisition. Shareholders of both National Grid and Niagara
Mohawk subsequently approved the Acquisition in January 2001 and I am pleased
to be able to inform you that the Scheme and the Acquisition are on course for
completion in early 2002.
As I explained to you in my earlier letter, the Acquisition will involve the
formation of a new holding company for the Group, New National Grid, which
will be introduced by means of a Court sanctioned scheme of arrangement. The
Scheme is an important step towards completing the Acquisition and cannot be
implemented without your support as it is subject to your approval at the
Court Meeting and at the Scheme EGM, both of which will be held at Warwick
Arts Centre, Coventry on 7 January 2002. In addition to requiring the approval
of National Grid Shareholders, the Scheme is subject to the approval of the
Court.
I am writing to you now to give you further details of the Scheme and to
recommend that you vote in favour of the Scheme and the other resolutions
being proposed at these shareholder meetings.
2. Effect of the Scheme
Upon the Scheme becoming effective, New National Grid will be the holding
company of the Group, and all existing National Grid Shares will be cancelled
and replaced with the same number of shares in New National Grid.
As a result, if you hold National Grid Shares you will receive the same number
of shares, with the same economic and voting rights, in New National Grid as
you previously held. If you are a holder of National Grid ADSs you will
continue to hold the same number of ADSs, with the same economic rights in New
National Grid, as you previously held. We are also taking this opportunity to
bring the voting rights of the New National Grid ADSs into line with those of
the New National Grid Shares by giving holders of New National Grid ADSs
rights to attend, speak and vote at general meetings.
The National Grid Special Share, which is held by the UK Secretary of State
for Trade and Industry, will also be cancelled as a result of the Scheme and
replaced with the New National Grid Special Share, which has equivalent
rights.
The Scheme has no impact on the management of your company and all of the
existing Directors of National Grid, including myself, will continue as the
Directors of New National Grid. Additionally, as I indicated in
Registered Office: Registered in
15 Marylebone Road England and Wales
London No 2367004
NW1 5JD
9
January 2001, following completion of the Acquisition, William E. Davis,
chairman and chief executive officer of Niagara Mohawk, will be appointed as
an Executive Director of New National Grid and Dr Bonnie G. Hill, a non-
executive director of Niagara Mohawk, will join the New National Grid Board as
a Non-executive Director.
Immediately upon the Scheme becoming effective, New National Grid will change
its name to National Grid Group plc and the current holding company, National
Grid, will be renamed National Grid Holdings One plc.
3. Reasons for the Scheme
The terms of the Acquisition allow Niagara Mohawk Shareholders to elect to
receive cash, New National Grid ADSs, or a mixture of both, in exchange for
their Niagara Mohawk Shares. Under US tax legislation, Niagara Mohawk
Shareholders would normally be liable to US tax in respect of the cash they
receive. In addition, depending on their circumstances, they may be liable to
US tax in respect of ADSs received because the cash portion of the purchase
price will exceed, in aggregate, 20 per cent. of the total purchase price.
At the time the Acquisition was announced, National Grid agreed to pay
approximately one-third in aggregate of the purchase price in cash and reserved
the right to increase the aggregate cash portion of the purchase price if cash
elections were received in excess of this amount. On 20 November 2001, National
Grid announced that it will increase the aggregate cash portion of the price
paid to 50 per cent., assuming receipt of sufficient cash elections. You should
note that any increase in the aggregate cash portion of the purchase price will
not affect the total purchase price paid to Niagara Mohawk Shareholders.
The Scheme allows National Grid the flexibility to set the aggregate cash
portion of the purchase price at any level above 20 per cent. of the total
purchase price as, under US tax legislation, the introduction of New National
Grid as the new holding company of National Grid shortly before completion of
the Acquisition should ensure that Niagara Mohawk Shareholders receive New
National Grid ADSs in exchange for their Niagara Mohawk Shares on a tax-free
basis.
4. Acquisition of Niagara Mohawk
The Acquisition is subject to a number of conditions, including regulatory and
other consents and approvals in the US, the majority of which we have received.
The only material regulatory approval outstanding is that of the SEC. As noted
above, the Acquisition is expected to complete in early 2002.
Under the terms of the Merger Agreement, if the Scheme does not become
effective, the Acquisition can proceed using an alternative structure, to be
agreed between National Grid and Niagara Mohawk, which substantially preserves
the economic and tax benefits of the Acquisition for both parties and Niagara
Mohawk Shareholders.
5. Action to be taken
Two meetings of National Grid Shareholders, the Court Meeting and the Scheme
EGM, will be held on 7 January 2002 to seek approval of the Scheme and its
implementation. Notices of the Court Meeting and the Scheme EGM are contained in
Part V of this document. A summary of the resolutions to be proposed at the
Court Meeting and the Scheme EGM is set out in section 13 of Part II of this
document.
It is important that as many votes as possible are cast at the Court Meeting so
that the Court may be satisfied that there is a fair representation of National
Grid Shareholder opinion. You are therefore urged, whether or not you propose to
attend the meetings, to sign and return the enclosed Forms of Proxy, Card A for
the Court Meeting and Card B for the Scheme EGM, as soon as possible.
Instructions on how to complete the Forms of Proxy and how to appoint a proxy
using the internet are set out in section 16 of Part II of this document and on
pages 63 and 64. If you would like any further help completing the Forms of
Proxy please contact the National Grid Shareholder Enquiry Unit, National Grid
House, Kirby Corner Road, Coventry CV4 8JY (telephone: 024 7642 3940, fax: 024
7642 3651, e-mail: shareholder.enquiries@uk.ngrid.com). Please note that this
service will only provide procedural advice and not personal financial advice.
If you hold National Grid ADSs, you should complete the voting instruction card
you have received in accordance with the instructions set out in section 16 of
Part II of this document. For answers to any further questions you may have
relating to the completion of the voting instruction card, you should contact
The Bank of New York (telephone: 1-888-BNY-ADRs toll-free for calls inside the
US).
10
6. Recommendation
The Board, which has been advised by Rothschild, considers the Scheme to be in
the best interests of National Grid and its shareholders as a whole. In giving
its advice, Rothschild has relied upon the Board's views of the commercial
merits of the proposals. The Board also considers the resolutions to be
proposed at the Scheme EGM to be in the best interests of National Grid and
its shareholders as a whole.
The Board therefore unanimously recommends that holders of National Grid
Shares vote, and that holders of National Grid ADSs instruct the Depositary to
vote, in favour of the Scheme at the Court Meeting and in favour of each of
the resolutions to be proposed at the Scheme EGM, as the Directors intend to
do in respect of their own beneficial shareholdings which amount to 211,783
National Grid Shares in aggregate.
Yours sincerely,
/s/ JAMES ROSS
James Ross
Chairman
11
PART II
EXPLANATION OF THE SCHEME AND ITS EFFECTS
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
[LOGO]
N M ROTHSCHILD & SONS
10 December 2001
To National Grid Shareholders, holders of National Grid ADSs, the Special
Shareholder and, for information only, to participants in the National Grid
Share Schemes
Dear Shareholder,
Introduction of a new holding company to be effected
by means of a scheme of arrangement
1. Introduction
On 5 September 2000, National Grid announced that it had signed a merger
agreement under which National Grid would acquire Niagara Mohawk through the
introduction of a new holding company for the Group, New National Grid, by
means of a scheme of arrangement under section 425 of the Act. The Acquisition
was approved by Niagara Mohawk Shareholders on 19 January 2001 and by National
Grid Shareholders on 29 January 2001. We are writing to you on behalf of
National Grid to explain the Scheme and its effects.
Implementation of the Scheme requires the approval of National Grid
Shareholders at the Court Meeting and a special resolution to be passed at the
Scheme EGM. Further explanation of the Court Meeting and the Scheme EGM is
given in section 13 below. A description of the action you are recommended to
take in relation to the two meetings is set out in section 16 below.
The reasons for introducing the new holding company are set out in the letter
from the Chairman of National Grid in Part I of this document, which should be
read together with this Part II. That letter contains the unanimous
recommendation by the Board to vote in favour of the resolutions to be
proposed at the Court Meeting and the Scheme EGM.
Once National Grid Shareholders have approved the Scheme at the Court Meeting
and the Scheme EGM, the Scheme must be sanctioned by the Court. The effect of
the Court's sanction of the Scheme is that, when the Court Order is delivered
to the Registrar of Companies and registered by him, all National Grid
Shareholders are bound by the terms of the Scheme. The Special Shareholder has
already consented to the Scheme and New National Grid has given its consent to
the Scheme and an undertaking to be bound by the terms of the Scheme.
It is expected that the Scheme Effective Date will be in early 2002.
Immediately upon the Scheme becoming effective, New National Grid will change
its name to National Grid Group plc and National Grid Group plc will be
renamed National Grid Holdings One plc. It is expected that trading in the New
National Grid Shares and the New National Grid ADSs arising from the Scheme
will commence on the Scheme Effective Date.
The full text of the Scheme is set out in Part III of this document. The full
text of each of the resolutions to be proposed at the Court Meeting and the
Scheme EGM is set out in Part
2. Summary of the Scheme
Under the Scheme, all the Scheme Shares and the National Grid Special Share will
be cancelled on the Scheme Effective Date. Following this cancellation, the
issued share capital of National Grid will be restored to its former nominal
amount by applying the reserve arising in the books of National Grid, as a
result of the cancellation of the Scheme Shares and the National Grid Special
Share, to pay up the Capitalisation Shares and the New B Share in full. These
shares will be issued to New National Grid (and/or its nominees) and will be
created by the passing
N M Rothschild & Sons Limited Registered number 925279 England
New Court, St. Swithin's Lane Registered office as shown
London EC4P 4DU Regulated by FSA
12
of Resolution 1 at the Scheme EGM. The New B Share will rank pari passu in all
respects with the Capitalisation Shares.
In consideration of the cancellation of the Scheme Shares, Scheme Shareholders
will receive:
For each Scheme Share cancelled One New National Grid Share
In consideration of the cancellation of the National Grid Special Share, the
Special Shareholder will have issued to her the New National Grid Special Share.
No fractions of New National Grid Shares will arise under the Scheme.
While the National Grid Shares underlying the National Grid ADSs will be
cancelled and replaced by New National Grid Shares under the Scheme, existing
National Grid ADSs will automatically represent New National Grid ADSs.
Accordingly, from the Scheme Effective Date, holders of Scheme ADSs will instead
hold:
For each Scheme ADS One New National Grid ADS
(representing the right to (representing the right to receive
receive five National Grid Shares) five New National Grid Shares)
Immediately after the Scheme Effective Date, National Grid Shareholders will
hold the same number of New National Grid Shares and holders of National Grid
ADSs will hold the same number of New National Grid ADSs as they held
immediately prior to the Scheme Effective Date, in each case with the same
economic rights.
The other rights attaching to the New National Grid Shares are substantially the
same as those attaching to the existing National Grid Shares save for minor
modifications which have been made to the National Grid Articles to reflect
current practice. Similarly, the other rights attaching to the New National Grid
ADSs are the same as those attaching to the existing National Grid ADSs save
that the holders of New National Grid ADSs will be given similar voting rights
to those of New National Grid Shareholders. The rights attaching to the New
National Grid Special Share are substantially the same as those attaching to the
existing National Grid Special Share save for amendments to reflect recent
changes in the structure of the electricity supply industry in England and
Wales. A summary of the principal differences between the New National Grid
Articles and the National Grid Articles is set out in section 5 of Part IV of
this document.
3. Reduction of the share capital of New National Grid
In order to obtain the desired tax treatment for National Grid Shareholders, the
issued share capital of New National Grid immediately after the Scheme Effective
Date must be the same as the issued share capital of National Grid immediately
prior to the Scheme Effective Date. Accordingly, it is proposed that the
shareholders of New National Grid (currently National Grid Nominees Limited and
Fiona Smith, Group General Counsel and Company Secretary of National Grid) pass
a special resolution approving the reduction of the entire issued share capital
of New National Grid to nil. This reduction will also require confirmation by
the Court. This confirmation will be sought at the same time as the Court is
requested to sanction the Scheme. The reduction is intended to become effective
immediately prior to the Scheme becoming effective.
4. Implementation of the Scheme
4.1 The Scheme will not become effective and binding unless:
(a) the Scheme is approved by National Grid Shareholders at the
Court Meeting;
(b) Resolution 1 set out in the notice of Scheme EGM contained in
Part V of this document is passed by National Grid Shareholders;
(c) the Special Shareholder consents to the Scheme at the Court
Hearing;
(d) the Court confirms the reduction of the issued share capital of
New National Grid to nil;
(e) the Scheme is sanctioned (with or without modification) and the
cancellation of the Scheme Shares and the National Grid Special
Share as part of the Scheme is confirmed by the Court at the
Court Hearing;
(f) an office copy of the order of the Court confirming the reduction
of New National Grid's share capital to nil is delivered to the
Registrar of Companies and is registered by him;
13
(g) an office copy of the Court Order sanctioning the Scheme and
confirming the reduction of National Grid's share capital to nil
is delivered to the Registrar of Companies and is registered by
him;
(h) the UK Listing Authority agrees to admit the New National Grid
Shares issued pursuant to the Scheme to the Official List
(subject only to allotment) and its agreement is not withdrawn
prior to the Scheme Effective Date;
(i) the London Stock Exchange agrees to admit the New National Grid
Shares issued pursuant to the Scheme to trading on its market for
listed securities (subject only to allotment) and its agreement
is not withdrawn prior to the Scheme Effective Date; and
(j) the NYSE indicates that it intends to authorise the listing of
the New National Grid ADSs arising from the Scheme (upon official
notice of issuance).
4.2 In addition, the Directors will not take the steps necessary to enable
the Scheme to become effective unless, at the relevant time, they
consider that the Scheme continues to be in the best interests of
National Grid Shareholders as a whole and that the following conditions
have been satisfied or waived:
(a) the Scheme is approved in writing by any regulatory body whose
consent is required, or is considered by National Grid to be
necessary;
(b) no regulatory body seeks, as a result of the transactions to be
effected by the Scheme, any revocation of or modification to any
licence, appointment or other authorisation held by any member of
the National Grid Group, except on satisfactory terms; and
(c) no regulatory body seeks, as a result of the transactions to be
effected by the Scheme, undertakings or assurances from any
member of the National Grid Group, except on satisfactory terms.
In this section 4, "on satisfactory terms" means on terms which are satisfactory
to National Grid and New National Grid and which would not, or would not
reasonably be expected to, have, individually or in aggregate, a material
adverse effect on the National Grid Group taken as a whole.
New National Grid has given its consent to the Scheme and an undertaking to be
bound by the terms of the Scheme. The Court Hearing is expected to be held in
early 2002. National Grid Shareholders will have the opportunity to attend the
Court Hearing to support or oppose the Scheme and to appear in person or be
represented by Counsel.
If the Scheme is sanctioned by the Court and the conditions to the Scheme are
satisfied or waived, it is expected that the Scheme will become effective, and
dealings in the New National Grid Shares to be issued pursuant to the Scheme and
in New National Grid ADSs arising from the Scheme will commence, in early 2002.
If the Scheme has not become effective by 31 August 2002 (or such later date as
the Court may allow), it will lapse, in which event the position of National
Grid Shareholders, holders of National Grid ADSs and the Special Shareholder
will remain unchanged.
The Scheme contains a provision for National Grid and New National Grid jointly
to consent on behalf of all persons concerned to any modification of or addition
to the Scheme, or to any condition which the Court may think fit to approve or
impose. National Grid has been advised that the Court would be unlikely to
approve or impose any such amendment to the Scheme which might be material to
the interests of Scheme Shareholders and/or the Special Shareholder unless
National Grid Shareholders and/or the Special Shareholder (as appropriate) were
informed of any such amendment. It will be a matter for the Court to decide, in
its discretion, whether or not a further meeting of National Grid Shareholders
should be held or the further consent of the Special Shareholder should be
sought. If the Court does approve or impose any amendment to the Scheme which,
in the opinion of the Directors, is such as to require the consent of the
National Grid Shareholders and/or the Special Shareholder (as appropriate), the
Directors will not take the necessary steps to enable the Scheme to become
effective unless and until such consent is obtained.
5. Effect of the Scheme
The effect of the Scheme will be that Scheme Shareholders and holders of Scheme
ADSs will have their respective interests in National Grid replaced by an
equivalent proportionate interest in New National Grid (of which National Grid
will be a wholly-owned subsidiary). Subject to the dilutive effect of the New
National Grid ADSs subsequently issued to Niagara Mohawk Shareholders in
connection with the Acquisition, any subsequent
14
exercise of options granted under the National Grid Share Schemes (see section
11 below) and the exchange of any Exchangeable Bonds, their proportionate
interests in the profits, net assets and dividends of the National Grid Group
will not be affected.
6. Changes to the National Grid Articles
Subject to the passing of Resolution 1 at the Scheme EGM, the National Grid
Articles will be amended to ensure that any holders of National Grid Shares
issued after the passing of Resolution 1, and prior to the confirmation by the
Court of the reduction of capital of National Grid provided for under the
Scheme, are issued subject to the terms of the Scheme. In addition, the
amendment to the National Grid Articles provides that any National Grid Shares
issued after the Scheme Effective Date, for example, upon exercise of options
under the National Grid Share Schemes, will be transferred to New National Grid
in consideration of the issue or transfer to such holder by New National Grid of
New National Grid Shares on a one for one basis.
7. Directors
All of the Directors of National Grid have been appointed directors of New
National Grid. The service agreement or letter of appointment (as appropriate)
of each of the Directors will be novated from National Grid to New National
Grid, with effect from the Scheme Effective Date. The effect of the Scheme on
the interests of the Directors (details of which are set out in section 7 of
Part IV of this document) is the same as its effect on the interests of other
Scheme Shareholders.
8. Taxation
Clearances have been obtained from the Inland Revenue for the Scheme under
section 138 of the Taxation of Chargeable Gains Act 1992 and section 707 of the
Income and Corporation Taxes Act 1988. Accordingly, UK resident National Grid
Shareholders who hold their National Grid Shares beneficially and as an
investment should not be treated as making a disposal of their National Grid
Shares, or as receiving taxable income, under the Scheme. Further details of the
tax position of UK resident shareholders is set out in section 12 of Part IV of
this document. Further details of the tax position of US resident shareholders
and holders of National Grid ADSs is set out in section 13 of Part IV of this
document.
9. Listing, dealings, share certificates, ADS certificates and settlement
Applications have been made to the UK Listing Authority for the New National
Grid Shares to be admitted to the Official List and to the London Stock Exchange
for the New National Grid Shares to be admitted to trading on the London Stock
Exchange's market for listed securities. The last day of dealings in National
Grid Shares will be the Scheme Record Date, which is expected to be in early
2002. The last time for registration of transfers of National Grid Shares will
be 5.30 p.m. on the Scheme Record Date. It is expected that Admission will
become effective and that dealings in the New National Grid Shares to be issued
pursuant to the Scheme will commence at 8.00 a.m. on the Scheme Effective Date,
the business day after the Scheme Record Date. Following receipt of the SEC
approval of the Acquisition, the expected timetable will be finalised and
National Grid Shareholders will be notified by announcement to the Regulatory
News Service of the London Stock Exchange.
Application has been made to list the New National Grid ADSs arising from the
Scheme on the NYSE under the symbol "NGG", the symbol currently used for
National Grid ADSs. The last time for registration of transfers of National Grid
ADSs is expected to be 4.00 p.m. (New York time) on the Scheme Record Date. It
is expected that dealings will commence on the NYSE in the New National Grid
ADSs arising from the Scheme at 9.30 a.m. (New York time) on the Scheme
Effective Date.
On the Scheme Effective Date, share certificates for the Scheme Shares and the
National Grid Special Share will cease to be valid. For Scheme Shareholders who
hold their National Grid Shares in a CREST account, New National Grid Shares are
expected to be credited to the relevant CREST accounts at 8.00 a.m. on the
Scheme Effective Date. For those holding shares in certificated form, definitive
certificates for the New National Grid Shares are expected to be despatched
within ten business days after the Scheme Effective Date. Pending despatch of
share certificates, transfers of New National Grid Shares will be certified by
Lloyds TSB Registrars against the share register.
Existing National Grid ADSs will automatically represent New National Grid ADSs,
and existing National Grid ADRs will automatically represent New National Grid
ADRs, in each case on the Scheme Effective Date.
All mandates in force at 5.30 p.m. on the Scheme Record Date relating to payment
of dividends on National Grid Shares and all instructions given relating to
notices and other communications will, unless and until varied or revoked, be
deemed from the Scheme Effective Date to be valid and effective mandates or
instructions to New National Grid in relation to the corresponding holdings of
New National Grid Shares.
15
10. Memorandum and Articles of Association of New National Grid
The Memorandum and Articles of Association of New National Grid are
substantially the same as the existing Memorandum and Articles of Association of
National Grid. Accordingly, the rights attaching to New National Grid Shares
will, after the Scheme becomes effective, be substantially the same as the
rights attaching to National Grid Shares.
It is proposed that those who hold an interest in New National Grid through New
National Grid ADSs and who are registered in the books of the Depositary should
have rights to attend, speak and vote at general meetings. Accordingly, the New
National Grid Articles will enable the Depositary to appoint holders of New
National Grid ADSs as proxies, and these proxies will have the right to attend,
speak and vote at general meetings. Such proxies will be able, in turn, to
appoint proxies to attend, speak and vote at a general meeting instead of them.
To ensure that holders of New National Grid ADSs will be able to vote on special
and extraordinary resolutions, the New National Grid Articles will require such
resolutions to be decided on a poll. All ordinary resolutions will continue to
be decided on a show of hands or, if a poll is demanded in accordance with the
New National Grid Articles, on a poll.
The New National Grid Articles also give effect to the Electronic Communications
Order, which allows for communication between companies and their shareholders
by electronic means.
A summary of the principal differences between the New National Grid Articles
and the existing National Grid Articles is set out in section 5 of Part IV of
this document.
11. Employee share schemes
The sanction of the Scheme by the Court will have an effect on most awards made
under the existing National Grid Share Schemes. In most cases, the employees
holding such awards will have the choice of buying the National Grid Shares
subject to their option during a prescribed period of time following the
sanction of the Scheme by the Court, or exchanging their option for an
equivalent option over New National Grid Shares. This is explained in further
detail in section 9 of Part IV of this document.
As part of the implementation of the Scheme, National Grid Shareholders will be
asked to approve an amendment to the National Grid Articles at the Scheme EGM
which will ensure that employees who choose to exercise their options to acquire
National Grid Shares after the Scheme Effective Date will receive the same
number of New National Grid Shares.
Except as explained in section 9 of Part IV of this document, no further awards
will be made under the existing National Grid Share Schemes after the Scheme
Effective Date.
To provide incentives to executives and employees, and to align their interests
with those of the shareholders, it is proposed that New National Grid adopts the
New National Grid Share Plans that will operate over New National Grid Shares.
The approval of National Grid Shareholders to the New National Grid Share Plans
is being sought at the Scheme EGM to comply with best practice.
The proposed New National Grid Share Plans, the key features of which are
summarised in section 10 of Part IV of this document, broadly replicate the
existing National Grid Share Schemes. The Remuneration Committee has reviewed
total remuneration arrangements and developments in both market practice and
best practice (for example, the revision of the Association of British Insurers'
guidelines), which are reflected in the New National Grid Share Plans. The most
significant changes are:
(a) under the proposed Executive Share Option Plan 2002, in response to
market practice, particularly in the US, the limit on the maximum size
of an award which may be granted to an individual in any twelve-month
period has been increased from 1.5 times salary to 3 times salary (or
more if the Remuneration Committee concludes that it is necessary to
make larger grants, for example, in the case of new executives and
employees). However, in determining the size of any grants, the
Remuneration Committee will continue to have regard to grant levels in
comparable companies and to evolving best practice. It has no current
intention to exceed the 1.5 times salary limit contained in the
existing Executive Share Option Plan 2000 in respect of grants for UK-
based executives;
(b) the proposed Executive Share Option Plan 2002 includes flexibility to
grant options subject to pre-grant performance conditions rather than
pre-exercise conditions, as recently endorsed by the Association of
British Insurers. While the Remuneration Committee has no current
intention of utilising this flexibility, it will monitor evolving best
practice in this regard in deciding whether it becomes appropriate to
do so and will liaise with the Association of British Insurers before
utilising such flexibility; and
16
(c) while the main features of the proposed Share Matching Plan 2002 remain
the same as the existing Share Matching Scheme (1996), the detailed
drafting of the plan has been revised to permit the more efficient
operation of the plan and also to permit the Incentive Compensation
Plan, which is currently operated as a separate plan for US executives,
to be integrated into the Share Matching Plan 2002.
12. Overseas shareholders
The implications of the Scheme for persons resident in, or citizens or nationals
of, jurisdictions outside the UK ("overseas shareholders") may be affected by
the laws of the relevant jurisdictions. Such overseas shareholders should inform
themselves about and observe all applicable legal requirements. It is the
responsibility of each overseas shareholder to satisfy himself as to the full
observance of the laws of the relevant jurisdiction in connection with the
Scheme, including the obtaining of any governmental, exchange control or other
consents which may be required and/or compliance with other necessary
formalities which are required to be observed and the payment of any issue,
transfer or other taxes due in such jurisdiction.
If New National Grid is advised that the issue of New National Grid Shares in
respect of any overseas shareholder would infringe the laws of any jurisdiction
outside the UK, or would require New National Grid to observe any governmental
or other consent or any registration, filing or other formality, the Scheme
provides that New National Grid may determine that the New National Grid Shares
to which such overseas shareholder would otherwise be entitled shall be issued
to a nominee appointed by New National Grid and then sold, with the net proceeds
of sale being remitted to the overseas shareholder.
Overseas shareholders should consult their own legal and tax advisers with
respect to the legal and tax consequences of the Scheme. For additional
information relating to the UK tax consequences of the Scheme, see section 8
above. For summaries of the UK and US taxation consequences of a holding of New
National Grid Shares or New National Grid ADSs, see sections 12 and 13
respectively, of Part IV of this document.
13. Consents and meetings
13.1 Special Shareholder consent
The Special Shareholder has consented to the establishment of a new holding
company of National Grid to be effected by way of the Scheme. The consent of the
Special Shareholder to the Scheme is required at the Court Hearing. She has
agreed to provide her consent at the Court Hearing and to undertake to be bound
by the terms of the Scheme.
13.2 Court Meeting
The Court Meeting has been convened for 11.00 a.m. on 7 January 2002, pursuant
to an order of the Court, at which meeting, or at any adjournment thereof,
National Grid Shareholders will consider and, if thought fit, approve the
Scheme.
Your attention is drawn to the notice of Court Meeting contained in Part V of
this document, which includes a note explaining the resolution.
At the Court Meeting voting will be by poll and each National Grid Shareholder
entitled to attend and who is present in person or by proxy will be entitled to
one vote for each National Grid Share held. The statutory majority required to
approve the Scheme at the Court Meeting is a simple majority in number of the
National Grid Shareholders present and voting (either in person or by proxy) at
the Court Meeting representing not less than 75 per cent. of the number of
National Grid Shares held by such National Grid Shareholders.
It is important that as many votes as possible are cast at the Court Meeting so
that the Court may be satisfied that there is a fair representation of National
Grid Shareholder opinion. National Grid Shareholders are therefore urged to
return the completed Forms of Proxy as soon as possible. Details of the action
you should take and instructions on completing the Forms of Proxy are given in
section 16 below and on pages 63 and 64.
If the Scheme becomes effective, it will be binding on all Scheme Shareholders
irrespective of whether they attended the Court Meeting and irrespective of the
manner in which they voted.
13.3 Scheme EGM
The Scheme EGM has also been convened for 7 January 2002 (the same date as the
Court Meeting) at 11.15 a.m. (or, if later, immediately following the conclusion
or adjournment of the Court Meeting), at which meeting, or at
17
any adjournment thereof, National Grid Shareholders will consider and, if
thought fit, pass the resolutions set out in the notice of Scheme EGM.
Your attention is drawn to the notice of Scheme EGM contained in Part V of this
document, which includes notes explaining each of the resolutions.
The resolutions to be proposed at the Scheme EGM are for the following business:
Resolution 1:
To approve:
(a) the Scheme;
(b) the cancellation of the Scheme Shares and the National Grid Special
Share;
(c) the increase in the share capital of National Grid to its former amount
by the creation of the New B Share and the Capitalisation Shares to be
issued to New National Grid;
(d) the allotment of the New B Share and the Capitalisation Shares by the
Directors; and
(e) alterations to the National Grid Articles to ensure that:
(i) any National Grid Shares issued after the passing of Resolution 1
and prior to the confirmation by the Court of the reduction of
capital of National Grid provided for under the Scheme are issued
subject to the Scheme; and
(ii) any National Grid Shares issued after the Scheme Effective Date
are transferred to New National Grid in consideration for the
issue or transfer to such holders by New National Grid of New
National Grid Shares on a one for one basis.
Subject to the resolution being passed, these alterations to the National Grid
Articles will take effect whether or not the Scheme becomes effective. The
authority to allot National Grid Shares granted to the Directors by this
resolution will lapse on the date of the Annual General Meeting of the Company
in 2002.
Resolution 2:
To change the name of National Grid to "National Grid Holdings One plc",
conditional on the Scheme becoming effective.
In order to pass each of Resolutions 1 and 2 not less than 75 per cent. of the
votes cast by National Grid Shareholders must be in favour. On a show of hands
each National Grid Shareholder present in person (but not by proxy) will have
one vote and on a poll each National Grid Shareholder present in person or by
proxy will have one vote for each National Grid Share held.
Resolutions 3 - 10:
To approve the New National Grid Share Plans and to authorise the Directors of
New National Grid to do all acts and things as may be necessary to bring them
into effect.
Resolution 11:
To authorise each of National Grid and National Grid Company to make donations
and incur expenditure which would otherwise be prohibited by the Political
Parties, Elections and Referendum Act 2000, which came into force earlier this
year.
National Grid does not currently make donations to political parties, nor will
New National Grid do so without the specific approval of its shareholders. For
an explanation of the background to, and reasons for, this Resolution, you are
referred to the explanatory note to Resolution 11 set out on pages 61 and 62 of
this document.
In order to pass each of Resolutions 3 to 11 more than 50 per cent. of the votes
cast by National Grid Shareholders must be in favour. On a show of hands each
National Grid Shareholder present in person (but not by proxy) will have one
vote and on a poll each National Grid Shareholder present in person or by proxy
will have one vote for each National Grid Share held.
18
14. Authorities relating to New National Grid
By resolutions of New National Grid passed on 7 December 2001, the authorised
share capital of New National Grid was increased by (L)1 by the creation of the
New National Grid Special Share and, conditional on the Scheme becoming
effective, the Directors of New National Grid were authorised to issue and allot
the New National Grid Special Share and New National Grid Shares, and to make
purchases of New National Grid's own ordinary shares.
Following completion of the Scheme and the Acquisition, the Directors of New
National Grid will have authority to issue and allot up to approximately one-
third of the nominal amount of the then issued share capital. The Directors of
New National Grid have no present intention of issuing shares except pursuant to
the Scheme, the Acquisition, on the exercise of options under the National Grid
Share Schemes and the New National Grid Share Plans and in connection with the
Exchangeable Bonds.
For additional information on the authorities relating to New National Grid's
share capital which have been granted, see section 3 of Part IV of this
document.
The resolutions passed on 7 December 2001 also approved the adoption of the New
National Grid Articles and conferred an authority to the same effect as
Resolution 11 to be proposed at the Scheme EGM.
15. Listing Particulars
A copy of the Listing Particulars relating to New National Grid prepared in
accordance with the Listing Rules has been delivered to the Registrar of
Companies in England and Wales for registration as required by section 83 of the
Financial Services and Markets Act 2000. The Listing Particulars are available
on the National Grid website at www.nationalgrid.com/uk/investors/
niagaramohawkLP.pdf and copies are available, free of charge, by application to
the National Grid Shareholder Enquiry Unit, National Grid House, Kirby Corner
Road, Coventry CV4 8JY (telephone: 024 7642 3940, fax: 024 7642 3651, e-mail:
shareholder.enquiries@uk.ngrid.com) at any time prior to Completion. A copy of
the Listing Particulars may also be obtained from the offices of N M Rothschild
& Sons Limited, New Court, St. Swithin's Lane, London EC4P 4DU and may be
inspected at the offices of CMS Cameron McKenna, Mitre House, 160 Aldersgate
Street, London EC1A 4DD and at the Document Viewing Facility, UK Listing
Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS during normal
business hours on any weekday (Saturdays, Sundays and public holidays excepted)
until Completion. A copy will also be available for inspection at the Court
Meeting and the Scheme EGM.
16. Action to be taken
National Grid Shareholders will find enclosed with this document two Forms of
Proxy as follows:
(a) Card A which is to be used for the Court Meeting; and
(b) Card B which is to be used for the Scheme EGM.
It is important that as many votes as possible are cast at the Court Meeting so
that the Court may be satisfied that there is a fair representation of National
Grid Shareholder opinion. National Grid Shareholders are therefore urged to
return the completed Forms of Proxy as soon as possible. Further instructions on
completing the Forms of Proxy are given on pages 63 and 64.
Therefore, whether or not you propose to attend the meetings in person, you are
requested, if you hold National Grid Shares, to complete and return both Forms
of Proxy. Completed Forms of Proxy should be returned to the Registrars, Lloyds
TSB Registrars, The Causeway, Worthing BN99 6BY as soon as possible and in any
case so as to be received by Lloyds TSB Registrars no later than 11.00 a.m. on 5
January 2002 for the Court Meeting and 11.15 a.m. on 5 January 2002 for the
Scheme EGM. The return of the Forms of Proxy will not prevent you from attending
either of the meetings and voting in person if you wish. In each case, the Forms
of Proxy should be completed in accordance with the instructions set out at the
end of this document.
The Form of Proxy in respect of the Court Meeting (Card A) may also be handed to
the Chairman at the Court Meeting before the start of the meeting. However, in
the case of the Scheme EGM, the relevant Form of Proxy (Card B) will be invalid
unless it is lodged so as to be received no later than 11.00 a.m. on 5 January
2002.
The Forms of Proxy can be revoked or amended at any time up to 11.15 a.m. on 5
January 2002 (in the case of Card B for the Scheme EGM) or the start of the
meeting (in the case of Card A for the Court Meeting).
19
If you wish to amend or revoke your Form(s) of Proxy after you have returned
them to Lloyds TSB Registrars, you should contact Lloyds TSB Registrars at the
address given above.
You may, if you wish, register the appointment of a proxy for the Court Meeting
and/or the Scheme EGM electronically, by logging on to the website at
www.sharevote.co.uk. Alternatively, if you have registered for a Shareview
portfolio, you may appoint a proxy by logging on to the website at
www.shareview.co.uk and clicking on "Company Meetings". In each case, you will
need your Voting Reference Numbers (the three 8-digit numbers printed on the
Forms of Proxy). To register the appointment of a proxy for the Court Meeting,
you will need to use the Voting Reference Numbers on the Form of Proxy for the
Court Meeting (Card A). To register the appointment of a proxy for the Scheme
EGM, you will need to use the Voting Reference Numbers on the Form of Proxy for
the Scheme EGM (Card B). In order to register the appointment of a proxy for
both meetings, you must log on separately using each set of Voting Reference
Numbers. Full details of the procedures are given on the websites. If you wish
to use the internet, the proxy appointments and voting instructions must be
received by Lloyds TSB Registrars not later than 11.00 a.m. on 5 January 2002
for the Court Meeting and 11.15 a.m. on 5 January 2002 for the Scheme EGM.
Please note that any electronic communication that is found to contain a
computer virus will not be accepted.
The use of Lloyds TSB Registrars' internet proxy appointment and voting
instruction service (the "Internet Service") in connection with the Court
Meeting and the Scheme EGM, is governed by Lloyds TSB Registrars' conditions of
use of this service. These conditions are legally binding.
When the Voting Reference Number is entered and the icon "GO" is clicked the
user will be deemed to confirm that he:
(a) is registering to use the Internet Service;
(b) has the right to vote his National Grid Shares; and
(c) has read, understood and agreed to be bound by the conditions of use.
Material particulars of the conditions governing the use of the Internet Service
are set out in section 14 of Part IV of this document. The conditions are set
out in full on the website at www.sharevote.co.uk, and may be read by logging on
to that site and entering the Voting Reference Numbers printed on either Form of
Proxy.
A holder of National Grid ADSs should complete the voting instruction card in
relation to the voting rights attached to the National Grid Shares represented
by its National Grid ADSs and return the voting instruction card to The Bank of
New York, Proxy Department, New York, NY 10203-0399, USA as soon as possible and
in any event to be received by no later than 5.00 p.m. (New York time) on 3
January 2002. If you hold your National Grid ADSs through a bank, broker or
other financial institution, you should consult with that institution to
determine the deadline by which your voting instructions must be returned.
The voting instruction card can be revoked or amended at any time up to 5.00
p.m. (New York time) on 3 January 2002. If you wish to revoke or amend your
voting instruction card after you have returned it to The Bank of New York, you
should contact The Bank of New York at the address given above.
17. Further information
Your attention is drawn to the letter from your Chairman on pages 9 to 11 of
this document and the additional information set out in Part IV of this
document, all of which form part of this Explanatory Statement. Your attention
is also drawn to the Scheme which is set out in full in Part III of this
document.
Yours very truly,
for and on behalf of
N M Rothschild & Sons Limited
20
PART III
SCHEME OF ARRANGEMENT
IN THE HIGH COURT OF JUSTICE No. 7240 of 2001
CHANCERY DIVISION
COMPANIES COURT
IN THE MATTER OF NATIONAL GRID GROUP PLC
AND IN THE MATTER OF THE COMPANIES ACT 1985
SCHEME OF ARRANGEMENT
(UNDER SECTION 425 OF THE COMPANIES ACT 1985)
BETWEEN
NATIONAL GRID GROUP PLC
AND
THE HOLDERS OF THE SCHEME SHARES (as hereinafter defined)
AND
THE HOLDER OF THE NATIONAL GRID SPECIAL SHARE (as hereinafter defined)
1. Preliminary
1.1 In this Scheme, unless inconsistent with the subject or context, the
following expressions shall bear the following meanings:
"Act" means the Companies Act 1985, as amended;
"business day" means any day other than a Saturday or
Sunday on which banks are generally open
for business in England and Wales;
"Court" means the High Court of Justice of England
and Wales;
"Court Hearing" means the hearing of the Petition by the
Court;
"Court Meeting" means the meeting of holders of National
Grid Shares convened by direction of the
Court pursuant to section 425 of the Act
for 11.00 a.m. on 7 January 2002, to
consider and, if thought fit, approve this
Scheme, including any adjournment thereof;
"CREST" means a relevant system (as defined in the
CREST Regulations) in respect of which
CRESTCo is the operator (as defined in the
CREST Regulations);
"CRESTCo" means CRESTCo Limited;
"CREST Regulations" means the Uncertificated Securities
Regulations 2001 (SI 2001 No. 3755) as
from time to time amended;
"holder" includes any person entitled by
transmission;
"National Grid" means National Grid Group plc;
"National Grid Shares" means ordinary shares of 11 13/17 pence
each in the capital of National Grid;
"National Grid Special Share" means the special rights non-voting
redeemable preference share of (L)1 in the
capital of National Grid held by the
Special Shareholder;
"New National Grid" means New National Grid plc;
"New National Grid Shares" means ordinary shares of 10 pence each in
the capital of New National Grid;
"New National Grid Special means the special rights non-voting
Share" redeemable preference share of (L)1 in the
capital of New National Grid to be held by
the Special Shareholder;
"Petition" means the petition to the Court to
sanction the Scheme;
21
"Scheme Effective Date" means the date and time on which this
Scheme becomes effective in accordance
with clause 8 of this Scheme;
"Scheme Record Date" means the business day immediately
preceding the Scheme Effective Date;
"Scheme Shareholder" means a holder of Scheme Shares;
"Scheme Shares" means:
(a) all National Grid Shares in issue
at the date of this Scheme;
(b) all (if any) additional National
Grid Shares in issue 48 hours prior
to the Court Meeting; and
(c) all (if any) further National Grid
Shares which may be in issue
immediately prior to the
confirmation by the Court of the
reduction of capital provided for
under this Scheme in respect of
which the original or any
subsequent holders shall be bound
or shall have agreed in writing to
be bound by this Scheme;
"Special Shareholder" means the Secretary of State for Trade and
Industry, the holder of the National Grid
Special Share;
"this Scheme" means this scheme of arrangement in its
present form or with or subject to any
modification thereof or addition thereto
or condition approved or imposed by the
Court; and
"uncertificated" or "in
uncertificated form" means recorded on the relevant register as
being held in uncertificated form in
CREST, and title to which, by virtue of
the CREST Regulations, may be transferred
by means of CREST.
1.2 The authorised share capital of National Grid as at the date of this
Scheme is (L)250,000,001 divided into 2,500,000,000 National Grid
Shares, of which 1,486,906,935 have been issued and are fully paid up
(and the remainder are unissued), and one National Grid Special Share
which has been issued and is fully paid up.
1.3 New National Grid was incorporated as a private limited company on 11
July 2000 under the name Intercede 1610 Limited. Its name was changed on
30 August 2000 to New National Grid Limited and it was re-registered as
a public limited company on 29 November 2000. The authorised share
capital of New National Grid at the date of this Scheme is
(L)250,000,001 divided into 2,500,000,000 New National Grid Shares, of
which 500,000 have been issued and are paid up as to one-quarter (and
the remainder are unissued) and the New National Grid Special Share
which has not been issued.
1.4 The purpose of this Scheme is to provide for the cancellation of the
Scheme Shares and the National Grid Special Share and the issue of new
National Grid Shares and one new B share of (L)1 to New National Grid in
consideration of the allotment by New National Grid of New National Grid
Shares to the Scheme Shareholders and of the New National Grid Special
Share to the Special Shareholder.
1.5 New National Grid has given its written consent to this Scheme and has
given a written undertaking to be bound by its terms. The Special
Shareholder has agreed to appear by Counsel at the Court Hearing to
consent to this Scheme and to undertake to be bound by its terms.
2. Cancellation of National Grid share capital
2.1 The share capital of National Grid shall be reduced to nil by cancelling
the Scheme Shares and the National Grid Special Share.
2.2 Forthwith and contingently upon the reduction of the share capital of
New National Grid in issue immediately prior to the Scheme Effective
Date and the reduction of share capital pursuant to sub-clause 2.1
taking effect:
2.2.1 the authorised share capital of National Grid shall be
increased to its former amount by the creation of one new B
share of (L)1 and such number of new National Grid Shares as
shall together be of an aggregate nominal amount equal to
the aggregate nominal amount of the shares cancelled in
accordance with sub-clause 2.1; and
2.2.2 National Grid shall apply the credit arising in its books of
account on the reduction of capital pursuant to sub- clause
2.1, in paying up, in full at par, the new B share of (L)1
and the new National Grid Shares created pursuant to
sub-clause 2.2.1 and shall allot and issue the same,
credited as fully paid, to New National Grid and/or its
nominee(s).
2.3 The new B share of (L)1 in the capital of National Grid to be created
pursuant to sub-clause 2.2.1 shall rank pari passu with the new National
Grid Shares to be created pursuant to sub-clause 2.2.1.
22
3. New National Grid Shares and the New National Grid Special Share
3.1 In consideration of the cancellation of the Scheme Shares and the
National Grid Special Share and the issue of the new B share of (L)1 and
the new National Grid Shares to New National Grid and/or its nominee(s)
pursuant to clause 2 of this Scheme, New National Grid shall (subject to
the provisions of sub-clause 3.3):
3.1.1 allot and issue (credited as fully paid) New National Grid
Shares to the Scheme Shareholders on the basis of one New
National Grid Share for each Scheme Share held at 5.30 p.m.
on the Scheme Record Date; and
3.1.2 allot and issue (credited as fully paid) the New National
Grid Special Share to the Special Shareholder.
3.2 The New National Grid Shares to be issued pursuant to sub-clause 3.1.1
shall rank in full for all dividends or distributions made, paid or
declared after the Scheme Effective Date on the ordinary share capital
of New National Grid.
3.3 The provisions of sub-clause 3.1 shall be subject to any prohibition or
condition imposed by law. Without prejudice to the generality of the
foregoing, if, in respect of any Scheme Shareholder who is a citizen,
resident or national of any jurisdiction outside the UK ("overseas
shareholder"), New National Grid is advised that the allotment and issue
of New National Grid Shares pursuant to this clause 3 may infringe the
laws of any jurisdiction outside the UK or may require New National Grid
to observe any governmental or other consent or any registration, filing
or other formality, then New National Grid may determine that no New
National Grid Shares shall be allotted or issued to such overseas
shareholder under this clause 3, but shall instead be allotted to a
nominee appointed by New National Grid, as a trustee for such overseas
shareholder, on terms that the nominee shall, as soon as practicable
following the Scheme Effective Date, sell the New National Grid Shares
so allotted at the best price which can reasonably be obtained and shall
account for the net proceeds of such sale (after the deduction of all
expenses and commissions, including value added tax, payable thereon) by
sending a cheque or warrant to such overseas shareholder in accordance
with the provisions of clause 4 below. None of National Grid, New
National Grid, any nominee referred to in this sub-clause 3.3 or any
broker or agent of any of them shall have any liability for any loss
arising as a result of the timing or terms of any such sale.
4. Certificates and payment
4.1 Not later than ten (10) business days after the Scheme Effective Date,
New National Grid shall send by post to the allottees of the New
National Grid Shares and to the allottee of the New National Grid
Special Share allotted and issued pursuant to clause 3 of this Scheme
certificates in respect of such shares. Where Scheme Shares are held in
uncertificated form, New National Grid will procure that CRESTCo is
instructed to cancel the entitlement to Scheme Shares of each of the
Scheme Shareholders concerned and to credit to the appropriate stock
account in CREST of each such Scheme Shareholder his entitlement to New
National Grid Shares.
4.2 Not later than ten (10) business days following the sale of any relevant
New National Grid Shares pursuant to sub-clause 3.3, New National Grid
shall procure that the nominee shall account for the cash payable by
despatching to the persons respectively entitled thereto cheques and/or
warrants by post.
4.3 All certificates required to be sent by New National Grid pursuant to
sub-clause 4.1 and all cheques or warrants required to be sent pursuant
to sub-clause 4.2 shall be sent through the post in pre-paid envelopes
addressed to the persons respectively entitled thereto at their
respective addresses appearing in the register of members of National
Grid at 5.30 p.m. on the Scheme Record Date (or, in the case of joint
holders, to the address of that one of the joint holders whose name
stands first in the register in respect of the joint holding) or in
accordance with any special instructions regarding communications
received at the registered office of National Grid prior to 5.30 p.m. on
the Scheme Record Date.
4.4 None of National Grid, New National Grid, any nominee referred to in
sub-clause 3.3 or any agent of any of them shall be responsible for any
loss or delay in transmission of certificates, cheques or warrants sent
in accordance with this clause 4.
4.5 The preceding sub-clauses of this clause 4 shall take effect subject to
any prohibition or condition imposed by law.
5. Certificates representing Scheme Shares and the National Grid Special
Share
With effect from and including the Scheme Effective Date, all certificates
representing holdings of Scheme Shares and the National Grid Special Share shall
cease to be valid in respect of such holdings.
23
6. Mandates
Each mandate in force at 5.30 p.m. on the Scheme Record Date relating to the
payment of dividends on Scheme Shares and each instruction then in force as to
notices and other communications from National Grid shall, unless and until
varied or revoked, be deemed as from the Scheme Effective Date to be a valid and
effective mandate or instruction to New National Grid in relation to the
corresponding New National Grid Shares to be allotted and issued pursuant to
this Scheme.
7. Professional Fees
National Grid shall pay and discharge all of the debts and liabilities of
National Grid and of New National Grid to their professional advisers which have
been incurred or will be incurred in connection with this Scheme and with the
reduction of capital of New National Grid.
8. Scheme Effective Date
This Scheme shall become effective as soon as an office copy of the Order of the
Court sanctioning this Scheme under section 425 of the Act and confirming the
reduction of capital proposed under this Scheme under section 137 of the Act
shall have been duly delivered to the Registrar of Companies for registration
and registered by him.
9. Lapse
Unless this Scheme shall have become effective on or before 31 August 2002 or
such later date, if any, as the Court may allow, it shall lapse.
10. Modification
National Grid and New National Grid may jointly consent on behalf of all persons
concerned to any modification of or addition to this Scheme or to any condition
which the Court may think fit to approve or impose.
Dated the 10th day of December 2001
24
PART IV
ADDITIONAL INFORMATION
1. Introduction
1.1 Overview of National Grid Group
National Grid Group is an international network business. Its principal
activities are the ownership and operation of the high-voltage transmission
network in England and Wales and electricity transmission and distribution
networks serving approximately 1.7 million customers in the north-eastern US.
The Group also operates interconnectors between England and Wales and each of
France and Scotland and between the US and Canada. It is developing an
interconnector in Australia. It has interests in transmission networks in
Argentina and Zambia with joint venture partners.
The Group's telecommunications interests comprise its 32.6 per cent. economic
interest in Energis plc, wholly-owned infrastructure businesses in the UK and US
and joint ventures in Poland and Latin America.
1.2 Acquisition of Niagara Mohawk and the Scheme
The Group is currently in the process of completing the acquisition of Niagara
Mohawk, the principal activities of which are the delivery of electricity and
natural gas in New York State. Its electricity customer base, at more than 1.5
million customers, is similar in size to that of National Grid USA. It also has
over 0.5 million retail gas customers in the residential and business sectors
and offers transportation of gas purchased by customers directly from suppliers.
Niagara Mohawk's electricity system is interconnected with that of National Grid
USA and consists of over 9,000 miles of transmission lines and 41,000 miles of
distribution lines. Shareholders of both National Grid and Niagara Mohawk
approved the Acquisition in January 2001.
The Acquisition is subject to a number of conditions, including regulatory and
other consents and approvals in the US, the majority of which have been
received. The only material regulatory approval outstanding is that of the SEC.
The Acquisition is expected to complete in early 2002, prior to which National
Grid will carry out a corporate reorganisation by way of the Scheme. Under the
Scheme, New National Grid will become the holding company of National Grid.
2. Incorporation and activity of New National Grid
2.1 New National Grid was originally incorporated and registered in England
and Wales under the Act as a private limited company under the name
Intercede 1610 Limited with registered number 4031152 on 11 July 2000.
Its name was changed to New National Grid Limited on 30 August 2000 and
it was re-registered as a public limited company, New National Grid plc,
on 29 November 2000. The principal legislation under which New National
Grid operates is the Act and the regulations made thereunder.
2.2 The registered office of New National Grid is at 15 Marylebone Road,
London NW1 5JD.
2.3 New National Grid has entered into the Merger Agreement, the Financing
Documents, the Exchangeable Bonds Trust Deed, the Undertaking, the
service agreement with William E. Davis described in section 6.5 below
and an agreement dated 10 December 2001 between New National Grid,
National Grid and Rothschild, whereby New National Grid has appointed
Rothschild to act as its sponsor in connection with Admission. New
National Grid has established a wholly-owned subsidiary, Grid Delaware,
Inc. A copy of the audited accounts for New National Grid for the period
from incorporation to 31 March 2001 has been filed with the Registrar of
Companies.
3. Share capital
3.1 The authorised, issued and fully paid share capital of New National Grid
as at the date of this document is as follows:
------------------------------------------------------------------------------------------------------------------------------
Authorised
Number Authorised Amount Issued Number Issued Amount
------------------------------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 500,000(1) (L)50,000
1 (L)1 New National Grid Special Share -- --
------------------------------------------------------------------------------------------------------------------------------
Note:
(1) The 500,000 New National Grid Shares have been issued and are paid
up as to one-quarter. National Grid Nominees Limited holds 499,990
New National Grid Shares and Fiona Smith, Group General Counsel and
Company Secretary of National Grid, holds 10 New National Grid
Shares as nominee for National Grid Nominees Limited. Subject to the
sanction of the Court, these New National Grid Shares will be
cancelled immediately prior to the Scheme becoming effective.
25
3.2 On incorporation, New National Grid had an authorised share capital of
(L)100 divided into 100 ordinary shares of (L)1 each, of which one
ordinary share of (L)1 was issued. By a resolution of New National Grid
passed on 28 November 2000: (i) the authorised share capital comprising
ordinary shares of (L)1 was sub-divided into ordinary shares of 10 pence
each; and (ii) the authorised share capital was increased to
(L)250,000,000 by the creation of 2,499,999,000 new ordinary shares of
10 pence each. On 28 November 2000, 499,990 New National Grid Shares
were issued to National Grid Nominees Limited.
3.3 By resolutions of New National Grid passed on 7 December 2001:
3.3.1 the authorised share capital of New National Grid was increased
from (L)250,000,000 to (L)250,000,001 by the creation of the New
National Grid Special Share;
3.3.2 the directors of New National Grid were generally and
unconditionally authorised, pursuant to section 80 of the Act, to
allot relevant securities (as defined in the said section 80) up
to an aggregate nominal value of (L)200,000,000 in respect of
allotments of relevant securities in connection with: (a) the
Scheme; (b) the Acquisition; and (c) the exchange of any of the
Exchangeable Bonds, such authority to expire on the conclusion of
the first Annual General Meeting of New National Grid to be held
following the Scheme Effective Date, provided that New National
Grid may at any time before such expiry make an offer or
agreement which would or might require relevant securities to be
allotted after such expiry and the directors of New National Grid
may allot relevant securities in pursuance of any such offer or
agreement as if the authority conferred hereby had not expired;
3.3.3 conditional on the Scheme becoming effective, the directors of
New National Grid were generally authorised, pursuant to section
80 of the Act, to allot relevant securities (as defined in the
said section 80) up to an aggregate nominal amount of
(L)66,666,666 provided always that following implementation of
the Scheme, the authority conferred by this section 3.3.3 shall
be limited to the allotment of relevant securities up to an
aggregate nominal amount of one-third of the ordinary share
capital of New National Grid in issue immediately following
implementation of the Scheme or, if the Acquisition completes,
Completion, such authority to expire on the conclusion of the
first Annual General Meeting of New National Grid to be held
following the Scheme Effective Date, provided that New National
Grid may at any time before such expiry make an offer or
agreement which would or might require relevant securities to be
allotted after such expiry and the directors of New National Grid
may allot relevant securities in pursuance of any such offer or
agreement as if the authority conferred hereby had not expired;
3.3.4 conditional on the Scheme becoming effective and pursuant to the
general authority granted to the directors of New National Grid
by the resolution referred to in section 3.3.3 above, the
directors of New National Grid were empowered pursuant to section
95 of the Act to allot equity securities (as defined in section
94(2) of the Act) for cash as if section 89(1) of the Act did not
apply to such allotment provided that such power shall be limited
to:
(i) the allotment of equity securities in connection with a
rights issue, open offer or any other pre-emptive offer
in favour of ordinary shareholders where the equity
securities respectively attributable to the interests of
ordinary shareholders on a fixed record date are
proportionate (as nearly as may be) to the respective
numbers of ordinary shares deemed to be held by them,
subject to such exclusions or other arrangements as the
directors of New National Grid may deem necessary or
expedient to deal with fractional entitlements, legal or
practical problems arising in any overseas territory or
by virtue of shares represented by depositary receipts,
the requirements of any regulatory body or stock
exchange or any other matter whatsoever; and
(ii) the allotment, otherwise than pursuant to section 3.3.4
(i) above, of equity securities for cash up to an
aggregate nominal value of (L)10,000,000 provided always
that the authority conferred by this section 3.3.4(ii)
shall be limited to the allotment of equity securities
for cash as if section 89(1) of the Act did not apply to
such allotment up to an aggregate nominal amount of 5
per cent. of the ordinary share capital of New National
Grid in issue immediately following implementation of
the Scheme or, if the Acquisition completes, Completion.
26
This power shall expire on the conclusion of the first Annual
General Meeting of New National Grid to be held following the
Scheme Effective Date except that the directors of New National
Grid shall be entitled, at any time prior to the expiry of this
power, to make any offer or agreement which would or might
require equity securities to be allotted after such expiry and to
allot equity securities in accordance with such offer or
agreement as if the power conferred hereby had not expired; and
3.3.5 conditional on the Scheme becoming effective, the directors of
New National Grid were generally authorised to make market
purchases (as defined in section 163(3) of the Act) of up to
200,000,000 New National Grid Shares provided always that the
authority conferred by this section 3.3.5 shall be limited to the
market purchase of such number of New National Grid Shares as
shall be equal to or less than 10 per cent. of the number of New
National Grid Shares in issue immediately following
implementation of the Scheme or, if the Acquisition completes,
Completion, at a price not less than 10 pence per New National
Grid Share nor more than a price per New National Grid Share of
105 per cent. of the average of the middle market quotation for a
New National Grid Share according to the Daily Official List for
the five business days before the purchase is made, such
authority to expire on the conclusion of the first Annual General
Meeting of New National Grid to be held following the Scheme
Effective Date, except that New National Grid may enter into a
contract to purchase such New National Grid Shares which would or
might be completed wholly or partly after such expiry.
3.4 Under the Scheme, New National Grid will issue New National Grid Shares,
credited as fully paid, to the Scheme Shareholders on the basis of one
New National Grid Share for each Scheme Share held and will issue the
New National Grid Special Share to the Special Shareholder. Accordingly,
the proposed authorised, issued and fully paid share capital of New
National Grid immediately before completion of the Acquisition will be
as follows:
------------------------------------------------------------------------------------------------------------------------------
Authorised Authorised
Number Amount Issued Number Issued Amount
------------------------------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 1,486,906,935 (L)148,690,693.50
1 (L)1 New National Grid Special Share 1 (L)1
------------------------------------------------------------------------------------------------------------------------------
Note: The table set out above assumes no issues of shares by New
National Grid or National Grid after 7 December 2001 (being the
latest practicable date prior to the publication of this
document), whether pursuant to the exercise of options or
otherwise, other than in connection with the Scheme.
3.5 Under the terms of the Merger Agreement, Niagara Mohawk Shareholders
will receive consideration of $19.00 per Niagara Mohawk Share, subject
to adjustment. This adjustment will be made by reference to the closing
price of a National Grid Share and the prevailing (L):$ exchange rate on
20 trading days selected at random from 40 consecutive trading days
ending on the tenth trading day prior to the deadline for Niagara Mohawk
Shareholders to make the election described below. At the date of its
announcement, the terms of the Acquisition valued the equity of Niagara
Mohawk at approximately $3.0 billion and the enterprise value of Niagara
Mohawk at approximately $8.9 billion. Under the Merger Agreement,
Niagara Mohawk Shareholders will be able to elect to receive their
consideration in cash, New National Grid ADSs or a combination thereof,
with the aggregate cash consideration offered to all Niagara Mohawk
Shareholders being $1.015 billion. Assuming this level of cash
consideration, a price of 435.5 pence and an exchange rate of
(L)1:$1.432 (being the Closing Price and Exchange Rate on 7 December
2001, the latest practicable date prior to the publication of this
document) the maximum number of New National Grid Shares which could be
issued pursuant to the Acquisition is 312,238,507.
However, under the terms of the Merger Agreement, if cash elections
received from all Niagara Mohawk Shareholders exceed $1.015 billion,
National Grid may, at its sole discretion, reduce the total number of
New National Grid ADSs to be issued and increase the aggregate cash
portion of the purchase price. On 20 November 2001, National Grid
announced that it will increase the aggregate cash portion of the price
paid to 50 per cent., assuming receipt of sufficient cash elections.
Assuming that the aggregate cash portion of the price paid represents 50
per cent. of the total consideration, a price of 435.5 pence and an
exchange rate of (L)1:$1.432 (being the Closing Price and Exchange Rate
on 7 December 2001, the latest
27
practicable date prior to the publication of this document), the
authorised, issued and fully paid share capital of New National Grid
immediately following completion of the Acquisition will be as follows:
------------------------------------------------------------------------------------------------------------------------------
Authorised
Number Authorised Amount Issued Number Issued Amount
------------------------------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 1,724,403,787 (L)172,440,378.70
1 (L)1 New National Grid Special Share 1 (L)1
------------------------------------------------------------------------------------------------------------------------------
Note: The table set out above also assumes no issues of shares by New
National Grid, National Grid or Niagara Mohawk after 7 December
2001 (being the latest practicable date prior to the publication
of this document), whether pursuant to the exercise of options
or otherwise, other than in connection with the Scheme and the
Acquisition.
No fractions of New National Grid ADSs will be issued in connection with
the Acquisition. Niagara Mohawk Shareholders who would otherwise have
been entitled to receive a fraction of a New National Grid ADS under the
terms of the Acquisition will receive cash in lieu of such fraction.
3.6 Other than pursuant to (i) the Scheme; (ii) the exercise of options
under the National Grid Share Schemes and the New National Grid Share
Plans; (iii) the Exchangeable Bonds; and (iv) the Acquisition, New
National Grid has no intention of issuing any of its authorised unissued
share capital and no issue of New National Grid Shares will be made
which will effectively alter control of New National Grid without the
prior approval of shareholders in general meeting.
3.7 Save as disclosed in this section 3: (i) there has been no issue of
share or loan capital of New National Grid since its incorporation; and
(ii) no share or loan capital of New National Grid is under option or
agreed to be put under option.
3.8 No commissions, discounts, brokerages or other special terms have been
granted in respect of the issue of any share capital of New National
Grid.
3.9 The New National Grid Shares to be issued pursuant to the Scheme and the
Acquisition have not been sold and are not being made available to the
public in conjunction with the application for Admission.
3.10 The New National Grid Shares to be issued pursuant to the Scheme and the
Acquisition will, when issued, be in registered form and will be capable
of being held in uncertificated form. No temporary documents of title
have been or will be issued in respect of the New National Grid Shares.
3.11 The trustee of the National Grid Qualifying Employee Share Ownership
Trust has agreed to waive all but 0.0001 pence of any dividend per share
due, or to become due, on any New National Grid Shares held in the
National Grid Qualifying Employee Share Ownership Trust. In addition,
the trustee of the National Grid 1996 Employee Benefit Trust has agreed
to waive all dividends on any New National Grid Shares held in that
trust. The trustees of each of the National Grid Qualifying Employee
Share Ownership Trust (No. 2), the National Grid Employee Trust 2001 and
the UK Trust, in respect of unallocated shares, have agreed to waive any
dividends per share due, or to become due, on any New National Grid
Shares held in those trusts.
4. Substantial shareholdings
4.1 In so far as is known to National Grid, as at 6 December 2001 (being the
latest practicable date prior to the publication of this document), the
following parties are interested, directly or indirectly, in 3 per cent.
or more of National Grid's issued ordinary share capital:
----------------------------------------------------------------------------
Percentage of
issued National
Shareholder Grid Shares
----------------------------------------------------------------------------
The Capital Group Companies, Inc. 7.05
Prudential Corporation plc 3.96
Deutsche Bank AG(1) 3.86
HSBC Investment Bank plc(1) 3.72
Credit Suisse First Boston Equities Limited(1) 3.36
----------------------------------------------------------------------------
Note:
(1) National Grid has been notified that HSBC Investment Bank plc, in
respect of 3.70 per cent., Deutsche Bank AG in respect of 3.80 per
cent. and Credit Suisse First Boston Equities Limited in respect of its
total holding had each hedged their economic risk to National Grid
Shares pursuant to structured derivative transactions entered into with
the Olayan Group. As a result of these transactions, the Olayan Group
retains an economic exposure to 10.86 per cent. of issued National Grid
Shares.
28
Save as disclosed in this section 4, the Directors are not aware of any
interest which as at 6 December 2001 represented 3 per cent. or more of
the issued ordinary share capital of National Grid.
4.2 The following table shows the persons who are expected to be interested,
directly or indirectly, in 3 per cent. or more of the issued share
capital of New National Grid following completion of the Acquisition,
assuming that:
(i) the aggregate cash portion of the purchase price for the
Acquisition represents 50 per cent. of the total consideration
and all Niagara Mohawk Shareholders receive 50 per cent. of the
consideration due to them in the form of New National Grid
ADSs;
(ii) the price per National Grid Share used to calculate the
Acquisition consideration is 435.5 pence (being the Closing Price
on 7 December 2001, the latest practicable date prior to the
publication of this document);
(iii) the Exchange Rate is (L): $1.432 (being the Exchange Rate on 7
December 2001, the latest practicable date prior to the
publication of this document);
(iv) there is no increase in the issued share capital of National Grid
or in New National Grid after 7 December 2001 (being the latest
practicable date prior to the publication of this document) save
in connection with implementation of the Scheme and the
Acquisition;
(v) there is no increase in the issued share capital of Niagara
Mohawk after 7 December 2001 (being the latest practicable date
prior to the publication of this document);
(vi) there are no dealings in National Grid Shares or New National
Grid Shares after 7 December 2001 (being the latest practicable
date prior to the publication of this document); and
(vii) the shareholdings in Niagara Mohawk are the same as at 30
September 2001 (being the latest date on which the top 50
shareholdings in Niagara Mohawk were published):
----------------------------------------------------------------------------
Percentage of
issued New National
Shareholder Grid Shares
----------------------------------------------------------------------------
The Capital Group Companies, Inc. 7.60
Prudential Corporation plc 3.42
Deutsche Bank AG(1) 3.45
HSBC Investment Bank plc(1) 3.30
Credit Suisse First Boston Equities
Limited(1) 3.05
----------------------------------------------------------------------------
Note:
(1) HSBC Investment Bank plc, in respect of 3.19 per cent., Deutsche Bank
AG in respect of 3.28 per cent. and Credit Suisse First Boston Equities
Limited, in respect of 2.90 per cent., have each hedged their economic
risk to National Grid Shares pursuant to structured derivative
transactions entered into with the Olayan Group. As a result of these
transactions, the Olayan Group is expected to have an economic exposure
to 9.37 per cent. of issued New National Grid Shares.
5. Summary of the principal differences between the New National Grid
Articles and the National Grid Articles
The principal differences between the New National Grid Articles and the
National Grid Articles are explained below. A copy of the New National Grid
Articles and of the National Grid Articles will be available for inspection as
referred to in section 16 below. A copy of the National Grid Articles (including
amendments proposed to be made at the Scheme EGM) will also be available during,
and for at least 15 minutes prior to, the Scheme EGM.
5.1 New National Grid Special Share
This Article reflects changes in the structure of the electricity supply
industry in England and Wales since the flotation of National Grid in 1995 and
in particular the introduction of new electricity trading arrangements
introduced in March 2001. For example, the "Pool", which used to be the
electricity trading market, no longer exists and accordingly references to "Pool
Members", as used in relation to the definition of "Restricted Person", have
been replaced by references to persons who are bound by the Balancing and
Settlement Code.
29
5.2 CREST
The New National Grid Articles expressly permit shares to be held in
uncertificated form in accordance with the CREST Regulations and the rules of
CREST (the electronic settlement system).
5.3 Electronic communications
Following various amendments to company law as a result of the Electronic
Communications Order, formal electronic communication with shareholders became
legally possible. The Electronic Communications Order provides that where there
is agreement between New National Grid and the shareholder(s) concerned, the
annual report and accounts and notices of meetings may be sent to shareholders
electronically, or New National Grid may publish the relevant documents on a
website and send a notice by electronic means informing shareholders that these
documents are available. The Electronic Communications Order also allows a
shareholder to appoint a proxy by electronic means. Provisions have been
included in the New National Grid Articles to give effect to the Electronic
Communications Order.
In accordance with the Electronic Communications Order, New National Grid will
only communicate electronically with those shareholders who specifically elect
for electronic communications.
5.4 Number of directors to retire
This Article relates to the number of directors to retire from office by
rotation and requires that all directors shall retire by rotation at least every
three years, in accordance with corporate governance best practice.
5.5 Removal of interim privatisation arrangements
Articles 1 ("Definitions") and 56 ("Limitations on Shareholdings") in the New
National Grid Articles do not contain references to certain interim arrangements
originally included in the National Grid Articles in relation to the flotation
of National Grid.
5.6 ADS holders
The New National Grid Articles allow ADS holders to attend, speak and vote at
general meetings. Accordingly, the Depositary will be able to appoint holders of
New National Grid ADSs as proxies, and these proxies will have the right to
attend, speak and vote at general meetings. Such proxies appointed by the
Depositary will be able, in turn, to appoint proxies to attend, speak and vote
at a general meeting instead of them. To ensure that ADS holders will be able to
vote on special and extraordinary resolutions, the New National Grid Articles
require such resolutions to be decided on a poll. All ordinary resolutions will
be decided on a show of hands or, if a poll is demanded in accordance with the
New National Grid Articles, on a poll. The Board, when declaring a Sterling
dividend, can elect to pay dividends to the Depositary in US dollars.
6. Directors, Secretary and Proposed Directors of New National Grid
6.1 Directors and Secretary
The Directors and their functions are set out below:
--------------------------------------------------------------------------------
Name Function
--------------------------------------------------------------------------------
James Hood Ross Chairman (Non-executive)
Roger John Urwin Group Chief Executive
Stephen John Box Group Finance Director
Richard Paul Sergel Group Director, North America
Steven John Holliday Group Director, UK and Europe
Edward Morrison Astle Group Director, Telecommunications
Robert Frederick William Faircloth Non-executive Director
John Albert Martin Grant Non-executive Director
Paul Lewis Joskow Non-executive Director
Richard Gurdon Reynolds Non-executive Director
--------------------------------------------------------------------------------
The business address of each of the Directors is 15 Marylebone Road, London NW1
5JD, with the exceptions of Richard Sergel and Paul Joskow, each of whose
business address is 25 Research Drive, Westborough, Massachusetts, MA 01582.
30
Fiona Smith is Group General Counsel and Company Secretary of New National
Grid.
6.2 Proposed Directors
It is proposed that, following Completion, William E. Davis, chairman and chief
executive officer of Niagara Mohawk, will be appointed Chairman of National Grid
USA for a period of two years from Completion to help ensure a smooth transition
and rapid integration and will also be appointed as an Executive Director of New
National Grid. One of Niagara Mohawk's non-executive directors, Dr Bonnie G.
Hill, will also join the Board as a Non-executive Director.
6.3 Details of the Directors' and the Proposed Directors' service contracts
with a period of notice or contract period of one year or more are as
follows:
6.3.1 On 17 November 1995, Roger Urwin entered into a service agreement
jointly with the Companies pursuant to which he was employed as
Managing Director Transmission. Roger Urwin was subsequently appointed
as Group Chief Executive on 1 April 2001. Roger Urwin currently
receives a base salary of (L)500,000 (which is reviewed annually on 1
April) and has an annual bonus opportunity under the Group Directors'
performance-related bonus plan. Long-term incentives are provided
through an executive share option plan. Roger Urwin is provided with a
car and receives death-in-service life cover. Roger Urwin is entitled
to personal accident insurance, reimbursement for all expenses properly
incurred and private medical expenses. The Companies (subject to Inland
Revenue limits from time to time) make pension contributions under a
defined-benefit pension scheme.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies' request, remain as
directors until the Companies' normal retirement age (currently 63). If
the employment of Roger Urwin is terminated following a change of
control of the Company or as a result of redundancy, and the termination
is with the consent of the Company, Roger Urwin may choose to receive a
pension with the option to commute part of this pension for a lump sum,
payable from the date of termination. The pension is calculated on
Pensionable Service (as defined) and Pensionable Salary (as defined) at
the date of termination. Subject to mutual agreement to the contrary,
Roger Urwin's service agreement is terminable by him on 12 months'
written notice and by the Companies on 12 months' written notice.
6.3.2 On 16 July 1997, Stephen Box entered into a service agreement jointly
with the Companies pursuant to which he is employed as Group Finance
Director. Stephen Box currently receives a base salary of (L)350,000
(which is reviewed annually on 1 April) and has an annual bonus
opportunity under the Group Directors' performance-related bonus plan.
Long-term incentives are provided through an executive share option
plan. Stephen Box is provided with a car and receives death-in-service
life cover. Stephen Box is entitled to personal accident insurance,
reimbursement for all expenses properly incurred and private medical
expenses. The Companies (subject to Inland Revenue limits from time to
time) make pension contributions under a defined-benefit pension
scheme. Because Stephen Box is subject to a pensions earnings cap, the
Companies have put in place pension arrangements, which are partially
funded, to provide a pension covering the difference between base
salary and the pensions cap.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies' request, remain as
directors until the Companies' normal retirement age (currently 63).
Subject to mutual agreement to the contrary, Stephen Box's service
agreement is terminable by him on 12 months' written notice and by the
Companies on 12 months' written notice.
6.3.3 On 22 March 2000, Rick Sergel entered into a service agreement jointly
with the Company and National Grid USA pursuant to which he is employed
as President and Chief Executive Officer of National Grid USA. Rick
Sergel receives no additional salary for being a director of National
Grid. His base salary as President and Chief Executive Officer of
National Grid USA is currently $700,000 and he has an annual bonus
opportunity under the National Grid USA annual bonus arrangement. Long-
term incentives are provided through an executive share option plan. He
participates in National Grid USA's Executive Supplemental Retirement
Plan and in other welfare plans, retirement, incentive and fringe
benefits plans on the same basis as other executive officers in
National Grid USA. The National Grid USA Executive Supplemental
Retirement Plan does not mandate a retirement age.
Subject to mutual agreement to the contrary, Rick Sergel's service
agreement is for an initial fixed term until March 2003, subject to a
one year notice period by the Company after March 2002, although the
service agreement is terminable by him on six months' written notice at
any time.
31
In the event that National Grid USA terminates Rick Sergel's service
agreement other than for Cause (as defined), death or Disability (as
defined) or Rick Sergel terminates the service agreement for Good Reason
(as defined), National Grid USA is obliged to make various payments to
Rick Sergel and he also has the right to receive certain benefits. The
quantum of the termination payments depends upon the length of time that
Rick Sergel has been employed and also whether the termination event has
arisen as a result of a Change in Control (as defined) of either
National Grid USA or National Grid. The payments and benefits are
intended as liquidated damages and the sole and exclusive remedy of Rick
Sergel in the relevant circumstances.
6.3.4 On 6 March 2001, Steven Holliday entered into a service agreement
jointly with the Companies pursuant to which he is employed as Group
Director, Europe. Steven Holliday currently receives a base salary of
(L)270,000 (which is reviewed annually on 1 April) and has an annual
bonus opportunity under the Group Directors' performance-related bonus
plan. Long-term incentives are provided through an executive share
option plan. Steven Holliday is provided with a car and receives death-
in-service life cover. Steven Holliday is entitled to personal accident
insurance, reimbursement for all expenses properly incurred and private
medical expenses. The Companies (subject to Inland Revenue limits from
time to time) make pension contributions under a defined-benefit
pension scheme. Because Steven Holliday is subject to a pensions
earnings cap, the Companies have put in place pension arrangements,
which are partially funded, to provide a pension covering the
difference between base salary and the pensions cap.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies' request, remain as
directors until the Companies' normal retirement age (currently 63).
Subject to mutual agreement to the contrary, Steven Holliday's service
agreement is terminable by him on 12 months' written notice and by the
Companies on 24 months' written notice for the first year, declining on
a straight-line basis in the second year to 12 months.
6.3.5 On 27 July 2001, Edward Astle entered into a service agreement jointly
with the Companies pursuant to which he is employed as Group Director,
Telecommunications. This appointment was effective from 1 September
2001. Edward Astle currently receives a base salary of (L)310,000
(which will be reviewed annually on 1 April). In addition to the annual
bonus opportunity under the Group Directors' performance-related bonus
plan, Edward Astle has special bonus plan arrangements under which he
is entitled to a bonus of (L)100,000 for the period up until 31 March
2002 on completing a telecommunications strategic review which is
approved by the Board. Thereafter, the special bonus arrangements will
be reviewed. Long-term incentives are provided through an executive
share option plan. Edward Astle is provided with a choice of car or car
allowance and receives death-in-service life cover. Edward Astle is
entitled to personal accident insurance, reimbursement for all expenses
properly incurred and private medical expenses. The Companies (subject
to Inland Revenue limits from time to time) make pension contributions
under a defined-benefit pension scheme. Because Edward Astle is subject
to a pensions earnings cap, the Companies have put in place pension
arrangements, which are partially funded, to provide a pension covering
the difference between base salary and the pensions cap.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies request, remain as
directors until the Companies' normal retirement age (currently 63).
Subject to mutual agreement to the contrary, Edward Astle's service
agreement is terminable by him on 12 months' written notice and by the
Companies on 24 months' written notice for the first year, declining on
a straight-line basis in the second year to 12 months.
6.4 The service agreement of each of the Executive Directors will be novated
to New National Grid, with effect from the Scheme Effective Date.
6.5 On 7 December 2001, William E. Davis entered into a service agreement
jointly with New National Grid and National Grid USA pursuant to which,
following Completion, he will be employed as Chairman of National Grid
USA and as an Executive Director of New National Grid for a fixed period
of 24 months. The service agreement can be terminated by William Davis
if he provides National Grid USA with three months' written notice.
William Davis will receive a payment equal to four times his base salary
on joining New National Grid and National Grid USA, if he has not
received such a payment immediately before Completion. William Davis
will receive no additional salary for being a director of New National
Grid. His base salary as Chairman of National Grid USA will be not less
than $820,000 (reviewed annually) and he will have an annual bonus
opportunity under National Grid USA's annual bonus arrangements.
Long-term incentives may be provided through an executive share option
plan. He will participate in National Grid USA's Executive Supplemental
Retirement Plan and any National Grid USA ICP I bonus plans/programs and
in other welfare plans, retirement, incentive and fringe benefit plans
on
32
the same basis as other executive officers of National Grid USA. The
provisions of some of these benefits plans and programs shall continue
to be effective for certain time periods following termination of
William Davis' employment. The National Grid USA Executive Supplemental
Retirement Plan does not mandate a retirement age.
6.6 The aggregate remuneration (including salaries, fees, pension
contributions, bonus payments and benefits in kind) of the Directors for
the year ended 31 March 2001 amounted to (L)2,808,000. The remuneration
policy of the National Grid Group will be reviewed by the Remuneration
Committee after the Acquisition, in the light of the responsibilities to
be undertaken by the Directors and Proposed Directors within the
Combined Group. Subject to this, it is estimated that for the year
ending 31 March 2002 the Directors of New National Grid will be paid a
total of approximately (L)3,326,000 by the Combined Group. The
Remuneration Committee comprises Bob Faircloth, John Grant and Richard
Reynolds.
6.7 There will be no variation in the total emoluments receivable by any of
the Directors under the Merger Agreement.
6.8 There is no arrangement under which a Director has agreed to waive
future emoluments nor have there been any such waivers during the
financial year immediately preceding the date of this document.
7. Directors' interests in National Grid and New National Grid
7.1 On the basis of the assumptions set out in section 4.2 of this Part IV,
the interests, all of which are beneficial, of the Directors in: (i)
National Grid Shares as at 6 December 2001 (being the latest practicable
date prior to the publication of this document) (which in aggregate
represent approximately 0.014 per cent. of the issued ordinary share
capital of National Grid); (ii) in New National Grid Shares immediately
following the Scheme Effective Date (which in aggregate will represent
approximately 0.014 per cent. of the issued ordinary share capital of
New National Grid); and (iii) in New National Grid Shares immediately
following completion of the Acquisition (which in aggregate will
represent approximately 0.012 per cent. of the issued ordinary share
capital of New National Grid), are set out in the table below. In each
case, the figures are based upon the interests in National Grid Shares
which have been notified by each Director to National Grid pursuant to
section 324 or section 328 of the Act as at 6 December 2001 (being the
latest practicable date prior to the publication of this document) or
are required pursuant to section 325 of the Act to be entered into the
register of Directors' interests maintained under that section or are
interests of a connected person (within the meaning of section 346 of
the Act) of a Director which would, if the connected person were a
Director, be required to be disclosed under those sections of the Act,
and the existence of which is known to or could with reasonable
diligence be ascertained by that Director:
-----------------------------------------------------------------------------------------------------
Expected interest in New Expected interest in
National Grid Shares New National Grid
Interest in immediately after the Scheme Shares immediately
Name National Grid Shares Effective Date after Completion
-----------------------------------------------------------------------------------------------------
James Ross 19,000 19,000 19,000
Roger Urwin 147,920 147,920 147,920
Edward Astle - - -
Stephen Box 18,459 18,459 18,459
Bob Faircloth - - -
John Grant 10,000 10,000 10,000
Steven Holliday - - -
Paul Joskow 5,000 5,000 5,000
Richard Reynolds 10,000 10,000 10,000
Rick Sergel 1,404 1,404 1,404
-----------------------------------------------------------------------------------------------------
33
7.2 The following Directors have the options set out in the table below (all
of which have been granted for no consideration) under the Executive
Share Option Scheme (1990) and the Executive Share Option Plan 2000:
-------------------------------------------------------------------------------------------------------------------------------
Outstanding
Exercise price National Grid
per National Shares under
Name Date of grant Grid Share (pence) Normal exercise periods option
-------------------------------------------------------------------------------------------------------------------------------
Roger Urwin 29 Sep 1997 280.50 Sep 2000 - Sep 2007 169,340
16 Jun 1998 375.75 Jun 2001 - Jun 2008 91,656
15 Jun 1999 455.25 Jun 2002 - Jun 2009 22,098
5 Jun 2000 531.50 Jun 2003 - Jun 2010 33,867
18 Jun 2001 563.00 Jun 2004 - Jun 2011 133,214
Edward Astle 6 Sep 2001 479.50 Sep 2004 - Sep 2011 193,952
Stephen Box 29 Sep 1997 280.50 Sep 2000 - Sep 2007 160,427
16 Jun 1998 375.75 Jun 2001 - Jun 2008 93,147
15 Jun 1999 455.25 Jun 2002 - Jun 2009 43,931
5 Jun 2000 531.50 Jun 2003 - Jun 2010 37,630
18 Jun 2001 563.00 Jun 2004 - Jun 2011 93,250
Steven Holliday 30 Mar 2001 540.00 Mar 2004 - Mar 2011 150,000
18 Jun 2001 563.00 Jun 2004 - Jun 2011 71,936
Rick Sergel 31 Mar 2000 566.50 Mar 2003 - Mar 2010 201,845
18 Jun 2001 563.00 Jun 2004 - Jun 2011 134,321
-------------------------------------------------------------------------------------------------------------------------------
The following Directors have the options set out in the table below (all
of which have been granted for no consideration) under the Share
Matching Scheme (1996):
-------------------------------------------------------------------------------------------------------------------------------
Outstanding
National Grid
Exercise price in Shares under
Name Date of grant total (pence) Normal exercise periods option
-------------------------------------------------------------------------------------------------------------------------------
Roger Urwin 16 Jun 1998 100.00 Jun 2001 - Jun 2005 4,047
11 Jun 1999 100.00 Jun 2002 - Jun 2006 3,884
26 Jun 2000 100.00 Jun 2003 - Jun 2007 3,859
8 Jun 2001 100.00 Jun 2004 - Jun 2008 5,635
Stephen Box 11 Jun 1999 100.00 Jun 2002 - Jun 2006 3,844
26 Jun 2000 100.00 Jun 2003 - Jun 2007 4,122
8 Jun 2001 100.00 Jun 2004 - Jun 2008 6,134
-------------------------------------------------------------------------------------------------------------------------------
Rick Sergel participates in the Incentive Compensation Plan which is a
comparable plan to the Share Matching Scheme (1996). On 5 June 2001,
Rick Sergel received an award under this plan which he chose to invest
into the Deferred Compensation Plan resulting in an entitlement to 4,353
notional National Grid ADSs which, as a result of a dividend
reinvestment, accrued a further 87 notional National Grid ADSs on 15
August 2001.
34
The following Directors have the options set out in the table below (all
of which have been granted for no consideration) under the 1999 Savings
Related Share Option Scheme:
-------------------------------------------------------------------------------------------------------------------------------
Exercise price Outstanding
per National National Grid
Grid Share Shares under
Name Date of grant (pence) Normal exercise periods option
-------------------------------------------------------------------------------------------------------------------------------
Roger Urwin 22 Jun 2001 457.00 Sep 2006 - Feb 2007 3,692
Steven Holliday 22 Jun 2001 457.00 Sep 2006 - Feb 2007 3,692
-------------------------------------------------------------------------------------------------------------------------------
7.3 Each of the current Executive Directors (Roger Urwin, Edward Astle,
Stephen Box, Steven Holliday and Rick Sergel) is deemed for the purposes
of the Act to be a potential beneficiary under the National Grid
Qualifying Employee Share Ownership Trust ("QUEST") and the National
Grid 1996 Employee Benefit Trust and thereby to have an interest as at 6
December 2001 (being the latest practicable date prior to the
publication of this document) in the 1,568,424 National Grid Shares held
by the QUEST and the 888,840 National Grid Shares held by the 1996
Employee Benefit Trust.
7.4 Save as disclosed in this section 7, none of the Directors has any
interest in the share or loan capital of National Grid or any of its
subsidiaries, nor has National Grid or any of its subsidiaries provided
any guarantees for the benefit of the Directors as at 6 December 2001
(being the latest practicable date prior to the publication of this
document).
7.5 There are no outstanding loans or guarantees granted or provided by any
member of the National Grid Group to or for the benefit of any
Directors.
7.6 No Director has any interest in any transaction which is or was unusual
in its nature or conditions or significant to the business of National
Grid and any of its subsidiaries and which was effected by National Grid
during the current or immediately preceding financial year or which was
effected by National Grid during any earlier financial year and remains
in any respect outstanding or unperformed.
35
8. Options over National Grid Shares
8.1 As at 6 December 2001 (being the latest practicable date prior to the
publication of this document), the following options granted to
Directors and employees of the Group under the National Grid Share
Schemes (other than the Share Matching Scheme (1996)) were outstanding:
------------------------------------------------------------------------------------------------------------------------------
Exercise price
per National Outstanding
Grid Share National Grid
Scheme or Plan Date of grant (pence) Normal exercise periods Shares under option
-------------------------------------------------------------------------------------------------------------------------------
Executive Share Option 20 Dec 91 64.60 Dec 1994 - Dec 2001 100,000
Scheme (1990) 17 Dec 92 90.20 Dec 1995 - Dec 2002 38,609
17 Dec 93 118.90 Dec 1996 - Dec 2003 47,801
28 Nov 96 194.50 Nov 1999 - Nov 2006 15,424
10 Feb 97 205.50 Feb 2000 - Feb 2007 217,402
4 Aug 97 258.00 Aug 2000 - Aug 2007 179,263
29 Sep 97 280.50 Sep 2000 - Sep 2007 711,611
16 Jun 98 375.75 Jun 2001 - Jun 2008 1,138,659
21 Dec 98 490.00 Dec 2001 - Dec 2008 14,489
15 Jun 99 455.25 Jun 2002 - Jun 2009 278,267
6 Jul 99 435.75 Jul 2002 - Jul 2009 353,533
27 Sep 99 424.00 Sep 2002 - Sep 2009 56,603
31 Mar 00 566.50 Mar 2003 - Mar 2010 1,509,615
5 Jun 00 531.50 Jun 2003 - Jun 2010 456,130
5 Jul 00 526.00 Jul 2003 - Jul 2010 958,515
Executive Share Option 8 Sep 00 500.35 Sep 2003 - Sep 2010 64,971
Plan 2000 15 Sep 00 548.00 Sep 2003 - Sep 2010 20,088
2 Feb 01 623.00 Feb 2004 - Feb 2011 48,955
30 Mar 01 540.00 Mar 2004 - Mar 2011 150,000
18 Jun 01 563.00 Jun 2004 - Jun 2011 1,916,282
5 Jul 01 527.00 Jul 2004 - Jul 2011 453,210
6 Sep 01 479.50 Sep 2004 - Mar 2011 242,907
Savings Related Share Option 5 Jul 96 146.00 Aug 2001 - Feb 2002 138,409
Scheme (1990) 15 Jul 97 171.00 Aug 2002 - Feb 2003 2,223,351
3 Jul 98 312.00 Sep 2001 - Feb 2002 37,711
3 Jul 98 312.00 Sep 2003 - Feb 2004 1,327,756
2 Jul 99 337.00 Sep 2002 - Feb 2003 979,221
2 Jul 99 337.00 Sep 2004 - Feb 2005 2,021,912
1999 Savings Related 23 Jun 00 416.00 Sep 2003 - Feb 2004 544,805
Share Option Scheme 23 Jun 00 416.00 Sep 2005 - Feb 2006 745,605
22 Jun 01 457.00 Sep 2004 - Feb 2005 750,051
22 Jun 01 457.00 Sep 2006 - Feb 2007 1,663,537
Each of these options may be satisfied on exercise either by the issue
of new shares or by the transfer of market-purchased shares. In respect
of options granted to US employees, the exercise of options will be
satisfied by the issue of new shares.
36
8.2 As at 6 December 2001 (being the latest practicable date prior to the
publication of this document), the following awards granted to Directors
and certain employees of the Group under the Share Matching Scheme
(1996), which will be satisfied by the transfer of market- purchased
shares, were outstanding:
-------------------------------------------------------------------------------------------------------------------------------
Exercise Outstanding
price in National Grid
Scheme Date of grant total (pence) Normal exercise periods Shares under option
-------------------------------------------------------------------------------------------------------------------------------
Share Matching Scheme (1996) 23 Jun 97 100.00 Jun 2000 - Jun 2004 8,594
30 Sep 97 100.00 Sep 2000 - Sep 2004 5,274
16 Jun 98 100.00 Jun 2001 - Jun 2005 9,919
11 Jun 99 100.00 Jun 2002 - Jun 2006 27,355
26 Jun 00 100.00 Jun 2003 - Jun 2007 29,786
8 Jun 01 100.00 Jun 2003 - Jun 2007 11,769
25 Jun 01 100.00 Jun 2003 - Jun 2007 28,162
-------------------------------------------------------------------------------------------------------------------------------
8.3 Options granted under the National Grid Share Schemes have all been
granted for no consideration.
8.4 As at 6 December 2001 (being the latest practicable date prior to the
publication of this document), the total number of National Grid Shares
under option or the subject of awards under the National Grid Share
Schemes was 19,525,551. At the same date, 1,568,424 National Grid Shares
were held by the National Grid Qualifying Employee Share Ownership Trust
("QUEST") and 888,840 National Grid Shares were held by the National
Grid 1996 Employee Benefit Trust.
8.5 The trustee of the QUEST has agreed to waive all but 0.0001 pence of any
dividend per share due, or to become due, on any National Grid Shares
held in the QUEST. In addition, the trustee of the National Grid 1996
Employee Benefit Trust has agreed to waive all dividends on any National
Grid Shares held in that Trust.
9. Effect of the Scheme on the National Grid Share Schemes
Assuming that the Scheme becomes effective, no further awards will be made under
any of the existing National Grid Share Schemes, except for the National Grid
USA Incentive Thrift Plans (which will be amended as set out in section 10.7
below) and the Deferred Compensation Plan (which is summarised in section 9.11
below and will continue to operate without significant amendment).
9.1 Executive Share Option Scheme (1990)
Outstanding options to purchase National Grid Shares (which may be satisfied
either through newly-issued or market-purchased shares) become exercisable for a
period of six months following the Court sanctioning the Scheme whether or not
performance targets have been satisfied.
The Remuneration Committee will offer optionholders replacement options over New
National Grid Shares. Replacement options will have the same effective date of
grant, exercise prices and terms as existing options. Performance conditions
will continue to apply except that the performance of New National Grid will be
measured rather than the performance of National Grid.
The Executive Directors of National Grid have agreed not to exercise any options
granted to them under the Executive Share Option Scheme (1990) which would
become exercisable as a result of the Scheme and, instead, to accept the offer
of replacement options.
9.2 Executive Share Option Plan 2000
This plan replaced the Executive Share Option Scheme (1990) in respect of
options granted from September 2000. Certain executives and employees hold
options to purchase National Grid Shares under this plan.
Outstanding options granted prior to 17 January 2001 will become exercisable for
a period of one month on notification being sent to optionholders that the Court
has sanctioned the Scheme, but only to the extent that the Remuneration
Committee certifies that the performance targets have been met to date.
The Remuneration Committee will offer optionholders replacement options over New
National Grid Shares. In respect of the replacement options and, pursuant to the
provisions contemplating such an exchange contained within the plan rules, any
performance targets will cease to apply.
37
Options granted on or after 17 January 2001 do not become exercisable and,
instead, such options will compulsorily be exchanged for an equivalent option
over New National Grid Shares and the relevant performance targets will continue
to apply.
No Executive Director received any options under this plan prior to 17 January
2001.
9.3 Savings Related Share Option Scheme (1990)
Options granted under the Savings Related Share Option Scheme (1990) will become
exercisable for a period of six months following the Court sanctioning the
Scheme. However, options can only be exercised to the extent that money has been
saved with the savings contract (i.e. the options will not become exercisable in
full unless they are about to mature). Again, replacement options will be
offered.
9.4 1999 Savings Related Share Option Scheme
The 1999 Savings Related Share Option Scheme replaced the Savings Related Share
Option Scheme (1990) in respect of options granted from June 2000.
The Scheme will have the same implications as for the Savings Related Share
Option Scheme (1990) except that options will only become exercisable for a
period of one month from the Remuneration Committee notifying participants that
the Court has sanctioned the Scheme.
9.5 Profit Sharing Scheme (1990)
The Profit Sharing Scheme (1990) permitted the award to UK employees of free
National Grid Shares. Under its rules, National Grid Shares awarded are held on
the participants' behalf for a minimum of two years. If shares are held in trust
for the maximum period of three years, no tax is payable on release of the
shares from trust. The final award of free shares under the Profit Sharing
Scheme (1990) was made in January 2001.
The Scheme will not trigger early release from the trust of the National Grid
Shares being held on behalf of the employees. National Grid Shares will be
exchanged for an equivalent holding of New National Grid Shares and participants
will have the same rights in respect of these New National Grid Shares.
9.6 Employee Share Ownership Plan (UK) (2000)
No awards have been made under this plan.
9.7 1999 US Employee Stock Purchase Plan
No awards have been made under this plan.
9.8 Share Matching Scheme (1996)
Under the Share Matching Scheme (1996), the Remuneration Committee required
certain Executive Directors (and permitted certain other executives) to invest a
proportion of their annual bonus in National Grid Shares. In return for making
such investment, the participant received a matching option which permitted him
to acquire, for a nominal sum, such number of shares as had a value equal to the
pre-tax value of the bonus used to purchase the investment shares. The matching
options can generally only be exercised if the participant remains employed for
at least three years and to the extent that he retains the investment shares
until the matching option is exercised. In limited circumstances, a participant
may be permitted to retain his option following cessation of employment.
The matching options become exercisable on the Court sanctioning the Scheme,
except for matching options granted on or after 17 January 2001 which will
automatically be exchanged for options over New National Grid Shares.
Awards granted under the Share Matching Scheme (1996) can only be satisfied
through market-purchased shares; no new shares may be issued.
On an ex-gratia basis, the Remuneration Committee has tended to award a payment
to participants equal to the dividends which would have been earned on those
shares subject to the matching options. As explained at section 10.6, it is
proposed that this practice be entrenched within the rules of the replacement
plan.
9.9 Incentive Compensation Plan
Executives of National Grid USA receive an integrated annual bonus comprising
both a cash and share element. The share element involves participants receiving
market-purchased National Grid ADSs, except to the extent that the bonus is
deferred under the Deferred Compensation Plan. The National Grid ADSs are
generally vested immediately although participants may be prohibited from
selling National Grid ADSs for a period. Following the Scheme becoming
effective, all of these National Grid ADSs will convert into equivalent New
National Grid ADSs.
38
9.10 National Grid USA Incentive Thrift Plans
These are tax sponsored 401(k) plans for US based employees. There is one plan
for the union workforce and another for the non-union workforce. Broadly,
subject to statutory limits, substantially all employees may make a cash
contribution under the applicable plan and receive a matching contribution from
National Grid USA. Certain management participants earning more than the
statutory limit are entitled to "top-up" their entitlement via the Deferred
Compensation Plan. Any matching contributions are currently invested in National
Grid ADSs. In addition, participants may choose to invest their contributions in
National Grid ADSs (as well as a number of other investment choices).
Following the Scheme becoming effective, investments held in such National Grid
ADSs will convert into equivalent New National Grid ADSs.
9.11 Deferred Compensation Plan
In keeping with normal remuneration practices in the US, National Grid USA
permits certain management employees to defer a proportion of their net income
through a tax deferred plan. Such deferred income is credited with earnings/
losses based upon a proxy investment option selected among several available,
including National Grid ADSs. Following the Scheme becoming effective, the
National Grid ADS tracking option will convert into a New National Grid ADS
tracking option.
9.12 Consequences of an employee exercising an option over National Grid Shares
Where options over National Grid Shares are exercised following Court sanction
of the Scheme, National Grid Shares will be issued in the normal way. However,
as part of the reorganisation, a resolution will be proposed at the Scheme EGM
to amend the National Grid Articles to provide, inter alia, that, if any person
becomes a National Grid Shareholder after the Scheme Effective Date, they are
required to exchange their National Grid Shares in consideration of the same
number of New National Grid Shares. The proposed amendment is set out in
paragraph (e) of Resolution 1 in the notice of the Scheme EGM set out on pages
55 and 56 of this document.
10. Proposed New National Grid Share Plans
At the Scheme EGM, resolutions will be proposed to approve the adoption of the
following New National Grid employee share plans and new employee trusts which
will operate in conjunction with the New National Grid Share Plans:
(i) National Grid Executive Share Option Plan 2002 ("Executive Plan")
(ii) National Grid Employee Share Ownership Plan 2002 ("UK Plan") and the
associated trust ("UK Trust")
(iii) National Grid Savings Related Share Option Plan 2002 ("Sharesave Plan")
(iv) National Grid Employee Stock Purchase Plan 2002 ("US Plan")
(v) National Grid Share Matching Plan 2002 ("Matching Plan")
(vi) National Grid USA Incentive Thrift Plans I and II ("Thrift Plans")
(vii) National Grid Employee Trust 2002 ("Employee Trust")
(viii) National Grid Qualifying Employee Share Ownership Trust (No. 2) 2002
("QUEST No. 2")
In addition, the current Deferred Compensation Plan will continue to operate for
US based executives and employees with participants being able to choose New
National Grid ADSs as an investment proxy.
Copies of the New National Grid Share Plans are available for inspection at the
offices of CMS Cameron McKenna, 160 Aldersgate Street, London EC1A 4DD during
normal business hours on any weekday (excluding Saturdays, Sundays and public
holidays), until Completion and will also be available for inspection at the
place of the Scheme EGM for at least 15 minutes before, and during, the meeting.
10.1 Principal features common to all the New National Grid Share Plans
10.1.1 Limits on the issue of shares under the New National Grid Share Plans
Each of the New National Grid Share Plans may operate over newly-issued shares
or market-purchased shares.
The number of shares which may be issued under the New National Grid Share Plans
in any year is limited to:
(i) 10 per cent. of New National Grid's ordinary issued share capital in
respect of options granted (or shares issued otherwise than pursuant to
the exercise of options) in the ten calendar years ending with that
year under the New National Grid Share Plans or any other employee
share plan adopted by New National Grid or any subsidiary; and
39
(ii) 5 per cent. of New National Grid's ordinary issued share capital in
respect of options granted (or shares issued otherwise than pursuant to
the exercise of options) in the ten calendar years ending with that year
under the Executive Plan, the Matching Plan or any other executive share
plan adopted by New National Grid or any subsidiary.
In calculating the above limits, any National Grid Shares issued pursuant to the
National Grid Share Schemes will count as though those shares had been New
National Grid Shares.
10.1.2 Rights attaching to shares
New National Grid Shares allotted under the New National Grid Share Plans will
rank pari passu with all other New National Grid Shares in issue, but will not
normally qualify for dividends or other rights for which the record date is
earlier than the date of allotment of the shares. Application will be made to
the UK Listing Authority for the New National Grid Shares to be admitted to the
Official List and to trading on the London Stock Exchange's market for listed
securities and/or for the New National Grid ADSs to be listed on the NYSE.
10.1.3 Variation of capital
Other than for the UK Plan and the Thrift Plans, in the event of any variation
of share capital, or (except in the case of Inland Revenue-approved options) of
a demerger or the payment of a capital or special dividend or of any other
circumstances similarly affecting options, the Remuneration Committee may make
such adjustments as it considers appropriate to adjust:
(i) in the case of share options, the number of shares under option and the
price payable on their exercise; and
(ii) in the case of other awards, the number of shares subject to the award.
For the UK Plan and the Thrift Plans, this is not necessary because the
participants will be shareholders and will be treated accordingly in this
capacity.
10.1.4 Alterations to the New National Grid Share Plans
The Remuneration Committee may at any time alter or add to the New National Grid
Share Plans in any respect, provided that the prior approval of shareholders is
obtained for any alterations or additions to the advantage of participants in
respect of eligibility, limits on participation, the overall limits on the issue
of shares, terms of exercise, the rights attaching to the shares acquired,
non-assignability of options (or other awards) and the terms of the options (or
other awards) in the event of a variation of capital.
The requirement to obtain the prior approval of shareholders will not, however,
apply to any minor alteration made to benefit the administration of the New
National Grid Share Plans, to take account of a change in legislation or to
obtain or maintain favourable tax, exchange control or regulatory treatment for
participants or for any participating company in the Group. The above does not
restrict the ability of the Remuneration Committee to adjust performance
conditions (if any) to take account of supervening events. No alteration to the
terms of the Inland Revenue-approved part of the Executive Plan, the UK Plan or
the Sharesave Plan may be made while it is so approved without the Inland
Revenue's approval.
10.1.5 Extension of the New National Grid Share Plans overseas
At the Scheme EGM, a resolution will be proposed to give the Directors power to
extend the New National Grid Share Plans to countries outside the UK (or US in
respect of the US Plan and the Thrift Plans). To do this, the Remuneration
Committee may need either to add schedules to the New National Grid Share Plans
or to establish other plans based on the New National Grid Share Plans which
will take account of local tax, exchange control or securities laws in the
relevant jurisdictions.
10.1.6 Non-transferability of awards/options
Awards/options are not transferable other than to the participant's personal
representative in the event of his death.
10.1.7 Reorganisations
In the event of an internal reorganisation, including a future scheme of
arrangement, the rules of the relevant New National Grid Share Plans provide
that this will not accelerate the vesting of any awards or options granted under
the New National Grid Share Plans and that performance conditions will continue
to apply. Instead, options/awards would be replaced by new options/ awards over
shares in the new holding company or, if participants do not agree to such an
exchange, lapse.
10.1.8 Pensionability
No benefits received under the New National Grid Share Plans will be pensionable
except that:
40
(i) a decision by an employee to invest his own normal salary in buying
Partnership Shares (as explained in section 10.3.2(ii)) under the UK
Plan will not reduce pension benefits provided by the Company except to
the extent required by law; and
(ii) US participants in the US Schedule to the Matching Plan, in accordance
with local practice, determine their entitlement to pensions by
reference to salary plus bonuses (and include the value of any shares
awarded in calculating this amount). Participant contributions to the
Thrift Plans are included when calculating pension benefits, but
company matching contributions are not. Further, amounts deferred under
the Deferred Compensation Plan are generally not included in the
calculation of participants' pensions, with the exception of senior
management.
10.1.9 Amendments
The Directors reserve the right up to the Scheme EGM to make any amendments and
additions to the New National Grid Share Plans as they consider appropriate,
provided that amendments and additions do not conflict in any material respect
with this summary of the New National Grid Share Plans.
10.2 Executive Plan
10.2.1 General
The Executive Plan is divided into three parts, one of which will qualify for
beneficial tax treatment in the UK, one of which will qualify for beneficial tax
treatment in the US and the final part which will not qualify for any specific
beneficial tax treatment. The three parts are identical in all material respects
unless indicated to the contrary in this summary.
The Remuneration Committee will be responsible for operating the Executive Plan.
10.2.2 Eligibility
Employees (including Executive Directors) of New National Grid, its subsidiaries
and joint venture companies in which the Group has a sufficient interest to
permit participation under the relevant Inland Revenue rules (currently 50 per
cent.) ("Joint Venture Companies"), will be eligible to participate in the
Executive Plan, provided that they are not within one year of contractual
retirement age or otherwise excluded by the relevant legislation.
10.2.3 Grant of options
Options may be granted within the six weeks following the approval of the
Executive Plan by shareholders or (in the case of Inland Revenue-approved
options) its approval by the Inland Revenue and thereafter within the six weeks
following the announcement by New National Grid of its results for any period,
or in other exceptional circumstances.
No options may be granted more than ten years after the approval of the
Executive Plan by shareholders. The Remuneration Committee will formally review
the operation of the Executive Plan after no more than five years.
No payment will be required for the grant of an option.
10.2.4 Limit on individual participation
The rules limit the value of shares which can be placed under option to an
individual participant in any 12 month period to three times his base salary
except where the Remuneration Committee concludes in exceptional circumstances
that it is necessary to exceed this limit (e.g. on recruitment or to meet
competitive pressures, particularly in the US). Pursuant to this limit, the
Remuneration Committee will decide the level of awards in each year, reflecting
the performance over the preceding 12 months both of the individual and of New
National Grid, and considering general market practice at the time. At this
time, the Remuneration Committee considers that the maximum market value of
shares which will normally be placed under option to any UK-based individual in
any 12 month period will be 1.5 times the individual's base salary.
Under the Inland Revenue-approved part of the Executive Plan or any other
approved executive share option plan established by New National Grid or an
associated company, the aggregate market value at the date of grant of shares
under option to an individual shall not exceed (L)30,000, or such other limit as
may from time to time apply under the relevant legislation.
10.2.5 Exercise price
The price per ordinary share payable on the exercise of an option will be the
higher of:
(i) the price of an ordinary share on the Daily Official List on a business
day or the average over a number of business days in the 30 days before
grant of the option, or in the case of Inland Revenue-approved options,
41
any other day or days agreed with the Inland Revenue, provided that no
such day may fall before New National Grid last announced its results
for any period; and
(ii) the nominal value of an ordinary share, if the option relates to new
ordinary shares.
10.2.6 Exercise of options
An option will not normally be exercisable until three years after its grant.
Options will lapse ten years from the date granted or such shorter period as
determined by the Remuneration Committee at the time of grant.
The Executive Plan includes the flexibility to grant options subject to pre-
grant conditions, rather than pre-exercise conditions, as recently endorsed by
the Association of British Insurers. While the Remuneration Committee has no
current intention of utilising this flexibility, it will monitor evolving best
practice in this regard in deciding whether it becomes appropriate to do so and
will liaise with the Association of British Insurers before using such
flexibility.
The Remuneration Committee intends to set demanding performance conditions on
the exercise of options. Initially, these will be that an option may not be
exercised unless New National Grid's total shareholder return over a period of
at least three years, beginning with the financial year in which the option is
granted, is at least median as compared with a group of approximately 20 UK and
US energy utilities.
For the first tranche, options over shares worth up to an individual's base
salary will become exercisable in full if New National Grid's total shareholder
return is at least median. If the shares are worth more than the individual's
base salary, the rest will be exercisable on a sliding scale, becoming fully
exercisable if New National Grid's total shareholder return is in the upper
quartile of the group of comparable utilities. In addition, for options to
become exercisable, the Remuneration Committee must be satisfied that there has
been a sustained improvement in underlying financial performance over the
relevant period.
If the performance condition is not satisfied after the first three years, it
will be re-measured on the fourth, and if necessary, the fifth anniversary of
the date of grant.
Options normally lapse on cessation of employment. However, exercise is
permitted for a limited period:
(i) following cessation of employment for reasons of death, injury,
disability, pregnancy, redundancy or the employee's business unit
ceasing to be part of the Group, or otherwise at the Remuneration
Committee's discretion; and
(ii) on a reconstruction, take-over or winding-up of New National Grid
provided that it is not part of a reorganisation.
In the cases referred to in (i) above, the performance conditions cease to
apply, but will still apply in the case of normal retirement. In these cases,
the option may only be exercised within 12 months (six months in the case of
retirement) unless the Remuneration Committee determines otherwise. In the cases
referred to in (ii) above, the performance targets will be measured over the
reduced period to the date of reconstruction, take-over or winding-up, but the
Remuneration Committee has discretion to permit exercise even when the targets
have not been satisfied over this period (in exceptional circumstances where the
Remuneration Committee considers that the reduced period does not properly
reflect New National Grid's performance).
10.2.7 US schedule
This part of the Executive Plan will permit US incentive stock options to be
granted. These have certain tax advantages for participants and may be granted
over such number of shares and/or ADSs as will become exercisable in any
calendar year, having a value (as of the time of grant) of no more than $100,000
per participant. The rules of this part are substantially the same as explained
above for the other parts of the Executive Plan except for the following
modifications:
(i) to comply with applicable anti-discrimination law in the US, the
general prohibition on grants within one year of contractual retirement
age does not apply; and
(ii) to comply with the applicable tax rules, the periods during which a
participant may exercise his options following cessation of employment
are slightly different.
The number of New National Grid Shares which may be acquired on the vesting of
awards granted under the US Schedule to the Executive Plan may not exceed
200,000,000. This limit is required by US tax legislation. In practice, fewer
shares are likely to be used as the general limits set out in section 10.1.1
above will also apply.
42
10.3 UK Plan
10.3.1 General
New National Grid intends to obtain Inland Revenue approval for the UK Plan and
the UK Trust under the Finance Act 2000.
10.3.2 Operation
The UK Plan may be operated each year at the discretion of the Board, but may
not be operated more than ten years after its approval by shareholders. The UK
Plan consists of three elements:
(i) "Free Shares" which may be allocated to an employee by New National Grid
The market value of Free Shares allocated to any employee in any tax
year may not exceed (L)3,000 or such other limit as may from time to
time be permitted by the relevant legislation. Free Shares may be
allocated to employees equally, on the basis of salary, length of
service or hours worked, or on the basis of performance, as permitted by
legislation.
(ii) "Partnership Shares" which an employee may purchase out of his pre-tax
earnings
The market value of Partnership Shares which an employee can agree to
purchase in any tax year may not exceed (L)1,500 (or 10 per cent. of the
employee's remuneration, if lower), or such other limit as may be
permitted by the relevant legislation. The funds used to purchase shares
will be deducted from the employee's salary and will be held on the
employee's behalf for up to 12 months until they are used to buy
Partnership Shares. Where deductions are accumulated, the employee will
be entitled to buy shares at the market price of New National Grid
Shares at the start or end of the accumulation period, whichever is the
lower.
(iii) "Matching Shares" which may be allocated to an employee who purchases
Partnership Shares
Matching Shares are additional Free Shares. New National Grid may
allocate to an employee who purchases Partnership Shares up to a maximum
of two Matching Shares for every one Partnership Share purchased or such
other ratio as may from time to time be permitted by the legislation.
There is no minimum ratio of Matching Shares which New National Grid
must provide following a purchase of Partnership Shares. The same ratio
or ratios will apply to all employees who purchase Partnership Shares
under the UK Plan at a given time.
10.3.3 Eligibility
Employees (including Executive Directors) of New National Grid and participating
subsidiaries (including, for this purpose, Joint Venture Companies) who are
resident in the UK and who have been employed at all times by the Group for up
to approximately 18 months may be allocated Free Shares or Matching Shares or
invited to purchase Partnership Shares under the UK Plan. The Board may amend
the eligibility conditions and have discretion to allow other employees to
participate.
10.3.4 Retention of shares
The trustee of the UK Trust will initially hold all Free Shares or Matching
Shares allocated to employees and any Partnership Shares acquired on behalf of
employees. Employees can withdraw Partnership Shares from the UK Trust at any
time. Free Shares and Matching Shares must generally be retained by the trustee
of the UK Trust for a period of at least three to five years after the initial
allocation.
The Board may stipulate at the time of award that an employee who ceases to be
employed by the Group within a period of up to three years of being allocated
Free Shares or Matching Shares will forfeit his rights to those shares. However,
Free Shares and Matching Shares will not be forfeited in certain circumstances,
for example death, redundancy or retirement on or after reaching a specified
retirement age.
If an employee ceases to be employed by the Group at any time after acquiring
Partnership Shares, he will be required to withdraw the shares from the UK
Trust.
10.3.5 Dividends on shares held by the trustee of the UK Trust
An employee will be treated as the beneficial owner of shares held on his behalf
by the trustee of the UK Trust. Any dividends on shares held by the trustee of
the UK Trust may be used to acquire additional shares for employees or may be
distributed to employees.
43
10.3.6 Unapproved Appendix
If the statutory limits referred to above are reduced at any time, the Board
shall have the power to adopt an unapproved top-up arrangement to maintain the
higher limits referred to in this section 10.3.
10.4 Sharesave Plan
10.4.1 General
New National Grid intends to obtain Inland Revenue approval for the Sharesave
Plan under the Income and Corporation Taxes Act 1988.
10.4.2 Eligibility
Employees (including Executive Directors) of New National Grid and participating
subsidiaries (including, for this purpose, Joint Venture Companies) who are
resident in the UK will be eligible to participate. The Board can restrict
participation to full-time directors and employees who have completed a
qualifying period of service (within the limits set by the relevant legislation)
and they also have discretion to allow other employees to participate.
10.4.3 Grant of options
Invitations to participate in the Sharesave Plan may only be issued within the
six week period following the approval of the Sharesave Plan by the Inland
Revenue and thereafter in the six week period following the announcement by New
National Grid of its results for any period or in exceptional circumstances.
Options may not normally be granted later than 30 days after the date
invitations are made. Options may only be granted to employees who enter into
Inland Revenue-approved savings contracts under which monthly savings are made
over a period of three or five years.
The number of shares over which an option is granted will be such that the total
amount payable on its exercise will correspond to the expected proceeds on
maturity of the related savings contract.
Options may not be granted later than ten years after the approval of the
Sharesave Plan by shareholders.
10.4.4 Individual participation
Monthly savings by an employee under all savings contracts linked to options
granted under any approved savings related share option scheme may not exceed
the statutory maximum (currently (L)250 per month). If this limit is reduced,
the Board shall have the power to adopt an unapproved top-up arrangement to
maintain this higher limit.
10.4.5 Acquisition price
The price per ordinary share payable upon the exercise of options will not be
less than the higher of:
(i) 80 per cent. of the average of the price of an ordinary share on the
Daily Official List on the dealing day prior to the day on which options
are offered or the average of such prices over the three dealing days
prior to the day on which the options are offered (or on such other day
or days as may be agreed with the Inland Revenue, provided that no such
days may fall before New National Grid last announced its results for
any period); and
(ii) the nominal value of an ordinary share, if the option relates to new
ordinary shares.
10.4.6 Exercise of options
Options will normally be exercisable only for six months from the third, fifth
or seventh anniversary of the commencement of the related savings contracts.
Earlier exercise is permitted following death or cessation of employment by
reason of injury, disability, redundancy, retirement on reaching age 65 or
contractual retirement age, if different, or where the optionholder's employer
ceases to be within the Group. Options will otherwise lapse on cessation of
employment, although they may be exercisable for a limited period if they have
been held for at least three years. Early exercise is also permitted in the
event of a take-over, amalgamation or winding-up of New National Grid other than
in the case of an internal reorganisation, or if the participant reaches normal
contractual retirement age but remains with a Group company.
10.4.7 Participating companies
The Board can decide which subsidiaries participate in the Sharesave Plan.
Certain Joint Venture Companies may participate in the Sharesave Plan, although
the consent of the Inland Revenue will be required.
For legal reasons, it may be necessary for certain subsidiaries to adopt their
own plans operating over shares in New National Grid, which will be identical to
the Sharesave Plan in all material respects.
44
10.5 US Plan
10.5.1 General
The proposed National Grid Employee Stock Purchase Plan 2001 has been designed
to qualify under section 423 of the US Internal Revenue Code of 1986, as
amended. The US Plan will enable US employees (including Executive Directors) to
receive awards over New National Grid Shares or New National Grid ADSs on an
all-employee basis.
10.5.2 Eligibility
US-based employees of New National Grid and its subsidiaries are eligible to
participate in the US Plan. Participation can be restricted to employees who
have completed a qualifying period of service within the limits set by the
relevant US legislation.
Individuals may not be granted awards under the US Plan if they own shares
possessing 5 per cent. or more of the voting power or value of New National
Grid.
10.5.3 Grant of awards
Awards may be granted over a number of New National Grid Shares which will be
determined by the amount employees have saved by the end of a specified savings
period, subject to a maximum number of shares to be specified in the award. At
the end of that savings period, the awards will become exercisable. Any surplus
savings will be automatically carried over into the next savings period.
Awards may not be granted under the US Plan later than ten years after it is
approved by shareholders.
10.5.4 Savings
An eligible employee who applies for an award under the US Plan must agree to
savings being deducted from his after-tax pay. Total deductions in any calendar
year may not accrue at a rate which exceeds such amount (up to $25,000) as the
Board may resolve. However, in setting any relevant limit, the Board will have
regard to the comparable position under the UK Plan and the Sharesave Plan.
10.5.5 Purchase price
The price payable for each share shall be a price determined by the Board,
provided that it shall be not less than the lower of 85 per cent. of the market
value of a share on the date of grant and the date of purchase. However, in
setting any purchase price for the US Plan, the Board will have regard to the
comparable provisions under the UK Plan and the Sharesave Plan.
10.5.6 Limits
The number of shares which may be acquired on the vesting of awards granted
under the US Plan may not exceed 200,000,000. US tax legislation requires that
the US Plan specify a maximum number of shares over which options may be granted
during the term of the US Plan. In practice, fewer shares are likely to be used
as the general limits set out in section 10.1.1 above will also apply.
10.5.7 Purchase of shares
Shares subject to an award under the US Plan may normally only be purchased at
the end of the savings period specified in the US Plan's Rules, provided that
the optionholder is still in the employment of the Group. Shares cannot be
purchased pursuant to an award later than the earlier of five years after it was
granted and any other time determined by the Board at the date of grant. Special
provisions will allow for early purchase in the case of certain compassionate
leavers and in the event of a take-over of New National Grid other than in the
case of an internal reorganisation.
10.6 Matching Plan
10.6.1 Eligibility
Employees (including Executive Directors) of New National Grid, its subsidiaries
and joint venture companies in which the Group has a significant interest, who
are not within one year of reaching age 65 or their contractual retirement age
(if earlier) at the time the annual bonus is due to be paid, are eligible to
participate at the discretion of the Remuneration Committee; those who are
between 12 and 24 months from their normal retirement age may be allowed to
participate but with a matching award at only one-half of the level applicable
to all other participants.
45
10.6.2 Grant of matching awards
If invited to do so by the Remuneration Committee, an eligible executive may
invest all (or such lower proportion as the Remuneration Committee may decide)
of his performance-tested cash annual bonus (net of tax and any other
deductions). At present, the Remuneration Committee only permit up to one- third
of a participant's bonus to be invested in this way. As soon as practical
thereafter, New National Grid will then procure the grant of a matching award
over matching shares equal in value to the amount of annual bonus invested
(prior to tax and any other deductions).
A matching award consists of the right to purchase New National Grid Shares for
a nominal payment, although the rules permit the structure of awards to be
changed if this would be advantageous from a tax perspective (including
dispensing with the need for payment of a nominal amount).
Matching awards can only be granted within the six weeks following the approval
of the Matching Plan by shareholders and thereafter within the six weeks
following the announcement of New National Grid's results for the full year, or
in other exceptional circumstances.
No matching awards can be granted later than ten years after the approval of the
Matching Plan by shareholders and the Remuneration Committee will formally
review the operation of the Matching Plan after no more than five years.
10.6.3 Exercise of awards
A matching award will normally be exercisable on or after the third anniversary
of its grant and to the extent that the shares purchased with the associated
annual bonus have been retained up to that date by the participant and the
participant is still employed by a Group company (or was so employed at his
actual retirement date). On exercise, a participant will receive a cash payment
broadly equal to the value of accrued dividends on the shares representing the
matching award.
A matching award may be exercisable early for a limited period on an
amalgamation, take-over or winding up of New National Grid (not being an
internal reorganisation). If the participant ceases employment with a Group
company, he will not be able to exercise the matching award at all, unless the
Remuneration Committee otherwise determines. The Remuneration Committee will
adopt guidelines indicating when this discretion will be used, the extent to
which an award may be exercised and the exercise period.
A matching award cannot be exercised later than the tenth anniversary of its
date of grant in any circumstances.
10.6.4 US schedule
National Grid USA currently operates a separate but similar plan for US
executives, the Incentive Compensation Plan. A separate schedule to the Matching
Plan is proposed which will allow the US executives to participate on the same
basis as currently.
The key differences are that US participants automatically receive a proportion
of their annual bonus in shares or ADSs (there is no requirement to invest part
of their bonus to receive a matching award) and, at the discretion of the
Remuneration Committee, a shorter (or no) vesting period may be set.
This additional flexibility (which may only be used for US-based executives)
enables the Matching Plan to operate on a competitive basis in the US, taking
proper account of local practice.
As may be necessary to comply with applicable anti-discrimination law in the US,
the general prohibition on grants within one year of contractual retirement age
does not apply.
10.7 Thrift Plans
It is proposed that the existing National Grid USA Incentive Thrift Plans
continue to operate but that certain amendments be made to permit the plans to
operate over new issue shares. No awards which relate to New National Grid
Shares or New National Grid ADSs will be made later than ten years after the
Thrift Plans' approval by shareholders.
10.7.1 Eligibility
All employees (including Executive Directors) of National Grid USA and other
nominated companies are generally eligible to participate, subject to meeting
pre-determined service requirements, before being eligible to receive matching
contributions.
10.7.2 Savings
Participants may contribute a proportion of their income into the plans, subject
to certain legal limits, and direct how this is invested among various
investment options. One investment choice will be New National Grid ADSs.
46
10.7.3 Company contributions
Participating companies will make matching contributions under the Thrift Plans
which, it is anticipated, will be invested in New National Grid ADSs, although
the rules have flexibility to permit other investment options.
10.7.4 Release of investments
The plans are long-term savings plans and are designed to provide benefits to
participants on or towards retirement. However, the plans, following the
applicable statutory rules, allow funds to be withdrawn early in a number of,
broadly, compassionate situations.
10.8 Employee Trust
The Employee Trust will be constituted by a trust deed to be entered into
between New National Grid and an offshore, independent professional trustee. New
National Grid will have power to appoint and remove the trustee. This Employee
Trust is distinct from the UK Trust constituting part of the UK Plan.
The Employee Trust can be used to benefit employees and former employees of New
National Grid and its subsidiaries and certain of their dependants. The Employee
Trust will have the power to acquire New National Grid Shares. Any shares so
acquired can be used for the purposes of the employees' share plans operated by
New National Grid as described above.
New National Grid and its subsidiaries may fund the Employee Trust by loan or
gift to acquire New National Grid Shares either by market purchase or by
subscription. Any options to subscribe for shares granted to the Employee Trust
or shares issued to the Employee Trust will be treated as counting against the
relevant dilution limits described more fully at section 10.1.1 above.
The Employee Trust will not, without shareholder approval, make an acquisition
of shares if, as a result of that acquisition, it together with the trust
associated with the UK Plan (but excluding shares allocated under the UK Plan),
the QUEST No. 2. and the existing National Grid trusts hold more than 5 per
cent. of New National Grid's share capital.
The trustees of the Employee Trust will waive all dividends on any New National
Grid shares held in trust unless directed otherwise by New National Grid.
10.9 QUEST No. 2
The principal terms are as set out for the Employee Trust except that certain
additional restrictions apply to meet the statutory requirements set out in
Schedule 5 to the Finance Act 1989. The trustee will be a wholly-owned
subsidiary of New National Grid.
In practice, the QUEST No. 2 is likely to operate in conjunction with the
Sharesave Plan.
11. Long-term incentive plans operated by Niagara Mohawk
Completion of the Acquisition will affect the various long-term incentive plans
operated by Niagara Mohawk as follows:
(i) stock options granted under the Niagara Mohawk 1992 Stock Option Plan
will, with the consent of participants, be cancelled, as provided for in
the Merger Agreement, for a cash payment being the difference between
the consideration payable for a Niagara Mohawk Share and the stock
options' exercise prices;
(ii) in respect of the phantom (cash) incentive schemes operated by Niagara
Mohawk, the decision has been taken to cancel all the awards on the same
basis as described above, except for:
(a) stock appreciation rights awards made under the Niagara Mohawk 1995
Stock Incentive Plan and the Niagara Mohawk Long Term Incentive
Plan, which will be replaced by equivalent stock appreciation
rights relating to New National Grid ADSs; and
(b) deferred stock units made under the Niagara Mohawk Outside Director
Deferred Stock Unit Plan which will be cashed out either
immediately or over a period of time, as prescribed in the rules of
that plan; and
(iii) Niagara Mohawk Shares held by employees within the Niagara Mohawk Non-
Represented Employees' Savings Fund Plan and the Niagara Mohawk Power
Corporation Represented Employees' Savings Fund Plan may be exchanged
for equivalent holdings of New National Grid ADSs.
No further awards will be made under these plans following Completion.
47
12. UK taxation
The following is a summary of certain aspects of UK taxation and is included as
a general guide only. It is based on current UK legislation and what is
understood to be current Inland Revenue practice, both of which are subject to
change, possibly with retrospective effect. It applies only to persons who are
resident or ordinarily resident in the UK for UK tax purposes and who hold their
National Grid Shares beneficially and as an investment. The information is
general in character, is not exhaustive and may not apply to certain classes of
shareholder (including, but not limited to, dealers in securities). Any person
who is in any doubt as to his tax position or who may be subject to tax in any
jurisdiction outside the UK should consult an appropriate professional adviser.
12.1 The Scheme
Appropriate clearances have been obtained from the Inland Revenue for the Scheme
under section 138 of the Taxation of Chargeable Gains Act 1992 and section 707
of the Income and Corporation Taxes Act 1988, such that UK resident National
Grid Shareholders should not be treated as making a disposal of their National
Grid Shares, or as receiving taxable income, under the Scheme.
Any subsequent disposal of New National Grid Shares may, depending on the
shareholder's personal circumstances, give rise to a charge to UK tax on
chargeable gains. New National Grid Shares issued under the Scheme should be
regarded as having been acquired on the same date and for the same consideration
as the National Grid Shares in respect of whose cancellation they are issued.
For the purposes of UK tax on chargeable gains, a holder of ADSs is treated as
holding a beneficial interest in the underlying shares. In practice, no
liability to UK tax is likely to arise to a holder of National Grid ADSs in
connection with the Scheme.
No stamp duty or SDRT should generally be payable on the cancellation of
National Grid Shares or the issue of New National Grid Shares under the Scheme.
Special rules may apply to shares held in or issued to depositary receipt or
clearance service arrangements, although no stamp duty or SDRT should generally
be payable by holders of National Grid ADSs in connection with the Scheme.
12.2 Capital Gains
A disposal of New National Grid Shares by a shareholder resident or ordinarily
resident for tax purposes in the UK or a shareholder who carries on a trade,
profession or vocation in the UK through a branch or agency and has used, held
or acquired the New National Grid Shares for the purposes of such trade,
profession or vocation or such branch or agency may, depending on the
shareholder's circumstances, and subject to any available exemption or relief,
give rise to a chargeable gain or an allowable loss for the purpose of UK
taxation of chargeable gains. A shareholder who is an individual and who has on
or after 17 March 1998 ceased to be resident or ordinarily resident for tax
purposes in the UK for a period of less than five tax years and who disposes of
New National Grid Shares during that period may also be liable to UK taxation on
chargeable gains (subject to any available exemption or relief).
12.3 Dividends
New National Grid will not be required to withhold tax at source from dividend
payments it makes.
Individual shareholders resident in the UK should generally be entitled to a tax
credit in respect of any dividend paid by New National Grid which they can
offset against their total income tax liability. The amount of the tax credit
for dividends is one-ninth of the amount of the net cash dividend. The amount of
the net cash dividend received by such an individual shareholder and the
associated tax credit are both included in computing the shareholder's income
for UK tax purposes.
The rate of income tax on dividends is 10 per cent. for lower rate and basic
rate taxpayers. The tax credit will discharge the income tax liability of an
individual shareholder who is not liable to income tax at a rate greater than
the basic rate. Higher rate taxpayers will be liable to tax on such dividends at
the rate of 32.5 per cent., so that an individual shareholder who is a higher
rate taxpayer will have a liability, after taking account of the tax credit,
equal to 25 per cent. of the net cash dividend.
A UK resident corporate shareholder will not normally be liable to corporation
tax in respect of any dividend received.
Shareholders who are not resident in the UK for tax purposes will generally not
benefit from any entitlement to a refund of any part of the tax credit.
12.4 Stamp duty and stamp duty reserve tax
A transfer for value of New National Grid Shares will generally be subject to UK
ad valorem stamp duty or to SDRT. Stamp duty and SDRT are normally a liability
of the purchaser. The amount of stamp duty or SDRT
48
payable is generally calculated at the applicable rate on the consideration for
the transfer of the New National Grid Shares, being currently 0.5 per cent. of
the amount or value of the consideration (currently rounded up to the nearest
(L)5 in the case of stamp duty).
Paperless transfers of New National Grid Shares within CREST are generally
liable to SDRT, rather than stamp duty, at the rate of 0.5 per cent. of the
amount or value of the consideration payable. CREST is obliged to collect SDRT
on relevant transactions settled within the system. Deposits of New National
Grid Shares into CREST will generally not be subject to SDRT, unless the
transfer into CREST is itself for consideration.
No UK stamp duty will be payable on the acquisition or transfer of New National
Grid ADSs or beneficial ownership of New National Grid ADSs, provided that any
instrument of transfer or written agreement to transfer remains at all times
outside the UK, and further provided that any instrument of transfer or written
agreement to transfer is not executed in the UK and the transfer does not relate
to any matter or thing done or to be done in the UK. An agreement for the
transfer of despositary receipts representing New National Grid ADSs or
beneficial ownership of such depositary receipts will not give rise to a
liability for SDRT.
Any transfer for value of the underlying New National Grid Shares represented by
New National Grid ADSs may give rise to a liability on the transferee to stamp
duty or SDRT. A holder of New National Grid Shares who transfers or deposits
those shares into any depositary receipt or clearance service arrangement may
incur a liability to SDRT of 1.5 per cent. of the value of the shares so
transferred or deposited. However, any SDRT or stamp duty arising in relation to
the issue of New National Grid ADSs to Niagara Mohawk Shareholders will be paid
by New National Grid. On a transfer of New National Grid Shares from the
custodian of the Depositary to a holder of New National Grid ADSs upon
cancellation of the New National Grid ADSs, only a fixed UK stamp duty of (L)5
per instrument of transfer will be payable.
Special rules apply to market intermediaries.
13. US taxation
The following is a summary of certain US federal income tax consequences of the
ownership of New National Grid ADSs or New National Grid Shares to a US Holder
(as defined below) that receives New National Grid ADSs or New National Grid
Shares in connection with the Scheme and holds New National Grid ADSs or New
National Grid Shares as capital assets. This summary does not purport to address
all material US federal income tax consequences of the ownership of New National
Grid ADSs or New National Grid Shares, and does not take into account the
specific circumstances of any particular investor (such as tax- exempt entities,
certain insurance companies, banks, dealers, traders in securities that elect to
mark to market, investors liable for alternative minimum tax, investors that
actually or constructively own 10 per cent. or more of the voting shares of New
National Grid, investors that hold New National Grid ADSs or New National Grid
Shares as part of a straddle, hedging or conversion transaction or investors
whose functional currency is not the US dollar), some of whom may be subject to
special rules.
This summary is based on the current tax laws of the US (including the Internal
Revenue Code, its legislative history, existing and proposed regulations
thereunder, published rulings and court decisions), as well as on the Treaty,
all of which are subject to change, possibly with retrospective effect. On 24
July 2001, the governments of the UK and the US signed a convention for the
avoidance of double taxation and the prevention of fiscal evasion with respect
to taxes on income and capital gains (the "New Treaty") that will replace the
existing Treaty. The US Senate and the UK Parliament must ratify the New Treaty.
The New Treaty will come into force once each country has notified the other of
the completion of its ratification procedure. However, the timing of the
ratification by the UK and US governments is unknown. In addition, this summary
is based in part upon the representations of the Depositary and the assumption
that each obligation in the deposit agreement and any related agreement will be
performed in accordance with its terms.
13.1 Definition of "US Holder"
For purposes of this summary, the term "US Holder" means a beneficial owner of
New National Grid ADSs or New National Grid Shares and the cash dividends paid
with respect thereto that: (i) is an individual citizen or resident of the US
for US federal tax purposes, a corporation created or organised in or under the
laws of the US, any state therein or the District of Columbia, an estate whose
income is subject to US federal income tax regardless of its source, or a trust
if a US court can exercise primary supervision over the trust's administration
and one or more US persons are authorised to control all substantial decisions
of the trust; (ii) is resident in the US for purposes of the Treaty (and, in
case of a corporation, is not also resident in the UK for UK tax purposes);
(iii) is not a corporation which, alone or together with one or more associated
corporations, controls, directly or indirectly, 10 per cent. or more of the
voting shares of New National Grid; (iv) holds the New National Grid ADSs or New
National Grid Shares in a manner which is not effectively connected with a
permanent establishment in the UK from which such person performs independent
personal services; and (v) is not otherwise
49
ineligible for benefits under the Treaty with respect to income and gains
derived in connection with the New National Grid ADSs or New National Grid
Shares.
13.2 Taxation of dividends
Distributions paid to a US Holder by New National Grid will be taxable as
ordinary income to the US Holder for US federal income tax purposes to the
extent paid out of New National Grid's current or accumulated earnings and
profits, as determined for US federal income tax purposes, based upon the US
dollar value of the distribution on the date it is actually or constructively
received. In determining the amount of dividend income, a US Holder will use the
spot currency exchange rate on the day the dividend is included in income. Any
difference between the amount of dividend income and the dollars actually
received may constitute a foreign currency gain or loss, which is an ordinary
gain or loss. Individual US Holders, however, are not required to recognise a
gain of less than $200 from the exchange of foreign currency in a "personal
transaction" as defined in paragraph 988(e) of the Internal Revenue Code. The
dividend will not be eligible for the dividends-received deduction generally
allowed to US corporations in respect of dividends received from other US
corporations. Distributions by New National Grid in excess of its current and
accumulated earnings and profits will be treated as a return of capital to the
extent of the US Holder's tax basis in the New National Grid ADSs or New
National Grid Shares and thereafter as a capital gain.
13.3 UK tax credit
A US Holder is entitled to a UK tax credit for the UK tax notionally withheld
with respect to such dividend. A US Holder will include as ordinary income the
amount of any dividend paid by New National Grid out of its current or
accumulated earnings and profits (the "base dividend") plus the amount of any UK
credit (before reduction for UK withholding tax). For example, if New National
Grid paid a dividend of $90 to a US Holder, for US federal income tax purposes,
the US Holder would recognise ordinary income of $90 plus the $10 UK tax credit,
or a total of $100. The income is recognised when the dividend is actually or
constructively received by the Depositary (in the case of New National Grid
ADSs) or by the US Holder (in the case of New National Grid Shares).
Subject to certain limitations and requirements, a US Holder will be entitled
under the Treaty to credit the UK withholding tax against the US Holder's US
federal income tax liability. A US Holder that does not elect to claim a foreign
tax credit for the UK withholding tax may instead claim a deduction for such
tax. For foreign tax credit limitation purposes, the dividend will be income
from sources without the US, but generally will be treated separately, together
with other items of "passive income" (or, in the case of certain holders,
"financial services income"). The rules relating to foreign tax credits are
complex and US Holders should consult their own tax advisers to determine
whether and to what extent a foreign tax credit would be available and whether
any filings or other actions may be required to substantiate a US Holder's
foreign tax credit claim. Each eligible US Holder that relies on the Treaty must
file IRS Form 8833 disclosing this reliance with its US tax return.
13.4 Information reporting requirements
Information reporting requirements may apply to dividend payments (or other
taxable distributions) in respect of New National Grid ADSs and New National
Grid Shares made within the US to a non-corporate US person and may also apply
to proceeds from the disposition of New National Grid ADSs and New National Grid
Shares, and "backup withholding" at the rate of 31 per cent. may apply to such
payments unless a US Holder provides certification of its entitlement to an
exemption. Amounts withheld under the backup withholding rules may be credited
against a US Holder's US federal income tax liability, and a US Holder may
obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the Internal Revenue
Service.
13.5 Sale of New National Grid ADSs or New National Grid Shares
Upon a sale or other disposition of New National Grid ADSs or New National Grid
Shares, a US Holder will recognise a gain or loss for US federal income tax
purposes in an amount equal to the difference between the US dollar value of the
amount realised and the US Holder's tax basis in the New National Grid ADSs or
New National Grid Shares. A gain or loss recognised by a US Holder will be a
long-term capital gain or loss with respect to New National Grid ADSs or New
National Grid Shares held for more than 12 months at the time of the sale or
other disposition, and any gain or loss recognised generally will be income or
loss from sources within the US for foreign tax credit limitation purposes. A
long-term capital gain of a non-corporate US holder is generally subject to tax
at a minimum tax rate of 20 per cent.
50
14. Summary of conditions of use of the internet proxy appointment and voting
instruction service
14.1 Introduction
This section summarises certain material conditions governing the use, by
National Grid Shareholders, of Lloyds TSB Registrars' internet proxy appointment
and voting instruction service (the "Internet Service") in connection with the
Court Meeting and the Scheme EGM. The conditions of use set out below in this
section 14 are legally binding and should be read carefully before using the
Internet Service.
The conditions of use of the Internet Service are set out in full on the website
at www.sharevote.co.uk, and may be read by logging on to that site and entering
the Voting Reference Number (being the 24 digit reference number printed on the
Forms of Proxy).
14.2 Confirmations
When the Voting Reference Number is entered and the icon "GO" is clicked the
user will be deemed to confirm that he:
(i) is registered to use the Internet Service;
(ii) has the right to vote his National Grid Shares; and
(iii) has read, understood and agreed to be bound by the relevant conditions
of use.
14.3 Voting Reference Number and security
A user of the Internet Service must take all reasonable steps to ensure that
his, her or its Voting Reference Number is kept secret and not disclosed to
someone else unless the user wants that other person to use the Voting Reference
Number to access the Internet Service on their behalf and has given them a power
of attorney to do so. Corporate shareholders holding National Grid Shares on
behalf of clients should note that divulging their Voting Reference Number to
one of their clients may enable that client to use the Internet Service in
respect of the corporate shareholder's entire holding. Users of the Internet
Service will be given a limited number of attempts to enter their Voting
Reference Numbers following which their right to use the Internet Service will
be withdrawn. Lloyds TSB Registrars will not accept any message or instruction
containing a computer virus.
14.4 Authority given by use of the Voting Reference Number
Lloyds TSB Registrars (and/or the Company) will be entitled to act on
instructions given using the Internet Service in connection with the Voting
Reference Number without obtaining any further written or other confirmation,
even if those instructions are not actually given or authorised by a National
Grid Shareholder or duly authorised attorney. However, Lloyds TSB Registrars may
insist upon written confirmation of appointments and may make additional
security checks where it is reasonably believed they are justified.
14.5 Availability of Internet Service
Lloyds TSB Registrars will make all reasonable efforts to ensure the Internet
Service is available during the times specified in the voting documentation but
routine maintenance requirements, excess demand and circumstances beyond its
control may mean this is not possible.
14.6 Limitation of liability
Neither Lloyds TSB Registrars nor the Company are liable for any direct loss or
damage resulting from making the Internet Service available, unless directly
caused by their negligence, fraud or deliberate default. Lloyds TSB Registrars'
and the Company's liability for consequential and indirect losses is excluded
(except in the case of fraud). Lloyds TSB Registrars and/or the Company will
have no liability for instructions accepted via the Internet Service in good
faith. Neither Lloyds TSB Registrars nor the Company will be liable for failing
to act on any message given to Lloyds TSB Registrars using the Internet Service,
which Lloyds TSB Registrars do not receive.
14.7 Record keeping
Lloyds TSB Registrars may record all telephone conversations in connection with
the Internet Service and keep the recordings for at least one year. Records will
also be kept of all proxy appointments and other instructions given via the
Internet Service for one year.
14.8 E-mail addresses
If a user of the Internet Service provides Lloyds TSB Registrars with e-mail
contact details when using the Internet Service, Lloyds TSB Registrars may use
those details in order to contact the user for any purpose that is legitimately
connected with the user's National Grid Shares. Lloyds TSB Registrars may also
give the e-mail contact details to National Grid for this purpose.
51
14.9 Software and hardware
It is the responsibility of users of the Internet Service to ensure that any
software supplied to them when they access the Internet Service is compatible
with their equipment and any software on their equipment. Users must take all
reasonably practicable measures to ensure that their equipment is free of any
computer virus (in particular because the Internet Service is accessible via the
internet over which Lloyds TSB Registrars have no control) and is adequately
maintained in every way.
Users of the Internet Service must not access the Internet Service using any
computer or other device they do not own unless they have first obtained the
owner's permission and must compensate Lloyds TSB Registrars for any loss they
may suffer as a result of not obtaining such permission. Users of the Internet
Service are responsible for their use of any internet access services through
which they access the Internet Service.
Users of the Internet Service will be granted a non-exclusive, non-
transferable, temporary licence to use software supplied to them when they
access the Internet Service for the purpose of accessing the Internet Service,
and for no other purpose. If the Internet Service is accessed from a country
outside the UK, the user is responsible for complying with the local laws of
that country and must compensate Lloyds TSB Registrars for any loss they may
suffer as a result of the user's failure to comply with this obligation.
An appointment or instruction given using the Internet Service will be treated
as received when it is recorded by Lloyds TSB Registrars' server in a way
capable of being reproduced in legible form.
14.10 Law
These conditions of use will be governed by English law and a user of the
Internet Service and Lloyds TSB Registrars (for themselves and on behalf of the
Company) submit to the jurisdiction of the English Courts in connection with any
dispute.
15. Additional information
15.1 N M Rothschild & Sons Limited is registered in England (number 925279)
and has its registered office at New Court, St Swithin's Lane, London
EC4P 4DU. N M Rothschild & Sons Limited, which is regulated in the UK by
the Financial Services Authority, has given and not withdrawn its
written consent to the issue of this document with the inclusion herein
of the references to its name in the form and context in which they
appear.
15.2 Employees of N M Rothschild & Sons Limited who are advising National
Grid and New National Grid in relation to the Acquisition, the Scheme,
the proposed listing and admission to trading have an interest, in
aggregate, in 868 National Grid Shares.
16. Documents available for inspection
Copies of the following documents are available for inspection during usual
business hours on any weekday (Saturdays, Sundays and public holidays excepted)
at the offices of CMS Cameron McKenna, Mitre House, 160 Aldersgate Street,
London EC1A 4DD until Completion:
(i) the Listing Particulars;
(ii) the Scheme Circular;
(iii) the Merger Agreement;
(iv) the Financing Documents;
(v) the Exchangeable Bonds Trust Deed;
(vi) the Undertaking;
(vii) the agreement appointing Rothschild as sponsor referred to in section
2.3 above;
(viii) the letter of consent from the Special Shareholder referred to in
section 13.1 of Part II of this document;
(ix) the Memorandum and Articles of Association of National Grid (as
currently in force, and as they will be following the proposed
amendments to be approved at the Scheme EGM);
(x) the Memorandum and Articles of Association of New National Grid;
(xi) the Directors' and Proposed Directors' service agreements referred to
in sections 6.3 and 6.5 above;
(xii) the rules of the National Grid Share Schemes and the New National Grid
Share Plans;
(xiii) the rules of the Niagara Mohawk long-term incentive plans referred to
in section 11 above; and
(xiv) the consent letter referred to in section 15.1 above.
Dated 10 December 2001
52
PART V
NOTICES OF MEETINGS
IN THE HIGH COURT OF JUSTICE No. 7240 of 2001
CHANCERY DIVISION
COMPANIES COURT
MR REGISTRAR SIMMONDS
IN THE MATTER OF NATIONAL GRID GROUP PLC
AND IN THE MATTER OF THE COMPANIES ACT 1985
NOTICE OF COURT MEETING
NOTICE IS HEREBY GIVEN that by an Order dated 4 December 2001 made in the above
matters, the High Court of Justice of England and Wales has directed a meeting
(the "Court Meeting") to be convened of the holders of ordinary shares of 11
13/17 pence each in the capital of National Grid Group plc (the "Company") for
the purpose of considering and, if thought fit, approving (with or without
modification) a Scheme of Arrangement proposed to be made between the Company,
the Scheme Shareholders (as defined in the said Scheme of Arrangement) and the
Special Shareholder (as defined in the said Scheme of Arrangement) and that such
meeting will be held in the Butterworth Hall, Warwick Arts Centre, Coventry CV4
7AL on 7 January 2002 at 11.00 a.m., at which time and place all Shareholders
are requested to attend.
At the Court Meeting, the following resolution will be proposed:
THAT the scheme of arrangement dated 10 December 2001 between the
Company, the Scheme Shareholders (as defined in the Scheme) and the
Special Shareholder (as defined in the Scheme) in its original form or
with or subject to any modification, addition or condition approved or
imposed by the Court (the "Scheme"), the terms of which are set forth in
the document of which the notice of this meeting forms part, be approved
and the directors of the Company be authorised to take all such action
as they may consider necessary or appropriate for carrying the Scheme
into effect.
A copy of the said Scheme of Arrangement and a copy of the Explanatory Statement
required to be furnished pursuant to section 426 of the Companies Act 1985 are
incorporated in the document of which this notice forms part.
A member (shareholder) who is entitled to attend and vote at the Court Meeting
may vote thereat in person or may appoint a proxy or proxies to attend the Court
Meeting and vote on his or her behalf. A proxy need not be a member of the
Company. A Form of Proxy for use in connection with the Court Meeting (Card A)
is enclosed with this document and instructions on how to fill in the Form of
Proxy are set out at the end of this document.
To be valid, the Form of Proxy (Card A) must be completed and signed in
accordance with the instructions printed thereon and it is requested that it be
lodged at the office of Lloyds TSB Registrars, The Causeway, Worthing BN99 6BY
no later than 11.00 a.m. on 5 January 2002. The Form of Proxy may also be handed
to the Chairman at the Court Meeting before the start of the meeting. The
completion and return of a Form of Proxy will not prevent a member who wishes to
do so from attending and voting in person.
A holder of American Depositary Shares should complete a voting instruction card
in relation to the voting rights attached to the ordinary shares represented by
his or her American Depositary Shares and return the card to the Depositary, The
Bank of New York, Proxy Department, New York, NY 10203- 0399, USA as indicated
on the voting instruction card as soon as possible and in any event by 5.00 p.m.
(New York time) on 3 January 2002. Those who hold their American Depositary
Shares through a bank, broker or other financial institution, should consult
with that institution to determine the deadline by which their voting
instructions must be returned.
In the case of joint holders, the vote of the senior who tenders a vote, whether
in person or by proxy or (if such member is a corporation) by authorised
representative, will be accepted to the exclusion of the vote of the other joint
holder(s) and for this purpose seniority will be determined by the order in
which the names appear in the register of members of the Company in respect of
the joint holding.
Only those shareholders registered in the register of members of the Company as
at 6.00 p.m. on 5 January 2002 or, in the event that the Court Meeting is
adjourned, 48 hours before the time of any adjourned meeting, shall be entitled
to attend or vote at the Court Meeting in respect of the number of shares
registered in their name at the relevant time. Changes to entries in the
register of members after 6.00 p.m. on 5 January 2002 or, in the event that the
Court Meeting is adjourned, less than 48 hours before the time of any adjourned
meeting, shall be disregarded in determining the rights of any person to attend
or vote at the Court Meeting.
By the Order referred to above, the Court has appointed James Ross or, failing
him, Roger Urwin or, failing him, Bob Faircloth to act as Chairman of the Court
Meeting and has directed the Chairman to report the result thereof to the High
Court of Justice of England and Wales.
53
The said Scheme of Arrangement will be subject to the subsequent sanction of the
High Court of Justice of England and Wales.
CMS Cameron McKenna
Mitre House
160 Aldersgate Street
London EC1A 4DD
Solicitors for the Company
Dated 10 December 2001
Explanatory note
The purpose of the Scheme is to establish New National Grid as the new holding
company of the Group.
The Scheme must be approved by the Court, which will not sanction the Scheme
unless it has previously been approved by National Grid Shareholders at a
separate Court Meeting convened for this purpose.
The resolution will be passed if it is approved by more than 50 per cent. of the
shareholders voting and if the shares represented by votes cast in favour of the
resolution are not less than 75 per cent. of the total shares voted. The
resolution will be decided on a poll, which will be conducted at the Court
Meeting and will include the votes of all shareholders present in person or by
proxy.
54
National Grid Group plc
NOTICE OF EXTRAORDINARY GENERAL MEETING
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of National Grid
Group plc (the "Company") will be held in the Butterworth Hall, Warwick Arts
Centre, Coventry CV4 7AL on 7 January 2002 at 11.15 a.m. (or, if later,
immediately following the conclusion or adjournment of the Court Meeting (as
defined in the document of which this Notice forms part)) for the purposes of
considering and, if thought fit, passing the following resolutions which, in the
case of Resolutions 1 and 2, will be proposed as special resolutions and, in the
case of Resolutions 3 to 11, will be proposed as ordinary resolutions.
SPECIAL RESOLUTIONS
Resolution 1: To approve the implementation of the Scheme and amend National
Grid's Articles of Association
THAT:
(a) the Scheme of Arrangement dated 10 December 2001 between the Company,
the Scheme Shareholders (as defined in the Scheme) and the Special
Shareholder (as defined in the Scheme) in its original form or with or
subject to any modification, addition or condition approved or imposed
by the Court (the "Scheme") be approved and the Directors of the Company
be authorised to take all such action as they may consider necessary or
appropriate for carrying the Scheme into effect;
(b) for the purpose of giving effect to the Scheme, the issued share capital
of the Company be reduced to nil by cancelling and extinguishing the
Scheme Shares (as defined in the Scheme) and the National Grid Special
Share (as defined in the Scheme);
(c) forthwith and contingently upon the said reduction of capital taking
effect:
(i) the share capital of the Company be increased to its former
amount by the creation of one new B share of (L)1 and such
number of new ordinary shares of 11 13/17 pence each in the
capital of the Company ("new Ordinary Shares") as shall
together be of an aggregate nominal amount equal to the
aggregate nominal amount of the shares cancelled in accordance
with paragraph (b) of this resolution. The B share of (L)1
shall rank pari passu in all respects with the new Ordinary
Shares; and
(ii) the credit arising in its books of account on the reduction of
capital be applied in paying up, in full and at par, the new B
share of (L)1 and the new Ordinary Shares created pursuant to
sub-paragraph (c)(i) of this resolution, such new B share of (L)1
and the new Ordinary Shares to be allotted and issued, credited
as fully paid, to New National Grid plc (registered in England
No. 4031152) and/or its nominee(s);
(d) the Directors of the Company be generally and unconditionally
authorised, pursuant to section 80 of the Companies Act 1985, to allot
relevant securities (as defined in the said section 80) up to an
aggregate nominal value of (L)170,000,000 in respect of allotments of
relevant securities in connection with the Scheme provided that this
authority shall expire on the conclusion of the Annual General Meeting
of the Company in 2002 and shall be in addition to any other authority
conferred on the Directors of the Company pursuant to the said section
80;
(e) the Articles of Association of the Company be amended by:
(i) the adoption and inclusion of the following new Article as
Article 4A:
4A. The B share
The B share of (L)1 in the capital of the Company shall rank pari
passu in all respects with the ordinary shares of 11 13/17 pence
each.
(ii) the adoption and inclusion of the following new Article as
Article 159:
SCHEME OF ARRANGEMENT
159. In this Article 159, expressions not defined in these
Articles but defined in the Scheme shall have the same
respective meanings in this Article.
159.1 Notwithstanding any other provision of these Articles, if
any shares in the Company are allotted and issued to any
person (a "new member") other than New National Grid or
any nominee of New National Grid after the time at which
this Article becomes effective and prior to the
confirmation by the Court of the reduction of capital
provided for under the Scheme, such shares shall be
allotted and issued subject to the terms of the Scheme
and
55
shall be Scheme Shares for the purposes thereof and the
new member, and any subsequent holder other than New
National Grid or any nominee of New National Grid, shall
upon the Scheme becoming effective be bound by the terms
of the Scheme.
159.2 If any shares in the Company are allotted and issued to a
new member other than New National Grid or any nominee of
New National Grid after the Scheme Effective Date, they
will be transferred to New National Grid in consideration
for and conditionally on the issue or transfer to the new
member (or any subsequent holder) of one ordinary share
in New National Grid for each share in the Company so
transferred. The New National Grid ordinary shares so
issued will be credited as fully paid and will rank pari
passu in all respects with all New National Grid ordinary
shares in issue at the time (other than as regards any
dividend or other distribution payable by reference to a
record date preceding the date of allotment and issue)
and will be subject to the Articles of Association of New
National Grid.
159.3 The number of shares to be issued or transferred under
Article 159.2 may be adjusted by the Directors in such
manner as the auditors may determine on any
reorganisation of the share capital of the Company or of
New National Grid effected after the Scheme Effective
Date, provided always that any fractions of an ordinary
share in New National Grid shall be aggregated and sold
for the benefit of New National Grid.
159.4 To give effect to any such transfer required by Article
159.2, the Company may appoint any person to execute a
form of transfer on behalf of the new member (or any
subsequent holder of the relevant shares in the Company)
in favour of New National Grid and to agree for and on
behalf of the new member (or any such holder) to become a
member of New National Grid; and
(iii) the addition of the following definitions to Article 1:
"New National Grid": the company called New National Grid plc
with registered number 4031152; and
"Scheme": the scheme of arrangement dated 10 December 2001
proposed between the Company, the Scheme Shareholders (as defined
in the Scheme) and the Special Shareholder (as defined in the
Scheme), in its original form or with or subject to any
modification, addition or condition approved or imposed by the
Court (as defined in the Scheme).
Explanatory note
Resolution 1 seeks approval for the Scheme and certain actions necessary in
order to carry the Scheme into effect. If passed, the resolution will:
(a) approve the Scheme and authorise the Directors of National Grid to take
all action necessary to carry the Scheme into effect;
(b) authorise the cancellation by National Grid of all its existing shares,
thereby reducing its share capital to nil;
(c) upon the reduction of capital taking effect, authorise National Grid to
restore its share capital to its former amount;
(d) authorise the Directors of National Grid to issue shares in National
Grid to New National Grid, thereby establishing National Grid as a
wholly-owned subsidiary of New National Grid; and
(e) amend the Articles of Association of National Grid to ensure that all
shares in National Grid issued prior to the Court Hearing or after the
Scheme Effective Date are exchanged for shares in New National Grid.
Resolution 1 is a special resolution which will be passed if not less than 75
per cent. of the votes cast are in favour of the resolution.
Resolution 2: To change the name of the Company to "National Grid Holdings One
plc"
THAT, conditional on the Scheme becoming effective, the name of the Company be
changed to "National Grid Holdings One plc".
Explanatory note
Upon the Scheme becoming effective, National Grid will become a subsidiary of
New National Grid. Resolution 2 seeks approval for National Grid to change its
name to National Grid Holdings One plc, thus enabling New National Grid to
assume the name "National Grid Group plc".
56
Resolution 2 is a special resolution which will be passed if not less than 75
per cent. of the votes cast are in favour of the resolution.
Resolutions 3 to 11 are ordinary resolutions which will be passed if more than
50 per cent. of the votes cast are in favour of the resolutions.
The purpose of Resolutions 3 to 10 is to seek shareholder approval for the
adoption by New National Grid of executive and employee share option plans to
replace those currently operated by National Grid.
ORDINARY RESOLUTIONS
Resolution 3: To approve the National Grid Executive Share Option Plan 2002
THAT, conditional on the Scheme becoming effective:
(a) the National Grid Executive Share Option Plan 2002 to be adopted by New
National Grid plc (the "Executive Plan"), the main features of which are
summarised in Part IV of the document of which this notice forms part
and a copy of which is produced to the Meeting and signed by the
Chairman for the purposes of identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary to carry the Executive Plan into effect,
including, but not limited to, making such amendments as may be
necessary to obtain the approval of the Inland Revenue and/or such other
amendments as those Directors may consider necessary;
(c) the Directors of New National Grid plc be authorised to establish
schedules to the Executive Plan or to establish other plans based on the
Executive Plan to take account of local tax, exchange control or
securities laws outside the UK, provided that any shares issued under
the schedules or other plans must be treated as counting against any
individual or overall limits on participation contained in the Executive
Plan; and
(d) the Directors of New National Grid plc be authorised to vote and be
counted in the quorum on any matter connected with the Executive Plan,
notwithstanding that they may have an interest in the Executive Plan
(except that no such Director may be counted in a quorum or vote on his
own participation) and to relax any prohibition on voting by interested
Directors contained in New National Grid plc's Articles of Association.
Explanatory note
Resolution 3 seeks approval for the adoption by New National Grid of an
executive share option plan, details of which are given on pages 41 and 42 of
the document of which this notice forms part.
The plan is similar to, and is intended to replace, the National Grid Executive
Share Option Plan approved by National Grid Shareholders in 2000. It will enable
executive share options to be granted each year at market price of, except in
exceptional circumstances, up to a maximum value of three times salary. The
exercise of options initially granted under the Plan will be subject to the
performance of the Group when measured against a comparator group of
approximately 20 utility companies in the UK and the US.
Resolution 4: To approve the National Grid Employee Share Ownership Plan 2002
THAT, conditional on the Scheme becoming effective:
(a) the National Grid Employee Share Ownership Plan 2002 including the
related Trust Deed to be adopted by New National Grid plc (the "UK
Plan"), the main features of which are summarised in Part IV of the
document of which this notice forms part and a copy of which is produced
to the Meeting and signed by the Chairman for the purposes of
identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary to carry the UK Plan into effect, including,
but not limited to, making such amendments as may be necessary to obtain
the approval of the Inland Revenue and/or such other amendments as those
Directors may consider necessary, and establishing an unapproved plan to
mirror the benefits available under the UK Plan should the Directors
consider that to be appropriate;
(c) the Directors of New National Grid plc be authorised to establish
schedules to the UK Plan or to establish other plans based on the UK
Plan to take account of local tax, exchange control or securities laws
outside the UK, provided that any shares issued under the schedules or
other plans must be treated as counting against any individual or
overall limits on participation contained in the UK Plan; and
57
(d) the Directors of New National Grid plc be authorised to vote and be
counted in the quorum on any matter connected with the UK Plan,
notwithstanding that they may have an interest in the UK Plan and to
relax any prohibition on voting by interested Directors contained in New
National Grid plc's Articles of Association.
Explanatory note
Resolution 4 seeks approval for the adoption by New National Grid of an all-
employee share ownership plan, details of which are set out on pages 43 and 44
of the document of which this notice forms part.
The plan is similar to, and is intended to replace, the National Grid Employee
Share Ownership Plan approved by National Grid Shareholders in 2000 and is
intended to encourage employee share ownership as a means of fostering the
commitment of employees to the long-term success of the Group. The plan is in
accordance with UK Government policy on employee share ownership and contains
three elements:
1. Free Shares: shares which New National Grid may award to
employees in a tax-advantaged way;
2. Partnership Shares: shares which employees buy from their before-tax
income; and
3. Matching Shares: additional Free Shares which New National Grid
may award to employees who buy Partnership
Shares.
New National Grid will choose which, if any, of the above elements to offer to
eligible employees in any year.
Resolution 5: To approve the National Grid Savings Related Share Option Plan
2002
THAT, conditional on the Scheme becoming effective:
(a) the National Grid Savings Related Share Option Plan 2002 to be adopted
by New National Grid plc (the "Sharesave Plan"), the main features of
which are summarised in Part IV of the document of which this notice
forms part and a copy of which is produced to the Meeting and signed by
the Chairman for the purposes of identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary to carry the Sharesave Plan into effect,
including, but not limited to, making such amendments as may be
necessary to obtain the approval of the Inland Revenue and/or such
other amendments as those Directors may consider necessary, adopting
similar plans for the employees of each subsidiary of New National
Grid plc but operating over shares in New National Grid plc, and
establishing an unapproved plan to mirror the benefits available under
the Sharesave Plan should the Directors consider that to be
appropriate;
(c) the Directors of New National Grid plc be authorised to establish
schedules to the Sharesave Plan or to establish other plans based on the
Sharesave Plan to take account of local tax, exchange control or
securities laws outside the UK, provided that any shares issued under
the schedules or other plans must be treated as counting against any
individual or overall limits on participation contained in the Sharesave
Plan; and
(d) the Directors of New National Grid plc be authorised to vote and be
counted in the quorum on any matter connected with the Sharesave Plan,
notwithstanding that they may have an interest in the Sharesave Plan and
to relax any prohibition on voting by interested Directors contained in
New National Grid plc's Articles of Association.
Explanatory note
Resolution 5 seeks approval for the adoption by New National Grid of an employee
savings-related plan, details of which are set out on page 44 of the document of
which this notice forms part.
The plan is similar to, and is intended to replace, the National Grid Savings
Related Share Option Scheme approved by National Grid Shareholders in 1999 and,
if approved, will enable the grant of options to purchase shares at a discount
to those UK employees who enter into special savings contracts to save over a
three- or five-year period. The plan will be open to all UK employees, subject
to certain eligibility criteria.
58
Resolution 6: To approve the National Grid Employee Stock Purchase Plan 2002
THAT, conditional on the Scheme becoming effective:
(a) the National Grid Employee Stock Purchase Plan 2002 to be adopted by New
National Grid plc (the "US Plan"), the main features of which are
summarised in Part IV of the document of which this notice forms part
and a copy of which is produced to the Meeting and signed by the
Chairman for the purposes of identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary to carry the US Plan into effect, including,
but not limited to, making such amendments as may be necessary to comply
with any federal, state or local laws, rules or regulations and/ or make
such other amendments as those Directors may consider necessary;
(c) the Directors of New National Grid plc be authorised to establish
schedules to the US Plan or to establish other plans based on the US
Plan to take account of local tax, exchange controls and securities laws
outside the US, provided that any shares issued under the schedules or
other plans must be treated as counting against any individual or
overall limits on participation contained in the US Plan; and
(d) the Directors of New National Grid plc be authorised to vote and be
counted in the quorum on any matter connected with the US Plan,
notwithstanding that they may have an interest in the US Plan and to
relax any prohibition on voting by interested Directors contained in New
National Grid plc's Articles of Association.
Explanatory note
Resolution 6 seeks approval for the adoption by New National Grid of a US stock
purchase plan, details of which are set out on page 45 of the document of which
this notice forms part.
The plan is similar to, and is intended to replace, the US Employee Stock
Purchase Plan approved by National Grid Shareholders in 1999. If approved, it
will enable US employees to use a savings plan to purchase shares in a tax-
efficient manner, thus providing them with a similar benefit to that provided to
UK employees under the Savings Related Share Option Plan.
Resolution 7: To approve the National Grid Share Matching Plan 2002
THAT, conditional on the Scheme becoming effective:
(a) the National Grid Share Matching Plan 2002 to be adopted by New National
Grid plc (the "Matching Plan"), the main features of which are
summarised in Part IV of the document of which this notice forms part
and a copy of which is produced to the Meeting and signed by the
Chairman for the purposes of identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary or desirable to carry the Matching Plan into
effect, including, but not limited to, making such amendments as those
Directors may consider necessary;
(c) the Directors of New National Grid plc be authorised to establish
schedules to the Matching Plan or to establish other plans based on the
Matching Plan to take account of local tax, exchange control or
securities laws outside the UK, provided that any shares issued under
the schedules or other plans must be treated as counting against any
individual or overall limits on participation contained in the Matching
Plan; and
(d) the Directors of New National Grid plc be authorised to vote and be
counted in the quorum on any matter connected with the Matching Plan,
notwithstanding that they may have an interest in the Matching Plan
(except that no such Director may be counted in a quorum or vote on his
own participation) and to relax any prohibition on voting by interested
Directors contained in New National Grid plc's Articles of Association.
Explanatory note
Resolution 7 seeks approval for the adoption by New National Grid of a share
matching plan, details of which are set out on pages 45 and 46 of the document
of which this notice forms part.
The share matching plan is similar to, and is intended to replace, the Share
Matching Scheme approved by National Grid Shareholders in 1996. Under the terms
of the proposed plan, Executive Directors and certain executives will be able to
invest a portion of any cash bonus in shares, which will then be held in trust.
Provided that the individual concerned has remained in New National Grid's
employment and has not disposed of shares
59
held in trust, New National Grid will match the shares purchased by the
individual after a three-year holding period and all the shares will be released
from trust. A cash payment equivalent to any dividend payments on matching
shares will also be made on the release of shares from trust. With suitable
modifications, the plan may be extended to US executives.
Resolution 8: To approve the National Grid USA Incentive Thrift Plans I and II
THAT, conditional on the Scheme becoming effective:
(a) the National Grid USA Incentive Thrift Plans I and II to be adopted by
New National Grid plc (the "Thrift Plans"), the main features of which
are summarised in Part IV of the document of which this notice forms
part and a copy of which is produced to the Meeting and signed by the
Chairman for the purposes of identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary to carry the Thrift Plans into effect,
including, but not limited to, making such amendments as those Directors
may consider necessary;
(c) the Directors of New National Grid plc be authorised to establish
schedules to the Thrift Plans or to establish other plans based on the
Thrift Plans to take account of local tax, exchange control or
securities laws outside the US, provided that any shares issued under
the schedules or other plans must be treated as counting against any
individual or overall limits on participation contained in the Thrift
Plans; and
(d) the Directors of New National Grid plc be authorised to vote and be
counted in the quorum on any matter connected with the Thrift Plans,
notwithstanding that they may have an interest in the Thrift Plans and
to relax any prohibition on voting by interested Directors contained in
New National Grid plc's Articles of Association.
Explanatory note
Resolution 8 seeks approval for the amendment by New National Grid of the
existing incentive thrift plans, details of which are set out on pages 46 and 47
of the document of which this notice forms part.
They will allow all qualifying employees in the US to contribute a portion of
income into the plan, subject to certain limits, and to direct how their
contributions are to be invested among various options, including New National
Grid ADSs.
The plan will be open to all US employees, subject to certain eligibility
requirements.
Resolution 9: To approve the National Grid Employee Trust 2002
THAT, conditional on the Scheme becoming effective:
(a) the establishment of the National Grid Employee Trust 2002 by New
National Grid plc (the "Employee Trust"), the main features of which are
summarised in Part IV of the document of which this notice forms part
and which will be constituted by a trust deed a copy of which is
produced to the Meeting and signed by the Chairman for the purposes of
identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary to carry the Employee Trust into effect,
including, but not limited to, making such amendments as those Directors
may consider necessary; and
(c) the Directors of New National Grid plc be authorised to vote and to be
counted in a quorum on any matter connected with the Employee Trust,
notwithstanding that they may have an interest in the Employee Trust and
to relax any prohibition on voting by interested Directors contained in
New National Grid plc's Articles of Association.
Explanatory note
Resolution 9 seeks approval for the establishment by New National Grid of an
employee trust, details of which are set out on page 47 of the document of which
this notice forms part. If approved, the trust will operate in conjunction with
certain of the share plans described in Resolutions 3 to 8, by holding shares to
be delivered to participants.
60
Resolution 10: To approve the National Grid Qualifying Employee Share
Ownership Trust (No. 2) 2002
THAT, conditional on the Scheme becoming effective:
(a) the establishment of the National Grid Qualifying Employee Share
Ownership Trust (No. 2) 2002 by New National Grid plc ("QUEST No. 2"),
the main features of which are summarised in Part IV of the document of
which this notice forms part and which will be constituted by a trust
deed a copy of which is produced to the meeting and signed by the
Chairman for the purposes of identification be approved;
(b) the Directors of New National Grid plc be authorised to do all acts and
things as may be necessary to carry the QUEST No. 2 into effect,
including, but not limited to, making such amendments as may be
necessary to obtain the approval of the Inland Revenue and/or such other
amendments as those Directors may consider necessary; and
(c) the Directors of New National Grid plc be authorised to vote and to be
counted in a quorum on any matter connected with the QUEST No. 2,
notwithstanding that they may have an interest in the QUEST No. 2 and to
relax any prohibition on voting by interested Directors contained in New
National Grid plc's Articles of Association.
Explanatory note
Resolution 10 seeks approval for the establishment by New National Grid of a
qualifying employee share ownership trust ("QUEST"), details of which are set
out on page 47 of the document of which this notice forms part. If approved, the
QUEST will operate in conjunction with certain of the share plans described in
Resolutions 3 to 8, by holding shares to be delivered to participants.
Resolution 11: To authorise the Company to make donations to EU political
organisations and incur EU political expenditure
THAT the Company and its wholly-owned subsidiary, The National Grid Company plc,
be authorised to:
(a) make donations to EU political organisations; and
(b) incur EU political expenditure,
in an aggregate amount not exceeding (L)100,000 during the period beginning on
the date of passing of this resolution and ending on the date of the Annual
General Meeting of the Company in 2002. For the purposes of this resolution,
"donations", "EU political organisations" and "EU political expenditure" have
the meanings given to them in Part XA of the Companies Act 1985 (as amended by
the Political Parties, Elections and Referendums Act 2000).
Explanatory note
Resolution 11 seeks approval from shareholders to enable National Grid and
National Grid Company to make donations or incur expenditure which they would
otherwise be prohibited from making or incurring following the coming into force
of the relevant provisions of the Political Parties, Elections and Referendums
Act 2000 (the "new legislation") earlier this year.
Amongst other things, the new legislation prohibits companies from making
donations or incurring expenditure in excess of an aggregate of (L)5,000 in
relation to political organisations in the European Union in the 12 month period
following the date of their first Annual General Meeting after the new
legislation came into effect (and in each succeeding 12 month period), unless
such donations and expenditure have been approved in advance by the company's
shareholders.
National Grid does not currently make donations to political parties in the
European Union, nor will New National Grid do so without the specific approval
of its shareholders. However, the new legislation contains wide definitions of
"donations", "EU political expenditure" and "EU political parties" and, as a
result, it is possible that National Grid may be prohibited from supporting, for
example, bodies concerned with policy review or law reform, with the
representation of the business community or sections of it or with the
representation of other communities or special interest groups which it is in
shareholders' interests for National Grid to support.
If Resolution 11 is passed, National Grid and National Grid Company will be
authorised to make donations and incur expenditure which might otherwise be
prohibited by the new legislation, up to a limit of, in aggregate, (L)100,000.
The Directors consider that the authority is necessary to:
61
(a) provide National Grid and National Grid Company with comfort that they
will not, because of uncertainties as to the interpretation of the scope
and interpretation of the new legislation, unintentionally commit a
technical breach of the new legislation; and
(b) allow National Grid and National Grid Company to continue to provide
financial and other support to organisations which it is in
shareholders' interests for them to support.
New National Grid has passed a resolution to the same effect as Resolution 11,
which will come into force upon the Scheme becoming effective. The authority
conferred on National Grid and National Grid Company by Resolution 11 will cease
to be effective at that time, as the new legislation requires that the relevant
resolution be granted by the ultimate holding company of any group of companies
seeking authority thereunder. In accordance with the new legislation, New
National Grid (or, if for any reason the Scheme does not become effective,
National Grid) will disclose in its next Annual Report any donation to any EU
political organisation and any EU political expenditure made or incurred by any
member of the Group which is in excess of (L)200.
On behalf of the Board Registered Office:
Fiona Smith 15 Marylebone Road
Group General Counsel and Company Secretary London
NW1 5JD
10 December 2001
Registered in England
and Wales No. 2367004
Notes:
1. A member (shareholder) of the Company who is entitled to attend and vote at
the meeting but is unable to be present in person is entitled to appoint a
proxy or proxies to attend the meeting and, on a poll, to vote on his or her
behalf. A proxy need not be a member of the Company. A Form of Proxy (Card
B) is enclosed with this document and instructions on how to fill in the
Form of Proxy are set out at the end of the document of which this notice
forms part.
2. A holder of American Depositary Shares should complete a voting instruction
card in relation to the voting rights attached to the ordinary shares
represented by his or her American Depositary Shares and return the card to
the Depositary, The Bank of New York, Proxy Department, New York, NY
10203-0399, USA as soon as possible and in any event by 5.00 p.m. (New York
time) on 3 January 2002. Those who hold their American Depositary Shares
through a bank, broker or other financial institution should consult with
that institution to determine the deadline by which their voting
instructions must be returned.
3. Copies of the Company's existing Articles of Association, copies of the
Articles of Association as proposed to be amended by paragraph (e) of the
Resolution numbered 1 set out in the notice of Meeting and copies of the New
National Grid Share Plans as proposed to be adopted by the Resolutions
numbered 3 to 10 set out in the notice of Meeting are available for
inspection at the offices of CMS Cameron McKenna, 160 Aldersgate Street,
London EC1A 4DD during normal business hours on any weekday (excluding
Saturdays, Sundays and public holidays) from the date of this notice until
close of business on 7 January 2002 and will also be available for
inspection at the place of the meeting for at least 15 minutes before, and
during, the meeting.
4. The Company, pursuant to Regulation 41 of the Uncertificated Securities
Regulations 2001, specifies that only those members registered in the
register of members of the Company as at 6.00 p.m. on 5 January 2002 (or, if
later, 48 hours before the conclusion or adjournment of the Court Meeting)
or, in the event that this meeting is adjourned, in the register of members
48 hours before the time of any adjourned meeting shall be entitled to
attend or vote at the meeting in respect of the number of shares registered
in their name at that time. Changes to entries in the register of members
after 6.00 p.m. on 5 January 2002 (or, if later, 48 hours before the
conclusion or adjournment of the Court Meeting) or, in the event that this
meeting is adjourned, in the register of members 48 hours before the time of
any adjourned meeting shall be disregarded in determining the rights of any
person to attend or vote at the meeting.
62
Instructions on completing Forms of Proxy
How to fill in the Forms of Proxy
You are entitled to appoint a proxy or proxies to attend the Court Meeting and
to vote on your behalf on the poll which will be conducted at the Court Meeting.
To appoint a proxy or proxies, you must complete and sign the enclosed
reply-paid Form of Proxy for the Court Meeting (Card A). You are kindly
requested to return your Form of Proxy to our share registrars, Lloyds TSB
Registrars, The Causeway, Worthing BN99 6BY so that it is received no later than
11.00 a.m. on 5 January 2002. Forms of Proxy may also be handed to the Chairman
at the Court Meeting before the start of the meeting.
You are entitled to appoint a proxy or proxies to attend the Scheme EGM on your
behalf and, in the event that a poll is called, to vote on your behalf. To
appoint a proxy or proxies, you must complete the enclosed reply-paid Form of
Proxy for the Scheme EGM (Card B), sign it and return it to Lloyds TSB
Registrars (at the address above) so that it is received no later than 11.15
a.m. on 5 January 2002.
If someone else signs either or both of the Forms of Proxy on your behalf, their
authority to do so must be returned with the relevant Form(s) of Proxy. If the
appointer is a corporation, the Form(s) of Proxy must be executed under its
common seal or signed on its behalf by a duly appointed officer or attorney. The
appropriate power of attorney or other authority or a notarially certified copy
of such power (if any), should be returned with the relevant Form(s) of Proxy.
In the case of joint shareholders, any one holder may sign the Form(s) of Proxy.
If more than one holder signs, only the vote of the first named on the Company's
share register will be accepted. Any alterations to each Form of Proxy must be
initialled.
Before filling in either Form of Proxy, please read the notes set out below.
What is a poll?
Votes on most resolutions at a general meeting of the Company are decided on a
show of hands in which each shareholder present is entitled to cast one vote
irrespective of the number of shares registered in his or her name.
However, if a poll is called in accordance with the Company's Articles of
Association (a common situation being where the result of a show of hands is
unclear), or in the case of the Court Meeting, where voting on a poll is
required, every shareholder of the Company (whether present in person at the
meeting or represented by proxy) is entitled to cast a number of votes equal to
the number of shares registered in his name.
Who can be appointed a proxy?
You can appoint anyone you like as your proxy or proxies: a proxy does not have
to be a shareholder of the Company. If you wish, you can also appoint more than
one proxy. However, you are responsible for ensuring that the person you appoint
is able and willing to attend the Court Meeting and/or the Scheme EGM on your
behalf. If your proxy does not attend the Court Meeting and/or the Scheme EGM
your vote will not be cast in the event of a poll. Unless you specifically
nominate another person or persons to attend the Court Meeting and/or the Scheme
EGM to vote on your behalf, the Chairman of the Meeting will be appointed as
your proxy and will vote on your behalf according to your instructions.
If you wish to appoint as your proxy someone other than the Chairman, cross out
the words "the Chairman of the Meeting" on the Form(s) of Proxy and write the
full name(s) of your proxy or proxies in the space provided.
In what circumstances will a proxy be able to vote at the Scheme EGM?
Your proxy will be able to vote on your behalf on a Resolution at the Scheme EGM
only if a poll is called on that Resolution. Proxies cannot vote on a show of
hands.
How do I instruct my proxy on how my votes should be cast?
The Resolutions to be proposed at the Court Meeting and the Scheme EGM are set
out in full in the notices of the Court Meeting and the Scheme EGM on the
preceding pages. The Resolutions are described in abbreviated form on the
Form(s) of Proxy.
To instruct your proxy on how you wish your votes to be cast at the Court
Meeting, please sign either the "For" or the "Against" box on Card A.
To instruct your proxy on how your votes should be cast in the event that a poll
is called at the Scheme EGM, please tick the appropriate box opposite each
Resolution on Card B to show whether your proxy should vote "For" or "Against"
or should abstain.
63
Please note that if you do not give specific voting instructions on each
Resolution by placing a tick in the appropriate box, your proxy will be free to
vote or abstain on each Resolution as he or she thinks fit. Unless you
specifically instruct otherwise, your proxy may also vote or abstain as he or
she thinks fit on any other business (including any amendments to each
Resolution) which may properly come before the Scheme EGM.
What happens if I appoint a proxy, then decide to attend the Court Meeting
and/or the Scheme EGM myself?
Even if you return the appropriate completed Forms of Proxy, you will still be
entitled to attend the Court Meeting and the Scheme EGM instead of your proxy
and to participate in voting if you so wish. On a poll in which you vote in
person, the votes of any proxy appointed by you will be disregarded.
Can I appoint my proxy electronically?
You may, if you wish, register the appointment of a proxy electronically by
logging on to the website at www.sharevote.co.uk. Alternatively, if you have
registered for a Shareview portfolio, log on to your portfolio at
www.shareview.co.uk and click on "Company Meetings". You will need your Voting
Reference Numbers (the three 8-digit numbers on the Forms of Proxy). To register
the appointment of a proxy for the Court Meeting, you will need to use the
Voting Reference Numbers on the Form of Proxy for the Court Meeting (Card A). To
register the appointment of a proxy for the Scheme EGM, you will need to use the
Voting Reference Numbers on the Form of Proxy for the Scheme EGM (Card B). In
order to register the appointment of a proxy for both meetings, you must log on
separately using each set of Voting Reference Numbers. Full details of the
procedures are given on the websites. The proxy appointment and instructions
must be received by Lloyds TSB Registrars by 11.00 a.m. (in the case of the
Court Meeting) and 11.15 a.m. (in the case of the Scheme EGM) on 5 January 2002.
Please note that any electronic communication that is found to contain a
computer virus will not be accepted. Before using the internet service you
should read the material particulars of the conditions of use of the service in
section 14 of Part IV of this document.
Please do not disclose your Voting Reference Number to anyone else, unless you
wish them to give instructions on your behalf.
64
Exhibit 99(b)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are
in any doubt as to the action you should take, you should immediately consult
your stockbroker, bank manager, solicitor, accountant or other independent
professional adviser duly authorised under the Financial Services and Markets
Act 2000.
If you have sold or transferred all of your National Grid Shares or National
Grid ADSs, you should send this document, together with the accompanying
documents, at once to the purchaser or transferee, or to the stockbroker, bank
or other agent through or to whom the sale or the transfer was effected for
transmission to the purchaser or transferee. The distribution of this document
in jurisdictions other than the UK may be restricted by law and therefore
persons into whose possession this document comes should inform themselves
about and observe such restrictions. Any failure to comply with these
restrictions may constitute a violation of the securities laws of any such
jurisdiction.
A copy of this document, which comprises listing particulars dated 10 December
2001 relating to New National Grid and which has been prepared in accordance
with the Listing Rules of the UK Listing Authority made under section 74 of
the Financial Services and Markets Act 2000, has been delivered to the
Registrar of Companies in England and Wales for registration as required by
section 83 of that Act.
--------------------------------------------------------------------------------
[NATIONAL GRID LOGO]
National Grid Group plc
currently named New National Grid plc
(incorporated and registered in England and Wales with
registered number 4031152)
Listing Particulars
relating to the admission to the Official List
of up to 2,000,000,000 ordinary shares of 10 pence each in
National Grid Group plc
Sponsored by N M Rothschild & Sons Limited
--------------------------------------------------------------------------------
Applications have been made to the UK Listing Authority for the New National
Grid Shares to be admitted to the Official List and to the London Stock
Exchange for the New National Grid Shares to be admitted to trading on the
London Stock Exchange's market for listed securities. Admission to the
Official List together with admission to trading on the London Stock
Exchange's market for listed securities constitute admission to official
listing on a stock exchange. Pursuant to the Scheme, New National Grid Shares
will be issued to National Grid Shareholders. Pursuant to the Acquisition, New
National Grid Shares will be issued to the Depositary only, which will, in
turn, issue New National Grid ADSs to Niagara Mohawk Shareholders. Neither the
New National Grid Shares nor the New National Grid ADSs will be made generally
available or marketed to the public in the UK or the US. It is expected that
Admission will become effective and dealings will commence in the New National
Grid Shares to be issued pursuant to the Scheme at 8.00 a.m. on the Scheme
Effective Date. Application has been made to list the New National Grid ADSs
arising from the Scheme and to be issued pursuant to the Acquisition on the
NYSE under the symbol "NGG", the symbol currently used for the National Grid
ADSs. It is expected that dealings will commence on the NYSE in the New
National Grid ADSs arising from the Scheme at 9.30 a.m. (New York time) on the
Scheme Effective Date and in the New National Grid ADSs to be issued pursuant
to the Acquisition at 9.30 a.m. (New York time) on the the next business day
after Completion.
New National Grid and National Grid have been advised that the New National
Grid Shares to be issued pursuant to the Scheme will be exempt from the
registration requirements of the US Securities Act of 1933, as amended, by
virtue of section 3(a)(10) thereof and, as a consequence, the New National
Grid Shares to be issued pursuant to the Scheme have not been registered under
that Act. The New National Grid Shares to be issued pursuant to the
Acquisition and represented by the New National Grid ADSs have been registered
under the US Securities Act of 1933, as amended.
N M Rothschild & Sons Limited, which is regulated in the UK by the Financial
Services Authority, is acting exclusively as financial adviser to National
Grid and as financial adviser and sponsor to New National Grid and for no one
else in connection with the Scheme, the Acquisition and the proposed listing
of the New National Grid Shares on the Official List and their admission to
trading on the London Stock Exchange's market for listed securities and will
not be responsible to anyone other than National Grid and New National Grid
for providing the protections afforded to customers of N M Rothschild & Sons
Limited or for providing advice in relation to the Scheme, the Acquisition,
the proposed listing or admission to trading.
FORWARD-LOOKING STATEMENTS
These Listing Particulars contain certain statements that are neither reported
financial results nor other historic information. These statements are
forward-looking statements within the meaning of section 27A of the US
Securities Act of 1933, as amended, and section 21E of the US Securities
Exchange Act of 1934, as amended. These forward-looking statements rely on a
number of assumptions concerning future events and are subject to a number of
risks and uncertainties, many of which are outside of the control of New
National Grid and National Grid, that could cause actual results to differ
materially from those expressed in or implied by such statements. For a more
detailed description of these assumptions, risks and uncertainties, please see
National Grid's filings with the SEC (and in particular the "Risk Factors" and
"Operating and Financial Review" sections in its most recent annual report on
Form 20-F). Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document.
New National Grid has no intention and undertakes no obligation to update or
revise any forward-looking statements in light of new information, future
events or circumstances after the date of these Listing Particulars, except as
required by the Listing Rules.
REGISTERED AND HEAD OFFICE AND PRINCIPAL ADVISERS
Registered and Head Office of New National Grid
15 Marylebone Road
London NW1 5JD
Sponsor and Financial Adviser
N M Rothschild & Sons Limited
New Court, St Swithin's Lane
London EC4P 4DU
Joint Brokers
Credit Suisse First Boston Merrill Lynch International
(Europe) Limited 2 King Edward Street
One Cabot Square London EC1A 1HQ
London E14 4QJ
Legal Advisers Auditors and Reporting Accountants
CMS Cameron McKenna PricewaterhouseCoopers
Mitre House 1 Embankment Place
160 Aldersgate Street London WC2N 6RH
London EC1A 4DD
Registrars Bankers
Lloyds TSB Registrars Barclays Bank plc
The Causeway 54 Lombard Street
Worthing London EC3P 3AH
West Sussex BN99 6DA
2
CONTENTS
Page
Outline expected timetable 4
Part I: Information relating to National Grid Group 5
1. Overview of National Grid Group 5
2. National Grid Group's businesses 8
3. Environment 17
4. Occupational health and safety 17
5. Corporate governance and internal control 18
6. Employees 18
7. Acquisition of Niagara Mohawk 18
8. Current trading and prospects 20
Part II: Scheme of Arrangement 22
1. Introduction 22
2. Reasons for the Scheme 22
3. Summary of the Scheme 22
4. Reduction of the share capital of New National Grid 23
5. Implementation of the Scheme 23
6. Effect of the Scheme 24
7. Changes to the National Grid Articles 24
8. Directors 25
9. Taxation 25
10. Listing, dealings, share certificates, ADS certificates and settlement 25
11. Memorandum and Articles of Association of New National Grid 25
12. Employee share schemes 26
13. Overseas shareholders 27
14. Meetings 27
15. Authorities relating to New National Grid 27
Part III: Financial information on New National Grid 28
Part IV: Financial information on National Grid Group 31
Part V: Financial information on Niagara Mohawk 94
Part VI: Working capital 162
Part VII: Additional information 163
1. Responsibility 163
2. Incorporation and activity of New National Grid 163
3. Share capital 163
4. Substantial shareholdings 166
5. Summary of the Memorandum and Articles of Association of New
National Grid 167
6. Summary of the principal differences between the New National Grid
Articles and the National Grid Articles 173
7. Directors, Secretary and Proposed Directors of New National Grid 175
8. Directors' interests in National Grid and New National Grid 180
9. Options over National Grid Shares 183
10. Effect of the Scheme on the National Grid Share Schemes 184
11. Proposed New National Grid Share Plans 186
12. Long-term incentive plans operated by Niagara Mohawk 195
13. Principal subsidiaries and other principal undertakings of New National Grid 196
14. Principal investments of the Group 197
15. Principal establishments of the Group 198
16. UK taxation 198
17. US taxation 200
18. Material contracts 201
19. Litigation 204
20. Significant change 205
21. Additional information 205
22. Documents available for inspection 206
Definitions 207
3
OUTLINE EXPECTED TIMETABLE
All times shown in this document are London times unless otherwise stated
The Scheme
5.00 p.m. (New York time): Latest time for receipt by the Depositary of voting
3 January 2002 instruction cards in respect of National Grid ADSs(1)
5 January 2002 11.00 a.m.: Latest requested time for receipt of forms of proxy for the Court Meeting(2)
11.15 a.m.: Latest time for receipt of forms of proxy for the Scheme EGM
7 January 2002 11.00 a.m.: Court Meeting
11.15 a.m.: Scheme EGM(3)
Early 2002 Court Hearing of the Petition to sanction the Scheme(4)
Scheme Record Date, which will be the last day of dealings in National Grid Shares and
Early 2002 National Grid ADSs, and which will be the business day before the Scheme Effective
Date(4)
Early 2002 Scheme Effective Date:(4)
8.00 a.m.: Dealings in New National Grid Shares issued pursuant to the Scheme commence
on the London Stock Exchange
8.00 a.m.: Crediting of New National Grid Shares to CREST accounts
9.30 a.m. (New York time): Dealings in New National Grid ADSs arising from the Scheme
commence on the NYSE
Despatch of New National Grid Share certificates within ten business days after the
Early 2002 Scheme Effective Date(4)
The Acquisition
Early 2002 Completion:(4)
Early 2002 The next business day after Completion:(4)
8.00 a.m.: Dealings in New National Grid Shares issued pursuant to the Acquisition
commence on the London Stock Exchange
8.00 a.m.: Crediting of New National Grid Shares issued pursuant to the Acquisition to
the Depositary's CREST account
9.30 a.m. (New York time): Dealings in New National Grid ADSs issued pursuant to the
Acquisition commence on the NYSE
Despatch of direct registration transaction advices in respect of New National Grid ADSs
Early 2002 issued pursuant to the Acquisition within ten business days after Completion(4)
Notes:
(1) If you hold your National Grid ADSs through a bank, broker or other
financial institution, you should consult with that institution to
determine the deadline by which your voting instructions must be returned.
(2) Forms of proxy for the Court Meeting not returned by this time may be
handed to the Chairman of the Court Meeting before the start of the
meeting.
(3) To commence at the time specified or, if later, immediately following the
conclusion or adjournment of the Court Meeting.
(4) The actual dates for these events in 2002 will be set by reference to the
date on which the SEC approves the Acquisition and upon agreement with the
Court. Following receipt of the SEC approval of the Acquisition, the dates
will be notified to National Grid Shareholders by announcement to the
Regulatory News Service of the London Stock Exchange. The Acquisition must
complete after, but within a reasonable time of, the Scheme becoming
effective in order to obtain the desired tax treatment for Niagara Mohawk
Shareholders.
4
PART I
INFORMATION RELATING TO NATIONAL GRID GROUP
1. Overview of National Grid Group
1.1 Introduction
National Grid Group is an international networks business. Its principal
activities are the ownership and operation of the high-voltage transmission
network in England and Wales and electricity transmission and distribution
networks serving approximately 1.7 million customers in the north-eastern US.
The Group also operates interconnectors between England and Wales and each of
France and Scotland and between the US and Canada. It is also developing an
interconnector in Australia and has interests in transmission networks in
Argentina and Zambia with joint venture partners.
The Group's telecommunications interests comprise its 32.6 per cent. economic
interest in Energis, wholly-owned infrastructure businesses in the UK and US
and joint ventures in Poland and Latin America.
After the Scheme becomes effective, as described in Part II, the Group will
continue to undertake the operations and activities described in this Part I.
1.2 History and development of the Group
1.2.1 Corporate history
In 1990, the electricity industry in England and Wales was restructured under
the terms of the Electricity Act 1989. National Grid Company assumed, from the
CEGB, ownership and control of the transmission system and the CEGB's
interests in the interconnectors with France and Scotland. At the same time a
holding company was established for National Grid Company, the principal
shareholders of which were the 12 RECs.
The holding company was re-named The National Grid Group plc in November 1995.
In December 1995, National Grid's ordinary shares were admitted to trading on
the London Stock Exchange's market for listed securities, at which time seven
RECs distributed to their respective shareholders all or part of their
holdings in National Grid. One further REC distributed to its shareholders its
holding in National Grid in January 1996. As required by the National Grid
Articles, all RECs (including their affiliates) had disposed of holdings in
excess of 1 per cent. of National Grid's issued ordinary share capital by
December 1996. The National Grid Special Share was issued in 1990 and is held
by the Secretary of State.
National Grid ADSs were listed on the NYSE in October 1999. In March 2000,
National Grid was registered as a holding company under the US Public Utility
Holding Company Act of 1935.
1.2.2 Development of the business
The Group's initial investments in electricity activities outside the UK were
in Argentina and Zambia in 1994 and 1997 respectively. In 2000, the Group
entered the US electricity market with the acquisitions of NEES and EUA. These
businesses now form National Grid USA, an electricity transmission and
distribution utility operating in Massachusetts, Rhode Island and New
Hampshire. The Directors believe that National Grid USA provides the Group
with an excellent platform from which to expand its activities in the north-
eastern US, as demonstrated by the proposed acquisition of Niagara Mohawk.
Further information on National Grid USA and the Acquisition is given in
sections 2.3 and 7 below.
The Group's involvement in telecommunications activities began in 1993 with
the establishment of Energis. Subsequently, on the basis of this experience,
the Group expanded its telecommunications activities to include joint ventures
in Latin America and Poland as well as wholly-owned businesses in the US and
UK.
Certain of these investments have been affected by the general
telecommunications market downturn, by recent difficult economic conditions in
their countries of operation and, in the case of Intelig, by the
unavailability of long-term vendor financing. Accordingly, on 20 November
2001, the Group announced it had fully written down the carrying value of its
telecommunications investments in Latin America and was taking action to
reduce costs and seek purchasers or new strategic investors for the
businesses. Further information on the Group's telecommunications interests is
set out in section 2.5 below.
5
1.2.3 Business strategy
The Group's core skills lie in the design, construction, system operation,
regulatory management and customer service activities associated with
operating complex networks. Its strategy is to exploit its assets and skills
to create value for shareholders and benefits for customers by achieving
performance improvements and cost savings within the framework of incentive-
based regulation or competitive markets.
After more than a decade in which the Group has improved the operating
efficiency of the UK transmission business, the Directors believe that future
opportunities for outperformance of regulatory efficiency targets are more
limited. As a consequence, the Directors expect returns for the UK business to
be lower than can be achieved elsewhere, particularly in the US, and that the
Group's choice of future investments will reflect this.
The Group is primarily focused on regulated electricity networks which are
stable, generating cash for investments and earnings to support the Group's
dividend policy. The Directors believe that they can continue to create
shareholder value from investment in electricity transmission and distribution
through progressive efficiency improvements. The Directors also believe that
the Group can create additional value in distribution by offering high-quality
customer service and in transmission by facilitating the development of
competitive energy markets while preserving system security and reducing user
costs. Gas distribution businesses generally have similar characteristics to
those of electricity network businesses and, in the US particularly, are often
combined under common ownership. The Group will therefore consider investment
opportunities in this area, especially when such opportunities are associated
with electricity network businesses.
While the value of the Group's telecommunications businesses has been affected
by the general downturn in the telecommunications market, the Directors
believe that the sector continues to offer opportunities to create shareholder
value. However, going forward, the Directors intend to concentrate on
opportunities which leverage the Group's existing assets and infrastructure
skills.
1.2.4 Acquisition of Niagara Mohawk and the Scheme
The Group is currently in the process of completing the acquisition of Niagara
Mohawk, the principal activities of which are the delivery of electricity and
natural gas in New York State. Shareholders of both National Grid and Niagara
Mohawk approved the Acquisition in January 2001. The Acquisition will more
than double the size of the Group's operations in the US, consolidate its
position in the north-east and offer the potential for integration and
efficiency savings. The Directors believe that the Acquisition will create
value for shareholders through improved financial performance, particularly in
the core transmission and distribution businesses.
The Acquisition is subject to a number of conditions, including regulatory and
other consents and approvals in the US, the majority of which have been
received. The only material regulatory approval outstanding is that of the
SEC. The Acquisition is expected to complete in early 2002, prior to which
National Grid will carry out a corporate reorganisation by way of the Scheme,
further details of which are set out in Part II of this document. Under the
Scheme, New National Grid will become the holding company of National Grid.
Under the terms of the Merger Agreement, if the Scheme does not become
effective, the Acquisition can proceed using an alternative structure, to be
agreed between National Grid and Niagara Mohawk, which substantially preserves
the economic and tax benefits of the Acquisition for each of the parties and
for Niagara Mohawk Shareholders.
1.3 Financial summary
The following summary financial information for the three years ended 31 March
2001 has been extracted without material adjustment from the comparative table
of financial information set out in section 1 of Part IV of this document. The
summary financial information for the six month periods ended 30 September
2001 and 2000 has been extracted without material adjustment from the
unaudited interim financial statements of National Grid for the six months
ended 30 September 2001, set out in section 2 of Part IV of this document.
Shareholders should read the whole of this document and not just rely on the
summary information below.
In the unaudited interim financial statements for the six months ended 30
September 2001, the Group adopted Financial Reporting Standard 19, "Deferred
tax", to change the method of accounting for deferred taxation from a partial
to a full provision basis, and also adopted a revised presentation of the
minority interests' share of the results of associated undertakings.
Consequently, several restatements have been made to the comparative figures
for the year ended 31 March 2001 and the six months ended 30 September 2000
and to the balance sheet as at 31 March 2001 included in the unaudited interim
financial statements set out in section 2 of Part IV. The
6
comparative table in section 1 of Part IV and the financial information shown
below for the three years ended 31 March 2001 have not been restated to
reflect the changes described above.
Throughout this section 1.3, unless otherwise indicated, total operating
profit is stated before exceptional items and goodwill amortisation.
-----------------------------------------------------------------------------------------------------------------------------------
Six months ended
30 September Year ended 31 March
----------------------- ------------------------------------
2001 2000 2001 2000 1999
Summary Group profit and loss account (L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Group turnover 1,989.5 1,792.8 3,799.7 1,614.7 1,514.2
--------- --------- --------- --------- ---------
Operating profit
- Group undertakings 398.6 411.5 821.1 574.7 576.9
- share of joint ventures and associate (13.8) (49.1) (89.2) (28.2) 3.0
--------- --------- --------- --------- ---------
Total operating profit(1) 384.8 362.4 731.9 546.5 579.9
Goodwill amortisation(2) (47.7) (39.6) (74.5) (7.9) (2.5)
Exceptional items (287.3) 85.5 217.7 1,027.3 839.2
Net interest (152.7) (101.0) (250.6) (64.9) (118.5)
--------- --------- --------- --------- ---------
(Loss)/profit before taxation (102.9) 307.3 624.5 1,501.0 1,298.1
Taxation
- excluding exceptional items (23.5) (92.1) (85.8) (123.1) (120.3)
- exceptional items 5.5 143.3 235.4 (229.5) (162.8)
Minority interests (3.1) (3.7) (5.1) -- --
--------- --------- --------- --------- ---------
(Loss)/profit for the period (124.0) 354.8 769.0 1,148.4 1,015.0
========= ========= ========= ========= =========
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Before exceptional items and goodwill amortisation.
(2) Includes goodwill relating to joint ventures and associate.
1.3.1 Financial results for the three years ended 31 March 2001
The movement in total operating profit in the year ended 31 March 2000
reflects higher profit contributions from UK transmission, UK interconnectors
and Energis, a lower profit contribution from other activities and operating
losses incurred by Intelig. The increase in total operating profit in the year
ended 31 March 2001 principally reflected the first full-year contribution
from National Grid USA together with increased contributions from Energis and
electricity transmission joint ventures. The improvement in operating profit
was partially offset by the increased losses of Intelig and other
telecommunications joint ventures and lower profit contributions from UK
transmission and UK interconnectors.
The increase in goodwill amortisation in the year ended 31 March 2001 was
mainly as a result of the NEES and EUA acquisitions.
In each of the years ended 31 March 2001, 2000 and 1999, the Group recorded
exceptional profits of (L)242.9 million, (L)1,027.3 million and
(L)891.8 million respectively which were associated with the partial disposals
of its shareholding in Energis. In 2001, the Group recorded exceptional costs
of (L)45.3 million associated with the integration of NEES and EUA and an
exceptional profit of (L)20.1 million on the disposal of its market services
businesses. In 1999, an exceptional charge of (L)52.6 million was incurred in
respect of closing out interest rate swaps.
The reduction in the net interest charge in the year ended 31 March 2000
reflected a lower average level of net debt as a result of the sale of shares
in Energis in that and the previous year. The increase in the net interest
charge in the year ended 31 March 2001 was largely attributable to the
acquisitions of NEES and EUA, which were funded out of cash balances and new
borrowings.
The effective tax rates for each of the years ended 31 March 2001, 2000 and
1999, excluding the impact of exceptional items and adjustments relating to
prior years, were 26.0 per cent., 26.0 per cent. and 26.2 per cent.
respectively. In the year ended 31 March 2001, the tax charge excluding
exceptional items includes a credit of (L)20 million arising from an
adjustment to prior years' tax.
7
The exceptional tax credit in 2001 of (L)235.4 million primarily represents
the reversal of the 2000 exceptional tax charge of (L)229.5 million relating
to the exceptional profit on the partial disposal of Energis, and arises from
the realisation of capital losses for tax purposes as a result of Group
restructurings.
1.3.2 Financial results for the six months ended 30 September 2001
Total operating profit increased by 6 per cent. to (L)384.8 million in the six
months ended 30 September 2001, resulting from the improved performance of
National Grid USA's distribution and transmission businesses and Intelig,
partly offset by expected reductions in the recovery of US stranded costs and
in contributions from interconnectors.
An exceptional charge of (L)290.4 million was taken to write down fully the
carrying value of the Group's Latin American telecommunications investments
and provide for all expected associated liabilities. In addition, the Group
recorded an exceptional profit of (L)20.1 million from the partial disposal of
its shareholding in Energis, which was partially offset by exceptional costs
of (L)17.0 million substantially relating to the reorganisation of the
business of National Grid Company.
The increase in net interest mainly reflects Intelig's vendor financing
interest charges and exchange rate impacts on Intelig's US dollar-denominated
debt. The first half of the previous financial year included a (L)17 million
benefit relating to closing out fixed interest rate swaps.
The reduction in the tax charge, excluding exceptional items, for the six
months ended 30 September 2001 reflects an adjustment to the previous period
associated with the implementation of full provisioning for deferred tax and
the release of prior year tax provisions in this period.
2. National Grid Group's businesses
2.1 Transmission in England and Wales
2.1.1 Regulatory framework
Regulatory legislation for the electricity industry in England and Wales is
set out in the Electricity Act 1989 (as amended) and the Utilities Act 2000
which regulate the licensing of electricity generation, transmission,
distribution and supply and the establishment of the Authority. The Authority
is responsible for the supervision and enforcement of the licensing regime.
The Group's principal UK operating subsidiary, National Grid Company, is the
sole holder of an electricity transmission licence for England and Wales and
is the owner and operator of the transmission system. It is required, under
the terms of the transmission licence, to develop and maintain an efficient,
co-ordinated and economical system of electricity transmission and to
facilitate competition in the supply and generation of electricity.
The transmission licence came into effect in March 1990 and, unless revoked,
will continue in force until terminated by the Authority at not less than 25
years' notice. With the principal exception of the procurement and use of
balancing services as part of the Balancing Services activity described in
section 2.1.4, National Grid Company is prohibited by the terms of the
transmission licence from purchasing or otherwise acquiring electricity on its
own account for the purpose of sale to third parties, except with the consent
of the Authority. The transmission licence requires National Grid Company to
submit to the Authority audited accounts in respect of its UK transmission
business and to procure that the transmission business does not give any
cross-subsidy to or receive any cross-subsidy from any other business of
National Grid Company or any affiliate or related undertaking of National Grid
Company. The transmission licence also provides for regulation of National
Grid Company's transmission revenue, further details of which are set out in
section 2.1.5 below.
2.1.2 National Grid Company's customers
National Grid Company's customers are:
o the generators who own and operate the generating stations at which
electricity is produced;
o the interconnector users who trade electricity across the
interconnectors with Scotland and France;
o the electricity distribution companies who transfer electricity from
the transmission network across their local distribution networks to
customers;
8
o the electricity suppliers who purchase electricity under contract from
generators and sell it to their customers; and
o directly-connected customers, who are industrial consumers of
electricity and whose premises, by reason of the size and technical
characteristics or location of their electricity demand, are directly
connected to National Grid Company's transmission network.
2.1.3 Physical assets
The transmission network in England and Wales consists of approximately 4,500
miles of overhead lines, approximately 400 miles of underground cable and some
300 substations. Almost all of the assets comprising the transmission system
operate at 400 kV or 275 kV.
National Grid Company invests in the transmission network to meet the needs of
customers and to ensure continued compliance with security standards specified
in the transmission licence. Capital expenditure on the renewal, reinforcement
and extension of the transmission network, including interest capitalised, was
(L)361.2 million in the year ended 31 March 2001, compared with (L)286.5
million in the year ended 31 March 2000 and (L)314.0 million in the year ended
31 March 1999.
2.1.4 Operation and control
Day-to-day operation and control of the transmission system involve the
continuous matching of generation output to demand for electricity, ensuring
the stability and security of the power system and the maintenance of
satisfactory voltage and frequency. These activities are undertaken from the
National Grid control centre in Berkshire, with safety management of the
transmission system being co-ordinated from the network operations centre in
the Midlands.
National Grid Company is responsible for matching generation and demand in
real time throughout the day in order to maintain the quality and security of
electricity supply. Since the new electricity trading arrangements were
introduced on 27 March 2001, National Grid Company has discharged this
obligation through its balancing service activity by procuring services, known
collectively as balancing services, from parties including generators,
suppliers and large industrial consumers of electricity. Balancing services
comprise ancillary services procured by National Grid Company under contract,
principally from generators, the acceptance by National Grid Company of bids
and offers to increase or decrease the quantities of electricity to be
delivered to or taken from the total system and electricity traded by National
Grid Company, either bilaterally or on recognised power exchanges. The
balancing services incentive scheme described below gives National Grid
Company a financial incentive to undertake this activity efficiently.
2.1.5 Transmission revenues
As transmission asset owner and system operator, National Grid Company is
responsible for the development, construction, maintenance, operation and
commercial management of the transmission network. It recovers its costs,
including a return on capital employed, through charges to generators,
distributors, suppliers and directly-connected customers for use of and
connection to the transmission system and through charges for the provision of
balancing services.
(i) Revenue-controlled charges
Revenue from transmission network use of system charges and charges for
connections made before March 1990 is controlled by a revenue restriction
condition set out in the transmission licence. The revenue restriction formula
is reviewed from time to time by the Authority, typically at intervals of four
to five years. The current revenue restriction was introduced on 1 April 2001
and is expected to remain in force until 31 March 2006. In the first year of
the current revenue restriction, permitted revenue will be determined by
reference to a pre-determined amount which is set out in the transmission
licence. From 1 April 2002, revenue will be permitted to increase each year in
line with RPI, minus an efficiency factor, X, which has been set by the
Authority at 1.5. The revenue restriction formula also contains an adjustment
mechanism that adjusts revenue by reference to the level of capital
expenditure undertaken by National Grid Company in relation to new generation
connections.
(ii) Post-1990 connection charges
National Grid Company is permitted by the transmission licence to set charges
for connections to the transmission system made since March 1990 to recover
the costs directly or indirectly incurred in providing connections, together
with a reasonable rate of return on such costs.
9
(iii) Balancing Services Use of System Charges and Balancing Services Incentive
Scheme
As system operator, National Grid Company is responsible for the operation of
the transmission system, including the procurement and use of balancing
services as described in section 2.1.4 above. Revenue from charges for
provision of balancing services is regulated by means of the balancing
services incentive scheme set out in the transmission licence. This sets
targets (which are adjusted on a monthly basis by reference to RPI) for the
external costs incurred by National Grid Company in balancing the system in
the period up to 31 March 2002. The transmission licence provides that, if
external costs are below (L)471 million in the 365 days up to 31 March 2002,
National Grid Company will retain 40 per cent. of the savings up to a maximum
potential income of (L)45 million. If external costs are more than (L)500
million, National Grid Company will bear 12 per cent. of the excess up to a
maximum potential liability of (L)15 million. The balancing services incentive
scheme replaced the previous incentive scheme, the transmission services
scheme, and was introduced on 27 March 2001. Targets have also been set for
internal costs associated with balancing the system, which are subject to the
same percentage sharing factors as for external costs.
(iv) Procurement of ancillary services
Ancillary services are included within the balancing services described in
section 2.1.4 above. Until 26 March 2001, National Grid Company was required
by the transmission licence to procure ancillary services from the most
economical sources available to it and was able to pass through the costs of
procuring ancillary services, together with a small profit margin, to
participants in the electricity market. Since 27 March 2001, National Grid
Company has been able to recover the costs incurred in procuring ancillary
services as part of its balancing services activity.
(v) Other transmission revenue
National Grid Company also undertakes maintenance work for generators and
distributors. Charges for these services are unregulated.
(vi)Financial summary
UK transmission turnover and operating profit for the three years ended 31
March 2001 were as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March
------------------------------------------------
2001 2000 1999
Source of revenue (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Revenue-controlled charges(1) 849.3 873.6 836.8
Post-1990 connection charges(2) 77.9 76.1 74.7
Transmission Services Scheme(3) 236.4 239.9 265.0
Balancing Services Use of System Charges(4) 13.2 -- --
Ancillary services(5) 120.2 111.9 116.6
Other transmission revenue(6) 18.6 18.2 17.0
------------- ------------- -------------
Total turnover 1,315.6 1,319.7 1,310.1
============= ============= =============
Operating profit 486.3 523.1 508.1
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Regulated by RPI minus X formula.
(2) Limited to reasonable rate of return.
(3) Pre-determined cost target with incentives/penalties.
(4) Pre-determined cost target with incentives/penalties.
(5) Cost recovery plus small profit margin.
(6) Unregulated.
2.2 UK interconnectors
The Group has ownership interests in interconnectors with France and Scotland.
Arrangements for the auctioning of the capacity of the French interconnector
are described below. National Grid Company is required to set its charges for
use of the Scottish interconnector to recover no more than a reasonable rate
of return on the capital represented by the interconnector.
10
Operating profit from UK interconnectors in the year ended 31 March 2001 was
(L)42.8 million (2000: (L)46.6 million, 1999: (L)39.5 million).
2.2.1 France
The interconnector with France has a nominal transfer capability of 2,000 MW
in either direction and consists of four pairs of submarine cables, together
with land-based equipment on either side of the English Channel. National Grid
Company owns two pairs of cables and the land-based equipment on the English
side, the remaining assets being owned by RTE, the transmission division of
Electricite de France (E.D.F.), Service National ("EDF").
Until 31 March 2001, National Grid Company charged EDF for the use of the
interconnector assets owned by National Grid Company. At the request of the
Authority, new contractual arrangements were introduced on 1 April 2001 which
provide for the auctioning to third parties of blocks of interconnector
capacity on timescales ranging from three years to one day. Auctions of three-
year and one-year blocks representing approximately half of the total capacity
of the interconnector have been completed. An auction for 500 MW capacity from
October to December 2001 has also been held and the remaining capacity is
being offered in daily auctions. The Directors believe that National Grid
Company's income from this activity in the year ending 31 March 2002 will be
significantly lower than in previous years.
2.2.2 Scotland
National Grid Company's transmission network is interconnected with that of
Scottish Power plc, which in turn is interconnected with that of Scottish and
Southern Energy plc. National Grid Company owns the interconnector assets up
to the national boundary between England and Scotland. The full transfer
capability of the National Grid Company's interconnector assets is currently
made available under contract to Scottish Power plc and Scottish and Southern
Energy plc, which pay charges to National Grid Company for use of its assets
based on the availability of the interconnector. The Authority is examining
arrangements for access to and charging for use of the Scottish interconnector
as part of its proposals for reform of the Scottish electricity market.
The interconnector currently has a nominal transfer capability of 1,600 MW,
but this is often limited by system conditions to lower levels. Under the
terms of an agreement with Scottish Power plc and Scottish and Southern Energy
plc, work is in progress to increase the capability of the interconnector to
2,200 MW. Full availability of this increased capability awaits completion of
a new transmission line in North Yorkshire.
2.2.3 Interconnectors business development
The Group's strategy is to extract value from its interconnector skills by
designing, building and operating new interconnectors where there is potential
for trading between electricity markets. The Group is currently investigating
the potential for new interconnectors between England and Norway, between
England and the Netherlands and between Wales and the Republic of Ireland. The
Group's involvement in the Basslink interconnector project in Australia is
described in section 2.4.3 below.
2.3 United States
2.3.1 Background
The Group acquired NEES, now renamed National Grid USA, in March 2000 at a
cost of approximately (L)2.1 billion. National Grid USA acquired EUA in April
2000 at a cost of approximately (L)0.4 billion. The companies were integrated
on 1 May 2000.
National Grid USA operates a network of approximately 3,000 miles of
transmission lines and 31,000 miles of distribution lines in Massachusetts,
Rhode Island and New Hampshire. Its subsidiary company, NEP, is responsible
for the operation of the transmission network and delivery of electricity in
bulk to National Grid USA's four electricity distribution companies.
National Grid USA has minority interests in two operating nuclear generating
units, which it is in the process of divesting, and in three nuclear
generating units which are permanently shut down. It also has a
telecommunications subsidiary, NEESCom, further information on which is given
in section 2.5.4 below.
2.3.2 Financial summary
The table below shows total operating profit before exceptional costs and
goodwill amortisation of National Grid USA for the year ended 31 March 2001.
11
-----------------------------------------------------------------------------------------------------------------------------
Year ended
Operating profit before exceptional costs and goodwill amortisation 31 March 2001
(L)m
-----------------------------------------------------------------------------------------------------------------------------
Transmission 49.6
Distribution 154.8
Stranded costs recovery and generation 61.7
Nuclear generation joint ventures 7.9
US-Canada interconnector 22.3
NEESCom 2.9
Other (5.6)
----------------
293.6
================
-----------------------------------------------------------------------------------------------------------------------------
The acquisition of NEES was completed on 22 March 2000. As a result of the
short period of ownership in the year ended 31 March 2000, the contribution of
National Grid USA, the successor to NEES, to the Group's operating profit for
that year was not material.
2.3.3 Operating environment
(i) Electricity industry restructuring
The electricity industries in Massachusetts, Rhode Island and New Hampshire
have been restructured to promote competition in the electricity market and to
give customers a choice of electricity supplier.
Prior to this industry restructuring, the electricity distribution companies
now forming part of National Grid USA supplied electricity to all retail
customers in their respective service territories and purchased all of their
electricity requirements from NEP. Since the restructuring, National Grid USA
has opened its retail markets to competition and has sold, or is in the
process of selling, its generating capacity.
Under the regulatory settlements associated with restructuring, NEP is
permitted to recover the costs associated with investment in generating
capacity, including investments in nuclear generation and related
decommissioning contributions, and contractual commitments which were not
recovered from the sale of its generating capacity. NEP recovers these costs,
which are known as stranded costs, from its wholesale customers, including the
electricity distribution companies, through contract termination charges. The
electricity distribution companies are permitted in turn to recover these
costs through delivery charges to all retail customers.
(ii) Standard offer and default obligations
As part of the electricity industry restructuring arrangements, National Grid
USA's electricity distribution companies are required to make electricity
supply available to certain customers in their respective service territories
under transitional arrangements known generally as standard offer service.
Standard offer service is available to customers who have chosen not to select
an alternative supplier. In the year ended 31 March 2001, approximately 80 per
cent. of electricity delivered by National Grid USA's electricity distribution
companies was on standard offer terms. Almost all of the electricity required
to supply standard offer customers is purchased by National Grid USA under
contracts whose terms substantially match the duration of the requirement to
provide standard offer service.
The electricity distribution companies are also obliged to make a default
service available to customers who are not eligible for standard offer service
and have not obtained electricity supply from an alternative supplier. In
Massachusetts, default service is also available to new customers, defined as
customers who started taking service from 1 March 1998. National Grid USA
purchases electricity under wholesale contracts to meet the requirements of
default service customers.
(iii) Wholesale energy prices
From mid-2000 to mid-2001, utilities in the US faced significantly higher
costs of purchasing electricity as a result of underlying increases in
wholesale oil and gas prices. These increases, exacerbated by the inability of
local generating companies to meet electricity demand, contributed to an
electricity crisis in California.
12
National Grid USA's regulatory settlements enable the electricity distribution
companies to adjust their rates to reflect the costs of purchasing electricity
to meet the transitional supply obligations described in section 2.3.3(ii)
above. The electricity distribution companies were permitted by their
respective regulators to increase their rates to re-align revenues with the
costs of purchasing electricity and as a result, and despite increases in the
costs of purchasing electricity to meet its standard offer and default
obligations, National Grid USA did not experience the difficulties which
affected electricity utilities in California. In the second half of 2001,
wholesale oil and gas prices have fallen and the electricity distribution
companies have proposed or implemented rate reductions.
2.3.4 Distribution
National Grid USA has four electricity distribution companies which are:
o Massachusetts Electric, which serves approximately 1.2 million
customers in Massachusetts;
o Narragansett Electric, which serves approximately 460,000 customers in
Rhode Island;
o Granite State Electric, which serves approximately 38,000 customers in
New Hampshire; and
o Nantucket Electric, which serves approximately 11,000 customers on
Nantucket Island, off the coast of Massachusetts.
National Grid USA's electricity distribution companies have entered into
agreements approved by their respective regulators which provide for rate
reductions for electricity delivery and (with the exception of Granite State
Electric) other provisions to ensure that service quality is maintained or
improved.
(i) Massachusetts Electric
Under the Massachusetts Electric distribution rate plan approved by the MDTE,
distribution rates were reduced by $10 million on 1 May 2000 and will remain
frozen until the end of February 2005. From March 2005 to the end of December
2009, distribution rates will be indexed to the average of distribution rates
of similarly unbundled investor-owned utilities in New England, New York, New
Jersey and Pennsylvania. Massachusetts Electric has agreed that increases in
its distribution rates will initially be capped at 90 per cent. of the
regional average. Based on a pre-determined formula, annual merger-related
savings achieved up to the end of 2009 will be calculated and shared equitably
between customers and Massachusetts Electric from January 2010 until May 2020.
The rate plan also includes a service quality plan designed to encourage good
performance in areas including reliability and customer satisfaction. Under
Massachusetts Electric's current service quality plan, incentives of up to
$15 million for above-average performance and penalties of up to $12 million
for below-average performance have been possible. However, in June 2001 the
MDTE required gas and electricity utilities in Massachusetts to file new
service quality plans in compliance with their revised guidelines. The revised
guidelines include revenue penalties for service quality below certain pre-
determined benchmarks. However, the utilities may earn penalty offsets for
performance above the service quality benchmarks on the basis that these may
only be used to reduce any revenue penalties incurred in the same year.
Massachusetts Electric proposed revisions to its rate agreement which mirror
the MDTE's guidelines but retain the provision for incentives. The matter is
pending before the MDTE.
(ii) Narragansett Electric
Under the rate plan for Narragansett Electric approved by the RIPUC,
distribution rates were reduced by approximately $13 million on 1 May 2000 and
will remain frozen until 31 December 2004. During the rate freeze,
Narragansett is permitted to retain earnings up to 12 per cent. return on
equity. Any earnings between 12 per cent. and 13 per cent. will be shared
equally with customers. If earnings exceed 13 per cent., the excess will be
divided between customers and the company, with customers receiving 75 per
cent.
From 1 January 2005, distribution rates will be set by the RIPUC in accordance
with Narragansett's cost of service. Until the end of 2019 the company will be
able to include in its cost of service half of any proven savings achieved
since the merger of two former EUA distribution companies into Narragansett.
Narragansett will file evidence of the merger savings with the RIPUC in either
2002 or 2003, at the company's option, and these savings will be subject to
further verification in 2007.
The Narragansett rate plan includes service quality provisions including
penalties of up to $2.4 million in any year for poor performance.
13
(iii) Granite State Electric and Nantucket Electric
The current rates for Granite State Electric are subject to regulation by the
New Hampshire Public Utilities Commission and became effective in July 1998.
Nantucket Electric's distribution rates are linked to Massachusett's
Electric's rates and became effective on 1 May 2000.
2.3.5 Transmission
(i) Current arrangements
NEP operates and maintains National Grid USA's transmission network and
receives transmission revenues under local and regional transmission tariffs.
Transmission rates are regulated by the FERC and enable NEP to recover its
costs of providing transmission services, including a return on capital
employed.
NEP participates in the NEPOOL, which co-ordinates the operation of its
members' generation and transmission facilities. The despatch of generation
across New England is carried out by an independent system operator, ISO New
England, Inc.
(ii) Market reform and future developments
The FERC's objective is to create a seamless, national competitive wholesale
electricity market supported by adequate generation and transmission
infrastructure. To this end, it is encouraging electricity utilities to
separate their market activities from the ownership, operation or control of
transmission assets. In its Order 2000, the FERC required electricity
utilities to file proposals for transferring the management of such assets to
RTOs.
National Grid USA, ISO New England, Inc. and other transmission owners in New
England filed a joint proposal for a New England RTO with the FERC in January
2001. The FERC subsequently concluded that it would be desirable to promote
the formation of a single RTO for the entire north-eastern region and
initiated a mediation process involving National Grid USA, Niagara Mohawk and
a large number of electricity utilities in the region. An outline business
plan for a north-eastern RTO was filed with the FERC in September 2001. The
matter is still pending before the FERC.
The Group believes that the FERC's wish to promote the development of RTOs may
offer opportunities outside the north-east. In November 2001, National Grid
USA announced that it had entered into an agreement with the proposed Alliance
RTO. Under the agreement, National Grid USA would become the managing member
of an independent transmission company that would manage the transmission
networks of the Alliance RTO's members, who operate in 11 states stretching
from Missouri to Virginia. Both the formation of the Alliance RTO and National
Grid USA's participation as managing member are subject to approval by the
FERC.
2.3.6 US - Canada interconnector
The electricity networks in New England are interconnected with that of Hydro
Quebec in Canada through an interconnector which has a nominal transfer
capability of 2,000 MW. National Grid USA has ownership interests in the
interconnector and derives revenues from providing rights of use to third
parties.
2.3.7 Generation
NEP has historically had ownership interests in six nuclear generating units
in New England, of which three have been permanently shut down. These are
Yankee Atomic (in which it owns 34.5 per cent.), Maine Yankee (in which it
owns 24 per cent.) and Connecticut Yankee (in which it owns 19.5 per cent.).
Of the three units that are still in operation, NEP's interest in Millstone 3
has been sold and its interests in the remaining units, Vermont Yankee (in
which it owns 22.5 per cent.) and Seabrook (in which it owns 10 per cent.) are
in the process of being sold.
NEP's 16.2 per cent. interest in Millstone 3 was sold to Dominion Resources,
Inc. on 31 March 2001. National Grid USA received net proceeds of $27.9
million and paid $5.8 million into the decommissioning trust fund for the
unit. In addition, Dominion Resources, Inc. assumed responsibility for
decommissioning the unit.
Vermont Yankee Nuclear Power Corporation, the operator of the unit, announced
on 15 August 2001 that it had agreed to sell Vermont Yankee, including NEP's
interest, to Entergy Corporation for $180 million. The agreement also provides
for the transfer of associated decommissioning obligations to Entergy
Corporation. The sale is subject to the approval of the Public Service Board
of Vermont, the US Nuclear Regulatory Commission, the FERC and other
regulatory authorities.
14
The auction process for Seabrook, including NEP's interest, is being conducted
by a sale agent appointed by utility regulators in Connecticut and New
Hampshire. The process commenced in December 2001 and is expected to be
completed by the end of 2002.
For each nuclear generating unit in which it retains an interest, National
Grid USA is liable for funding its pro rata share of costs, including the
estimated costs of decommissioning. A decommissioning trust fund has been
established by the operator of each unit, to which National Grid USA is
contributing its pro rata share of the estimated costs of decommissioning.
As set out in section 2.3.3(i), National Grid USA is able to recover the costs
associated with its investment in nuclear generation, including
decommissioning contributions, through contract termination charges. Net
proceeds from sales of nuclear generating units have been and will be credited
against future contract termination charges.
2.4 Other electricity businesses and projects
2.4.1 Transener and Transba
The Group has a 42.5 per cent. interest in Citelec, which in turn has a 65 per
cent. holding in Transener, which has an exclusive concession to operate the
principal transmission system in Argentina. This concession is for an initial
period of 15 years starting in 1992, with a right to re-tender thereafter for
further ten-year periods up to a maximum of 95 years. In 1997, Transener
acquired a majority interest in Transba, the transmission company for the
province of Buenos Aires.
2.4.2 CEC
The Group has a 38.5 per cent. interest in CEC which owns and operates an
electricity transmission network of some 500 miles supplying electricity to
the mines of the Zambian Copperbelt. The privatisation of the copper mines was
completed in March 2000 and CEC has benefited from increased demand for
electricity due to increased mining activity.
2.4.3 Basslink
In February 2000, the Group was selected by the Basslink Development Board to
design, construct, operate and maintain the Basslink, a 600 MW interconnector
linking the electricity network on the island of Tasmania to the transmission
network in the state of Victoria on the Australian mainland. The Group has
applied for approval for the construction of the interconnector. The Group's
total investment in the project is estimated to be (L)200 million.
2.4.4 Financial summary
The Group's share of the operating profit of its electricity joint ventures in
Argentina and Zambia for the three years ended 31 March 2001 was as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March
--------------------------------------------------------
2001 2000 1999
Group's share of operating profit (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Argentina (Transener and Transba) 14.3 10.4 8.5
Zambia (CEC) 4.3 4.0 4.1
-----------------------------------------------------------------------------------------------------------------------------------
2.5 Telecommunications businesses
2.5.1 Energis
The Group's involvement in telecommunications activities began in 1993 with
the establishment of Energis. Energis is focused on the business marketplace,
offering advanced fixed and mobile services, data networks and internet and e-
commerce services. Its principal countries of operation are the UK, Germany,
the Netherlands, Switzerland, Ireland and Poland. Energis' network is more
than 20,000 kilometres long, connects to eight data centres across Europe and
provides services in 11 European countries and the US.
Energis remained a wholly-owned subsidiary of the Group until December 1997,
when it was listed on the London Stock Exchange and NASDAQ. At that time,
Energis also issued 75 million new ordinary shares, reducing the Group's
interest in the total share capital of Energis to just under 75 per cent.
Subsequent strategic disposals, together with the dilutive effect of issues of
new shares by Energis, have reduced the Group's
15
economic interest in Energis to its current level of 32.6 per cent. This
interest is valued at (L)427.4 million, based on a price of 75.5 pence per
Energis share (being the Closing Price of an Energis share on 7 December 2001,
the latest practicable date prior to the publication of this document). While
the Group retains two seats on the Energis board of directors, it is no longer
involved in the day-to-day management of the business. The Group intends to
dispose of its remaining interest in Energis over the medium term, having
regard to prevailing market conditions.
The Group's net cash investment in Energis up to its listing in December 1997
was (L)0.5 billion and the Group has since extracted cash totalling (L)2.2
billion from disposals of shares in Energis and repayment of loans. In the
year ended 31 March 2001, the Group's share of Energis' operating profit/
(loss) before amortisation of goodwill was (L)5.1 million (2000:
(L)1.3 million; 1999: (L)(9.6) million).
2.5.2 Energis Polska
The Group has an interest of 48.75 per cent. in Energis Polska, a joint
venture company in which its partners are Energis, PKP and P.T Centrala Sp.
zo.o.
Energis Polska targets the corporate market in Poland with a range of data and
voice services using a network based largely on existing optical fibre leased
from PKP, connecting major cities across Poland and interconnecting with
Energis' European network. Energis Polska's internet data centre in Warsaw was
opened in June 2001, when Energis Polska also announced that it had signed its
first customers.
2.5.3 Latin American businesses
The Group has interests in three Latin American telecommunications businesses.
In Brazil, the Group has a 50 per cent. interest in JVCO, the ultimate parent
undertaking of Intelig, which provides long-distance and international
telephone and data services. The Group's partners in the joint venture are
Sprint and France Telecom, each of which has an interest of 25 per cent.
In Chile, the Group has a 30 per cent. interest in Manquehue net, which
provides local telephone services in Santiago and also offers long-distance
telephone, internet and cable TV services. The other partners in Manquehue net
are Williams Communications Group Inc., Metrogas S.A., Inversiones El Roble
Limitada and Xycom Development Chile S.A.
In Argentina, the Group has a 50 per cent. interest in Silica Networks which
has been developing a broadband communications loop linking Buenos Aires in
Argentina to Santiago in Chile and connecting major cities along the route.
The Group's joint venture partners are Manquehue net and Williams
Communications Group Inc. which own 30.1 per cent. and 19.9 per cent.
respectively.
Against the backdrop of the general downturn in the telecommunications sector
and recent difficult economic conditions in the region, the Group announced a
strategic review of its Latin American telecommunications investments on
4 October 2001. The results of this review were announced by the Group on
20 November 2001 and included:
o the appointment of an adviser to seek new strategic investors in
Intelig, on behalf of all of the existing shareholders, as long-term
vendor financing could not be secured;
o action by the shareholders of Silica Networks to cut costs, suspend
further investment in the business and seek a purchaser for it; and
o a cost reduction programme at Manquehue net.
In the light of this review, the Group decided to make an exceptional charge
of (L)290.4 million in its interim results for the six months ended
30 September 2001 relating to the three Latin American telecommunications
businesses. The exceptional charge comprised a full write-down of the Group's
(L)169.7 million carrying value, as at 30 September 2001, for these businesses
and provision of (L)120.7 million for all expected associated liabilities.
2.5.4 NEESCom
National Grid USA's subsidiary company NEESCom builds fibre optic networks and
leases capacity to telecommunications service providers. The network links
sites in Massachussets, Rhode Island and New Hampshire and has recently been
extended to Albany in New York State.
16
2.5.5 GridCom
GridCom was established in February 2001 to enable the Group to take advantage
of infrastructure opportunities in the UK mobile telecommunications market. It
brings together the Group's expertise in network installation and maintenance
and the exploitation of National Grid Company's transmission towers.
GridCom has recently entered into a contract with Hutchison 3G UK Limited
under which it will provide at least 1,000 mobile telephone base stations,
thereby substantially expanding the Group's position in the UK mobile
telecommunications infrastructure market.
3. Environment
The Group is subject to environmental laws and regulations and recognises that
the minimisation of environmental impact is an essential part of its business.
Where practicable, it implements environmental management systems which are
externally verified, certified and audited in accordance with the
international ISO 14001 environmental system standard and carries out audits
of its environmental policies, procedures, operating practices and assets.
3.1 Prevention of water pollution
Transformers and underground cables contain oil which may, in exceptional
circumstances, pose a risk to the environment and in particular to adjacent
surface waters or groundwaters. In the UK, the Group is upgrading containment
systems and installing new oil/water separators at substations and
refurbishing cable joint bays in sensitive areas to reduce the risk of
leakage. A programme of spill containment, control and countermeasures at over
300 US substations has been completed and oil release contingency plans for
cables have been put in place.
3.2 Site assessment and remediation
In the UK, the Group has completed land contamination surveys at over 80 of
those substations considered to have the potential to be contaminated oil from
past activities. At 20 of these sites, potential risks to the environment have
been identified and a programme to establish the full extent of remediation
work required started in April 2001.
In the US, National Grid USA is aware of about 50 manufactured gas sites,
mainly in Massachusetts, associated with past activities of predecessor
companies of National Grid USA, which until the early 1970s was a combined
electricity and gas utility. National Grid USA has reported the existence of
all manufactured gas sites of which it is aware to state environmental
regulatory agencies and is engaged in various stages of investigation and
remediation at approximately 30 sites. In Massachusetts, a regulatory
agreement provides for recovery from customers of the remediation costs of
former manufactured gas sites and certain other hazardous waste sites. In
Rhode Island, a regulatory agreement provides for the recovery from customers
of the remediation costs of former manufactured gas plants incurred during the
rate freeze period.
3.3 Electric and magnetic fields
The Group recognises that the public has concerns about the possible health
effects of the electric and magnetic fields that arise from, amongst other
sources, the transmission, distribution and use of electricity. Research into
this issue has been in progress across the world for many years, including
independent research for which the Group provides financial support.
The European Council of Ministers has adopted a recommendation on the
limitation of exposure of the general public to electric and magnetic fields,
based on guidelines issued by the International Commission on Non-Ionising
Radiation Protection. The recommendation, which contains certain
qualifications, is addressed to the governments of EU member states rather
than to individual companies. The UK Government is considering how the
qualifications should be interpreted and how, if at all, the recommendation
should be adopted in the UK.
In the UK, National Grid Company carries out its operations in line with
guidance issued by the National Radiological Protection Board, an independent
statutory body, which has stated that it is considering the implications of
the recommendation of the European Council of Ministers.
In the US, National Grid USA keeps the subject of EMFs under review.
4. Occupational health and safety
The Group recognises the importance of occupational health and safety
management and seeks to manage risk effectively in order to ensure that its
activities, services and products do not harm employees, contractors,
customers or members of the public. In 2001, the Group appointed independent
external consultants who have
17
carried out a comprehensive assessment of its safety performance and
procedures in the UK and the US. The Group is now in the process of
implementing recommendations arising from this assessment.
5. Corporate governance and internal control
National Grid maintains its own code of corporate governance modelled on the
Combined Code of Corporate Governance appended to the Listing Rules. As
recommended by the Combined Code, the Board has established an Audit
Committee, a Remuneration Committee and a Nominations Committee.
The Audit Committee consists of four Non-executive Directors and is
responsible for considering the annual accounts and interim statements and for
discussing with the external auditors issues arising from their audit. It
reviews the scope and extent of the internal and external audit work plans and
internal control processes and considers, on behalf of the Board, the
effectiveness of the Group's system of internal control.
The Remuneration Committee consists of three Non-executive Directors and is
responsible for determining all aspects of Executive Directors' compensation,
drawing on advice from independent external remuneration consultants and
internal advisers.
The Nominations Committee consists of the Chairman, the Group Chief Executive
and two Non-executive Directors. It is responsible for considering and
recommending the reappointment of existing Directors, for identifying and
selecting potential new Directors and for proposing to the Board the
appointment of new Directors.
6. Employees
The average numbers of employees of the Group in the three years ended 31
March 2001 were as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Europe 3,662 3,651 3,606
North America 3,836 140 6
Latin America 17 13 10
Rest of the World 8 6 6
---------------- ---------------- ----------------
7,523 3,810 3,628
================ ================ ================
-----------------------------------------------------------------------------------------------------------------------------------
The vast majority of employees in Europe are either directly or indirectly
employed in the transmission of electricity in the UK. The vast majority of
employees in North America are either directly or indirectly employed in the
transmission and distribution of electricity in the US.
7. Acquisition of Niagara Mohawk
7.1 Terms and expected timetable for the Acquisition
On 5 September 2000, National Grid announced that it had entered into an
agreement to acquire Niagara Mohawk. The Acquisition was approved by Niagara
Mohawk Shareholders on 19 January 2001 and by National Grid Shareholders on 29
January 2001. The Acquisition is subject to a number of conditions, including
regulatory and other consents and approvals in the US, the majority of which
have been received. The only material regulatory approval outstanding is that
of the SEC. The Acquisition is expected to complete in early 2002.
Under the terms of the Merger Agreement, Niagara Mohawk Shareholders will
receive consideration of $19.00 per Niagara Mohawk Share, subject to
adjustment. This adjustment will be made by reference to the closing price of
a National Grid Share and the prevailing (L):$ exchange rate on 20 trading
days selected at random from 40 consecutive trading days ending on the tenth
trading day prior to the deadline for Niagara Mohawk Shareholders to make the
election described below. At the date of its announcement, the terms of the
Acquisition valued the equity of Niagara Mohawk at approximately $3.0 billion
and the enterprise value of Niagara Mohawk at approximately $8.9 billion.
Under the Merger Agreement, Niagara Mohawk Shareholders will be able to elect
to receive their consideration in cash, New National Grid ADSs or a
combination thereof, with the aggregate cash consideration offered to all
Niagara Mohawk Shareholders being $1.015 billion. However, if cash elections
received from all Niagara Mohawk Shareholders exceed $1.015 billion, National
Grid may, at its sole discretion, reduce the total number of
18
New National Grid ADSs to be issued and increase the cash component of the
consideration. On 20 November 2001, National Grid announced that it will
increase the aggregate cash portion of the price paid to 50 per cent.,
assuming receipt of sufficient cash elections.
7.2 Niagara Mohawk's activities
The principal activities of Niagara Mohawk are the delivery of electricity and
natural gas in New York State. Its electricity customer base, at more than 1.5
million customers, is similar in size to that of National Grid USA. It also
has over 0.5 million retail gas customers in the residential and business
sectors and offers transportation of gas purchased by customers directly from
suppliers.
Niagara Mohawk's electricity system is interconnected with that of National
Grid USA and consists of over 9,000 miles of transmission lines and 41,000
miles of distribution lines.
7.3 Niagara Mohawk's regulatory framework
As in New England, regulatory initiatives in New York State have encouraged
the separation of electricity generation, transmission and distribution in
order to promote competition and reduce prices to customers. A restructuring
plan approved by Niagara's Mohawk's regulator, the NYPSC, and introduced in
1998 required that all customers should be allowed to choose their electricity
supplier by the end of 1999 and provided for reductions in residential,
commercial and industrial rates. Niagara Mohawk was permitted to recover the
stranded costs associated with its restructuring, including costs arising from
the divestiture of generation assets at less than book value, and with the
buy-out of some of its contractual commitments to purchase electricity at
over-market prices from independent power producers. Since September 2001, the
restructuring plan has permitted Niagara Mohawk to pass through to customers
the full commodity cost of power.
The restructuring plan also included a gas rate agreement with the NYPSC which
provides for a freeze on gas delivery rates until the end of August 2003, but
permits Niagara Mohawk to pass through to customers gas commodity and
transportation costs. Niagara Mohawk is able to earn a threshold return on
equity of 10 per cent., or up to 12 per cent. if certain customer migration
and customer awareness targets are achieved, and is required to share with
customers earnings above this threshold.
As part of the regulatory approval process for the Acquisition, a ten-year
rate plan was approved by the NYPSC on 28 November 2001. Under the terms of
the plan, the existing freeze on gas delivery rates will continue until the
end of 2004. Electricity delivery rates will be reduced by $152 million and
will then be subject to only limited adjustments for a period of ten years.
However, the Group's ability to adjust rates to reflect changes in the
forecast commodity prices of oil and gas will continue. The balance of
stranded costs recoverable in the future has been reduced by the write-off of
$123 million associated with the Nine Mile Point nuclear power plants
discussed in section 7.4 below and will be further reduced by approximately
$850 million pursuant to their disposal. The Group will be permitted to earn a
return on its remaining stranded costs. Under the plan, the Group will be
allowed to earn a return on equity of up to 11.75 per cent. or 12.0 per cent.
if certain customer education targets are met. Returns above this level up to
14.0 per cent. will be shared equally between customers and the Group. If
returns exceed 14.0 per cent. but are below 16.0 per cent., customers will
receive 75 per cent. of the excess with the Group receiving the balance.
Should returns exceed 16.0 per cent, customers will receive 90 per cent. of
the excess with the balance being retained by the Group.
7.4 Disposal of nuclear generating units and energy marketing business
On 7 November 2001, Niagara Mohawk announced that it had sold Nine Mile Point
Nuclear Power Station No. 1 and its 41 per cent. interest in Nine Mile Point
Nuclear Power Station No. 2 to a subsidiary of Constellation Energy Group,
Inc. for a total of $603 million, comprising $271 million paid in cash at
closing and $332 million in principal and interest payable over five years.
Under the terms of the NYPSC's approval of the sale, Niagara Mohawk's
regulatory rate base will be reduced by the full amount of the principal but
not by the interest payable.
On completion of the sale, Niagara Mohawk transferred to the buyer its
existing decommissioning funds. The buyer has assumed responsibility for all
future decommissioning costs and Niagara Mohawk has no further obligation to
pay decommissioning costs. Niagara Mohawk will purchase electricity from the
buyer of the units at fixed prices for approximately 10 years.
In November 2001, Niagara Mohawk sold Niagara Mohawk Energy Marketing, Inc.,
its unregulated energy marketing business to Select Energy, Inc. for
approximately $38.5 million.
19
7.5 Expected benefits of the Acquisition
The Acquisition will more than double the size of the Group's operations in
the US, consolidate its position in the north-east and offer the potential for
integration and efficiency savings. Following completion of the Acquisition
approximately 60 per cent. of the Group's total operating profits (before
exceptional items and goodwill amortisation) are expected to be derived from
the US, where National Grid has the opportunity to achieve higher returns on
investment in regulated electricity businesses than in the UK. The Directors
believe that the Acquisition will create value for shareholders through
improved financial performance, particularly in the core transmission and
distribution businesses.
Integration planning for the Acquisition is well advanced and the Directors
expect to meet the cost reduction target in the rate plan by the fourth year
following Completion and to achieve half the savings by 31 March 2003. The
Directors believe that, as a result, the Acquisition will enhance earnings per
share before exceptional items and after goodwill amortisation in the first
full financial year after Completion and that the Group will achieve its
additional objective of earning a nominal pre-tax return of 10.5 per cent. on
its expanded US business by 31 March 2005.
8. Current trading and prospects
8.1 Current trading
On 20 November 2001, the Group announced its interim results for the six
months ended 30 September 2001.
The Directors believe that the results of the Group's core electricity
businesses demonstrate that it continues to perform well and to deliver on the
Group's strategy by producing good growth in operating profit and strong cash
flows. The Group recently completed a review of its Latin American
telecommunications businesses. The performance of these businesses has been
affected by the general telecommunications market downturn, the difficult
economic conditions in the region and, in the case of Intelig, by the
unavailability of long-term vendor financing. As a result, the Group announced
that it, together with its partners, had initiated a search for new strategic
investors in Intelig, was pursuing a sale of Silica Networks and taking action
to reduce costs at Manquehue net. The Group also announced that it had written
down in full the carrying value of its Latin American telecommunications
investments and provided for all expected associated liabilities. These write-
downs and provisions totalled (L)290.4 million.
In line with its stated dividend policy, National Grid announced an interim
dividend for the year ended 31 March 2002 of 6.46 pence per National Grid
Share, representing a 5 per cent. real increase over the previous year.
The Group continues to perform well and there has been no significant change
in its financial or trading position since 30 September 2001.
8.2 Prospects
8.2.1 Electricity - UK
Although the Directors expect UK transmission to continue to make a
significant contribution to total operating profit, the scope for growth is
limited. The revenue restriction introduced on 1 April 2001 gives UK
transmission a stable framework for five years but involves challenging
targets for efficiency improvements and reductions in controlled costs of the
transmission operator activity. The Directors are confident that the Group can
reduce these controllable costs by 20 per cent. over the five years to March
2006, exceeding regulatory targets, through measures including organisational
streamlining, the rationalisation of property holdings and the use of new
technology.
8.2.2 Electricity - US
The Group has been able to secure a substantial degree of regulatory certainty
in the US, where it has the opportunity to earn higher rates of return on
investment in regulated electricity businesses than in the UK. The Directors
consider that the financial contribution of the US business will be an
important factor in the Group's ability to grow earnings in order to meet its
progressive dividend policy. The Group's expansion in the US is likely to be
achieved through acquisitions and in the longer term by capitalising on
transmission opportunities arising from electricity market reform.
The Group's target is to achieve a return on investment from its enlarged US
business of 10.5 per cent. by 2005. This will be achieved through reductions
in controllable costs and modest volume growth.
20
8.2.3 Telecommunications
The skills in network design, construction and maintenance derived from the
core electricity business form the basis of the Group's telecommunications
investments to date. The Directors believe that the telecommunications sector
continues to offer opportunities to create shareholder value. However, going
forward, the Directors intend to concentrate on opportunities which leverage
the Group's existing assets and infrastructure skills.
8.3 Dividend policy
It is National Grid's practice to pay dividends twice a year. The interim
dividend is paid to qualifying shareholders in January of each year. Subject
to shareholder approval, the final dividend is paid to qualifying shareholders
in August each year.
On 21 November 2000, the Directors announced their aim to increase dividends
per share (as expressed in pounds Sterling) by 5 per cent. in real terms in
each of the next five years, based on their confidence in the Group's future
strength and because the prospects for growth and greater diversity of
earnings had increased. Following the Scheme becoming effective, New National
Grid intends to adopt the Group's stated dividend policy.
21
PART II
SCHEME OF ARRANGEMENT
1. Introduction
On 5 September 2000, National Grid announced that it had signed a merger
agreement under which National Grid would acquire Niagara Mohawk through the
introduction of a new holding company for the Group, New National Grid, by
means of a scheme of arrangement under section 425 of the Act. The Acquisition
was approved by Niagara Mohawk Shareholders on 19 January 2001 and by National
Grid Shareholders on 29 January 2001.
Implementation of the Scheme requires the approval of National Grid
Shareholders at the Court Meeting and a special resolution to be passed at the
Scheme EGM. Once National Grid Shareholders have approved the Scheme at the
Court Meeting and the Scheme EGM, the Scheme must be sanctioned by the Court.
The effect of the Court's sanction of the Scheme is that, when the Court Order
is delivered to the Registrar of Companies and registered by him, all National
Grid Shareholders are bound by the terms of the Scheme. The Special
Shareholder has already consented to the Scheme and New National Grid has
given its consent to the Scheme and a written undertaking to be bound by the
terms of the Scheme.
It is expected that the Scheme Effective Date will be in early 2002.
Immediately upon the Scheme becoming effective, New National Grid will change
its name to National Grid Group plc and National Grid Group plc will be
renamed National Grid Holdings One plc. It is expected that trading in the New
National Grid Shares and the New National Grid ADSs arising from the Scheme
will commence on the Scheme Effective Date.
Further explanation of the Court Meeting and the Scheme EGM is given in the
Scheme Circular.
2. Reasons for the Scheme
The terms of the Acquisition allow Niagara Mohawk Shareholders to elect to
receive cash, New National Grid ADSs, or a mixture of both, in exchange for
their Niagara Mohawk Shares. Under US tax legislation, Niagara Mohawk
shareholders would normally be liable to US tax in respect of the cash they
receive. In addition, depending on their circumstances, they may be liable to
US tax in respect of ADSs received because the cash portion of the purchase
price will exceed, in aggregate, 20 per cent. of the total purchase price.
At the time the Acquisition was announced, National Grid agreed to pay
approximately one-third in aggregate of the purchase price in cash and
reserved the right to increase the aggregate cash portion of the purchase
price if cash elections were received in excess of this amount. On 20 November
2001, National Grid announced that it will increase the aggregate cash portion
of the price paid to 50 per cent., assuming receipt of sufficient cash
elections. Any increase in the aggregate cash portion of the purchase price
will not affect the total purchase price paid to Niagara Mohawk Shareholders.
The Scheme allows National Grid the flexibility to set the aggregate cash
portion of the purchase price at any level above 20 per cent. of the total
purchase price as, under US tax legislation, the introduction of New National
Grid as the new holding company of National Grid shortly before completion of
the Acquisition should ensure that Niagara Mohawk Shareholders receive New
National Grid ADSs in exchange for their Niagara Mohawk Shares on a tax-free
basis.
3. Summary of the Scheme
Under the Scheme, all the Scheme Shares and the National Grid Special Share
will be cancelled on the Scheme Effective Date. Following this cancellation,
the issued share capital of National Grid will be restored to its former
nominal amount by applying the reserve arising in the books of National Grid,
as a result of the cancellation of the Scheme Shares and the National Grid
Special Share to pay up the Capitalisation Shares and the New B Share in full.
These shares will be issued to New National Grid (and/or its nominees) and
will be created by the passing of Resolution 1 to be proposed at the Scheme
EGM. The New B Share will rank pari passu in all respects with the
Capitalisation Shares.
In consideration of the cancellation of the Scheme Shares, Scheme Shareholders
will receive:
For each Scheme Share cancelled One New National Grid Share
22
In consideration of the cancellation of the National Grid Special Share, the
Special Shareholder will have issued to her the New National Grid Special
Share. No fractions of New National Grid Shares will arise under the Scheme.
While the National Grid Shares underlying the National Grid ADSs will be
cancelled and replaced by New National Grid Shares under the Scheme, existing
National Grid ADSs will automatically represent New National Grid ADSs.
Accordingly, from the Scheme Effective Date, holders of Scheme ADSs will
instead hold:
For each Scheme ADS One New National Grid ADS
(representing the right (representing the right
to receive five to receive five
National Grid Shares) New National Grid Shares)
Immediately after the Scheme Effective Date, National Grid Shareholders will
hold the same number of New National Grid Shares and holders of National Grid
ADSs will hold the same number of New National Grid ADSs as they held
immediately prior to the Scheme Effective Date, in each case with the same
economic rights.
The other rights attaching to the New National Grid Shares are substantially
the same as those attaching to the existing National Grid Shares save for
minor modifications which have been made to the National Grid Articles to
reflect current practice. Similarly, the other rights attaching to the New
National Grid ADSs are the same as those attaching to the existing National
Grid ADSs save that the holders of New National Grid ADSs will be given
similar voting rights to those of New National Grid Shareholders. The rights
attaching to the New National Grid Special Share are substantially the same as
those attaching to the existing National Grid Special Share save for
amendments to reflect recent changes in the structure of the electricity
supply industry in England and Wales. A summary of the principal differences
between the New National Grid Articles and the National Grid Articles is set
out in section 6 of Part VII of this document.
4. Reduction of the share capital of New National Grid
In order to obtain the desired tax treatment for National Grid Shareholders,
the issued share capital of New National Grid immediately after the Scheme
Effective Date must be the same as the issued share capital of National Grid
immediately prior to the Scheme Effective Date. Accordingly, it is proposed
that the shareholders of New National Grid (currently National Grid Nominees
Limited and Fiona Smith, Group General Counsel and Company Secretary of
National Grid) pass a special resolution approving the reduction of the entire
issued share capital of New National Grid to nil. This reduction will also
require confirmation by the Court. This confirmation will be sought at the
same time as the Court is requested to sanction the Scheme. The reduction is
intended to become effective immediately prior to the Scheme becoming
effective.
5. Implementation of the Scheme
5.1 The Scheme will not become effective and binding unless:
(a) the Scheme is approved by National Grid Shareholders at the
Court Meeting;
(b) Resolution 1 to be proposed at the Scheme EGM of this document
is passed by National Grid Shareholders;
(c) the Special Shareholder consents to the Scheme at the Court
Hearing;
(d) the Court confirms the reduction of the issued share capital of
New National Grid to nil;
(e) the Scheme is sanctioned (with or without modification) and the
cancellation of the Scheme Shares and the National Grid Special
Share as part of the Scheme is confirmed by the Court at the
Court Hearing;
(f) an office copy of the order of the Court confirming the
reduction of New National Grid's share capital to nil is
delivered to the Registrar of Companies and is registered by
him;
(g) an office copy of the Court Order sanctioning the Scheme and
confirming the reduction of National Grid's share capital to
nil is delivered to the Registrar of Companies and is
registered by him;
(h) the UK Listing Authority agrees to admit the New National Grid
Shares issued pursuant to the Scheme to the Official List
(subject only to allotment) and its agreement is not withdrawn
prior to the Scheme Effective Date;
23
(i) the London Stock Exchange agrees to admit the New National Grid
Shares issued pursuant to the Scheme to trading on its market
for listed securities (subject only to allotment) and its
agreement is not withdrawn prior to the Scheme Effective Date;
and
(j) the NYSE indicates that it intends to authorise the listing of
the New National Grid ADSs arising from the Scheme (upon
official notice of issuance).
5.2 In addition, the Directors will not take the steps necessary to enable
the Scheme to become effective unless, at the relevant time, they
consider that the Scheme continues to be in the best interests of
National Grid Shareholders as a whole and that the following conditions
have been satisfied or waived:
(a) the Scheme is approved in writing by any regulatory body whose
consent is required, or is considered by National Grid to be
necessary;
(b) no regulatory body seeks, as a result of the transactions to be
effected by the Scheme, any revocation of or modification to
any licence, appointment or other authorisation held by any
member of the National Grid Group, except on satisfactory
terms; and
(c) no regulatory body seeks, as a result of the transactions to be
effected by the Scheme, undertakings or assurances from any
member of the National Grid Group, except on satisfactory
terms.
In this section 5, "on satisfactory terms" means on terms which are
satisfactory to National Grid and New National Grid and which would not, or
would not reasonably be expected to, have, individually or in aggregate, a
material adverse effect on the National Grid Group taken as a whole.
New National Grid has given its written consent to the Scheme and a written
undertaking to be bound by the terms of the Scheme. The Court Hearing is
expected to be held in early 2002. National Grid Shareholders will have the
opportunity to attend the Court Hearing to support or oppose the Scheme and to
appear in person or be represented by Counsel.
If the Scheme is sanctioned by the Court and the conditions to the Scheme are
satisfied or waived, it is expected that the Scheme will become effective, and
dealings in the New National Grid Shares to be issued pursuant to the Scheme
and in New National Grid ADSs arising from the Scheme will commence, in early
2002. If the Scheme has not become effective by 31 August 2002 (or such later
date as the Court may allow), it will lapse, in which event the position of
National Grid Shareholders, holders of National Grid ADSs and the Special
Shareholder will remain unchanged.
The Scheme contains a provision for National Grid and New National Grid
jointly to consent on behalf of all persons concerned to any modification of
or addition to the Scheme, or to any condition which the Court may think fit
to approve or impose. National Grid has been advised that the Court would be
unlikely to approve or impose any such amendment to the Scheme which might be
material to the interests of Scheme Shareholders and/or the Special
Shareholder unless National Grid Shareholders and/or the Special Shareholder
(as appropriate) were informed of any such amendment. It will be a matter for
the Court to decide, in its discretion, whether or not a further meeting of
National Grid Shareholders should be held or the further consent of the
Special Shareholder should be sought. If the Court does approve or impose any
amendment to the Scheme which, in the opinion of the Directors, is such as to
require the consent of the National Grid Shareholders and/or the Special
Shareholder (as appropriate), the Directors will not take the necessary steps
to enable the Scheme to become effective unless and until such consent is
obtained.
6. Effect of the Scheme
The effect of the Scheme will be that Scheme Shareholders and holders of
Scheme ADSs will have their respective interests in National Grid replaced by
an equivalent proportionate interest in New National Grid (of which National
Grid will be a wholly-owned subsidiary). Subject to the dilutive effect of the
New National Grid ADSs subsequently issued to Niagara Mohawk Shareholders in
connection with the Acquisition, any subsequent exercise of options granted
under the National Grid Share Schemes (see section 12 below) and the exchange
of any Exchangeable Bonds, their proportionate interests in the profits, net
assets and dividends of the National Grid Group will not be affected.
7. Changes to the National Grid Articles
Subject to the passing of Resolution 1 at the Scheme EGM, the National Grid
Articles will be amended to ensure that any holders of National Grid Shares
issued after the passing of Resolution 1 to be proposed at the Scheme
24
EGM, and prior to the confirmation by the Court of the reduction of capital of
National Grid provided for under the Scheme, are issued subject to the terms
of the Scheme. In addition, the amendment to the National Grid Articles
provides that any National Grid Shares issued after the Scheme Effective Date,
for example, upon exercise of options under the National Grid Share Schemes,
will be transferred to New National Grid in consideration of the issue or
transfer to such holder by New National Grid of New National Grid Shares on a
one for one basis.
8. Directors
All of the Directors of National Grid have been appointed directors of New
National Grid. The service agreement or letter of appointment (as appropriate)
of each of the Directors will be novated from National Grid to New National
Grid, with effect from the Scheme Effective Date. The effect of the Scheme on
the interests of the Directors (details of which are set out in section 8 of
Part VII of this document) is the same as its effect on the interests of other
Scheme Shareholders.
9. Taxation
Clearances have been obtained from the Inland Revenue for the Scheme under
section 138 of the Taxation of Chargeable Gains Act 1992 and section 707 of
the Income and Corporation Taxes Act 1988. Accordingly, UK resident National
Grid Shareholders who hold their National Grid Shares beneficially and as an
investment should not be treated as making a disposal of their National Grid
Shares, or as receiving taxable income, under the Scheme. Further details of
the tax position of UK resident shareholders is set out in section 16 of Part
VII of this document. Further details of the tax position of US resident
shareholders and holders of National Grid ADSs are set out in section 17 of
Part VII of this document.
10. Listing, dealings, share certificates, ADS certificates and settlement
Applications have been made to the UK Listing Authority for the New National
Grid Shares to be admitted to the Official List and to the London Stock
Exchange for the New National Grid Shares to be admitted to trading on the
London Stock Exchange's market for listed securities. The last day of dealings
in National Grid Shares will be the Scheme Record Date, which is expected to
be in early 2002. The last time for registration of transfers of National Grid
Shares will be 5.30 p.m. on the Scheme Record Date. It is expected that
Admission will become effective and that dealings in the New National Grid
Shares to be issued pursuant to the Scheme will commence at 8.00 a.m. on the
Scheme Effective Date, the business day after the Scheme Record Date.
Following receipt of the SEC approval of the Acquisition, the expected
timetable will be finalised and National Grid Shareholders will be notified by
announcement to the Regulatory News Service of the London Stock Exchange.
Application has been made to list the New National Grid ADSs arising from the
Scheme on the NYSE under the symbol "NGG", the symbol currently used for
National Grid ADSs. The last time for registration of transfers of National
Grid ADSs is expected to be 4.00 p.m. (New York time) on the Scheme Record
Date. It is expected that dealings will commence on the NYSE in the New
National Grid ADSs arising from the Scheme at 9.30 a.m. (New York time) on the
Scheme Effective Date.
On the Scheme Effective Date, share certificates for the Scheme Shares and the
National Grid Special Share will cease to be valid. For Scheme Shareholders
who hold their National Grid Shares in a CREST account, New National Grid
Shares are expected to be credited to the relevant CREST accounts at 8.00 a.m.
on the Scheme Effective Date. For those holding shares in certificated form,
definitive certificates for the New National Grid Shares are expected to be
despatched within ten business days after the Scheme Effective Date. Pending
despatch of share certificates, transfers of New National Grid Shares will be
certified by Lloyds TSB Registrars against the share register.
Existing National Grid ADSs will automatically represent New National Grid
ADSs, and existing National Grid ADRs will automatically represent New
National Grid ADRs, in each case on the Scheme Effective Date.
All mandates in force at 5.30 p.m. on the Scheme Record Date relating to
payment of dividends on National Grid Shares and all instructions given
relating to notices and other communications will, unless and until varied or
revoked, be deemed from the Scheme Effective Date to be valid and effective
mandates or instructions to New National Grid in relation to the corresponding
holdings of New National Grid Shares.
11. Memorandum and Articles of Association of New National Grid
The Memorandum and Articles of Association of New National Grid are
substantially the same as the existing Memorandum and Articles of Association
of National Grid. Accordingly, the rights attaching to New National
25
Grid Shares will, after the Scheme becomes effective, be substantially the
same as the rights attaching to National Grid Shares.
It is proposed that those who hold an interest in New National Grid through
New National Grid ADSs and who are registered in the books of the Depositary
should have rights to attend, speak and vote at general meetings. Accordingly,
the New National Grid Articles will enable the Depositary to appoint holders
of New National Grid ADSs as proxies, and these proxies will have the right to
attend, speak and vote at general meetings. Such proxies will be able, in
turn, to appoint proxies to attend, speak and vote at a general meeting
instead of them. To ensure that holders of New National Grid ADSs will be able
to vote on special and extraordinary resolutions, the New National Grid
Articles will require such resolutions to be decided on a poll. All ordinary
resolutions will continue to be decided on a show of hands or, if a poll is
demanded in accordance with the New National Grid Articles, on a poll.
The New National Grid Articles also give effect to the Electronic
Communications Order which allows for communication between companies and
their shareholders by electronic means.
A summary of the principal differences between the New National Grid Articles
and the existing National Grid Articles is set out in section 6 of Part VII of
this document.
12. Employee share schemes
The sanction of the Scheme by the Court will have an effect on most awards
made under the existing National Grid Share Schemes. In most cases, the
employees holding such awards will have the choice of buying the National Grid
Shares subject to their option during a prescribed period of time following
the sanction of the Scheme by the Court, or exchanging their option for an
equivalent option over New National Grid Shares. This is explained in further
detail in section 10 of Part VII of this document.
As part of the implementation of the Scheme, National Grid Shareholders will
be asked to approve an amendment to the National Grid Articles at the Scheme
EGM which will ensure that employees who choose to exercise their options to
acquire National Grid Shares after the Scheme Effective Date will receive the
same number of New National Grid Shares.
Except as explained in section 10 of Part VII of this document, no further
awards will be made under the existing National Grid Share Schemes after the
Scheme Effective Date.
To provide incentives to executives and employees, and to align their
interests with those of the shareholders, it is proposed that New National
Grid adopts the New National Grid Share Plans that will operate over New
National Grid Shares. The approval of National Grid Shareholders to the New
National Grid Share Plans is being sought at the Scheme EGM to comply with
best practice.
The proposed New National Grid Share Plans, the key features of which are
summarised in section 11 of Part VII of this document, broadly replicate the
existing National Grid Share Schemes. The Remuneration Committee has reviewed
total remuneration arrangements and developments in both market practice and
best practice (for example, the revision of the Association of British
Insurers' guidelines), which are reflected in the New National Grid Share
Plans. The most significant changes are:
(a) under the proposed Executive Share Option Plan 2002, in response to
market practice, particularly in the US, the limit on the maximum size
of an award which may be granted to an individual in any twelve-month
period has been increased from 1.5 times salary to three times salary
(or more if the Remuneration Committee concludes that it is necessary
to make larger grants, for example, in the case of new executives and
employees). However, in determining the size of any grants, the
Remuneration Committee will continue to have regard to grant levels in
comparable companies and to evolving best practice. It has no current
intention to exceed the 1.5 times salary limit contained in the
existing Executive Share Option Plan 2000 in respect of grants for UK-
based executives;
(b) the proposed Executive Share Option Plan 2002 includes flexibility to
grant options subject to pre-grant performance conditions rather than
pre-exercise conditions, as recently endorsed by the Association of
British Insurers. While the Remuneration Committee has no current
intention of utilising this flexibility, it will monitor evolving best
practice in this regard in deciding whether it becomes appropriate to
do so and will liaise with the Association of British Insurers before
utilising such flexibility; and
26
(c) while the main features of the proposed Share Matching Plan 2002 remain
the same as the existing Share Matching Scheme (1996), the detailed
drafting of the plan has been revised to permit the more efficient
operation of the plan and also to permit the Incentive Compensation
Plan, which is currently operated as a separate plan for US executives,
to be integrated into the Share Matching Plan 2002.
13. Overseas shareholders
The implications of the Scheme for persons resident in, or citizens or
nationals of, jurisdictions outside the UK ("overseas shareholders") may be
affected by the laws of the relevant jurisdictions. Such overseas shareholders
should inform themselves about and observe all applicable legal requirements.
It is the responsibility of each overseas shareholder to satisfy himself as to
the full observance of the laws of the relevant jurisdiction in connection
with the Scheme, including the obtaining of any governmental, exchange control
or other consents which may be required and/or compliance with other necessary
formalities which are required to be observed and the payment of any issue,
transfer or other taxes due in such jurisdiction.
If New National Grid is advised that the issue of New National Grid Shares in
respect of any overseas shareholder would infringe the laws of any
jurisdiction outside the UK, or would require New National Grid to observe any
governmental or other consent or any registration, filing or other formality,
the Scheme provides that New National Grid may determine that the New National
Grid Shares to which such overseas shareholder would otherwise be entitled
shall be issued to a nominee appointed by New National Grid and then sold,
with the net proceeds of sale being remitted to the overseas shareholder.
Overseas shareholders should consult their own legal and tax advisers with
respect to the legal and tax consequences of the Scheme. For additional
information relating to the UK tax consequences of the Scheme, see section 9
above. For summaries of the UK and US taxation consequences of a holding of
New National Grid Shares or New National Grid ADSs, see sections 16 and 17,
respectively, of Part VII of this document.
14. Meetings
The Court Meeting has been convened for 11.00 a.m. on 7 January 2002, pursuant
to an order of the Court, at which meeting, or at any adjournment thereof,
National Grid Shareholders will consider and, if thought fit, approve the
Scheme. Notice of the Court Meeting is contained in Part V of the Scheme
Circular.
The Scheme EGM has been convened for 7 January 2002 (the same date as the
Court Meeting) at 11.15 a.m. (or, if later, immediately following the
conclusion or adjournment of the Court Meeting), at which meeting, or at any
adjournment thereof, National Grid Shareholders will consider and, if thought
fit, pass the resolutions set out in the notice of Scheme EGM contained in
Part V of the Scheme Circular.
15. Authorities relating to New National Grid
By resolutions of New National Grid passed on 7 December 2001, the authorised
share capital of New National Grid was increased by (L)1 by the creation of
the New National Grid Special Share and, conditional on the Scheme becoming
effective, the Directors of New National Grid were authorised to issue and
allot the New National Grid Special Share and New National Grid Shares, and to
make purchases of New National Grid's own ordinary shares.
Following completion of the Scheme and the Acquisition, the Directors of New
National Grid will have authority to issue and allot up to approximately one-
third of the nominal amount of the then issued share capital. The Directors of
New National Grid have no present intention of issuing shares except pursuant
to the Scheme, the Acquisition, on the exercise of options under the National
Grid Share Schemes and the New National Grid Share Plans and in connection
with the Exchangeable Bonds.
For additional information on the authorities relating to New National Grid's
share capital which have been granted see section 3 of Part VII of this
document.
The resolutions passed on 7 December 2001 also approved the adoption of the
New National Grid Articles and authorised each of New National Grid and
National Grid Company to make donations and incur expenditure which would
otherwise be prohibited by the Political Parties, Elections and Referendum Act
2000, which came into force earlier this year. National Grid does not
currently make donations to political parties, nor is it intended that New
National Grid will do so without the specific approval of its shareholders.
27
PART III
FINANCIAL INFORMATION ON NEW NATIONAL GRID
1. Financial information for the period from 11 July 2000 to 31 March 2001
The financial information set out in this section has been extracted without
material adjustment from the audited accounts of New National Grid for the
period from 11 July 2000 to 31 March 2001 which were approved by the board of
directors of New National Grid on 31 May 2001. New National Grid had no
profits or losses for this period, and accordingly, no profit and loss account
is presented. Except for entering into the Financing Documents, the
Exchangeable Bonds Trust Deed, the Undertaking, the service contract with
William E. Davis described in Section 7.7.7 of Part VII and the Sponsor's
Agreement, New National Grid has not traded since 31 March 2001 and
accordingly no interim financial statements to 30 September 2001 have been
prepared.
Balance sheet at 31 March 2001
-----------------------------------------------------------------------------------------------------------------------------
At 31 March
Notes 2001
(L)
-----------------------------------------------------------------------------------------------------------------------------
Fixed assets
Investment 4 7
-------------
Current assets
Cash at bank 12,500
-------------
12,500
Creditors: amounts falling due within one year
Amount owed to Group undertaking (7)
-------------
Net current assets 12,493
-------------
Net assets employed 12,500
=============
Capital & reserves
Called up share capital 5 12,500
-------------
Equity shareholders' funds 6 12,500
=============
-----------------------------------------------------------------------------------------------------------------------------
Notes to the financial information
1. Accounting policies
(a) Basis of accounting
The financial information has been prepared under the historical cost
convention and in accordance with applicable accounting and financial
reporting standards.
(b) Basis of preparation
The financial information presents information about New National Grid not its
group. In accordance with section 228 of the Act, New National Grid is exempt
from preparing consolidated financial statements as it is a subsidiary of
National Grid Holdings Limited and is included within the consolidated
accounts of that company.
As permitted by Financial Reporting Standard 1 (Revised 1996), no cash flow
statement has been presented as the cash flows of New National Grid have been
included in the consolidated cash flow statement of National Grid.
(c) Investments
Investments held as fixed assets are stated at cost.
28
2. Directors' emoluments
The emoluments of the directors are paid by a Group undertaking and are deemed
by them to be wholly attributable to their services to that undertaking.
Accordingly, no details in respect of their emoluments have been included in
this financial information.
3. Audit fees
Audit fees are borne by the ultimate parent undertaking.
4. Investment
-----------------------------------------------------------------------------------------------------------------------------
Shares in
Group
undertakings
(L)
-----------------------------------------------------------------------------------------------------------------------------
Cost and net book value
Additions during the period and at 31 March 2001 7
-----------------------------------------------------------------------------------------------------------------------------
The fixed asset investment relates to an investment in the ordinary share
capital of Grid Delaware Inc., a wholly owned subsidiary company incorporated
in the US. The principal activity of Grid Delaware Inc. is as an investment
company.
5. Share capital
-----------------------------------------------------------------------------------------------------------------------------
31 March 2001
--------------------------------------
Ordinary shares of 10p each Number (L)
-----------------------------------------------------------------------------------------------------------------------------
Authorised 2,500,000,000 250,000,000
================= =================
Allotted and issued 500,000 50,000
================= =================
Partly called up and paid 500,000 12,500
================= =================
-----------------------------------------------------------------------------------------------------------------------------
New National Grid was incorporated on 11 July 2000 with authorised share
capital of 100 ordinary shares of (L)1 each and issued share capital of one
(L)1 ordinary share.
On 28 November 2000, the authorised ordinary shares of (L)1 each were sub-
divided into ordinary shares of 10 pence each in a 10:1 share split. On this
date, New National Grid also increased its authorised share capital to
2,500,000,000 ordinary shares of 10 pence each by the creation of
2,499,999,000 ordinary shares of 10 pence each.
On this date, New National Grid also issued a further 499,990 ordinary shares
of 10 pence each.
One quarter of the nominal value of each share has been paid.
6. Reconciliation of movement in equity shareholders' funds
-----------------------------------------------------------------------------------------------------------------------------
(L)
-----------------------------------------------------------------------------------------------------------------------------
Issue of ordinary shares 12,500
-----------------
Closing equity shareholders' funds 12,500
=================
-----------------------------------------------------------------------------------------------------------------------------
29
7. Related party transactions and ultimate parent company
New National Grid is exempt from disclosing transactions with those companies
within the National Grid Group of companies where all of the voting rights are
held within the group. There were no transactions with companies where not all
of the voting rights are held within the National Grid Group.
The ultimate parent and controlling company is National Grid and the
intermediate parent company for which consolidated financial statements are
prepared is National Grid Holdings Limited. Both companies are incorporated in
Great Britain.
30
PART IV
FINANCIAL INFORMATION ON NATIONAL GRID GROUP
1. Financial information for the three years to 31 March 2001
The financial information set out in this section has been extracted without
material adjustment from the 2001, 2000 and 1999 Annual Reports of National
Grid. The financial statements for the year ended 31 March 2001, were approved
by the Board on 31 May 2001. No adjustments have been made to restate balances
for the adoption of UK Financial Reporting Standard ("FRS") 19, "Deferred
Tax", or to reflect a revised presentation of the minority interests' share of
the results of associated undertakings, which National Grid reported in its
interim financial statements for the six months ended 30 September 2001 (see
section 2 below). In addition, no adjustments have been made to restate
balances under US GAAP for the adoption of Statement of Financial Accounting
Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging
Activities", and SFAS 142, "Accounting for Goodwill and Other Intangible
Assets", with effect from 1 April 2001 (see section 2 below).
Accounting policies
(a) Basis of preparation of accounts
The accounts are prepared under the historical cost convention and in
accordance with applicable UK accounting and financial reporting standards.
The accounts have been prepared in accordance with UK GAAP, which differ in
certain respects to US GAAP. A summary of the main differences between UK and
US GAAP is set out in note 29.
The preparation of accounts in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the accounts and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.
(b) Basis of consolidation
The Group accounts include the accounts of National Grid and all 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 participating interest and over which it exercises a
significant influence.
The accounts of Group and associated undertakings used for consolidation are
generally made up to 31 March. However, where this has not been practical, the
results of one Group undertaking and certain 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, in respect
of associated undertakings, an equity interest which enables it to exercise a
significant influence. The results of Group businesses disposed of are
included up to the date that control is relinquished.
(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 - up to 20 years.
(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.
31
(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. Cost includes payroll and finance costs incurred which are
directly attributable to the construction of tangible fixed assets.
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 tangible fixed assets
are, in general, as follows:
-----------------------------------------------------------------------------------------------------------------------------
Years
-----------------------------------------------------------------------------------------------------------------------------
Plant and machinery
Transmission plant 15 to 60
Distribution plant 15 to 60
Interconnector plant 15 to 25
Freehold and leasehold properties up to 65
Motor vehicles and office equipment 3 to 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, which primarily comprise consumable stores, are stated at the lower of
cost and net realisable value.
(h) Regulatory assets
Regulatory assets established in accordance with US Statement of Financial
Accounting Standards 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71) are recorded as debtors, if they comprise rights or
other access to future economic benefits which arise as a result of past
transactions or events which have created an obligation to a third party (note
14).
(i) Decommissioning
Decommissioning liabilities, based on discounted future estimated expenditures
expected to be incurred, are provided for in full and a corresponding tangible
fixed asset or regulatory asset is also recognised.
(j) Turnover
Turnover primarily represents the amounts derived from the transmission,
distribution and generation of electricity and the provision of related
services, including the recovery of stranded costs (note 1). It excludes
inter-business and inter-company transactions, and is stated net of value
added tax and similar sales-based taxes.
(k) Pensions and other post-retirement benefits
The cost of providing pensions and other post-retirement benefits is charged
to the profit and loss account on a systematic basis over the service lives of
the employees in the schemes. Variations from the regular pension cost are
allocated over the estimated average remaining service lives of current
employees.
(l) Research and development
Research and development expenditure is charged to the profit and loss account
in the period in which it is incurred.
(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.
32
(n) Financial instruments
Derivative financial instruments ("derivatives") are used by the Group mainly
for the management of its interest rate and foreign currency exposures.
Derivatives include interest rate swaps, currency swaps, options and forward
rate agreements. All transactions are undertaken or maintained to provide a
commercial hedge of the interest and currency risk associated with the Group's
underlying business activities and the financing of those activities.
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 or underlying position being hedged, either
within net interest or disclosed separately where deemed exceptional. Gains or
losses arising on hedging instruments which do not qualify as hedges for
accounting purposes are taken to the profit and loss account as they arise.
33
National Grid Group plc
Group profit and loss account
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March
--------------------------------------
2001 2000 1999
Notes (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Turnover, including share of joint ventures 4,004.1 1,677.5 1,568.3
Less: share of joint ventures' turnover (continuing operations) (204.4) (62.8) (54.1)
---------- ---------- ----------
Group turnover - continuing operations 1(a) 3,799.7 1,614.7 1,514.2
Operating costs 2 (3,084.1) (1,042.6) (937.5)
---------- ---------- ----------
Operating profit of Group undertakings 1(b) 715.6 572.1 576.7
Share of joint ventures' and associate's operating (loss)/profit 1(b) (103.5) (33.5) 0.7
---------- ---------- ----------
Operating profit
- Before exceptional integration costs and goodwill amortisation 1(b) 731.9 546.5 579.9
- Exceptional integration costs 3(a) (45.3) -- --
- Goodwill amortisation (74.5) (7.9) (2.5)
Total operating profit - continuing operations 1(b) 612.1 538.6 577.4
Exceptional profit relating to partial disposal of Energis 3(b) 242.9 1,027.3 891.8
Profit on disposal of businesses 3(c) 20.1 -- --
Net interest 7 (250.6) (64.9) (118.5)
Exceptional cost of closing out interest rate swaps 3(d) -- -- (52.6)
---------- ---------- ----------
Profit on ordinary activities before taxation - continuing operations 624.5 1,501.0 1,298.1
Taxation
- Excluding exceptional items 8 (85.8) (123.1) (120.3)
- Exceptional items 8 235.4 (229.5) (162.8)
8 149.6 (352.6) (283.1)
---------- ---------- ----------
Profit on ordinary activities after taxation 774.1 1,148.4 1,015.0
Minority interests
Equity (3.3) -- --
Non-equity (1.8) -- --
(5.1) -- --
---------- ---------- ----------
Profit for the year 769.0 1,148.4 1,015.0
Dividends 9 (223.0) (205.5) (192.0)
---------- ---------- ----------
Retained profit 22 546.0 942.9 823.0
========== ========== ==========
Earnings per ordinary share
- Basic, including exceptional items and goodwill amortisation 10 52.1p 78.0p 69.2p
- Basic, excluding exceptional items and goodwill amortisation 10 26.5p 24.3p 23.3p
- Diluted, including exceptional items and goodwill amortisation 10 49.5p 73.4p 65.2p
- Diluted, excluding exceptional items and goodwill amortisation 10 25.8p 23.8p 22.7p
Dividends per ordinary share 9 15.08p 13.94p 13.07p
---------- ---------- ----------
-----------------------------------------------------------------------------------------------------------------------------------
Group statement of total recognised gains and losses
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March
--------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Profit for the year 769.0 1,148.4 1,015.0
Exchange adjustments (12.0) 3.1 (0.8)
Tax on exchange adjustments 31.9 -- --
---------- ---------- ----------
Total recognised gains and losses relating to the year 788.9 1,151.5 1,014.2
========== ========== ==========
-----------------------------------------------------------------------------------------------------------------------------------
34
National Grid Group plc
Group balance sheet
-----------------------------------------------------------------------------------------------------------------------------------
At 31 March
------------------------------------------------
2001 2000 1999
Notes (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Fixed assets
Intangible assets - goodwill 11 1,186.2 844.7 15.1
Tangible assets 12 5,617.3 4,938.3 3,099.4
Investments in joint ventures
- Share of gross assets 1,133.6 828.6 310.7
- Share of gross liabilities (798.2) (622.7) (239.6)
--------------- --------------- ---------------
- Share of net assets 335.4 205.9 71.1
- Loans to joint ventures 64.9 -- --
Investment in associate 414.9 205.8 151.0
Other investments 145.1 107.3 11.0
Total investments 13 960.3 519.0 233.1
------------- ------------- -------------
7,763.8 6,302.0 3,347.6
------------- ------------- -------------
Current assets
Stocks 34.1 29.3 12.7
Debtors (amounts falling due within one year) 14 880.4 490.1 140.2
Debtors (amounts falling due after one year) 14 1,016.5 798.3 52.3
Assets held for exchange 15 16.6 16.6 16.6
Business held for resale -- 118.9 --
Cash and deposits 271.2 1,011.6 1,524.5
------------- ------------- -------------
2,218.8 2,464.8 1,746.3
Creditors (amounts falling due within one year)
Borrowings (1,008.7) (669.0) (590.6)
Other creditors (1,205.0) (1,192.1) (824.3)
16 (2,213.7) (1,861.1) (1,414.9)
------------- ------------- -------------
Net current assets 5.1 603.7 331.4
------------- ------------- -------------
Total assets less current liabilities 7,768.9 6,905.7 3,679.0
Creditors (amounts falling due after more than one year)
Convertible bonds (480.3) (469.0) (458.9)
Other borrowings (2,700.4) (2,537.2) (1,178.4)
Other creditors (574.8) (494.0) (43.6)
17 (3,755.5) (3,500.2) (1,680.9)
Provisions for liabilities and charges 20 (495.8) (461.4) (45.6)
------------- ------------- -------------
Net assets employed 3,517.6 2,944.1 1,952.5
============= ============= =============
Capital and reserves
Called up share capital 21 174.7 174.7 173.9
Share premium account 22 276.9 274.7 246.5
Profit and loss account 22 3,024.2 2,459.6 1,532.1
------------- ------------- -------------
Equity shareholders' funds 3,475.8 2,909.0 1,952.5
Minority interests
Equity 21.8 22.9 --
Non-equity 23 20.0 12.2 --
41.8 35.1 --
------------- ------------- -------------
3,517.6 2,944.1 1,952.5
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
35
National Grid Group plc
Group cash flow statement
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March
------------------------------------------------
2001 2000 1999
Notes (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Net cash inflow from operating activities 25(a) 810.6 682.0 605.9
Dividends from joint ventures 20.3 4.5 3.1
Returns on investments and servicing of finance
Interest received 94.8 92.0 18.2
Interest paid (398.2) (156.7) (137.9)
Dividends paid to minority interests (3.5) -- --
Net cash outflow for returns on investments and servicing of
finance (306.9) (64.7) (119.7)
Taxation
Corporate tax paid (137.2) (274.3) (154.9)
Capital expenditure
Payments to acquire tangible fixed assets (471.6) (292.2) (329.7)
Receipts of capital contributions 2.2 7.6 11.9
Receipts from disposals of tangible fixed assets 11.8 5.4 5.3
Net cash outflow for capital expenditure (457.6) (279.2) (312.5)
Acquisitions and disposals
Payments to acquire investments (337.2) (144.5) (13.1)
Acquisition of Group undertakings 25(b) (440.9) (2,045.1) (12.1)
Receipts from sales of Energis shares -- 952.9 959.3
Disposal of businesses 25(c) 195.9 -- --
Net cash (outflow)/inflow for acquisitions and disposals (582.2) (1,236.7) 934.1
Equity dividends paid (212.5) (197.6) (183.1)
------------- ------------- -------------
Net cash (outflow)/inflow before management of liquid
resources and financing (865.5) (1,366.0) 772.9
Management of liquid resources
Decrease/(increase) in short term deposits 775.2 618.8 (1,482.3)
Net cash inflow/(outflow) from the management of liquid
resources 25(d),(e) 775.2 618.8 (1,482.3)
Financing
Issue of ordinary shares 7.0 5.5 5.4
Payments to repurchase ordinary shares -- (1.1) --
------------- ------------- -------------
New borrowings 1,015.4 1,029.3 717.7
Borrowings repaid (934.0) (260.1) (35.5)
------------- ------------- -------------
Increase in borrowings 25(d),(e) 81.4 769.2 682.2
Net cash inflow from financing 88.4 773.6 687.6
------------- ------------- -------------
Movement in cash and overdrafts 25(d),(e) (1.9) 26.4 (21.8)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
36
Notes to the accounts
1. Segmental analysis
EUA was acquired on 19 April 2000 (note 26(a)). The operations of EUA and NEES
- acquired 22 March 2000 - were successfully integrated on 1 May 2000 and now
operate as National Grid USA. As a consequence it is not possible to provide
an indication of EUA's contribution to the Group's results for the year ended
31 March 2001.
(a) Turnover
-----------------------------------------------------------------------------------------------------------------------------------
Turnover
-----------------------------------------------------------------------------------------------------
Sales Sales Sales Sales Sales Sales
Total between to third Total between to third Total between to third
sales businesses parties sales businesses parties sales businesses parties
2001 2001 2001 2000 2000 2000 1999 1999 1999
(L)m (L)m (L)m (L)m (L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Turnover, including share
of joint ventures 4,049.3 45.2 4,004.1 1,715.3 37.8 1,677.5 1,601.9 33.6 1,568.3
Less: share of joint
ventures' turnover (204.4) -- (204.4) (62.8) -- (62.8) (54.1) -- (54.1)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Group turnover 3,844.9 45.2 3,799.7 1,652.5 37.8 1,614.7 1,547.8 33.6 1,514.2
======== ======== ======== ======== ======== ======== ======== ======== ========
Transmission - UK 1,315.6 16.8 1,298.8 1,319.7 16.9 1,302.8 1,310.1 15.7 1,294.4
- USA 194.7 3.4 191.3 3.4 0.6 2.8 -- -- --
Distribution - USA 1,519.0 0.6 1,518.4 25.8 -- 25.8 -- -- --
Stranded costs recovery
and generation - USA 334.9 0.1 334.8 6.1 -- 6.1 -- -- --
Interconnectors - UK 83.6 -- 83.6 86.6 -- 86.6 75.8 -- 75.8
- USA 47.9 -- 47.9 1.3 -- 1.3 -- -- --
Telecommunications - USA 9.5 -- 9.5 0.2 -- 0.2 -- -- --
Other activities 339.7 24.3 315.4 209.4 20.3 189.1 161.9 17.9 144.0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Group turnover 3,844.9 45.2 3,799.7 1,652.5 37.8 1,614.7 1,547.8 33.6 1,514.2
======== ======== ======== ======== ======== ======== ======== ======== ========
Europe 1,696.6 1,576.1 1,513.6
North America 2,103.1 38.6 0.6
-------- -------- --------
3,799.7 1,614.7 1,514.2
======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------------
The analysis of turnover by geographical area is on the basis of origin.
Turnover on a destination basis would not be materially different.
Other activities turnover primarily comprises market services, including EnMO
Limited ("EnMO") which provides the On-the-day Commodity Market for gas
trading in Great Britain, and contracting activities.
37
(b) Operating profit
--------------------------------------------------------------------------------------------------------------------------------
Operating profit
--------------------------------------------------------------------------------------
Before exceptional integration After exceptional integration
costs and goodwill amortisation costs and goodwill amortisation
----------------------------------------- -----------------------------------------
2001 2000 1999 2001 2000 1999
(L)m (L)m (L)m (L)m (L)m (L)m
--------------------------------------------------------------------------------------------------------------------------------
Transmission - UK 486.3 523.1 508.1 486.3 523.1 508.1
- USA 49.6 1.3 -- 39.5 1.2 --
Distribution - USA 154.8 1.7 -- 110.0 0.7 --
Stranded costs recovery and
generation - USA 61.7 0.2 -- 61.7 0.2 --
Interconnectors - UK 42.8 46.6 39.5 42.8 46.6 39.5
- USA 22.3 0.6 -- 22.3 0.6 --
- Other (0.1) (0.9) -- (0.1) (0.9) --
Telecommunications - USA 2.9 0.1 -- (1.4) (0.1) --
Other activities 0.8 2.0 29.3(1) (0.2) 0.7 29.1(1)
Exceptional integration costs - USA -- -- -- (45.3) -- --
----------- ----------- ----------- ----------- ----------- -----------
Group undertakings 821.1 574.7 576.9 715.6 572.1 576.7
----------- ----------- ----------- ----------- ----------- -----------
Telecommunications - Energis 5.1 1.3 (9.6) (8.7) (4.0) (11.6)
- Intelig (118.0) (44.1) -- (118.0) (44.1) --
- Other (3.4) -- -- (3.9) -- --
Generation - USA 7.9 0.2 -- 7.9 0.2 --
Other electricity activities 19.2 14.4 12.6 19.2 14.4 12.3
----------- ----------- ----------- ----------- ----------- -----------
Joint ventures and associate (89.2) (28.2) 3.0 (103.5) (33.5) 0.7
----------- ----------- ----------- ----------- ----------- -----------
Total operating profit 731.9 546.5 579.9 612.1 538.6 577.4
=========== =========== =========== =========== =========== ===========
Europe 545.7 577.6 568.4 531.9 572.3 566.4
North America 288.0 (1.4) (1.1) 182.5 (4.0) (1.3)
Latin America (106.0) (33.7) 8.5 (106.5) (33.7) 8.5
Rest of the World 4.2 4.0 4.1 4.2 4.0 3.8
----------- ----------- ----------- ----------- ----------- -----------
731.9 546.5 579.9 612.1 538.6 577.4
=========== =========== =========== =========== =========== ===========
Electricity 851.3 590.4 591.6 750.1 588.0 589.1
Telecommunications (119.4) (43.9) (11.7) (138.0) (49.4) (11.7)
----------- ----------- ----------- ----------- ----------- -----------
Total operating profit 731.9 546.5 579.9 612.1 538.6 577.4
=========== =========== =========== =========== =========== ===========
--------------------------------------------------------------------------------------------------------------------------------
Note:
(1) Includes (L)15.2m relating to a revision of accounting estimates of
provisions resulting from the implementation of Financial Reporting
Standard 12.
It is not practical to allocate the exceptional integration costs (see note
3(a)) over the above segments, as a consequence of the integration of the
operations of NEES and EUA.
38
(c) Total and net assets
-----------------------------------------------------------------------------------------------------------------------------------
Total assets Net assets
------------------------------- -------------------------------
2001 2000 2001 2000
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Transmission - UK 3,426.2 3,104.5 3,055.9 2,788.2
- USA 744.4 600.0 701.7 608.2
Distribution - USA 2,686.8 1,884.4 2,402.5 1,679.5
Stranded costs recovery and generation - USA 1,105.6 777.7 371.6 97.6
Interconnectors - UK 154.9 166.4 152.1 166.4
- USA 191.2 184.1 190.6 178.1
- Other 11.0 5.7 9.8 5.7
Telecommunications - USA 148.4 108.3 143.4 106.4
Other activities 392.1 479.5 199.7 272.9
------------- ------------- ------------- -------------
Group undertakings 8,860.6 7,310.6 7,227.3 5,903.0
------------- ------------- ------------- -------------
Telecommunications - Energis 414.9 205.8 414.9 205.8
- Intelig 164.8 92.6 164.8 92.6
- Other 110.5 0.7 110.5 0.7
Generation - USA 32.8 28.7 32.8 28.7
Other electricity activities 92.2 83.9 92.2 83.9
------------- ------------- ------------- -------------
Joint ventures and associate 815.2 411.7 815.2 411.7
------------- ------------- ------------- -------------
Unallocated 306.8 1,044.5 (4,524.9) (3,370.6)
------------- ------------- ------------- -------------
9,982.6 8,766.8 3,517.6 2,944.1
============= ============= ============= =============
Europe 4,270.0 3,695.3 3,834.9 3,308.1
North America 5,060.2 3,849.3 3,863.2 2,828.9
Latin America 319.2 156.6 319.2 156.6
Rest of the World 26.4 21.1 25.2 21.1
Unallocated 306.8 1,044.5 (4,524.9) (3,370.6)
------------- ------------- ------------- -------------
9,982.6 8,766.8 3,517.6 2,944.1
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The analysis of total assets and net assets by business segment includes all
attributable goodwill and excludes inter-business balances. Unallocated total
assets include investment in own shares, assets held for exchange and cash and
deposits. Unallocated net liabilities include net borrowings, taxation,
interest, dividends, certain provisions, investment in own shares and assets
held for exchange.
39
(d) Other segmental information
-----------------------------------------------------------------------------------------------------------------------------------
Capital expenditure Depreciation and amortisation
----------------------------------------- -----------------------------------------
2001 2000 1999 2001 2000 1999
(L)m (L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Transmission - UK 361.2 286.5 314.0 147.7 133.7 117.8
- USA 29.4 0.8 -- 23.4 0.5 --
Distribution - USA 84.3 2.6 -- 120.8 2.3 --
Stranded costs recovery and generation -
USA 9.9 -- -- 40.6 0.9 --
Interconnectors - UK 0.9 -- -- 13.3 13.2 13.3
- USA -- 0.9 -- 13.9 0.3 --
- Other 2.9 -- -- -- -- --
Telecommunications - USA 30.0 -- -- 5.8 0.1 --
Other activities 17.2 25.3 15.0 4.4 7.3 2.9
----------- ----------- ----------- ----------- ----------- -----------
Group undertakings 535.8 316.1 329.0 369.9 158.3 134.0
=========== =========== =========== =========== =========== ===========
Europe 378.5 311.7 328.9 162.8 152.5 133.6
North America 154.4 4.4 0.1 207.1 5.8 0.4
Rest of the World 2.9 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
535.8 316.1 329.0 369.9 158.3 134.0
=========== =========== =========== =========== =========== ===========
-----------------------------------------------------------------------------------------------------------------------------------
Stranded costs recovery
Under settlement agreements reached as part of industry restructuring,
National Grid USA is allowed to recover its costs (net of sales proceeds) and,
where applicable, a return on those costs, associated with its ongoing efforts
to exit the generation business.
40
2. Operating costs
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation 276.5 154.9 133.8
Payroll costs (note 4(a)) 302.7 127.5 114.7
Purchases of electricity 1,247.9 124.8 112.5
Rates 176.5 103.7 99.4
Transmission services scheme direct costs 219.6 212.6 254.0
EnMO direct costs 201.2 70.7 --
Other operating charges 659.7 248.4 223.1
------------- ------------- -------------
3,084.1 1,042.6 937.5
============= ============= =============
Operating costs include:
Research and development costs 8.1 7.8 8.4
Operating lease rentals
- Plant and machinery 4.2 0.1 --
- Other 15.1 3.3 3.0
Amortisation of goodwill(1) 60.2 2.6 0.2
Amortisation of regulatory assets 33.2 0.8 --
Auditors' remuneration
- Statutory audit fees 1.0 0.5 0.4
- Taxation advice and acquisition activity, including due diligence 3.6 1.4 0.7
- Stock exchange related 0.1 0.4 0.9
- Regulatory related services 0.8 0.9 0.9
- Other 0.6 0.3 0.1
5.1 3.0 2.6
------------- ------------- -------------
6.1 3.5 3.0
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Note:
(1) Excludes goodwill of (L)14.3m (2000: (L)5.3m; 1999: (L)2.3m) relating to
joint ventures and associate.
In addition to the non-audit fees of (L)5.1m (2000: (L)3.0m; 1999: (L)2.6m),
fees of: a) (L)1.5m (2000: (L)1.2m; 1999: (L)1.6m), incurred in respect of
acquisitions have been capitalised and; b) (L)0.5m (2000 and 1999: (L)nil),
incurred in respect of disposals have been charged in arriving at the profit
on disposal of businesses. Fees of (L)4.3m (2000: (L)nil; 1999: (L)nil)
relating to the development and implementation of the new electricity trading
arrangements, which are fully recoverable, have also been paid to
PricewaterhouseCoopers.
Auditors' remuneration in respect of non-statutory audit fees includes (L)nil
(2000: (L)nil; 1999: (L)0.4m) in respect of services provided by Coopers &
Lybrand prior to the appointment of PricewaterhouseCoopers.
3. Exceptional items
(a) Exceptional integration costs
The 2001 exceptional integration costs of (L)45.3m ((L)39.4m after tax)
principally comprise early retirement costs arising on the integration of the
operations of NEES and EUA.
(b) Exceptional profit relating to partial disposal of Energis
The 2001 exceptional profit of (L)242.9m ((L)242.9m after tax) arises from
reductions in the Group's interest in Energis, an associated undertaking,
primarily as a consequence of the placing of shares by Energis in September
2000 and the acquisition by Energis of a majority stake in Ision in January
2001.
The 2000 exceptional profit of (L)1,027.3m relating to the partial disposal of
the Group's shareholding in Energis comprises a profit of (L)895.2m ((L)665.7m
after tax) resulting from the sale of 28.9m shares in Energis and a profit
41
of (L)132.1m ((L)132.1m after tax) resulting from reductions in the Group's
interest in Energis, primarily as a consequence of the placing by Energis of
14.8m of its shares.
The 1999 exceptional profit of (L)891.8m ((L)712.7m after tax) resulted from
the sale of 60m shares in Energis.
(c) Profit on disposal of businesses
The 2001 exceptional profit of (L)20.1m ((L)20.1m after tax) relates to the
net gain on the disposal of market services businesses. The operating results
of these businesses up to the date of disposal are included within other
activities.
(d) Exceptional cost of closing out interest rate swaps
The 1999 exceptional charge of (L)52.6m ((L)36.3m after tax) relates to the
cost of closing out (L)415.0m of interest rate swaps.
(e) Exceptional tax credit
The 2001 exceptional tax credit of (L)229.5m represents a reversal of the 2000
exceptional tax charge relating to the exceptional profit on the partial
disposal of Energis, arising from the realisation of capital losses for tax
purposes as a result of Group restructurings.
4. Payroll costs and employees
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
(a) Payroll costs
Wages and salaries 326.0 129.4 116.5
Social security costs 26.3 11.5 10.2
Other pension costs 18.9 10.4 10.3
------------- ------------- -------------
371.2 151.3 137.0
Less: amounts capitalised (68.5) (23.8) (22.3)
------------- ------------- -------------
302.7 127.5 114.7
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
Number Number Number
-----------------------------------------------------------------------------------------------------------------------------------
(b) Average number of employees
Europe 3,662 3,651 3,606
North America 3,836 140 6
Latin America 17 13 10
Rest of the World 8 6 6
------------- ------------- -------------
7,523 3,810 3,628
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The vast majority of employees in:
- Europe are either directly or indirectly employed in the transmission
of electricity in the UK.
- North America are either directly or indirectly employed in the
transmission, distribution and generation of electricity in the USA.
42
5. Directors' emoluments
(a) Remuneration policy
The Remuneration Committee, which consists exclusively of Non-executive
Directors, is responsible for determining all aspects of Executive Directors'
compensation, drawing on advice from external remuneration consultants and
internal advisors.
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 levels of customer service, safety and
environmental standards while having due regard to the markets in which the
Group operates.
(b) Directors' remuneration
The remuneration of individual Directors in office during the three years
ended 31 March 2001 is set out below:
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2001
------------------------------------------------------------------
Total emoluments
Base salary Annual (excluding
and fees bonus(1) Benefits pension)
(L)'000s (L)'000s (L)'000s (L)'000s
-----------------------------------------------------------------------------------------------------------------------------------
Chairman
James Ross (Non-executive Director) 120 -- -- 120
Executive Directors
David Jones 440 212 13 665
Roger Urwin 275 150 11 436
Stephen Box 300 142 13 455
Wob Gerretsen(2) 177 34 48 259
Steven Holliday(3) 1 -- -- 1
Rick Sergel 408 197 15 620
Non-executive Directors
Bob Faircloth 30 -- -- 30
John Grant 30 -- -- 30
Paul Joskow 45 -- -- 45
Richard Reynolds 50 -- -- 50
------------- ------------- ------------- -------------
1,876 735 100 2,711
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Total cash bonus paid includes amount invested by Director in Share Match
scheme and, in the case of Roger Urwin, an ex-gratia payment of (L)19,000
in respect of dividends on Matching Shares.
(2) Died on 19 October 2000: (L)36,427 of his benefits is in respect of
repatriation of personal property.
(3) Appointed to the Board on 30 March 2001.
The total remuneration of David Jones, the highest paid Director (now
retired), was (L)665,440.
43
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2000
------------------------------------------------------------------
Total emoluments
Base salary (excluding
and fees Annual bonus Benefits pension)
(L)'000s (L)'000s (L)'000s (L)'000s
-----------------------------------------------------------------------------------------------------------------------------------
Chairman
James Ross (Non-executive Director)(1) 98 -- -- 98
Executive Directors
David Jones 350 126 13 489
Stephen Box 250 87 11 348
Wob Gerretsen(2) 240 64 44 348
Rick Sergel(3) 5 -- -- 5
Roger Urwin 230 81 10 321
Non-executive Directors
David Jefferies (former Chairman)(4) 50 -- 3 53
Bob Faircloth 30 -- -- 30
John Grant 30 -- -- 30
Paul Joskow(3) -- -- -- --
Richard Reynolds 50 -- -- 50
Malcolm Williamson(4) 8 -- -- 8
------------- ------------- ------------- -------------
1,341 358 81 1,780
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Appointed Chairman at the AGM on 22 July 1999.
(2) Wob Gerretsen's base salary included a temporary overseas allowance and
his benefits included (L)31,667 in respect of his relocation.
(3) Appointed to the Board on 27 March 2000.
(4) Resigned from the Board on 22 July 1999.
The total remuneration of David Jones, the highest paid Director, including
the gain on the exercise of options, was (L)505,344.
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 1999
------------------------------------------------------------------
Total emoluments
Base salary (excluding
and fees Annual bonus Benefits pension)
(L)'000s (L)'000s (L)'000s (L)'000s
-----------------------------------------------------------------------------------------------------------------------------------
Chairman
David Jefferies (Non-executive Director) 150 -- 9 159
Executive Directors
David Jones 300 108 8 416
Stephen Box 200 70 66(1) 336
Wob Gerretsen 183 63 11 257
Roger Urwin 205 71 14 290
Non-executive Directors
Bob Faircloth 27 -- -- 27
John Grant 30 -- -- 30
Richard Reynolds 31 -- -- 31
James Ross(2) 4 -- -- 4
Malcolm Williamson 30 -- -- 30
------------- ------------- ------------- -------------
1,160 312 108 1,580
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Benefits include relocation expenses of (L)51,526.
(2) Appointed to the Board on 1 March 1999.
The total remuneration of David Jones, the highest paid Director, was
(L)416,000.
44
(c) Directors' pension benefits
Pension benefits earned by individual Executive Directors in the three years
ended 31 March 2001 are as follows:
--------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2001
-------------------------------------------------------------------------------
Increase to
Age at Director's accrued pension Accrued pension
31 March contributions during year (net as at 31 March(1)
2001 during year of inflation) 2001
(L)'000s (L)'000s (L)'000s
--------------------------------------------------------------------------------------------------------------------------------
David Jones(2) 58 13 57 284
Roger Urwin 55 8 26 160
Stephen Box 50 9 14 36
Wob Gerretsen(3) -- 4 -- --
Steven Holliday(4) 44 -- -- --
Rick Sergel 51 -- 21 229
--------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Accrued pension represents the pension which would be paid annually at age
60 if the Director resigned on 31 March 2001.
(2) David Jones, the highest paid Director retired on 31 March 2001 with an
unreduced pension.
(3) Wob Gerretsen died on 19 October 2000. His beneficiaries received payments
of (L)988,613 and are receiving a pension of (L)100,256 per annum.
(4) Steven Holliday was appointed to the Board on 30 March 2001.
--------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 2000
-------------------------------------------------------------------------------
Increase to
Age at Director's accrued pension Accrued pension
31 March contributions during year (net as at 31 March(1)
2000 during year of inflation) 2000
(L)'000s (L)'000s (L)'000s
--------------------------------------------------------------------------------------------------------------------------------
David Jones 57 21 35 220
Stephen Box 49 14 11 22
Wob Gerretsen 58 12 19 127
Rick Sergel(2) 50 -- -- 193
Roger Urwin 54 14 16 130
--------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Accrued pension represents the pension which would be paid annually at age
60 if the Director resigned on 31 March 2000.
(2) Appointed to the Board on 27 March 2000.
45
--------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March 1999
-------------------------------------------------------------------------------
Increase to
Age at Director's accrued pension Accrued pension
31 March contributions during year (net as at 31 March(1)
1999 during year of inflation) 1999
(L)'000s (L)'000s (L)'000s
--------------------------------------------------------------------------------------------------------------------------------
David Jones 56 18 25 183
Stephen Box 48 12 7 11
Wob Gerretsen 57 11 11 107
Roger Urwin 53 11 2 112
--------------------------------------------------------------------------------------------------------------------------------
Note:
(1) Accrued pension represents the pension which would be paid annually at age
60 if the Director resigned on 31 March 1999.
6. Pensions and other post-retirement benefits
Substantially all of the Group's UK employees are members of the Electricity
Supply Pension Scheme ("the ESPS"), a defined benefit funded scheme. The
assets of the Scheme are held in a separate trustee administered fund. The
ESPS is divided into sections, one of which is the Group's section. The latest
full actuarial valuation of the Group's section of the ESPS was carried out by
Bacon & Woodrow, Consulting Actuaries, as at 31 March 1998. The results of
this latest valuation have been used as the basis for assessing pension cost.
The attained age method was used for the latest 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 ESPS at 31 March 1998 was (L)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.
Substantially all of the Group's US employees are members of defined benefit
plans. The assets of the plans are held in separate trustee administered
funds. The latest full actuarial valuations were carried out as at 1 April
2000 for the NEES plans and at 19 April 2000 for the EUA plans (for the
purpose of determining the fair value of the net assets acquired on the
acquisition of EUA (note 26(a)). The projected unit credit method was used for
the latest valuations and the principal actuarial assumptions adopted were
that the real annual rate of return on investments would average 4.6%; that
real annual increases in salary would average 1.2%; that inflation would
average 4.0 %; and that increases in pensions would be nil. The market value
of the assets relating to the Group's US defined benefit plans at 1 April 2000
(NEES) and 19 April 2000 (EUA) total $1,223.2m and the actuarial value of the
assets represented 124% 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 2001 charged to operating profit
of (L)18.9m (2000: (L)10.4m; 1999: (L)10.3m) represents the regular pension
cost of (L)21.2m (2000: (L)13.0m; 1999: (L)12.4m) less a variation from the
regular pension cost totalling (L)2.3m (2000: (L)2.6m; 1999: (L)2.1m), of
which (L)1.5m (2000: (L)1.5m; 1999: (L)1.5m) relates to the partial release of
a pension provision. In addition, net interest includes a credit of (L)15.7m
(2000: (L)3.5m; 1999: (L)3.7m) in respect of the notional interest element of
the variation from the regular pension cost.
Included in debtors at 31 March 2001 is a pension prepayment of (L)28.2m
(2000: (L)28.0m).
In the US, the Group provides health care and life insurance to eligible
retired US employees. Eligibility is based on certain age and length of
service requirements and in some cases retirees must contribute to the cost of
their coverage . The latest actuarial valuations were carried out as at 1
April 2000 for the NEES plans and at 19 April 2000 for the EUA plans (for the
purpose of determining the fair value of net assets acquired on the
acquisition of EUA (note 26(a))). The principal assumptions adopted were a
discount rate of 7.75% and that medical costs would increase by 8.25% per
annum, decreasing to 5.25% in 2002 and remaining at 5.25% thereafter.
The cost of providing health care and life insurance to retired US employees
for the year ended 31 March 2001 amounted to (L)7.3m (2000, for the period 22
March 2000 to 31 March 2000: (L)0.2m; 1999: (L)nil).
46
7. Net interest
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Bank loans and overdrafts 118.0 12.4 20.3
Other 232.1 146.0 128.1
------------- ------------- -------------
Interest payable and similar charges 350.1 158.4 148.4
Interest capitalised (20.7) (20.4) (19.4)
------------- ------------- -------------
Interest payable and similar charges net of interest capitalised 329.4 138.0 129.0
Interest receivable and similar income (112.9) (95.0) (28.1)
------------- ------------- -------------
216.5 43.0 100.9
Joint ventures (net of interest capitalised (L)18.5m (2000: (L)2.1m; 1999:
(L)nil)) 8.3 6.3 7.0
Associate 25.8 15.6 10.6
------------- ------------- -------------
250.6 64.9 118.5
============= ============= ===========
-----------------------------------------------------------------------------------------------------------------------------------
Interest on the funding attributable to assets in the course of construction
was capitalised during 2001 at a rate of 6.7% (2000: 6.7%; 1999: 7.4%).
Interest payable and similar charges for 2001 includes (L)21.0m of losses
arising from the valuation at maturity of US dollar interest rate swaptions
that provides an economic hedge against US dollar borrowings, but which do not
qualify as hedges for accounting purposes. Interest receivable and similar
income for 2001 includes a (L)17.4m gain on closing out sterling fixed
interest rate swaps that were originally entered into as hedges for sterling
borrowings. These hedges are no longer needed as a result of the reduction in
the Group's sterling borrowings.
Interest payable and similar charges for 1999 includes bank facility fees and
interest rate option costs totalling (L)14.1m relating to the acquisition of
NEES and costs of (L)7.6m relating to the issue of the 6% mandatorily
exchangeable bonds 2003.
Details relating to the 1999 exceptional cost ((L)52.6m) of closing out
interest rate swaps are contained in note 3(d).
47
8. Taxation
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
UK
- Corporation tax at 30% (2000: 30%; 1999: 31%) (153.2) 347.4 280.1
- Adjustment in respect of prior years (20.0) -- --
------------- ------------- -------------
(173.2) 347.4 280.1
------------- ------------- -------------
Overseas
- Corporate tax 26.7 2.1 1.0
- Deferred tax (6.0) -- --
------------- ------------- -------------
20.7 2.1 1.0
------------- ------------- -------------
(152.5) 349.5 281.1
Joint ventures 3.1 3.1 2.4
Associate (0.2) -- (0.4)
------------- ------------- -------------
(149.6) 352.6 283.1
============= ============= =============
Comprising:
Taxation - excluding exceptional items 85.8 123.1 120.3
------------- ------------- -------------
Taxation - exceptional tax credit (note 3(e)) (229.5) -- --
Taxation - exceptional items (5.9) 229.5 162.8
------------- ------------- -------------
(235.4) 229.5 162.8
------------- ------------- -------------
(149.6) 352.6 283.1
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The tax credit for 2001 has been increased by (L)54.2m (tax charge for 2000
and 1999 reduced by (L)18.4m and (L)32.7m respectively) 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.
48
A reconciliation of the UK corporation tax rate to the effective tax rate of
the Group is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(% of profit before taxation)
-----------------------------------------------------------------------------------------------------------------------------------
UK corporation tax rate 30.0 30.0 31.0
Increase/(decrease) resulting from:
Tax depreciation in excess of book depreciation (13.6) (3.0) (2.0)
Goodwill amortisation and other permanent differences 8.7 0.1 2.8
Unrelieved tax losses (including overseas) 11.4 -- --
Provisions for liabilities and charges (1.3) (0.9) (2.9)
Overseas income taxed at other than UK statutory rate (11.4) -- --
Other 2.2 (0.2) (2.7)
------------- ------------- -------------
Effective tax rate before adjustment in respect of prior years and exceptional
items 26.0 26.0 26.2
Adjustment in respect of prior years (4.9) -- --
------------- ------------- -------------
Effective tax rate after adjustment in respect of prior years and before
exceptional items 21.1 26.0 26.2
Exceptional items (45.1) (2.5) (4.4)
------------- ------------- -------------
Effective tax rate after exceptional items (24.0) 23.5 21.8
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
9. Dividends
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
pence pence pence (L)m (L)m (L)m
(per ordinary share)
-----------------------------------------------------------------------------------------------------------------------------------
Ordinary dividends
- Interim 6.05 5.59 5.25 89.5 82.5 76.9
- Proposed final 9.03 8.35 7.82 133.5 123.0 115.1
-------- -------- -------- -------- -------- --------
15.08 13.94 13.07 223.0 205.5 192.0
======== ======== ======== ======== ======== ========
-----------------------------------------------------------------------------------------------------------------------------------
49
10. Earnings per ordinary share
----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Earnings Profit number Earnings Profit number Earnings Profit number
per for the of per for the of per for the of
share year shares share year shares share year shares
2001 2001 2001 2000 2000 2000 1999 1999 1999
pence (L)m million pence (L)m million pence (L)m million
----------------------------------------------------------------------------------------------------------------------------------
Basic, including
exceptional items and
goodwill amortisation 52.1 769.0 1,475.8 78.0 1,148.4 1,472.9 69.2 1,015.0 1,466.6
Profit relating to
partial disposal of
Energis (note 3(b)) (16.5) (242.9) -- (54.2) (797.8) -- (48.6) (712.7) --
Profit on disposal of
businesses (note 3(c)) (1.3) (20.1) -- -- -- -- -- -- --
Goodwill amortisation 5.0 74.5 -- 0.5 7.9 -- 0.2 2.5 --
Exceptional integration
costs (note 3(a)) 2.8 39.4 -- -- -- -- -- -- --
Exceptional tax credit
(note 3(e)) (15.6) (229.5) -- -- -- -- -- -- --
Cost of closing out
interest rate swaps
(note 3(d)) -- -- -- -- -- -- 2.5 36.3 --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Basic, excluding
exceptional items and
goodwill amortisation 26.5 390.4 1,475.8 24.3 358.5 1,472.9 23.3 341.1 1,466.6
Dilutive impact of
employee share options (0.2) -- 9.9 (0.2) -- 10.1 (0.2) -- 11.3
Dilutive impact of 4.25%
exchangeable bonds 2008 (0.5) 21.2 110.3 (0.3) 20.9 110.3 (0.4) 20.2 110.3
-------- -------- -------- -------- -------- -------- -------- -------- --------
Diluted, excluding
exceptional items and
goodwill amortisation 25.8 411.6 1,596.0 23.8 379.4 1,593.3 22.7 361.3 1,588.2
Profit relating to
partial disposal of
Energis (note 3(b)) 15.2 242.9 -- 50.1 797.8 -- 44.9 712.7 --
Profit on disposal of
businesses (note 3(c)) 1.3 20.1 -- -- -- -- -- -- --
Goodwill amortisation (4.7) (74.5) -- (0.5) (7.9) -- (0.1) (2.5) --
Exceptional integration
costs (note 3(a)) (2.5) (39.4) -- -- -- -- -- -- --
Exceptional tax credit
(note 3(e)) 14.4 229.5 -- -- -- -- -- -- --
Cost of closing out
interest rate swaps
(note 3(d)) -- -- -- -- -- -- (2.3) (36.3) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Diluted, including
exceptional items and
goodwill amortisation 49.5 790.2 1,596.0 73.4 1,169.3 1,593.3 65.2 1,035.2 1,588.2
======== ======== ======== ======== ======== ======== ======== ======== ========
----------------------------------------------------------------------------------------------------------------------------------
The weighted average number of shares in issue excludes the shares held by
employee share trusts.
Earnings per ordinary share, excluding exceptional items and goodwill
amortisation, are provided in order to reflect the underlying performance of
the Group.
50
11. Intangible fixed assets - goodwill
-----------------------------------------------------------------------------------------------------------------------------------
Cost Amortisation Net book value
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 15.3 (0.2) 15.1
Exchange adjustments (15.4) -- (15.4)
Addition (note 26(b)) 847.6 -- 847.6
Charge for the year -- (2.6) (2.6)
------------------ ------------------ ------------------
At 31 March 2000 847.5 (2.8) 844.7
Exchange adjustments 136.0 (2.2) 133.8
Addition (note 26(a)) 213.5 -- 213.5
Adjustments to acquisition provisional fair values
(note 26(b)) 68.2 -- 68.2
Disposal (16.6) 2.8 (13.8)
Charge for the year -- (60.2) (60.2)
------------------ ------------------ ------------------
At 31 March 2001 1,248.6 (62.4) 1,186.2
================== ================== ==================
-----------------------------------------------------------------------------------------------------------------------------------
51
12. Tangible fixed assets
-----------------------------------------------------------------------------------------------------------------------------------
Motor
Assets in the vehicles and
Land and Plant and course of office
buildings machinery construction equipment Total
(L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Cost at 1 April 1999 117.7 4,186.6 331.3 127.9 4,763.5
Exchange adjustments (6.7) (50.1) (0.7) (0.6) (58.1)
Acquisition of Group undertaking 359.3 2,672.4 40.1 27.9 3,099.7
Capital expenditure 13.6 4.5 275.8 22.2 316.1
Disposals (5.6) (31.6) -- (11.0) (48.2)
Reclassifications 13.3 318.4 (336.0) 4.3 --
------------- ------------- ------------- ------------- -------------
Cost at 31 March 2000 491.6 7,100.2 310.5 170.7 8,073.0
------------- ------------- ------------- ------------- -------------
Depreciation at 1 April 1999 19.0 1,558.9 -- 86.2 1,664.1
Exchange adjustments (3.8) (22.0) -- (0.2) (26.0)
Acquisition of Group undertaking 203.2 1,173.1 -- 12.5 1,388.8
Charge for the year 2.2 134.9 -- 17.8 154.9
Disposals (4.6) (31.6) -- (10.9) (47.1)
Reclassifications 0.7 (0.7) -- -- --
------------- ------------- ------------- ------------- -------------
Depreciation at 31 March 2000 216.7 2,812.6 -- 105.4 3,134.7
------------- ------------- ------------- ------------- -------------
Net book value at 31 March 2000 274.9 4,287.6 310.5 65.3 4,938.3
============= ============= ============= ============= =============
Cost at 1 April 2000 491.6 7,100.2 310.5 170.7 8,073.0
Exchange adjustments 49.4 384.5 6.4 2.3 442.6
Acquisition of Group undertaking 57.8 415.1 7.2 -- 480.1
Capital expenditure 8.3 4.2 507.8 15.5 535.8
Disposal of businesses (139.1) (408.6) (2.8) (20.5) (571.0)
Other disposals (6.0) (50.5) -- (11.7) (68.2)
Reclassifications (15.4) 444.7 (419.4) (9.9) --
------------- ------------- ------------- ------------- -------------
Cost at 31 March 2001 446.6 7,889.6 409.7 146.4 8,892.3
------------- ------------- ------------- ------------- -------------
Depreciation at 1 April 2000 216.7 2,812.6 -- 105.4 3,134.7
Exchange adjustments 26.6 168.9 -- 1.2 196.7
Acquisition of Group undertaking 15.1 173.5 -- -- 188.6
Charge for the year 6.5 251.6 -- 18.4 276.5
Disposal of businesses (114.6) (326.9) -- (17.0) (458.5)
Other disposals (1.6) (49.7) -- (11.7) (63.0)
Reclassifications (0.7) 14.0 -- (13.3) --
------------- ------------- ------------- ------------- -------------
Depreciation at 31 March 2001 148.0 3,044.0 -- 83.0 3,275.0
------------- ------------- ------------- ------------- -------------
Net book value at 31 March 2001 298.6 4,845.6 409.7 63.4 5,617.3
============= ============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The net book value of tangible fixed assets at 31 March 2001 is stated after
deducting capital contributions of (L)84.8m (2000: (L)95.9m).
The cost of tangible fixed assets at 31 March 2001 includes (L)280.5m (2000:
(L)259.8m) relating to interest capitalised.
52
The net book value of land and buildings comprises:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Freehold 262.5 240.1
Long leasehold (over 50 years) 30.0 30.3
Short leasehold (under 50 years) 6.1 4.5
------------- -------------
298.6 274.9
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
13. Fixed asset investments
-----------------------------------------------------------------------------------------------------------------------------------
Listed Own Other
Unlisted joint ventures associate shares investments Total
------------------------- ------------ --------- ------------ ---------
Share of Share of
net assets Loans net assets
(L)m (L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 71.1 -- 151.0 11.0 -- 233.1
Exchange adjustments 4.9 -- -- -- (1.7) 3.2
Acquisition of Group undertaking 29.1 -- -- -- 92.7 121.8
Additions 144.5 -- -- 11.2 -- 155.7
Disposals -- -- (56.8) (5.9) -- (62.7)
Share of retained loss (39.2) -- (19.6) -- -- (58.8)
Other movements (4.5) -- 131.2 -- -- 126.7
------------ --------- ------------ --------- ------------ ---------
At 31 March 2000 205.9 -- 205.8 16.3 91.0 519.0
Exchange adjustments (4.0) 3.5 -- -- 15.4 14.9
Acquisition of Group undertaking 6.3 -- -- -- 28.7 35.0
Additions 250.8 61.4 -- 2.1 22.9 337.2
Disposal of business -- -- -- -- (23.1) (23.1)
Other disposals -- -- -- (8.2) -- (8.2)
Share of retained loss (122.9) -- (34.4) -- -- (157.3)
Other movements (0.7) -- 243.5 -- -- 242.8
------------ --------- ------------ --------- ------------ ---------
At 31 March 2001 335.4 64.9 414.9 10.2 134.9 960.3
============ ========= ============ ========= ============ =========
-----------------------------------------------------------------------------------------------------------------------------------
The market value of the investment in the listed associate (Energis) at 31
March 2001 was (L)1,579.4m (2000: (L)3,309.3m).
Own shares at 31 March 2001 relate to 5.9m (2000: 10.4m) 11 13/17p ordinary
shares in National Grid, held by employee share trusts for the purpose of
satisfying certain obligations under the various share option schemes operated
by the Group. The carrying value of (L)10.2m (2000: (L)16.3m) (market value
(L)31.9m (2000: (L)59.6m)) represents the exercise amounts receivable in
respect of those shares which were issued at market value by the Company and
cost in respect of those shares purchased in the open market. Funding is
provided to the trusts by Group undertakings. The trusts have waived their
rights to dividends on these shares.
53
14. Debtors
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Amounts falling due within one year:
Trade debtors 379.9 246.9
Amounts owed by an associate 10.5 14.8
Amounts owed by joint ventures 23.3 1.0
Regulatory assets 255.1 108.6
Prepayments and accrued income 115.8 101.9
Other debtors 95.8 16.9
------------- -------------
880.4 490.1
------------- -------------
Amounts falling due after more than one year:
Amounts owed by an associate 45.1 48.0
Regulatory assets 941.4 727.4
Other debtors 30.0 22.9
------------- -------------
1,016.5 798.3
------------- -------------
1,896.9 1,288.4
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Trade debtors are stated net of provisions for doubtful debts of (L)15.4m
(2000: (L)10.6m).
The amounts owed by an associate include a net investment in a finance lease
amounting to (L)48.9m (2000: (L)52.3m) comprising total rentals receivable of
(L)74.2m (2000: (L)85.5m) less unearned income of (L)25.3m (2000: (L)33.2m),
of which (L)3.8m (2000: (L)4.3m) falls due within one year and (L)45.1m (2000:
(L)48.0m) falls due after more than one year. Rentals received and receivable
in the year ended 31 March 2001 amounted to (L)11.3m (2000: (L)6.7m). At 31
March 2001, the minimum lease payments for each of the five years ending 31
March 2006 are (L)9.0m.
Regulatory assets
SFAS 71 establishes US GAAP for utilities whose regulators have the power to
approve and/or regulate rates that may be charged to customers. Provided that
through the regulatory process, the utility is substantially assured of
recovering its allowable costs by the collection of revenue from its
customers, such costs not yet recovered are deferred as regulatory assets. Due
to the different regulatory environment, no equivalent accounting standard
applies in the UK.
Under UK GAAP, regulatory assets established in accordance with SFAS 71 are
recognised where they comprise rights or other access to future economic
benefits which arise as a result of past transactions or events which have
created an obligation to transfer economic benefit to a third party.
Measurement of the past transaction or event and hence of the regulatory asset
is determined in accordance with UK GAAP.
Regulatory assets primarily relate to the right to recover from customers the
liabilities recognised in respect of purchased power obligations (note 17),
the decommissioning provision (note 20) and the under-recovery of power costs
incurred.
15. Assets held for exchange
The assets held for exchange of (L)16.6m (2000: (L)16.6m) represent the
carrying value of 73.5m (2000: 73.5m, restated to reflect a 5:1 share split)
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 61.0m (2000: 61.0m, restated to reflect a 5:1 share
split) of these shares are vested in the bondholders.
54
16. Creditors (amounts falling due within one year)
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Borrowings (note 18) 1,008.7 669.0
Trade creditors and accruals 648.9 529.5
Amounts owed to an associate 10.6 5.3
Amounts owed to a joint venture 2.1 0.2
Purchased power obligations 105.0 46.9
Corporate tax 16.2 378.4
Social security and other taxes 14.1 25.3
Proposed dividend 133.5 123.0
Other creditors 274.6 83.5
------------- -------------
2,213.7 1,861.1
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
17. Creditors (amounts falling due after more than one year)
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Borrowings (note 18) 3,180.7 3,006.2
Purchased power obligations 448.5 382.3
Other creditors 126.3 111.7
------------- -------------
3,755.5 3,500.2
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Purchased power obligations
As part of the sale of substantially all of its non-nuclear generating
business, National Grid USA entered into purchased power transfer agreements
with the purchasers whereby the purchasers took over a number of long term
contracts between National Grid USA and owners of various generating units. In
exchange, National Grid USA committed to make fixed monthly payments to the
purchasers towards the above-market cost of the contracts. The creditor
relating to purchased power obligations, which is also reflected in regulatory
assets (note 14), represents the net present value of these monthly payments
discounted at 5.12%. At 31 March 2001, amounts falling due after five years
totalled (L)131.6m (2000: (L)173.1m).
55
18. Borrowings
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Amounts falling due within one year:
Bank loans and overdrafts 627.5 144.5
Commercial paper 107.3 52.5
6% mandatorily exchangeable bonds 2003 242.6 242.6
5.5% US dollar bonds 2001 -- 197.6
US medium term notes 2001 13.8 18.7
Other loans 17.5 13.1
------------- -------------
1,008.7 669.0
------------- -------------
Amounts falling due after more than one year:
Bank borrowings 2002-2004 995.5 1,000.0
Pollution control revenue bonds 2018-2022 315.0 232.4
4.25% exchangeable bonds 2008 480.3 469.0
5.875% bonds 2024 443.6 443.3
US medium term notes 2002-2028 327.8 299.7
8.0% bonds 2006 239.1 238.9
European Investment Bank Swiss franc loan 2004 237.0 173.2
US private placement notes 2002-2015 74.8 78.4
Zero coupon bonds 2002 26.2 26.2
US tax exempt bonds 2002-2017 16.7 16.4
Other loans 24.7 28.7
------------- -------------
3,180.7 3,006.2
------------- -------------
Total borrowings 4,189.4 3,675.2
============= =============
Total borrowings are repayable as follows:
In one year or less 1,008.7 669.0
In more than one year, but not more than two years 85.8 707.1
In more than two years, but not more than three years 1,262.0 79.9
In more than three years, but not more than four years 47.1 512.3
In more than four years, but not more than five years 252.6 42.3
In more than five years - by instalments 61.7 58.7
- other than by instalments 1,471.5 1,605.9
------------- -------------
4,189.4 3,675.2
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
At 31 March 2001, borrowings totalling (L)348.6m (2000: (L)330.7m) were
secured by charges over property, plant and other assets of the Group.
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 in
the aggregate principal amount of $401.2m. The EPICs are exchangeable, subject
to certain exceptions, on or prior to 26 April 2003 at the option of the
holder of the bonds into ordinary shares of Energis plc, an associated
undertaking (note 15). If the EPICs are redeemed at the option of the
bondholders prior to 3 May 2003, the Group will deliver 4.1665 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 five, if the share
price is (L)3.30 or less, to a minimum of 4.1665 if the share price is (L)3.96
or more.
56
The 4.25% exchangeable bonds 2008 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 Exchangeable 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 Exchangeable
Bonds will be redeemed on 17 February 2008 at their principal amount plus a
premium (together the redemption price, being (L)1,209.31 per (L)1,000
principal amount of Exchangeable 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 Exchangeable Bonds has not been anticipated and
the Exchangeable Bonds have been classified as repayable in more than five
years.
19. Financial instruments
The Group's treasury policy, including details of the nature, terms and credit
risk associated with financial instruments with off-balance sheet risk is
described below. Short term debtors and creditors, where permitted by the
financial reporting standard on derivatives and other financial instruments
(FRS 13), have been excluded from the analyses of the Group's financial assets
and financial liabilities contained within this note, which are after taking
account of currency swaps where applicable. It is assumed that because of
short maturities, the fair value of short term debtors and creditors
approximates to their book values.
Treasury policy
The funding and Treasury risk management of the Group is carried out by a
central department operating under policies and guidelines approved by the
Directors. The Treasury Policy Committee, a committee of the Group Board, is
responsible for regular review and monitoring of treasury activity and for
approval of specific transactions. Treasury-related risks faced by the Group
include interest rate risk, currency risk, credit risk and liquidity and
funding risk, and the policies applicable are described below. Derivative
financial instruments, including swaps and options, are used principally for
reducing interest rate and currency risk. Derivatives are not held for trading
purposes.
Interest rate risk
To provide protection against adverse interest rate movements, the interest
rate on the debt portfolio is managed through the use of fixed-rate debt,
combined with the use of interest rate swaps, options and option-related
instruments with a view to maintaining a significant proportion of the debt
portfolio at fixed rates over the medium term. The interest rate composition
of the Group's financial liabilities at 31 March 2001 and 31 March 2000 are
shown below.
Currency risk
Although foreign currency transaction exposures relating to cross-border
trading activity remain very limited, the policy of the Group is to hedge all
exposures exceeding $500,000 through the use of forward foreign exchange
contracts. The principal currency risk to which the Group is exposed arises
from the translation of assets and liabilities not denominated in sterling. In
general, the policy has been to hedge the balance sheet exposure through
currency borrowings, currency swaps or forward foreign exchange deals to the
extent of the original cost of the investment, where this is material and
where it is practical to do so in the light of costs and availability of
suitable financial instruments for the currency concerned.
The acquisition of Niagara Mohawk will further increase the balance sheet
exposure to US dollars. In view of the increased materiality of the US dollar
to the Group the policy has been reviewed, and the objective will be to match
the US dollar proportion of the Group's financial liabilities to the
proportion of its cash flow that arises in dollars and is available to service
those liabilities.
The currency composition of the Group's financial assets and financial
liabilities at 31 March 2001 and 31 March 2000 are shown below.
Liquidity risk
National Grid seeks to ensure that all of its forecast funding 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. Longer-term refinancing risk is controlled by
ensuring that the amount of loans maturing in any year is not excessive,
compared with the Group's borrowing capacity.
57
Currency and interest rate composition of financial liabilities
--------------------------------------------------------------------------------------------------------------------------------
Fixed rate liabilities
-------------------------------
Weighted
average
Weighted period for
average which rate is
Total Variable rate Fixed rate interest rate fixed
(L)m (L)m (L)m % Years
--------------------------------------------------------------------------------------------------------------------------------
At 31 March 2001
Sterling 539.6 (759.4) 1,299.0 6.92 4.6
US dollars 3,647.3 1,239.5 2,407.8 6.86 3.4
Others 2.5 2.5 -- -- --
------------- ------------- ------------- ------------- -------------
Borrowings 4,189.4 482.6 3,706.8 6.88 3.8
Other financial liabilities (sterling) 30.4 -- 30.4 5.34 4.6
Other financial liabilities (US dollars) 662.2 621.2 41.0 6.22 10.0(1)
------------- ------------- ------------- ------------- -------------
4,882.0 1,103.8 3,778.2 6.86 3.8
============= ============= ============= ============= =============
At 31 March 2000
Sterling 776.2 (447.5) 1,223.7 6.90 5.6
US dollars 2,899.0 756.2 2,142.8 6.96 4.4
------------- ------------- ------------- ------------- -------------
Borrowings 3,675.2 308.7 3,366.5 6.94 4.8
Other financial liabilities (sterling) 33.5 0.1 33.4 5.34 3.2
Other financial liabilities (US dollars) 408.2 396.0 12.2 5.92 --(1)
------------- ------------- ------------- ------------- -------------
4,116.9 704.8 3,412.1 6.92 4.8
============= ============= ============= ============= =============
--------------------------------------------------------------------------------------------------------------------------------
Note:
(1) Excludes non-equity minority interests of (L)20.0m (2000: (L)12.2m) with
no fixed repayment date.
At 31 March 2001, the weighted average interest rate on short term borrowings
of (L)1,008.7m (2000: (L)669.0m) was 5.9% (2000: 6.1%).
Other US dollar financial liabilities at 31 March 2001 and at 31 March 2000
predominantly relate to purchased power obligations due after more than one
year of (L)448.5m (2000: (L)382.3m) and the exchange revaluation of a cross
currency swap of (L)166.4m (2000: (L)nil).
Substantially all of the variable rate borrowings are subject to interest
rates which fluctuate with LIBOR for the appropriate currency at differing
premiums or in the case of certain USA based companies, are based on the
market rate for tax exempt commercial paper.
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.
58
Currency and interest rate composition of financial assets
-----------------------------------------------------------------------------------------------------------------------------------
Fixed rate assets
-------------------------------
Weighted
average
Weighted period for
Non-interest average which rate is
Total bearing Variable rate Fixed rate interest rate fixed
(L)m (L)m (L)m (L)m % Years
-----------------------------------------------------------------------------------------------------------------------------------
At 31 March 2001
Sterling 136.9 -- 136.9 -- -- --
US dollars 131.6 -- 131.6 -- -- --
Other currencies 2.7 -- 2.7 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Cash and deposits 271.2 -- 271.2 -- -- --
Other financial assets
(sterling) 65.5 16.6 -- 48.9 11.50 4.8
Other financial assets
(US dollars) 38.6 -- 11.9 26.7 5.37 9.8
Other financial assets
(other) 4.9 -- 4.9 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
380.2 16.6 288.0 75.6 9.34 6.6
============= ============= ============= ============= ============= =============
At 31 March 2000
Sterling 808.5 -- 808.5 -- -- --
US dollars 202.2 -- 202.2 -- -- --
Other currencies 0.9 -- 0.9 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Cash and deposits 1,011.6 -- 1,011.6 -- -- --
Other financial assets
(sterling) 90.1 16.6 21.2 52.3 11.50 5.4
Other financial assets
(US dollars) 149.7 118.9 -- 30.8 9.43 2.6
------------- ------------- ------------- ------------- ------------- -------------
1,251.4 135.5 1,032.8 83.1 9.84 3.2
============= ============= ============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Other financial assets at 31 March 2001 predominantly relate to assets held
for exchange of (L)16.6m (2000: (L)16.6m), a net investment in a finance lease
of (L)48.9m (2000: (L)52.3m), the exchange revaluation of a cross currency
swap of (L)nil (2000: (L)21.2m), fixed asset investment of (L)38.6m (2000:
(L)30.8m), and business held for resale of (L)nil (2000: (L)118.9m). 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
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
In one year or less 1,181.4 682.7
In more than one year, but not more than two years 191.6 765.0
In more than two years, but not more than three years 1,348.9 141.4
In more than three years, but not more than four years 130.4 569.8
In more than four years, but not more than five years 333.3 102.1
In more than five years 1,696.4 1,855.9
------------- -------------
4,882.0 4,116.9
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
59
Maturity of financial assets at 31 March
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
In one year or less 316.2 1,166.9
In more than one year, but not more than two years 6.2 27.5
In more than two years, but not more than three years 6.5 4.7
In more than three years, but not more than four years 6.2 5.0
In more than four years, but not more than five years 7.0 6.0
In more than five years 38.1 41.3
------------- -------------
380.2 1,251.4
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Fair values of financial instruments at 31 March
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------- -------------------------------
Book value Fair value Book value Fair value
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
6% mandatorily exchangeable bonds 2003 (242.6) (196.7) (242.6) (391.6)
Other short term debt (766.1) (768.7) (426.4) (413.5)
Exchangeable bonds 2008 (480.3) (627.7) (469.0) (654.6)
Other long term debt (2,700.4) (2,704.8) (2,537.2) (2,533.4)
------------- ------------- ------------- -------------
Total borrowings (4,189.4) (4,297.9) (3,675.2) (3,993.1)
Cash and deposits 271.2 271.2 1,011.6 1,011.6
------------- ------------- ------------- -------------
Net borrowings (3,918.2) (4,026.7) (2,663.6) (2,981.5)
Other financial liabilities(1) (519.9) (516.3) (428.0) (426.3)
Net investment in finance lease 48.9 56.0 52.3 60.6
Assets held for exchange 16.6 205.1 16.6 429.7
Other financial assets(2) 43.5 44.8 149.7 149.7
------------- ------------- ------------- -------------
Net financial liabilities(1),(2) (4,329.1) (4,237.1) (2,873.0) (2,767.8)
Financial instruments held to manage interest rate and
currency profile:
Interest rate swaps (2.9) (40.4) (2.4) 6.1
Forward foreign currency contracts and cross currency swaps (169.8) (250.1) 21.0 (1.2)
Cross currency option -- -- (11.1) (10.1)
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Excluding interest rate swaps (L)2.9m (2000: (L)2.4m), forward currency
contracts (L)3.4m (2000: (L)0.2m), cross currency swaps (L)166.4m (2000:
(L)nil) and cross currency option (L)nil (2000: (L)11.1m).
(2) Excluding cross currency swaps (L)nil (2000: (L)21.2m).
Market values, where available, have been used to determine fair values. Where
market values are not available, fair values have been calculated by
discounting cash flows at prevailing interest rates.
The notional principal amounts relating to financial instruments held to
manage interest rate and currency profile for interest rate swaps, foreign
currency contracts and cross currency swaps, and a cross currency option
amounted to (L)2,889.6m (2000: (L)2,534.9m); (L)2,118.0m (2000: (L)1,633.5m);
and (L)nil (2000: (L)1,061.9m) respectively.
60
Gains and losses on hedges
-----------------------------------------------------------------------------------------------------------------------------------
Net gain/
Gains Losses (loss)
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Unrecognised gains and (losses) on hedges at 1 April 2000 40.0 (52.7) (12.7)
Gains/(losses) arising in the current year 5.5 (295.3) (289.8)
------------- ------------- -------------
45.5 (348.0) (302.5)
(Gains)/losses recognised during the year (34.8) 219.5 184.7
------------- ------------- -------------
Unrecognised gains and (losses) on hedges at 31 March 2001 10.7 (128.5) (117.8)
============= ============= =============
Of which:
Gains and (losses) expected to be recognised in the next year -- (27.9) (27.9)
Gains and (losses) expected to be recognised in subsequent years 10.7 (100.6) (89.9)
-----------------------------------------------------------------------------------------------------------------------------------
At 31 March 2001, within the (L)128.5m unrecognised loss there is an
unrecognised loss of (L)61.2m for which there are offsetting gains of (L)53.2m
on the related borrowings.
Borrowing facilities
At 31 March 2001, the Group had committed credit facilities from syndicates of
banks of (L)2,510.5m (2000: (L)2,493.7m) of which (L)1,120.7m (2000:
(L)1,493.7m) was undrawn and of which (L)816.9m expires within one year,
(L)211.2m expires after more than one year but less than two years, and
(L)92.6m expires after more than two years. The unused facilities are
available to support further acquisitions and other general corporate
purposes.
20. Provisions for liabilities and charges
-----------------------------------------------------------------------------------------------------------------------------------
Post-
Decom- retirement Environ- Deferred Total
missioning benefits mental taxation Other provisions
(L)m (L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 -- 15.2 25.5 -- 4.9 45.6
Exchange adjustments (4.4) (1.9) (0.3) (1.3) -- (7.9)
Acquisition of Group
undertaking 235.7 102.8 18.6 73.4 -- 430.5
Utilised -- (1.5) (2.6) -- (2.7) (6.8)
------------- ------------- ------------- ------------- ------------- -------------
At 31 March 2000 231.3 114.6 41.2 72.1 2.2 461.4
Exchange adjustments 29.3 14.7 3.8 18.1 -- 65.9
Adjustments to
acquisition provisional
fair values -- (11.8) -- 0.2 -- (11.6)
Acquisition of Group
undertaking 34.5 27.3 12.0 62.9 -- 136.7
Additions 16.3 18.7 10.5 -- -- 45.5
Unused amounts reversed (80.5) -- (10.0) (6.0) (1.8) (98.3)
Utilised (18.9) (13.8) (5.1) -- (0.1) (37.9)
Disposal of business (65.9) -- -- -- -- (65.9)
------------- ------------- ------------- ------------- ------------- -------------
At 31 March 2001 146.1 149.7 52.4 147.3 0.3 495.8
============= ============= ============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
61
The decommissioning provision of (L)146.1m at 31 March 2001, represents the
net present value of the estimated expenditure (discounted at rates up to
6.62%) expected to be incurred in respect of the decommissioning of certain
nuclear generating units and other related provisions. A related regulatory
asset is also recognised (note 14). Expenditure is expected to be incurred
between 2001 and 2042. Additions in the year ended 31 March 2001 include
(L)10.8m (2000: (L)nil) and (L)2.3m (2000: (L)nil) in respect of changes in
the discounted amount arising from the passage of time and the effect of the
change in the discount rate respectively.
The post-retirement benefits provision is in respect of pensions (L)76.1m
(2000: (L)57.3m) and other post-retirement benefits (health care and life
insurance) (L)73.6m (2000: (L)57.3m).
The environmental provision represents the estimated environmental restoration
and remediation costs relating to a number of sites. At 31 March 2001,
(L)37.8m of this provision represents the net present value of the estimated
expenditure (discounted at 7.75%) expected to be incurred between 2001 and
2045. Substantially all of the remainder of this provision is expected to be
utilised within the next five years. Additions in the year ended 31 March 2001
include (L)0.2m (2000: (L)nil) in respect of a change in the discounted amount
arising from the passage of time.
Deferred taxation provided in the accounts and the potential liability not
provided comprise:
-----------------------------------------------------------------------------------------------------------------------------------
Provided Not provided
------------------------------- -------------------------------
2001 2000 2001 2000
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Accelerated capital allowances -- -- 1,124.4 998.9
Other timing differences 147.3 72.1 (99.2) (100.1)
------------- ------------- ------------- -------------
147.3 72.1 1,025.2 898.8
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
21. Share capital
-----------------------------------------------------------------------------------------------------------------------------------
Allotted,
Authorised called up and fully paid
------------------------------- -------------------------------
Ordinary shares of 11 13/17p each millions (L)m millions (L)m
-----------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 2,125.0 250.0 1,477.9 173.9
Issued during the year -- -- 6.9 0.8
Repurchased and cancelled during the year -- -- (0.2) --
------------- ------------- ------------- -------------
At 31 March 2000 2,125.0 250.0 1,484.6 174.7
------------- ------------- ------------- -------------
At 31 March 2001 2,125.0 250.0 1,484.6 174.7
============= ============= ============= =============
One (L)1 special rights redeemable preference share (at 31 March 1999, 31 March 2000 and 31 March 2001).
-----------------------------------------------------------------------------------------------------------------------------------
The special rights redeemable preference share, the National Grid 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 National
Grid 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 National Grid Special Share. The National Grid 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 (L)1 in
priority to other shareholders.
62
Share option schemes
The Group operates two principal forms of share option schemes. They are a
Sharesave scheme and an Executive share option scheme ("the Executive
scheme").
The Sharesave scheme is savings related where, under normal circumstances,
share options are exercisable on completion of a three or a five year save-as-
you-earn contract. The exercise price of options granted represents 80% of the
market price at the date the option was granted.
The Executive scheme applies to senior executives, including Executive
Directors. Options granted for the
1999/00 financial year are subject to the achievement of performance targets
related to earnings per share growth over a three year period. Options granted
for the 2000/01 financial year are subject to the achievement of performance
targets related to total shareholder returns over a three year period. The
share options are generally exercisable between the third and tenth
anniversaries of the date of grant.
In any ten year period, the maximum number of shares that may be issued or
issuable pursuant to the exercise of options under all of the Group's share
option schemes may not exceed the number of shares representing 10% of the
Company's issued ordinary share capital from time to time.
Movement in options to subscribe for ordinary shares of 11 13/17p under the
Group's various options schemes for the two years ended 31 March 2001 are
shown below and include those options related to shares issued to employee
benefit trusts.
-----------------------------------------------------------------------------------------------------------------------------------
Executive share
Sharesave scheme scheme Total
millions millions millions
-----------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 16.3 4.7 21.0
Granted 3.5 2.3 5.8
Lapsed (0.5) (0.2) (0.7)
Exercised (3.1) (0.8) (3.9)
----------------- ----------------- -----------------
At 31 March 2000 16.2 6.0 22.2
Granted 1.4 1.6 3.0
Lapsed (0.4) -- (0.4)
Exercised (4.1) (0.7) (4.8)
----------------- ----------------- -----------------
At 31 March 2001 13.1 6.9 20.0
================= ================= =================
Exercisable between 1 April 2001 and: 28 Feb 2006 30 Mar 2011
Option price per ordinary share 146.0p to 64.6p to
416.0p 623.0p
-----------------------------------------------------------------------------------------------------------------------------------
63
22. Reserves
-----------------------------------------------------------------------------------------------------------------------------------
Share Profit
premium and loss
account account
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
At 1 April 1999 246.5 1,532.1
Exchange adjustments -- 3.1
Ordinary shares issued during the year 10.8 --
Repurchase and cancellation of ordinary shares -- (1.1)
Transfer on issue of certain shares under share option schemes 17.4 (17.4)
Retained profit for the year -- 942.9
------------- -------------
At 31 March 2000 274.7 2,459.6
Exchange adjustments -- (12.0)
Ordinary shares issued during the year 0.9 --
Tax on exchange adjustments -- 31.9
Transfer on issue of certain shares under share option schemes 1.3 (1.3)
Retained profit for the year -- 546.0
------------- -------------
At 31 March 2001 276.9 3,024.2
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
23. Minority interests: non-equity
The non-equity minority interests of (L)20.0m (2000: (L)12.2m) comprises
cumulative preference stock issued by Group undertakings.
24. Reconciliation of movement in equity shareholders' funds
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Profit for the year 769.0 1,148.4 1,015.0
Dividends (223.0) (205.5) (192.0)
------------- ------------- -------------
546.0 942.9 823.0
Issue of ordinary shares 0.9 11.6 5.9
Repurchase of ordinary shares -- (1.1) --
Exchange adjustments (12.0) 3.1 (0.8)
Tax on exchange adjustments 31.9 -- --
------------- ------------- -------------
Net increase in equity shareholders' funds 566.8 956.5 828.1
Equity shareholders' funds at start of year 2,909.0 1,952.5 1,124.4
------------- ------------- -------------
Equity shareholders' funds at end of year 3,475.8 2,909.0 1,952.5
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
64
25. Group cash flow statement
(a) Reconciliation of operating profit to net cash inflow from operating
activities
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Operating profit of Group undertakings 715.6 572.1 576.7
Depreciation and amortisation 369.9 158.3 134.0
Profit on disposal of tangible fixed assets (6.6) (4.3) (2.5)
(Increase)/decrease in stocks (7.9) (0.4) 0.2
Increase in debtors (189.8) (22.7) (13.0)
Decrease in creditors (55.3) (11.5) (60.6)
Decrease in provisions (11.7) (6.8) (29.6)
Other (3.6) (2.7) 0.7
------------- ------------- -------------
Net cash inflow from operating activities 810.6 682.0 605.9
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
(b) Acquisition of Group undertakings
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Payments to acquire Group undertakings (442.5) (2,049.2) (12.6)
Cash balances of Group undertakings acquired 1.6 4.1 0.5
------------- ------------- -------------
(440.9) (2,045.1) (12.1)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Because the operations of NEES and EUA were successfully integrated on 1 May
2000, it is not possible to provide an indication of EUA's contribution to the
cash flow for the year ended 31 March 2001. The contribution to cash flow of
NEES, which was acquired during the year ended 31 March 2000, was not material
to that year as a result of the acquisition occurring late in the financial
year.
(c) Disposal of businesses
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Consideration received 204.7 -- --
Cash balances of businesses disposed (8.8) -- --
------------- ------------- -------------
195.9 -- --
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
65
(d) Reconciliation of net cash flow to movement in net debt
------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
------------------------------------------------------------------------------------------------------------------------------
Movement in cash and overdrafts (1.9) 26.4 (21.8)
Net cash (inflow)/outflow from the management of liquid resources(1) (775.2) (618.8) 1,482.3
Increase in borrowings (81.4) (769.2) (675.2)(2)
------------- ------------- -------------
Change in net debt resulting from cash flows (858.5) (1,361.6) 785.3
Acquisition of Group undertakings (162.2) (611.7) (4.2)
Certificates of tax deposit surrendered (3.6) (5.9) (8.7)
Exchange adjustments (218.0) 29.9 (0.3)
Other non-cash movements (12.3) (10.9) (10.2)
------------- ------------- -------------
Movement in net debt in the year (1,254.6) (1,960.2) 761.9
Net debt at start of year (2,663.6) (703.4) (1,465.3)
------------- ------------- -------------
Net debt at end of year (3,918.2) (2,663.6) (703.4)
============= ============= =============
------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Liquid resources comprise short term deposits.
(2) In 1999, cash flow from increase in borrowings is net of (L)7.0m costs
relating to the issue of long term debt.
66
(e) Analysis of changes in net debt
-----------------------------------------------------------------------------------------------------------------------------------
Acquisition
At 1 April of Group Non-cash Exchange Other At 31 March
1998 Cash flow undertakings(1) movements adjustments movements 1999
(L)m (L)m (L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Cash at bank and in hand(2) 0.7 0.9 -- -- -- -- 1.6
Bank overdrafts (1.5) (22.7) -- -- -- -- (24.2)
(21.8)
Deposits(2) 49.3 1,482.3 -- -- -- (8.7) 1,522.9
Borrowings due after one year (1,320.5) (458.0) (0.2) 151.6 -- (10.2) (1,637.3)
Borrowings due within one year (193.3) (217.2) (4.0) (151.6) (0.3) -- (566.4)
(675.2)(3)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(1,465.3) 785.3 (4.2) -- (0.3) (18.9) (703.4)
========== ========== ========== ========== ========== ========== ==========
Acquisition
At 1 April of Group Non-cash Exchange Other At 31 March
1999 Cash flow undertakings(1) movements adjustments movements 2000
(L)m (L)m (L)m (L)m (L)m (L)m (L)m
Cash at bank and in hand(2) 1.6 6.2 -- -- -- -- 7.8
Bank overdrafts (24.2) 20.2 -- -- -- -- (4.0)
26.4
Deposits(2) 1,522.9 (618.8) 107.7 -- (2.1) (5.9) 1,003.8
Borrowings due after one year (1,637.3) (924.0) (663.3) 197.6 31.7 (10.9) (3,006.2)
Borrowings due within one year (566.4) 154.8 (56.1) (197.6) 0.3 -- (665.0)
(769.2)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(703.4) (1,361.6) (611.7) -- 29.9 (16.8) (2,663.6)
========== ========== ========== ========== ========== ========== ==========
Acquisition
At 1 April of Group Non-cash Exchange Other At 31 March
2000 Cash flow undertakings(1) movements adjustments movements 2001
(L)m (L)m (L)m (L)m (L)m (L)m (L)m
Cash at bank and in hand(2) 7.8 17.4 -- -- 0.1 -- 25.3
Bank overdrafts (4.0) (19.3) -- -- -- -- (23.3)
(1.9)
Deposits(2) 1,003.8 (775.2) -- -- 20.9 (3.6) 245.9
Borrowings due after one year (3,006.2) 60.6 (50.0) 32.1 (204.9) (12.3) (3,180.7)
Borrowings due within one year (665.0) (142.0) (112.2) (32.1) (34.1) -- (985.4)
(81.4)
---------- ---------- ---------- ---------- ---------- ---------- ----------
(2,663.6) (858.5) (162.2) -- (218.0) (15.9) (3,918.2)
========== ========== ========== ========== ========== ========== ==========
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Excluding cash and bank overdrafts.
(2) Cash and deposits per the balance sheet at 31 March 2001 (L)271.2m (2000:
(L)1,011.6m; 1999: (L)1,524.5m).
(3) In 1999, cash flow from increase in borrowings is net of (L)7.0m costs
relating to the issue of long term debt.
67
26. Acquisitions
(a) On 19 April 2000, the Group acquired the entire issued share capital of
EUA for a cash consideration of (L)414.0m including acquisition costs of
(L)4.5m. The acquisition has been accounted for by using the acquisition
method of accounting. Goodwill arising on acquisition is being amortised over
20 years, being its estimated useful economic life.
-----------------------------------------------------------------------------------------------------------------------------------
Fair value adjustments
--------------------------------------
Accounting
Book value at policy
acquisition Revaluations alignment Fair value
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Tangible fixed assets 274.4 34.9(4),(5) (17.8)(2),(4),(5) 291.5
Fixed asset investments 42.7 (3.4) (4.3)(2) 35.0
Stocks 1.7 -- -- 1.7
Debtors 457.4 (0.5) (143.8)(3),(4) 313.1
Business held for resale 50.2 5.2(7) -- 55.4
Cash and deposits 1.6 -- -- 1.6
Creditors excluding borrowings (274.8) (15.3)(8),(9) 110.3(3) (179.8)
Borrowings (162.6) -- 0.4 (162.2)
Provisions for liabilities and charges (157.7) (10.8)(8) 31.8(1),(2),(3) (136.7)
Minority interests (18.1) (1.0) -- (19.1)
----------------- ----------------- ----------------- -----------------
214.8 9.1 (23.4)
================= ================= =================
Net assets acquired 200.5
Goodwill arising on acquisition 213.5
-----------------
Cash consideration, including costs of
acquisition 414.0
=================
-----------------------------------------------------------------------------------------------------------------------------------
Business held for resale of (L)55.4m relates to a subsidiary undertaking of
EUA which was held exclusively with a view to resale. The fair value of this
business represents the net sale proceeds.
Fair value adjustments primarily comprise:
Accounting policy alignment relating to:
(1) recognition of deferred tax on a partial provisioning basis ((L)30.5m);
(2) recognition of decommissioning liabilities and other provisions in
accordance with FRS12 ((L)15.8m);
(3) non-recognition of certain liabilities, and related assets, which do not
comply with FRS12 ((L)123.1m);
(4) accounting for allowance for equity funds used during construction
((L)13.7m);
(5) accounting for costs incurred on the disposal of tangible fixed assets
((L)21.2m);
(6) non-recognition of certain regulatory assets to accord with UK GAAP
((L)19.0m).
Adjustments (4) and (5) have also resulted in corresponding revaluation
adjustments.
Other revaluation adjustments relating to:
(7) revaluation of business held for resale to reflect net proceeds from
sale ((L)5.2m);
(8) recognition of liabilities in respect of certain integration costs
((L)13.9m);
(9) recognition of additional liabilities in respect of taxation and certain
other items ((L)14.4m).
The loss after taxation and minority interest of EUA for the period 1 January
2000 to 18 April 2000, based on its accounting policies prior to acquisition,
was (L)0.4m. The comparative figure for the year ended 31 December 1999 was a
profit after taxation and minority interest of (L)10.5m.
68
(b) The acquisition of NEES was completed on 22 March 2000 at a total cost of
(L)2,070.8m. The net assets acquired were ascribed a provisional fair value of
(L)1,223.2m resulting in provisional goodwill of (L)847.6m.
-----------------------------------------------------------------------------------------------------------------------------------
Fair value adjustments
----------------------------------------------
Book value at Accounting policy Provisional fair
acquisition Revaluations alignment value
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Tangible fixed assets 1,688.6 96.7(4),(5) (74.4)(2),(4),(5) 1,710.9
Fixed asset investments 109.2 12.6(7) -- 121.8
Stocks 16.5 -- -- 16.5
Debtors 1,087.5 7.8(6),(7) (10.4)(2),(3) 1,084.9
Business held for resale 121.2 -- -- 121.2
Cash and deposits 116.5 -- (4.7) 111.8
Creditors excluding borrowings (799.4) (1.8) 42.4(3) (758.8)
Borrowings (719.4) -- -- (719.4)
Provisions for liabilities and
charges (584.6) (12.4)(6) 166.5(1),(2) (430.5)
Minority interests (35.2) -- -- (35.2)
--------------------- --------------------- --------------------- ---------------------
1,000.9 102.9 119.4 1,223.2
===================== ===================== ===================== =====================
-----------------------------------------------------------------------------------------------------------------------------------
Business held for resale of (L)121.2m ((L)118.9m at 31 March 2000 exchange
rate) relates to a subsidiary undertaking of NEES which is held exclusively
with a view to resale. The book and provisional fair value of this business
represents the anticipated net sale proceeds.
Fair value adjustments primarily comprise:
Accounting policy alignment relating to:
(1) recognition of deferred tax on a partial provisioning basis ((L)213.9m);
(2) recognition of decommissioning liabilities and other provisions in
accordance with FRS12 ((L)47.4m);
(3) non-recognition of certain liabilities, and related assets, which do not
comply with FRS12 ((L)34.6m);
(4) accounting for allowance for equity funds used during construction
((L)13.3m);
(5) accounting for costs incurred on the disposal of tangible fixed assets
((L)84.1m).
Adjustments (4) and (5) have also resulted in corresponding revaluation
adjustments.
Other revaluation adjustments relating to:
(6) recognition of a net deficiency on pension and other post-retirement
plans ((L)2.2m);
(7) revaluation of investments to market value ((L)12.6m).
69
During the year ended 31 March 2001, the provisional fair values applied were
reviewed and a number of adjustments were made to those provisional values, as
shown below.
-----------------------------------------------------------------------------------------------------------------------------------
Fair value adjustments
--------------------------------------
Provisional fair Accounting policy
value Revaluations alignment Final fair value
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Tangible fixed assets 1,710.9 -- -- 1,710.9
Fixed asset investments 121.8 (0.6) -- 121.2
Stocks 16.5 -- -- 16.5
Debtors 1,084.9 0.5 (47.4)(1) 1,038.0
Business held for resale 121.2 (33.6)(2) -- 87.6
Cash and deposits 111.8 -- -- 111.8
Creditors excluding borrowings (758.8) 1.3 -- (757.5)
Borrowings (719.4) -- -- (719.4)
Provisions for liabilities and charges (430.5) (0.3) 11.9(1) (418.9)
Minority interests (35.2) -- -- (35.2)
----------------- ----------------- ----------------- -----------------
1,223.2 (32.7) (35.5) 1,155.0
================= ================= ================= =================
-----------------------------------------------------------------------------------------------------------------------------------
Fair value adjustments primarily comprise:
(1) non-recognition of certain regulatory assets and related provisions to
accord with UK GAAP ((L)35.5m);
(2) revaluation of business held for resale to reflect net proceeds from
sale ((L)33.6m).
The results of NEES, prepared on the basis of its pre-acquisition policies,
for the period 1 January 2000 to 21 March 2000 and for its preceding financial
year ended 31 December 1999 are set out below:
-----------------------------------------------------------------------------------------------------------------------------------
Period 1 January Year ended
to 21 March 31 December
2000 1999
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Turnover 428.5 1,639.7
Operating costs (391.9) (1,426.9)
---------------- ----------------
Operating profit of group undertakings 36.6 212.8
Share of joint ventures' operating profit 1.5 6.4
Net interest (10.4) (46.1)
Taxation (12.1) (67.0)
Minority interests (0.9) (4.4)
---------------- ----------------
Profit for the period 14.7 101.7
================ ================
-----------------------------------------------------------------------------------------------------------------------------------
There were no recognised gains and losses, other then the profit for the
period.
70
The following unaudited pro forma summary gives effect to the acquisition of
NEES, as if the acquisition had taken place on 1 April 1998 and on 1 April
1999. The pro forma summary combines the consolidated results of the Group
(excluding NEES) and NEES after giving effect to certain adjustments. These
adjustments include estimates of the effect of adopting the final fair value
adjustments and the increased net interest expense, together with the
associated tax effects, as a result of financing the acquisition. The pro
forma does not necessarily reflect the results of operations as they would
have been if the Group (excluding NEES) and NEES had constituted a single
entity during the periods presented.
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 March
-------------------------------
2000 1999
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Turnover 3,272.0 3,050.7
Profit for the year - including exceptional items and goodwill amortisation 1,095.7 984.0
Profit for the year - excluding exceptional items and goodwill amortisation 350.5 355.9
------------- -------------
Earnings per ordinary share
Basic, including exceptional items and goodwill amortisation 74.4p 67.1p
Basic, excluding exceptional items and goodwill amortisation 23.8p 24.3p
-----------------------------------------------------------------------------------------------------------------------------------
(c) Goodwill arising on the acquisition of a Group undertaking during the year
ended 31 March 1999 amounted to (L)14.9m, comprising cash consideration of
(L)12.6m plus the fair value of net liabilities acquired of (L)2.3m.
27. Related party transactions
Transactions with an associate and joint ventures, which were in the normal
course of business, were as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Sales:
Services supplied 46.5 35.0 31.3
Finance lease rentals 11.3 6.7 9.0
Purchases:
Services received 26.3 16.7 15.3
Tangible fixed assets -- 5.6 21.9
-----------------------------------------------------------------------------------------------------------------------------------
Amounts owed by and owed to an associate and joint ventures are shown in notes
14 and 16 respectively.
28. Commitments and contingencies
(a) Future capital expenditure
-----------------------------------------------------------------------------------------------------------------------------------
Group Associate and joint ventures
------------------------------- -------------------------------
2001 2000 2001 2000
(L)m (L)m (L)m (L)m
Contracted for but not provided 396.8 237.8 90.1 132.4
-----------------------------------------------------------------------------------------------------------------------------------
(b) Proposed acquisition
National Grid has entered into an agreement to purchase the entire share
capital of Niagara Mohawk. This agreement has received approval from the
shareholders of both National Grid and Niagara Mohawk, but is subject to the
grant of various regulatory approvals which are expected to be received
towards the end of the 2001 calendar year. The cost of the acquisition is
estimated at approximately $3 billion.
71
(c) Lease commitments
At 31 March 2001, the Group's operating lease commitments for the financial
year ending 31 March 2002 amounted to (L)11.9m (2000: (L)11.0m) and are
analysed by lease expiry date as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Land and buildings Other Total
------------------------------- ------------------------------- -------------------------------
2001 2000 2001 2000 2001 2000
(L)m (L)m (L)m (L)m (L)m (L)m
Within one year 0.1 0.2 1.1 2.9 1.2 3.1
Between two and five
years 1.3 1.4 4.5 1.9 5.8 3.3
After five years 2.6 2.5 2.3 2.1 4.9 4.6
------------- ------------- ------------- ------------- ------------- -------------
4.0 4.1 7.9 6.9 11.9 11.0
============= ============= ============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Total commitments under non-cancellable operating leases were as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
In one year or less 11.9 11.0
In more than one year, but not more than two years 10.7 7.4
In more than two years, but not more than three years 8.4 5.8
In more than three years, but not more than four years 6.4 4.1
In more than four years, but not more than five years 5.5 3.5
In more than five years 34.6 31.3
------------- -------------
77.5 63.1
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
(d) Guarantees and performance bonds
A Group undertaking has issued performance bonds in the ordinary course of
business amounting to (L)88.1m (2000: (L)108.9m), of which (L)58.3m (2000:
(L)83.8m) is in respect of a joint venture, and has issued guarantees in
respect of an associate up to (L)14.1m (2000: (L)17.1m).
(e) Sale of Millstone 3
In November 1999, NEP, a National Grid subsidiary, entered into an agreement
with Northeast Utilities ("NU") to settle claims made by NEP relating to the
operation of the Millstone 3 nuclear unit. NU agreed to include NEP's share of
Millstone 3 in an auction of NU's share in that unit, at a guaranteed price.
On 31 March 2001, the Millstone 3 sale was completed and proceeds of $27.9m
((L)19.6m) were received by National Grid.
Subsequent to the November 1999 agreement and prior to completion of the sale,
NU agreed to sell 92.7% (including National Grid's 16.2% share) of Millstone 3
to a third party for approximately $855m ((L)602m). Thereafter, the Rhode
Island Attorney General and the RIPUC filed a protest at the FERC contending
that National Grid's share of the proceeds as agreed to in the settlement was
insufficient. Whilst the FERC found the protest to be outside the scope of the
sale approval process, National Grid cannot predict: a) whether the Rhode
Island authorities will reassert their contention; or b) the financial
consequences if they do.
72
29. Differences between UK and US accounting principles
The Group prepares its consolidated accounts in accordance with UK GAAP, which
differ in certain respects from US GAAP. The significant differences between
UK GAAP and US GAAP are set out below.
Deferred taxation
Under UK GAAP, provision is made for deferred taxation to the extent that a
liability or an asset will crystallise in the foreseeable future. US GAAP
requires full provisioning for deferred taxation liabilities and permits
deferred taxation assets to be recognised if their realisation is considered
more likely than not.
The deferred taxation adjustment arising on the UK GAAP results for 1999
includes a credit of (L)23.5m relating to a reduction from 31% to 30% in the
statutory rate of UK corporation tax.
The deferred tax liability under US GAAP is analysed as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Deferred taxation liabilities:
Excess of book value over taxation value of fixed assets 1,124.4 998.9
Other temporary differences 222.7 124.9
------------- -------------
1,347.1 1,123.8
Deferred taxation assets:
Other temporary differences (126.5) (135.0)
------------- -------------
1,220.6 988.8
============= =============
Analysed as follows:
Current 11.3 (3.2)
Non-current 1,209.3 992.0
------------- -------------
1,220.6 988.8
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Pensions
Under UK GAAP, pension costs are accounted for and disclosures are provided in
accordance with UK Statement of Standard Accounting Practice 24.
Under US GAAP, pension costs are determined in accordance with the
requirements of SFAS 87 and SFAS 88 and pension disclosures are presented in
accordance with SFAS 132. Differences between UK GAAP and US GAAP figures
arise from the requirement to use different actuarial methods and assumptions
and a different method of amortising certain surpluses and deficits. Under US
GAAP, the Company has estimated the effect on net income and shareholders'
equity assuming the adoption and application of SFAS 87 "Employers' Accounting
for Pensions" as of 1 April 1996, as the adoption of SFAS 87 on the actual
effective date of 1 April 1989 was not feasible. The unrecognised transition
asset at 1 April 1989, using the financial assumptions at 1 April 1996,
amounted to (L)171.5m and is being amortised over 15 years commencing 1 April
1989.
Under UK GAAP, as explained in note 6, net interest includes a credit of
(L)15.7m (2000: (L)3.5m; 1999: (L)3.7m) in respect of the notional interest
element of the variation from the regular pension cost. Under US GAAP, this
credit is not recognised.
73
The net periodic (credit)/cost for pensions and other post-retirement benefits
are as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Other post-
retirement
Pensions benefits
------------------------------------------------ -------------
2001 2000 1999 2001
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Service cost 25.1 19.7 15.0 3.6
Interest cost 110.7 63.7 63.6 20.7
Expected return on assets (141.7) (72.9) (74.0) (17.2)
Amortisation of prior service cost 2.6 2.6 -- --
Amortisation of previously unrecognised losses -- 0.9 -- 0.2
Amortisation of transitional asset (11.4) (11.4) (11.4) --
------------- ------------- ------------- -------------
(14.7) 2.6 (6.8) 7.3
Release of pension provision (1.5) (1.5) (1.5) --
------------- ------------- ------------- -------------
(16.2) 1.1 (8.3) 7.3
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The cost of providing other post-retirement benefits for the year ended 31
March 2000, which related to the period 22 March 2000 to 31 March 2000,
amounted to (L)0.2m (1999: (L)nil).
The additional cost incurred in respect of severance cases computed in
accordance with SFAS 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits" is
as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Cost of termination benefits 4.1 10.3 10.3
-----------------------------------------------------------------------------------------------------------------------------------
The principal financial assumptions used for the SFAS 87 calculations in
respect of the UK and USA defined benefit schemes are shown below. Information
in respect of the USA schemes is only provided in respect of the two years
ended 31 March 2001, as the USA schemes relate to NEES and EUA that were
acquired during this period.
-----------------------------------------------------------------------------------------------------------------------------------
USA UK
------------------------------- ------------------------------------------------
2001 2000 2001 2000 1999
% % % % %
-----------------------------------------------------------------------------------------------------------------------------------
Discount rate 7.3 7.8 5.5 5.5 6.3
Return on assets 8.8 8.5 5.8 6.0 6.5
General salary increases 4.0 5.1 3.3 4.0 4.8
Pension increases nil nil 2.5 3.0 3.3
-----------------------------------------------------------------------------------------------------------------------------------
The assumptions used for other post-retirement costs relate solely to USA
schemes as a result of the acquisitions of NEES and EUA in the two years ended
31 March 2001. These assumptions were that the discount rate used would be
7.75% and that medical costs would increase by 8.25%, decreasing to 5.25% in
2002 and remain at 5.25% thereafter.
74
A reconciliation of the funded status of the Group pension and other post-
retirement schemes to the prepaid/(accrued) cost that would appear in the
Group's balance sheet if prepared under US GAAP is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Pensions Other post-retirement benefits
------------------------------- -------------------------------
2001 2000 2001 2000
(L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation (1,906.5) (1,655.5) (316.2) (228.8)
Fair value of plan assets 2,095.8 2,110.7 202.3 178.9
------------- ------------- ------------- -------------
Excess of plan assets over projected benefit obligation 189.3 455.2 (113.9) (49.9)
Unrecognised transition asset (34.5) (45.9) -- --
Unrecognised net loss/(gain) 157.5 (152.4) 47.6 --
Unrecognised prior service cost 44.9 33.6 -- --
------------- ------------- ------------- -------------
Prepaid/(accrued) cost under US GAAP 357.2 290.5 (66.3) (49.9)
============= ============= ============= =============
Changes in the projected benefit obligation are shown below:
Projected benefit obligation at start of year 1,655.5 1,190.4 228.8 --
Adjustments to provisional fair values 5.3 -- (16.4) --
Service cost 25.1 19.7 3.9 0.2
Interest cost 110.7 63.7 20.7 --
Plan participants' contributions 4.5 4.2 -- --
Plan amendment - prior service cost 13.3 -- -- --
Terminations 4.1 12.6 0.2 --
Curtailments -- (2.3) -- --
Actuarial loss/(gain) 12.2 (67.0) 15.2 --
Benefits paid (121.8) (60.4) (17.5) --
Acquisition of Group undertakings 119.7 504.1 51.2 233.0
Exchange adjustments 77.9 (9.5) 30.1 (4.4)
------------- ------------- ------------- -------------
Projected benefit obligation at end of year 1,906.5 1,655.5 316.2 228.8
============= ============= ============= =============
Changes in plan assets are shown below:
Fair value of plan assets at start of year 2,110.7 1,356.8 178.9 --
Actual return on assets (150.0) 179.4 (13.2) --
Employer contributions 14.7 11.2 6.0 --
Plan participants' contributions 4.5 4.2 -- --
Benefits paid (121.8) (60.4) (16.7) --
Acquisition of Group undertakings 147.8 631.3 23.3 182.4
Exchange adjustments 89.9 (11.8) 24.0 (3.5)
------------- ------------- ------------- -------------
Fair value of plan assets at end of year 2,095.8 2,110.7 202.3 178.9
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
It is estimated that a 1% change in the assumed health care cost trends would
increase or decrease the accumulated post-retirement benefit obligation as at
31 March 2001 by (L)53.9m (2000: (L)27.3m) and (L)48.2m (2000: (L)24.4m)
respectively. There would be an immaterial effect on the net periodic cost for
the year ended 31 March 2001.
Shares held by employee share trusts
Under UK GAAP, shares in the Company held by employee share trusts are
recorded as fixed asset investments at cost less amounts written off. Under US
GAAP, those shares not fully vested are regarded as treasury stock and
recorded as a deduction from shareholders' equity.
75
Share option schemes
As permitted under UK GAAP, no cost is accrued for share options awarded under
the Sharesave scheme where the exercise price of the options is below the
market value at the date of grant. In respect of the grant of options under
the Executive scheme, no cost is accrued under UK GAAP as the exercise price
is equivalent to the market value at the date of grant. As permitted by SFAS
123, "Accounting for Stock-Based Compensation", the Group has accounted for
compensatory share option schemes under Accounting Principles Board statement
("APB") 25 "Accounting for Stock Issued to Employees". Under the requirements
of APB 25, the compensation costs relating to the Sharesave and Executive
schemes are amortised over the period from the date of grant of options to the
date those options are first exercisable. SFAS 123 prescribes a fair value
method of recognising share option compensation costs, the application of
which would have no material effect on the Group's reported net income or
earnings per ordinary share.
The average fair value of the options granted during each of the three
financial years ended 31 March 2001 are estimated as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Where the exercise price is less than the market price at the date of grant 155.0p 134.2p 117.8p
Where the exercise price is equal to the market price at the date of grant 68.0p 129.0p 89.0p
Where the exercise price is greater than the market price at the date of grant 65.0p -- --
-----------------------------------------------------------------------------------------------------------------------------------
The fair value of the options granted are estimated using the Black-Scholes
European option pricing model using the following principal assumptions:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Dividend yield 2.7% 4.1% 4.1%
Volatility 30.0% 33.0% 33.0%
Risk-free investment rate 5.9% 5.8% 5.3%
Average life (years) 4.0 4.2 3.8
-----------------------------------------------------------------------------------------------------------------------------------
Ordinary dividends
Under UK GAAP, final ordinary dividends are provided for in the year in
respect of which they are proposed by the Board for approval by the
shareholders.
Under US GAAP, dividends are not provided until declared.
Tangible fixed assets
During the financial year ended 31 March 1990, an impairment provision was
recorded in respect of certain tangible fixed assets. Part of this impairment
provision was subsequently released and shareholders' equity credited. Under
US GAAP this partial release would not be permitted.
Financial instruments
Under UK GAAP, interest rate and currency swaps used to hedge a portfolio of
borrowings are hedge accounted for and are not recorded at market value. Any
related foreign currency borrowings are translated at the hedged rate. Under
US GAAP, interest rate and currency swaps which are not related to specific
borrowings or to a specific group of similar borrowings are generally not
eligible for hedge accounting. Furthermore, under UK GAAP, it is permissible
to hedge account for the net assets of overseas operations with hedging
instruments denominated in currencies other than the functional currency of
the overseas operation. Under US GAAP, this treatment is not permitted. In
addition, interest rate swaps that convert fixed rate liabilities into
variable rate liabilities generally do not qualify for hedge accounting under
US GAAP. As a result, interest rate and currency swaps that do not meet the US
GAAP criteria for hedging are required to be recorded at market value with the
76
resultant unrealised gains and losses recognised in income together with any
exchange differences arising on the translation of any related foreign
currency borrowings at the exchange rate ruling on the balance sheet date.
Equity Plus Income Convertible Securities
Under UK GAAP, EPICs are carried in the balance sheet at the gross proceeds of
the issue and the related issue costs were written off in the year of issue.
Under US GAAP, the issue costs are deferred and written off over the period to
the expected date of redemption of the EPICs on 3 May 2003.
US GAAP requires the carrying value of the EPICs to be adjusted to the
settlement amount of the debt, which is linked to the Energis share price as
described in note 18.
Regulatory assets
SFAS 71 "Accounting for Certain Types of Regulation" establishes US GAAP for
utilities whose regulators have the power to approve and/or regulate rates
that may be charged to customers. Provided that through the regulatory
process, the utility is substantially assured of recovering its allowable
costs by the collection of revenue from its customers, such costs not yet
recovered are deferred as regulatory assets. Due to the different regulatory
environment, no equivalent accounting standard applies in the UK.
Under UK GAAP, regulatory assets established in accordance with SFAS 71 are
recognised where they comprise rights or other access to future economic
benefits which arise as a result of past transactions or events which have
created an obligation to transfer economic benefit to a third party.
Measurement of the past transaction or event and hence of the regulatory asset
is determined in accordance with UK GAAP. Where the application of UK GAAP
results in the non or partial recognition of an obligation compared with US
GAAP, any related regulatory asset is either not or partially recognised. In
certain circumstances, regulatory assets may be reported net of related
regulatory liabilities.
Recognition of UK transmission income
The main source of UK revenue is derived from the use of the UK transmission
system, and under US GAAP is recognised in the period in which the service is
provided up to the maximum revenue allowed under the transmission licence.
Under UK GAAP, any income received or receivable in excess of the maximum
revenue allowed for the period is recognised as income.
Severance and integration costs
Under UK GAAP, severance costs are provided for in the accounts if it is
determined that a constructive or legal obligation has arisen from a
restructuring programme where it is probable that it will result in the
outflow of economic benefits and the costs involved can be estimated with
reasonable accuracy. Under US GAAP, severance costs are recognised when the
employees accept the severance offer. In addition, where the number of
employees leaving results in a significant reduction in the accrual of pension
benefits for employees' future service (a curtailment under US GAAP), the
effects are reflected as part of the cost of such termination benefits.
Accordingly, timing differences between UK GAAP and US GAAP arise on the
recognition of such costs.
Under US GAAP, certain reorganisation costs relating to an acquired entity are
included in liabilities in determining the fair value of net assets acquired.
Under UK GAAP such costs are not recognised as liabilities of the acquired
entity at the date of acquisition and are treated as post acquisition costs.
Goodwill - effect of US GAAP adjustments
Under US GAAP, the fair value of net assets acquired is calculated in
accordance with US GAAP principles which differ in certain respects from UK
GAAP principles. As a result, the US GAAP net assets of the Group undertaking
acquired are less than the net assets as determined under UK GAAP principles.
These adjustments reflect the higher level of goodwill as calculated under US
GAAP and the related increase in goodwill amortisation.
Share of associate's adjustments to conform with US GAAP
The Group's share of the associate's results and net assets, which also impact
on the exceptional profit relating to Energis and assets held for exchange,
have been adjusted to conform with US GAAP.
77
Reconciliation of net income to US GAAP
The following is a summary of the material adjustments to net income which
would have been required if US GAAP had been applied instead of UK GAAP.
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Profit for the year, excluding exceptional items 315.9 350.6 338.6
Exceptional items after taxation 453.1 797.8 676.4
------------- ------------- -------------
Net income under UK GAAP 769.0 1,148.4 1,015.0
------------- ------------- -------------
Adjustments to conform with US GAAP
Deferred taxation (113.9) (1.4) (40.5)
Pensions 18.9 5.7 14.9
Share option schemes (5.3) (5.4) (4.5)
Tangible fixed assets - depreciation on reversal of partial
release of impairment provision 3.4 3.4 3.4
Financial instruments (55.4) 27.9 25.5
Issue costs associated with EPICs (1.8) (1.8) 7.3
Carrying value of EPICs liability 152.5 (115.0) --
Severance and integration costs 23.6 (11.3) (12.2)
Recognition of UK transmission income (17.0) -- --
Goodwill - effect of US GAAP adjustments (11.7) (0.2) --
Share of associate's adjustments to conform with US GAAP 48.0 (40.5) (6.1)
------------- ------------- -------------
Total US GAAP adjustments 41.3 (138.6) (12.2)
------------- ------------- -------------
Net income under US GAAP 810.3 1,009.8 1,002.8
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Net income under US GAAP includes (L)527.9m (2000: (L)795.7m; 1999: (L)718.6m)
relating to exceptional net gains which are treated as exceptional items under
UK GAAP.
Earnings per share ("EPS")
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Net income under US GAAP 810.3 1,009.8 1,002.8
Dilutive impact of 4.25% exchangeable bonds 2008 21.2 20.9 20.2
------------- ------------- -------------
Net income after dilution 831.5 1,030.7 1,023.0
============= ============= =============
Number Number Number
million million million
-----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares in issue - for basic EPS (note 10) 1,475.8 1,472.9 1,466.6
Weighted average shares in issue - for diluted EPS (note 10) 1,596.0 1,593.3 1,588.2
Basic earnings per share 54.9p 68.6p 68.4p
Diluted earnings per share 52.1p 64.7p 64.4p
-----------------------------------------------------------------------------------------------------------------------------------
78
Reconciliation of equity shareholders' funds to US GAAP
The following is a summary of the material adjustments to equity shareholders'
funds which would have been required if US GAAP had been applied instead of UK
GAAP.
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000
(L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Equity shareholders' funds under UK GAAP 3,475.8 2,909.0
------------- -------------
Adjustments to conform with US GAAP
Deferred taxation (1,072.4) (916.7)
Pensions 178.7 162.8
Shares held by employee share trusts (10.2) (16.3)
Ordinary dividends 133.5 123.0
Tangible fixed assets - reversal of partial release of impairment provision (41.6) (45.0)
Financial instruments (45.5) 1.0
Issue costs associated with EPICs 3.7 5.5
Carrying value of EPICs liability 37.5 (115.0)
Severance liabilities -- 5.5
Recognition of UK transmission income (17.0) --
Regulatory assets 37.5 --
Goodwill - effect of US GAAP adjustments 234.1 210.6
Share of associate's adjustments to conform with US GAAP 6.8 21.3
Other (0.9) --
------------- -------------
Total US GAAP adjustments (555.8) (563.3)
------------- -------------
Equity shareholders' funds under US GAAP 2,920.0 2,345.7
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Group cash flow statement
The Group accounts include a cash flow statement prepared in accordance with
FRS 1 (Revised 1996) "Cash Flow Statements" ("FRS1 (revised)"), the objectives
and principles of which are substantially the same as SFAS 95 "Statement of
Cash Flows" under US GAAP. The principal differences between FRS1 (revised)
and SFAS 95 relate to the classification of items within the cash flow
statement and the definition of cash and cash equivalents. Under UK GAAP cash
flows are classified under eight standard headings whereas US GAAP only
requires presentation of cash flows from three activities, being operating
activities, investing activities and financing activities.
Under US GAAP, in contrast to UK GAAP, cash and cash equivalents do not
include bank overdrafts but do include deposits and investments with original
maturities of three months or less.
79
Group cash flow statement (continued)
Set out below is a summary of the Group cash flow statement under US GAAP:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 425.5 347.5 349.0
Net cash used in investing activities (1,059.8) (736.2) (109.6)
Net cash (used in)/provided by financing activities (104.7) 596.2 512.6
------------- ------------- -------------
Net (decrease)/increase in cash and cash equivalents (739.0) 207.5 752.0
Cash and cash equivalents at beginning of year 977.3 769.8 17.8
Exchange adjustments 20.7 -- --
------------- ------------- -------------
Cash and cash equivalents at end of year 259.0 977.3 769.8
------------- ------------- -------------
Cash and deposits per balance sheet 271.2 1,011.6 1,524.5
Less: deposits with original maturities of more than three months (12.2) (34.3) (754.7)
------------- ------------- -------------
Cash and cash equivalents 259.0 977.3 769.8
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Reconciliation of US GAAP to UK GAAP cash flow headings
(i) Net cash provided by operating activities principally relates to net cash
inflow from operating activities, dividends from joint ventures, returns
on investments and servicing of finance, excluding costs relating to the
issue of debt, and taxation.
(ii) Net cash used in investing activities principally relates to capital
expenditure, acquisitions and disposals and the component of management of
liquid resources which comprises deposits with an original maturity of
more than three months.
(iii) Net cash (used in)/provided by financing activities comprises equity
dividends paid, financing, including costs relating to the issue of
debt, and movements in bank overdrafts.
Comprehensive income
Comprehensive income under US GAAP is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Net income in accordance with US GAAP 810.3 1,009.8 1,002.8
Other comprehensive income
Share of associate's other comprehensive income (47.5) 57.5 --
Exchange adjustments (3.1) (18.1) (0.8)
Tax on exchange adjustments 31.9 -- --
Additional minimum pension liability 2.1 -- --
Other 0.7 -- --
------------- ------------- -------------
Comprehensive income under US GAAP 794.4 1,049.2 1,002.0
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Cumulative foreign exchange losses recognised in other comprehensive income at
31 March 2001 under US GAAP were (L)22.0m (2000: (L)18.9m; 1999: (L)0.8m).
80
Other differences between UK and US GAAP
Under US GAAP, turnover attributable to the country of domicile is required to
be identified. With minor exceptions, the vast majority of turnover
attributable to "Europe" identified in note 1(a) is in respect of sales made
in the United Kingdom.
UK GAAP requires the investors' share of operating profit or loss, interest
and taxation relating to associates and joint ventures to be accounted for and
disclosed separately from those of Group undertakings. Under US GAAP, the
investors' share of the after tax profits and losses of joint ventures and
associates is included within the income statement as a single line item. UK
GAAP requires the investors' share of gross assets and gross liabilities of
joint ventures to be shown on the face of the balance sheet. Under US GAAP,
the net investment in joint ventures is shown as a single line item.
The Group reviews all long-lived assets for potential impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Under UK GAAP, recognition and measurement of
impairment is determined on the basis of discounted cash flows attributable to
income generating units. Under US GAAP, impairments of long-lived assets are
determined in accordance with SFAS 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" and are recognised
on the basis of undiscounted future cash flows and measured on the basis of
discounted future cash flows. This difference has no effect on the Group
accounts for the three years ended 31 March 2001.
Under UK GAAP, assets in the balance sheet are presented in ascending order of
liquidity and the balance sheet is analysed between net assets and
shareholders' funds. Under US GAAP, assets are presented in descending order
of liquidity and the balance sheet is analysed between total assets and
liabilities and shareholders' funds.
Under US GAAP, debtors falling due after more than one year of (L)1,016.5m
(2000: (L)798.3m) and provisions for liabilities and charges of (L)495.8m
(2000: (L)461.4m) would be classified as non-current assets and non-current
liabilities respectively.
Under UK GAAP, the assets held for exchange are included in current assets.
Under US GAAP, the assets held for exchange are classified as part of the
investment in an associate and are equity accounted.
New US Accounting Standards and pronouncements not yet effective
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS 137 and 138, establishes accounting and reporting standards
for derivative instruments and hedging activities. This standard, as amended,
which is effective for National Grid from 1 April 2001, requires all
derivatives to be recognised in the balance sheet as either assets or
liabilities and measured at fair value.
Certain derivatives which qualify for hedge accounting under UK GAAP do not
meet the requirements of SFAS 133, and any change in the fair value of these
instruments will be included in net income under US GAAP. The indicative
effect of adopting SFAS 133, as amended, is expected to decrease equity
shareholders' funds by approximately (L)14m (net of tax) at 1 April 2001.
81
2. Financial information for six months ended 30 September 2001
The financial information set out in this section has been extracted without
material adjustment from the unaudited financial statements of National Grid
for the six months ended 30 September 2001 which were approved by the Board on
19 November 2001. In the the unaudited interim financial statements for the
six months ended 30 September 2001, National Grid adopted FRS 19, "Deferred
Tax", to change the method of accounting for deferred taxation from a partial
to a full provision basis, and also modified the presentation of the minority
interests' share of the results of associated undertakings. Consequently
several restatements have been made to the comparative figures for the year
ended 31 March 2001 and the six months ended 30 September 2000 and to the
balance sheet as at 31 March 2001 included in the extracts from the unaudited
interim financial statements set out below.
National Grid Group plc
Group profit and loss account
------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
Notes (L)m (L)m (L)m
------------------------------------------------------------------------------------------------------
Group turnover - continuing
operations 2(a) 1,989.5 1,792.8 3,799.7
Operating costs (1,764.3) (1,461.5) (3,094.2)
-------------- -------------- --------------
Operating profit of Group
undertakings 2(c) 225.2 331.3 705.5
Share of joint ventures' and
associate's
operating loss 2(c) (195.5) (55.3) (96.0)
-------------- -------------- --------------
Operating profit
- Before exceptional items
and goodwill
amortisation 2(b) 384.8 362.4 739.4
- Exceptional costs 3(a) (17.0) (46.8) (45.3)
- Impairment of investments
in joint ventures 3(b) (290.4) -- --
- Goodwill amortisation (47.7) (39.6) (84.6)
Total operating profit -
continuing operations 2(c) 29.7 276.0 609.5
Exceptional profit relating
to partial disposal of
Energis 3(c) 20.1 132.3 243.3
Profit on disposal of
businesses -- -- 20.1
Net interest 4 (152.7) (101.0) (255.1)
-------------- -------------- --------------
(Loss)/profit on ordinary
activities before taxation (102.9) 307.3 617.8
- Taxation (excluding
exceptional items) 5 (23.5) (92.1) (182.1)
- Taxation (exceptional
items) 5.5 143.3 235.4
(18.0) 51.2 53.3
-------------- -------------- --------------
(Loss)/profit on ordinary
activities after taxation (120.9) 358.5 671.1
Minority interests (3.1) (3.7) (6.9)
-------------- -------------- --------------
(Loss)/profit for the period (124.0) 354.8 664.2
Dividends 6 (95.6) (89.5) (223.0)
-------------- -------------- --------------
Retained (loss)/profit (219.6) 265.3 441.2
============== ============== ==============
------------------------------------------------------------------------------------------------------
82
National Grid Group plc
Group profit and loss account (continued)
------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
Notes
------------------------------------------------------------------------------------------------------
(Loss)/earnings per ordinary
share
Basic, on (loss)/profit for
the period 7 (8.4)p 24.1p 45.0p
Basic, on adjusted profit
for the period(1) 7 13.9p 11.2p 20.0p
Diluted, on (loss)/profit
for the period 7 (8.4)p 22.9p 42.9p
Diluted, on adjusted profit
for the period(1) 7 13.5p 11.0p 19.8p
Dividends per ordinary share 6 6.46p 6.05p 15.08p
------------------------------------------------------------------------------------------------------
Note:
(1) Adjusted profit excludes exceptional items and goodwill amortisation
Group statement of total recognised gains and losses
------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
Note (L)m (L)m (L)m
------------------------------------------------------------------------------------------------------
(Loss)/profit for the period (124.0) 354.8 664.2
Exchange adjustments (25.6) 0.5 (14.7)
Tax on exchange adjustments -- -- 31.9
-------------- -------------- --------------
Total recognised gains and
losses relating to
the period (149.6) 355.3 681.4
============== ==============
Prior period adjustment 1 (802.3)
--------------
Total gains and losses
recognised since last
annual report (951.9)
==============
------------------------------------------------------------------------------------------------------
83
National Grid Group plc
Summarised Group balance sheet
-------------------------------------------------------------------------------------------------------
At 30 September At 31 March
------------------------------- -------------
2001 2000 2001
(restated) (restated)
Note (L)m (L)m (L)m
-------------------------------------------------------------------------------------------------------
Fixed assets
Intangible assets - goodwill 1,304.6 1,337.6 1,386.2
Tangible assets 5,637.8 5,467.9 5,617.3
Investments
- Joint ventures 160.6 409.7 398.8
- Associate 391.1 317.4 401.9
- Other investments 141.5 158.3 145.1
Total investments 693.2 885.4 945.8
------------- ------------- -------------
7,635.6 7,690.9 7,949.3
------------- ------------- -------------
Current assets
Stocks 35.5 35.6 34.1
Debtors (due within one year) 792.9 781.4 880.4
Debtors (due after one year) 901.8 923.5 1,053.9
Assets held for exchange 16.6 16.6 16.6
Business held for resale -- 133.7 --
Cash and deposits 500.9 649.7 271.2
------------- ------------- -------------
2,247.7 2,540.5 2,256.2
Creditors (due within one year) (1,450.1) (2,138.5) (2,213.7)
------------- ------------- -------------
Net current assets 797.6 402.0 42.5
------------- ------------- -------------
Total assets less current
liabilities 8,433.2 8,092.9 7,991.8
Creditors (due after one year) (4,380.6) (3,975.0) (3,755.5)
Provisions for liabilities and
charges (1,584.9) (1,582.9) (1,521.0)
------------- ------------- -------------
Net assets employed 2,467.7 2,535.0 2,715.3
============= ============= =============
Capital and reserves
Called up share capital 174.9 174.7 174.7
Share premium account 286.1 275.0 276.9
Profit and loss account 1,971.4 2,030.6 2,221.9
------------- ------------- -------------
Equity shareholders' funds 8 2,432.4 2,480.3 2,673.5
Minority interests 35.3 54.7 41.8
------------- ------------- -------------
2,467.7 2,535.0 2,715.3
============= ============= =============
-------------------------------------------------------------------------------------------------------
84
National Grid Group plc
Summarised Group cash flow statement
------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
Note (L)m (L)m (L)m
------------------------------------------------------------------------------------------------------
Net cash inflow from
operating activities 9 548.0 343.4 810.6
Dividends from joint
ventures 6.8 8.7 20.3
Net cash outflow for returns
on investments and
servicing of finance (102.8) (125.0) (306.9)
Net corporate tax refund/
(paid) 43.7 (58.4) (137.2)
Net cash outflow for capital
expenditure (194.7) (198.6) (457.6)
Net cash outflow for
acquisitions and disposals (31.0) (648.0) (582.2)
Equity dividends paid (133.4) (123.2) (212.5)
-------------- -------------- --------------
Net cash inflow/(outflow)
before management of liquid
resources and financing 136.6 (801.1) (865.5)
Net cash (outflow)/inflow
from the management of
liquid resources (225.5) 372.3 775.2
Net cash inflow from
financing 110.7 418.5 88.4
-------------- -------------- --------------
Movement in cash and
overdrafts 21.8 (10.3) (1.9)
============== ============== ==============
------------------------------------------------------------------------------------------------------
85
Notes
1. Prior period adjustments
The adoption of FRS 19 has resulted in a change in the method of accounting
for deferred tax, from a partial to a full provision basis. This change in
accounting policy has been reflected in the accounts as a prior period
adjustment in accordance with FRS 3. As a result, equity shareholders' funds
at 30 September 2000 and 31 March 2001 have been reduced by (L)753.1m and
(L)802.3m respectively and the comparative amounts of profit after taxation
for the six months ended 30 September 2000 and the year ended 31 March 2001
have been reduced by (L)57.8m and (L)104.8m respectively.
Prior period numbers have also been restated to reflect a revised segmental
analysis of National Grid USA's results (for the six months ended 30 September
2000 only), and a revised presentation of the minority interests' share of the
results of associated undertakings. The minority interests, which were
previously reported within operating profit, net interest and taxation, are
now included within minority interests.
2. Segmental analysis
----------------------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated)
a) Turnover (L)m (L)m (L)m
----------------------------------------------------------------------------------------------------------------------
Transmission - UK 608.5 643.2 1,315.6
Transmission - USA 104.2 100.2 194.7
Distribution - USA 933.5 673.1 1,519.0
Stranded costs recovery and generation - USA 124.5 174.8 334.9
Interconnectors - UK 27.5 42.4 83.6
Interconnectors - USA 22.4 23.5 47.9
Telecommunications - USA 6.5 4.3 9.5
Other activities(1) 198.1 155.2 339.7
Sales between businesses (35.7) (23.9) (45.2)
-------------- -------------- --------------
Group turnover - continuing operations 1,989.5 1,792.8 3,799.7
============== ============== ==============
Europe 800.5 819.1 1,696.6
North America 1,189.0 973.7 2,103.1
-------------- -------------- --------------
1,989.5 1,792.8 3,799.7
============== ============== ==============
----------------------------------------------------------------------------------------------------------------------
Note:
(1) Turnover primarily comprises EnMO, which provides the On-the-day Commodity
Market for gas trading in Great Britain, and contracting activities.
Stranded costs recovery
Under settlement agreements reached as part of industry restructuring,
National Grid USA is allowed to recover its costs (net of sales proceeds) and,
where applicable, a return on those costs, associated with its ongoing efforts
to exit the generation business.
86
----------------------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
b) Operating profit - before exceptional items and (restated) (restated)
goodwill amortisation (L)m (L)m (L)m
----------------------------------------------------------------------------------------------------------------------
Transmission - UK 243.4 242.8 486.3
Transmission - USA 30.8 24.0 49.6
Distribution - USA 82.9 72.6 154.8
Stranded costs recovery and generation - USA 24.9 39.0 61.7
Interconnectors - UK 6.9 22.5 42.8
Interconnectors - USA 8.4 11.0 22.3
Interconnectors - Other -- (0.4) (0.1)
Telecommunications - USA 1.8 1.6 2.9
Other activities (0.5) (1.6) 0.8
-------------- -------------- --------------
Group undertakings 398.6 411.5 821.1
-------------- -------------- --------------
Telecommunications - Energis (3.7) 2.4 4.4
Telecommunications - Intelig (21.8) (69.7) (118.0)
Telecommunications - Other (6.4) (0.6) (3.4)
Other electricity activities 18.1 18.8 35.3
-------------- -------------- --------------
Joint ventures and associate (13.8) (49.1) (81.7)
-------------- -------------- --------------
Total operating profit - before exceptional items and goodwill
amortisation 384.8 362.4 739.4
============== ============== ==============
Europe 246.3 274.1 545.0
North America 150.0 144.9 288.0
Latin America (14.1) (59.0) (97.8)
Rest of the World 2.6 2.4 4.2
-------------- -------------- --------------
384.8 362.4 739.4
============== ============== ==============
Electricity 416.2 431.4 859.5
Telecommunications (31.4) (69.0) (120.1)
-------------- -------------- --------------
384.8 362.4 739.4
============== ============== ==============
----------------------------------------------------------------------------------------------------------------------
87
----------------------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
c) Operating profit - after exceptional items and (restated) (restated)
goodwill amortisation (L)m (L)m (L)m
----------------------------------------------------------------------------------------------------------------------
Transmission - UK 243.4 242.8 486.3
Transmission - USA 24.7 18.5 37.6
Distribution - USA 55.5 47.6 101.8
Stranded costs recovery and generation - USA 24.9 39.0 61.7
Interconnectors - UK 6.9 22.5 42.8
Interconnectors - USA 8.4 11.0 22.3
Interconnectors - Other -- (0.4) (0.1)
Telecommunications - USA (0.4) (0.5) (1.4)
Other activities (0.5) (2.4) (0.2)
Exceptional costs - USA (4.3) (46.8) (45.3)
Exceptional costs - UK (12.7) -- --
Impairment of investments in joint ventures (120.7) -- --
-------------- -------------- --------------
Group undertakings 225.2 331.3 705.5
-------------- -------------- --------------
Telecommunications - Energis (15.4) (3.8) (9.4)
Telecommunications - Intelig (21.8) (69.7) (118.0)
Telecommunications - Other (6.7) (0.6) (3.9)
Other electricity activities 18.1 18.8 35.3
Impairment of investments in joint ventures (169.7) -- --
-------------- -------------- --------------
Joint ventures and associate (195.5) (55.3) (96.0)
-------------- -------------- --------------
Total operating profit - after exceptional items and goodwill
amortisation 29.7 276.0 609.5
============== ============== ==============
Europe 222.0 267.9 531.2
North America 110.0 64.7 172.4
Latin America (304.9) (59.0) (98.3)
Rest of the World 2.6 2.4 4.2
-------------- -------------- --------------
29.7 276.0 609.5
============== ============== ==============
Electricity 365.8 353.3 748.2
Telecommunications (336.1) (77.3) (138.7)
-------------- -------------- --------------
29.7 276.0 609.5
============== ============== ==============
----------------------------------------------------------------------------------------------------------------------
88
3. Exceptional items
a) Exceptional costs
The exceptional costs of (L)17.0m ((L)11.5m after tax) substantially relate to
restructuring costs incurred as a result of a business reorganisation.
b) Impairment of investments in joint ventures
The exceptional charge of (L)290.4m ((L)290.4m after tax) relates to the write
down of the Group's investments in its Latin American telecom joint ventures.
The exceptional charge comprises a write-down of the carrying value of the
Latin American telecom joint ventures of (L)169.7m to their estimated
recoverable amounts, and the recognition of related liabilities of (L)120.7m.
c) Partial disposal of Energis
The exceptional profit totalling (L)20.1m ((L)20.1m after tax) relating to the
partial disposal of Energis arises from a reduction in the Group's interest in
Energis, an associated undertaking, as a result of the issue of shares by
Energis relating to the acquisition by Energis of further shares in Ision.
4. Net interest
-----------------------------------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
(L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Interest payable and similar charges 136.9 164.7 350.1
Interest capitalised (11.9) (9.7) (20.7)
Interest receivable and similar income (24.1) (73.1) (112.9)
-------------- -------------- --------------
100.9 81.9 216.5
Joint ventures and associate 51.8 19.1 38.6
-------------- -------------- --------------
152.7 101.0 255.1
============== ============== ==============
-----------------------------------------------------------------------------------------------------------------------------------
5. Taxation
The tax charge of (L)23.5m on profit before taxation, excluding exceptional
items, for the six months ended 30 September 2001 is based on the estimated
effective tax rate, excluding exceptional items, for the year ending 31 March
2002 of 26%. The tax charge for the six months ended 30 September 2001
includes all of the benefit of an adjustment to prior periods, which is also
included in arriving at the estimated effective tax rate of 26% for the year
ending 31 March 2002.
89
6. Dividends
The interim dividend of 6.46p per ordinary share (2000: 6.05p) will be paid on
15 January 2002 to shareholders on the register on 30 November 2001.
7. (Loss)/earnings per ordinary share
Basic loss per ordinary share for the six months ended 30 September 2001 of
8.4p (2000: earnings of 24.1p) is calculated based on a loss for the period of
(L)124.0m (2000: profit of (L)354.8m) and 1,480.5m (2000: 1,474.8m) shares -
being the weighted average number of shares in issue during the period,
excluding the shares held by employee share trusts.
Basic earnings per ordinary share on the adjusted profit for the six months
ended 30 September 2001 of 13.9p (2000: 11.2p) excludes exceptional items (see
note 3) and goodwill amortisation totalling (L)329.5m (2000: (L)189.2m (net
credit)), and is based on earnings of (L)205.5m (2000: (L)165.6m).
For the purposes of calculating diluted loss/earnings per share, loss/earnings
and the weighted average number of shares have been adjusted for the effects
of all dilutive potential ordinary shares.
8. Reconciliation of movement in equity shareholders' funds
---------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
(L)m (L)m (L)m
---------------------------------------------------------------------------------------------
(Loss)/profit for the period (124.0) 354.8 664.2
Dividends (95.6) (89.5) (223.0)
-------------- -------------- --------------
(219.6) 265.3 441.2
Issue of ordinary shares 4.1 0.3 0.9
Exchange adjustments (25.6) 0.5 (14.7)
Tax on exchange adjustments -- -- 31.9
-------------- -------------- --------------
Net (decrease)/increase in equity
shareholders' funds (241.1) 266.1 459.3
Equity shareholders' funds at start of
period 2,673.5(1) 2,214.2 2,214.2
-------------- -------------- --------------
Equity shareholders' funds at end of
period 2,432.4 2,480.3 2,673.5
============== ============== ==============
---------------------------------------------------------------------------------------------
Note:
(1) Originally (L)3,475.8m before deducting prior period adjustment of
(L)802.3m.
90
9. Net cash inflow from operating activities
---------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
(L)m (L)m (L)m
---------------------------------------------------------------------------------------------
Operating profit of Group
undertakings 225.2 331.3 705.5
Depreciation and amortisation 183.5 193.8 380.0
Impairment of investments in joint
ventures 120.7 -- --
Profit on disposal of tangible fixed
assets (4.0) (6.2) (6.6)
Increase in stocks (2.0) (3.2) (7.9)
Decrease/(increase) in debtors 147.9 (76.8) (189.8)
Decrease in creditors (108.7) (79.0) (55.3)
Decrease in provisions (14.4) (12.6) (11.7)
Other (0.2) (3.9) (3.6)
-------------- -------------- --------------
548.0 343.4 810.6
============== ============== ==============
---------------------------------------------------------------------------------------------
10. Movement in net debt
---------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(L)m (L)m (L)m
---------------------------------------------------------------------------------------------
Movement in cash and overdrafts 21.8 (10.3) (1.9)
Cash outflow/(inflow) from the
management of liquid resources 225.5 (372.3) (775.2)
Increase in borrowings (101.4) (415.6) (81.4)
-------------- -------------- --------------
Change in net debt resulting from
cash flows 145.9 (798.2) (858.5)
Acquisition of Group undertakings -- (161.9) (162.2)
Certificates of tax deposit
surrendered -- -- (3.6)
Exchange adjustments 60.6 (138.1) (218.0)
Other non-cash movements (7.3) (4.3) (12.3)
-------------- -------------- --------------
Movement in net debt in the period 199.2 (1,102.5) (1,254.6)
Net debt at start of period (3,918.2) (2,663.6) (2,663.6)
-------------- -------------- --------------
Net debt at end of period (3,719.0) (3,766.1) (3,918.2)
============== ============== ==============
---------------------------------------------------------------------------------------------
91
11. Differences between UK and US GAAP
The Group prepares its consolidated accounts in accordance with UK GAAP, which
differ in certain respects from US GAAP. The significant adjustments necessary
to restate net income and equity shareholders' funds in accordance with US
GAAP are set out below.
------------------------------------------------------------------------------------------------------------------------------
Six months ended Year ended
30 September 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
a) Net income (L)m (L)m (L)m
------------------------------------------------------------------------------------------------------------------------------
Profit for the period, excluding exceptional items 157.8 126.0 210.7
Exceptional items after taxation (281.8) 228.8 453.5
-------------- -------------- --------------
Net (loss)/income under UK GAAP (124.0) 354.8 664.2
-------------- -------------- --------------
Adjustments to conform with US GAAP:
Deferred taxation 25.3 (29.6) (27.2)
Pensions 15.2 9.6 18.9
Share option schemes (0.7) (4.8) (5.3)
Tangible fixed assets 1.7 1.7 3.4
Financial instruments (84.2) 5.1 (55.4)
Issue costs associated with EPICs (0.9) (0.9) (1.8)
Carrying value of EPICs liability 179.7 65.0 152.5
Severance and integration costs -- 38.7 23.6
Recognition of income 5.9 (12.7) (17.0)
Goodwill 35.7 (1.0) (1.6)
Share of joint ventures' and associate's adjustments to conform with
US GAAP (17.9) 21.5 56.0
Other 0.7 -- --
-------------- -------------- --------------
Total US GAAP adjustments 160.5 92.6 146.1
-------------- -------------- --------------
Net income under US GAAP 36.5 447.4 810.3
============== ============== ==============
Basic earnings per share - US GAAP 2.5p 30.3p 54.9p
Diluted earnings per share - US GAAP 2.5p 28.7p 52.1p
------------------------------------------------------------------------------------------------------------------------------
Net income under US GAAP includes a net loss of (L)281.3m (2000 and year ended
31 March 2001 net gains of (L)267.7m and (L)527.9m respectively) which are
treated as exceptional items under UK GAAP.
92
------------------------------------------------------------------------------------------------------------------------------
At 30 September At 31 March
--------------------------------- --------------
2001 2000 2001
(restated) (restated)
b) Equity shareholders' funds (L)m (L)m (L)m
------------------------------------------------------------------------------------------------------------------------------
Equity shareholders' funds under UK GAAP 2,432.4 2,480.3 2,673.5
-------------- -------------- --------------
Adjustments to conform with US GAAP:
Deferred taxation (25.7) (48.0) (47.2)
Pensions 194.4 175.1 178.7
Shares held by employee share trusts (4.9) (13.6) (10.2)
Ordinary dividends 95.6 89.5 133.5
Tangible fixed assets (39.9) (43.3) (41.6)
Financial instruments (99.3) 6.1 (45.5)
Issue costs associated with EPICs 2.8 4.6 3.7
Carrying value of EPICs liability 217.2 (50.0) 37.5
Severance liabilities -- 4.1 --
Recognition of income (11.1) (12.7) (17.0)
Goodwill 68.1 40.9 34.1
Share of joint ventures' and associate's adjustments to conform with
US GAAP (34.1) 28.3 21.3
Other adjustments (2.3) 2.0 (0.8)
-------------- -------------- --------------
Total US GAAP adjustments 360.8 183.0 246.5
-------------- -------------- --------------
Equity shareholders' funds under US GAAP 2,793.2 2,663.3 2,920.0
============== ============== ==============
------------------------------------------------------------------------------------------------------------------------------
National Grid has adopted SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities" and SFAS 142 "Accounting for Goodwill and Other Intangible
Assets" with effect from 1 April 2001. However, the associate has not applied
SFAS 142 with effect from 1 April 2001, and consequently the US GAAP results
reflect National Grid's share of the associate's goodwill amortisation.
SFAS 133, as amended by SFAS 137 and SFAS 138, establishes accounting and
reporting standards for derivative instruments and hedging activities. The
effect of adopting SFAS 133 at 1 April 2001 has been to reduce US GAAP net
income and equity shareholders' funds by (L)13.9m (net of tax).
SFAS 142 requires that goodwill should no longer be amortised and that it must
be reviewed for impairment ("transitional goodwill impairment test") within
six months of adoption, and annually thereafter. The transitional goodwill
impairment test conducted at 1 April 2001, revealed that National Grid had no
impairment to recognise.
If SFAS 142 had been in effect for the six months ended 30 September 2000 and
the year ended 31 March 2001, reported net income under US GAAP would have
been higher by (L)33.6m and (L)70.9m respectively.
12. Basis of preparation
The financial information contained in this announcement has, with the
exception of the change in accounting policy resulting from the adoption of
FRS 19 (see note 1) and SFAS 133 and 142 (see note 11), been prepared on the
basis of the accounting policies set out in the Annual Report and Form-20F for
the year ended 31 March 2001 and does not constitute statutory accounts as
defined in Section 240 of the Companies Act 1985. The financial information in
respect of the year ended 31 March 2001 has been derived from the statutory
accounts for the year ended 31 March 2001, which have been delivered to the
Registrar of Companies. The auditors' report on those statutory accounts was
unqualified and did not contain a statement under Section 237(2) or (3) of the
Companies Act 1985. The financial information in respect of the six months
ended 30 September 2001 is unaudited but has been reviewed by the auditors.
93
PART V
FINANCIAL INFORMATION ON NIAGARA MOHAWK
1. Financial information for the three years ended 31 December 2000
The financial information set out in this section has been extracted without
material adjustment from the 2000 and 1999 Annual Reports of Niagara Mohawk.
These Annual Reports include the audited consolidated financial statements of
Niagara Mohawk for the years ended 31 December 1999 and 2000 and of Niagara
Mohawk Power for the year ended 31 December 1998. Niagara Mohawk became the
new holding company of Niagara Mohawk Power in 1999.
Niagara Mohawk's prior years consolidated financial statements have been
prepared from Niagara Mohawk Power's prior years consolidated financial
statements, except that accounts have been reclassified to reflect Niagara
Mohawk's structure.
Following the adoption of SFAS 133 with effect from 1 January 2001, certain
restatements have been made to the comparative balance sheet as at 31 December
2000 reported in unaudited financial information of Niagara Mohawk for the
nine months ended 30 September 2001, set out in section 2 below. These
restatements have not been reflected in this section 1.
The financial information has been prepared in accordance with US GAAP and
under the accounting policies set out in the notes below. US GAAP differs from
UK GAAP in certain material respects. The main differences between the
accounting policies adopted by Niagara Mohawk and Niagara Mohawk Power under
US GAAP and those adopted by National Grid (and to be adopted by New National
Grid) under UK GAAP relate to the accounting for pension costs, deferred
taxation, allowance for equity funds used during construction and derivative
financial instruments. A summary of these differences for each of the three
years to and as at 31 December 2000, is set out in section 3 below.
94
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Statements of Income and Retained Earnings
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December
------------------------------------------------
2000 1999 1998
Notes $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Operating revenues:
Electric 3,799,926 3,464,901 3,390,501
Gas 733,197 611,226 601,276
Other 6,149 8,059 643
------------- ------------- -------------
4,539,272 4,084,186 3,992,420
------------- ------------- -------------
Operating expenses:
Electricity purchased 1,714,946 1,012,811 1,138,453
Fuel for electric generation 74,340 189,657 239,982
Gas purchased 434,044 298,120 308,315
Other operation and maintenance 913,710 933,517 957,247
Power Choice charge -- -- 263,227
Amortisation/accretion of MRA(1)/IPP(2) buyout costs 375,487 363,374 119,409
Depreciation and amortisation 312,337 345,473 355,919
Other taxes 1 284,558 412,458 460,647
------------- ------------- -------------
4,109,422 3,555,410 3,843,199
------------- ------------- -------------
Operating income 429,850 528,776 149,221
Other income (deductions) (13,542) 3,938 60,764
------------- ------------- -------------
Income before interest charges 416,308 532,714 209,985
Interest charges 437,274 485,240 397,178
Preferred dividend requirement of subsidiary 31,437 36,808 36,555
------------- ------------- -------------
Income (loss) before income taxes (52,403) 10,666 (223,748)
Income taxes (6,769) 21,947 (66,368)
------------- ------------- -------------
Loss before extraordinary item (45,634) (11,281) (157,380)
Extraordinary item - Loss from the extinguishment of debt,
net of income taxes 4 (909) (23,807) --
------------- ------------- -------------
Net loss (46,543) (35,088) (157,380)
Retained earnings at beginning of year 610,952 646,040 803,420
------------- ------------- -------------
Retained earnings at end of year 564,409 610,952 646,040
============= ============= =============
Average number of shares of common stock outstanding (in
thousands) 167,383 186,689 166,186
------------- ------------- -------------
Basic and diluted loss per average share of common stock
before extraordinary item $ (0.27) $ (0.06) $ (0.95)
Extraordinary item per average share of common stock $ (0.01) $ (0.13) $ --
------------- ------------- -------------
Basic and diluted loss per average share of common stock $ (0.28) $ (0.19) $ (0.95)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
(1) Master Restructuring Agreement
(2) Independent Power Producer
95
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Statements of Comprehensive Income
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December
------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Net loss (46,543) (35,088) (157,380)
------------- ------------- -------------
Other comprehensive income (loss):
Unrealised gains on securities, net of tax (657) 113 304
Foreign currency translation adjustment (3,355) 5,448 (6,896)
Additional minimum pension liability (1,649) (5,967) --
------------- ------------- -------------
Other comprehensive loss (5,661) (406) (6,592)
------------- ------------- -------------
Comprehensive loss (52,204) (35,494) (163,972)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
96
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Balance Sheets
-----------------------------------------------------------------------------------------------------------------------------------
As at 31 December
------------------------------------------------
2000 1999 1998
Notes $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant: 1
Electric plant 7,179,329 7,221,762 8,826,650
Nuclear fuel 672,259 630,321 604,213
Gas plant 1,310,649 1,263,168 1,179,716
Common plant 349,751 364,718 349,066
Construction work in progress 289,634 312,322 471,802
------------- ------------- -------------
Total utility plant 9,801,622 9,792,291 11,431,447
Less accumulated depreciation and amortisation 4,019,282 3,904,049 4,553,488
------------- ------------- -------------
Net utility plant 5,782,340 5,888,242 6,877,959
------------- ------------- -------------
Other property and investments 596,036 484,735 411,106
------------- ------------- -------------
Current assets:
Cash, including temporary cash investments of $66,796,
$90,029 and $122,837 respectively 108,343 116,164 172,998
Accounts receivable (less allowance for doubtful accounts of
$62,600, $61,400 and $47,900 respectively) 1,8 470,820 373,510 427,588
Materials and supplies, at average cost:
Coal and oil for production of electricity 2,681 9,263 42,299
Gas storage 53,863 39,166 38,803
Other 90,750 90,605 118,855
Swap hedges receivable 49,911 -- 130,411
Prepaid taxes 19,393 21,489 17,282
Other 74,110 24,042 22,208
------------- ------------- -------------
869,871 674,239 970,444
------------- ------------- -------------
Regulatory assets: 2
MRA regulatory asset 3,328,720 3,686,019 4,045,647
Swap contracts regulatory asset 625,103 505,723 535,000
Regulatory tax asset 408,303 483,546 425,898
IPP buyout costs 234,117 260,873 41,971
Deferred environmental restoration costs 8 285,000 240,000 220,000
Deferred loss on sale of assets 158,333 135,229 --
Post-retirement benefits other than pensions 45,084 48,937 52,701
Unamortised debt expense 39,823 44,903 51,922
Other 191,524 112,556 95,090
------------- ------------- -------------
5,316,007 5,517,786 5,468,229
------------- ------------- -------------
Other assets 78,081 105,433 133,449
------------- ------------- -------------
12,642,335 12,670,435 13,861,187
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
97
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Balance Sheets
-----------------------------------------------------------------------------------------------------------------------------------
As at 31 December
------------------------------------------------
2000 1999 1998
Notes $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Capitalisation and Liabilities
Capitalisation: 4
Common stockholders' equity
Common stock, outstanding 160,239,818, 177,364,863 and nil
shares, respectively 1,874 1,874 --
Common stock of Niagara Mohawk Power, issued and
outstanding 187,364,863 shares -- -- 187,365
Treasury stock, at cost - 27,125,045, 10,000,000 and nil
shares, respectively (407,193) (157,167) --
Capital stock premium and expense 2,547,885 2,546,630 2,362,531
Accumulated other comprehensive income (31,861) (26,200) (25,794)
Retained earnings 564,409 610,952 646,040
------------- ------------- -------------
2,675,114 2,976,089 3,170,142
Preferred stock of subsidiary:
Not subject to mandatory redemption 440,000 440,000 440,000
Subject to mandatory redemption 53,750 61,370 68,990
Long-term debt 4,678,963 5,042,588 6,417,225
------------- ------------- -------------
Total capitalisation 7,847,827 8,520,047 10,096,357
------------- ------------- -------------
Current liabilities:
Short-term debt 5 110,000 -- --
Long-term debt due within one year 4 628,325 613,740 312,240
Sinking fund requirements on redeemable preferred stock of
subsidiary 4 7,620 7,620 7,620
Accounts payable 482,965 288,223 197,124
Payable on outstanding bank cheques 28,536 22,067 39,306
Customers' deposits 18,807 15,255 17,148
Accrued taxes 9,881 1,408 6,254
Accrued interest 98,408 67,593 132,236
Accrued vacation pay 34,607 35,334 38,727
Deferred gain on hedging activity 1 38,801 -- --
Other 137,953 67,068 91,877
------------- ------------- -------------
1,595,903 1,118,308 842,532
------------- ------------- -------------
Regulatory and other liabilities:
Accumulated deferred income taxes 1, 6 1,472,818 1,568,957 1,511,417
Liability for swap contracts 9 778,229 663,718 693,363
Employee pension and other benefits 7 218,569 226,223 235,376
Deferred gain on swap contracts 66,405 -- --
Unbilled gas revenues 1 18,852 14,552 30,652
Other 358,732 318,630 231,490
------------- ------------- -------------
2,913,605 2,792,080 2,702,298
------------- ------------- -------------
Commitments and contingencies: 2, 8
Liability for environmental restoration 285,000 240,000 220,000
------------- ------------- -------------
12,642,335 12,670,435 13,861,187
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
98
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows
Increase/(Decrease) in Cash
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December
------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss (46,543) (35,088) (157,380)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Power Choice charge -- -- 263,227
Amortisation/accretion of MRA/IPP buyout costs 375,487 363,374 119,409
Depreciation and amortisation 312,337 345,473 355,919
Amortisation of nuclear fuel 29,379 28,285 30,798
Extraordinary loss on extinguishment of debt, net of taxes 887 9,627 --
Provision for deferred income taxes (20,418) (8,325) 97,606
Unbilled revenues 4,300 (16,100) (12,629)
Net accounts receivable (net of changes in accounts
receivable sold) (97,310) 54,078 64,656
Materials and supplies (11,821) 21,800 (14,341)
Accounts payable and accrued expenses 163,229 50,358 (38,712)
Accrued interest and taxes 39,288 (53,361) 66,842
Changes in MRA and IPP buyout costs regulatory assets 36,132 (193,172) (3,978,039)
Deferral of MRA interest rate savings 20,469 28,006 10,741
Refundable federal income taxes -- 130,411 (130,411)
Changes in other assets and liabilities 21,549 33,065 45,304
------------- ------------- -------------
Net cash provided by (used in) operating activities 826,965 758,431 (3,277,010)
------------- ------------- -------------
Cash flows from investing activities:
Construction additions (231,892) (271,973) (365,396)
Nuclear fuel (41,938) (26,108) (26,804)
Less: Allowance for other funds used during construction 2,450 5,366 8,626
------------- ------------- -------------
Acquisition of utility plant (271,380) (292,715) (383,574)
Materials and supplies related to construction (930) 1,586 (219)
Accounts payable and accrued expenses related to construction 40,807 12,589 (9,678)
Proceeds from the sale of generation assets 47,500 860,080 --
Other investments (111,823) (73,482) (35,069)
Other 2,823 (17,272) (18,551)
------------- ------------- -------------
Net cash provided by (used in) investing activities (293,003) 490,786 (447,091)
------------- ------------- -------------
Cash flows from financing activities:
Issuance of Niagara Mohawk common stock -- -- 316,389
Proceeds from long-term debt 260,000 -- 3,361,178
Proceeds from preferred stock of subsidiary -- 150,000 --
Reduction in preferred stock of subsidiary (7,620) (157,620) (10,120)
Reductions in long-term debt (653,086) (1,134,020) (135,000)
Net change in short-term debt 110,000 -- --
Purchase of treasury stock (250,026) (157,167) --
Other (1,051) (7,244) (13,580)
------------- ------------- -------------
Net cash provided by (used in) financing activities (541,783) (1,306,051) 3,518,867
------------- ------------- -------------
Net decrease in cash (7,821) (56,834) (205,234)
Cash at beginning of year 116,164 172,998 378,232
------------- ------------- -------------
Cash at end of year 108,343 116,164 172,998
============= ============= =============
Supplemental disclosures of cash flow information:
Interest paid 367,297 512,735 315,541
Income taxes paid (refunded) 15,911 (118,052) (12,127)
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
99
Supplemental schedule of non-cash financing activities:
On 18 March 1999, Niagara Mohawk issued 187,364,863 shares of common stock in
a share-for-share exchange for Niagara Mohawk Power's outstanding common
stock.
Niagara Mohawk Power issued 20,546,264 shares of common stock, valued at
$14.75 per share ($303.1 million) to the IPP Parties on 30 June 1998.
The accompanying notes are an integral part of these financial statements.
100
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
Note 1 - Summary Of Significant Accounting Policies
Holding Company Formation
On 18 March 1999, Niagara Mohawk Power was reorganised into a holding company
structure in accordance with its Agreement and Plan of Exchange between
Niagara Mohawk Power and Niagara Mohawk. Niagara Mohawk was incorporated on 2
April 1998 as a wholly-owned subsidiary of Niagara Mohawk Power. Niagara
Mohawk Power's outstanding common stock was exchanged on a share-for-share
basis for Niagara Mohawk's common stock. Niagara Mohawk Power's preferred
stock and debt were not exchanged as part of the share exchange and continue
as obligations of Niagara Mohawk Power. Upon the share exchange on 18 March
1999, shares originally issued to Niagara Mohawk Power were cancelled. The
reorganisation was accounted for at net book value.
Subsidiaries
On 31 March 1999, Niagara Mohawk Power distributed its ownership in the stock
of Opinac North America, Inc. ("Opinac") as a dividend to Niagara Mohawk,
which was accounted for using the net book value of Opinac. The dividend
completed the holding company structure, with Niagara Mohawk owning 100 per
cent. of the common stock of its two subsidiaries, Niagara Mohawk Power and
Opinac. Niagara Mohawk Power and its subsidiaries manage all regulated
activities and comprise 97 per cent. of the assets and 86 per cent. of the
revenues of Niagara Mohawk. Opinac and its subsidiaries consist of an energy
marketing and trading company, and investments in energy related services and
businesses, an electric utility (Canadian Niagara Power Company, Limited,
"CNP"), a developmental stage telecommunications company (Telergy, Inc.), and
a research and development company (EVonyx, Inc.) that has developed and
intends to commercialise new fuel cell and battery technology and manage
investments in energy related services businesses. Opinac accounts for its
investments in Telergy, Inc. and EVonyx, Inc. using the cost method, and uses
the equity method to account for its interest in CNP. Niagara Mohawk's
management has determined it will pursue a sale of the energy marketing
business of Niagara Mohawk Energy, Inc. ("Niagara Mohawk Energy") in 2001. The
energy marketing business had revenues of $635 million and income from
continuing operations of $2.8 million in 2000.
Basis of Presentation
Niagara Mohawk Power is subject to regulation by the NYPSC and the FERC with
respect to its rates for service under a methodology, which establishes
prices, based on Niagara Mohawk Power's cost. Niagara Mohawk's accounting
policies conform to US GAAP, including the accounting principles for rate-
regulated entities with respect to Niagara Mohawk Power's nuclear,
transmission, distribution and gas operations (regulated business), and are in
accordance with the accounting requirements and ratemaking practices of the
regulatory authorities.
Niagara Mohawk's consolidated financial statements include the accounts of
Niagara Mohawk and its wholly owned subsidiaries. Inter-company balances and
transactions have been eliminated. The notes to the Consolidated Financial
Statements apply to both Niagara Mohawk and Niagara Mohawk Power unless
otherwise stated. Niagara Mohawk's 1998 consolidated financial statements have
been prepared from Niagara Mohawk Power's 1998 consolidated financial
statements, except that accounts have been reclassified to reflect Niagara
Mohawk's structure.
The closing of the MRA, which occurred on 30 June 1998, and the implementation
of Power Choice on 1 September 1998, have depressed and will continue to
depress earnings substantially during the five-year term of Power Choice. The
ability of Niagara Mohawk to improve earnings in the future will depend on the
outcome of the regulatory process, including the effect on rates proposed in
connection with the pending merger with National Grid. See Note 12 for a
discussion of the pending merger. The closing on the sale of the fossil and
hydro generation assets at various times during 1999 and 2000 has also
affected the comparability of the financial statements. See Note 2 for a
further discussion of the MRA and the generation asset sales.
The income statements and cash flow statements for Niagara Mohawk for the
three years ended 31 December 2000 reflect the reclassification of the
amortisation and accretion associated with certain costs incurred as part of
the MRA and additional IPP contract buyouts from "Other Operation and
Maintenance Expenses" to "Amortisation/Accretion of MRA/IPP Buyout Costs." The
following table outlines the components of the line item "Amortisation/
Accretion of MRA/IPP Buyout Costs:"
101
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December
2000 1999 1998
$'000 $'000 $'000
-----------------------------------------------------------------------------------------------------------------------------------
Amortisation of MRA regulatory asset 386,499 386,499 128,833
Accretion to MRA regulatory asset (Senior Discount Note) (29,199) (26,867) (8,411)
Other MRA related amortisation (17,914) (7,955) (4,018)
Amortisation of other IPP buyout costs 36,101 11,697 3,005
------------- ------------- -------------
375,487 363,374 119,409
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The income statements, balance sheet and cash flow statements for Niagara
Mohawk reflect the accounting and ratemaking treatment as directed by the
NYPSC as a result of May 2000 New York State tax law changes, whereby the
gross receipts tax has been replaced by a state income tax retroactive to 1
January 2000. The NYPSC issued an order on 21 December 2000 that requires the
deferral and pass back of any net tax reduction savings to customers.
Accordingly, Niagara Mohawk has reduced electric revenues by $31.1 million and
gas revenues by $7.3 million for the year ended 31 December 2000 and recorded
a corresponding liability to customers of $38.8 million (including $0.4
million in carrying charges), which is reflected in the "Other" current
liabilities line item on the balance sheet for the year ended 31 December
2000.
In addition, the income statements also reflect the reclassification of $5.6
million for the year ended 31 December 2000 from the "Other taxes" line item
to the "Income taxes" line item. Niagara Mohawk provides for federal and state
income taxes in accordance with SFAS 109, "Accounting for Income Taxes." See
Note 6. Federal, State and Foreign Income Taxes for the impact of the
application of SFAS 109, for the year ended 31 December 2000 on accumulated
deferred income taxes. The cash flow statements for Niagara Mohawk reflect the
above-mentioned income statement and balance sheet changes.
The consolidated cash flow statements for Niagara Mohawk have been presented
to reflect the closings of the sales of the fossil and hydro generation
assets, such that certain individual line items are net of the effects of the
sales.
Estimates
In order to conform with US GAAP, management is required to use estimates in
the preparation of Niagara Mohawk's financial statements. Actual results could
differ from those estimates.
Utility Plant
The cost of additions to utility plant and replacements of retirement units of
property are capitalised. Costs include direct material, labour, overhead and
allowance for funds used during construction ("AFC"). Replacement of minor
items of utility plant and the cost of current repairs and maintenance are
charged to expense. Whenever utility plant is retired, its original cost,
together with the cost of removal, less salvage, is charged to accumulated
depreciation.
The output of the co-owned generation units, Roseton Units No. 1 and 2 (which
has a capability of 1,200 MW) and Nine Mile Point Nuclear Station Unit No. 2,
and related expenses are shared in the same proportions as the co-tenants'
respective ownership interests. Niagara Mohawk Power's share of expenses
associated with these plants are included in the appropriate operating
expenses in Niagara Mohawk's Consolidated Statements of Income.
Allowance For Funds Used During Construction
Niagara Mohawk Power capitalises AFC in amounts equivalent to the cost of
funds devoted to plant under construction for its regulated business. AFC
rates are determined in accordance with FERC and NYPSC regulations. The AFC
rate in effect at 31 December 2000 was 8.86 per cent. AFC is segregated into
its two components, borrowed funds and other funds, and is reflected in the
"Interest charges" and "Other income" sections, respectively, in Niagara
Mohawk's Consolidated Statements of Income. The amount of AFC credits recorded
in each of the three years ended 31 December, in thousands of dollars, was as
follows:
102
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Other income 2,450 5,366 8,626
Interest charges 3,161 7,252 10,228
-----------------------------------------------------------------------------------------------------------------------------------
The above amounts include capitalised interest for fossil and hydro generation
of $57,000 for 2000, $518,000 for 1999 and $1,034,000 for 1998.
Depreciation, Amortisation and Nuclear Generation Plant Decommissioning Costs
For accounting and regulatory purposes, Niagara Mohawk Power's depreciation is
computed on the straight-line basis using the licence lives for its nuclear
class of depreciable property (licence lives are disclosed in Note 3) and the
average service lives for all other classes. Niagara Mohawk Power performs
depreciation studies to determine service lives of classes of property and
adjusts the depreciation rates when necessary.
The weighted average service life in years for each asset category are
presented in the table below:
-----------------------------------------------------------------------------------------------------------------------------------
Asset Category 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------------------
Electric 28 28 28
Gas 40 41 41
Common 17 16 15
-----------------------------------------------------------------------------------------------------------------------------------
Estimated decommissioning costs (costs to remove a nuclear plant from service
in the future) for Niagara Mohawk Power's Unit 1 and its share of Unit 2 are
being accrued over the service lives of the units, recovered in rates through
an annual allowance and currently charged to operations through depreciation.
Niagara Mohawk Power currently recognises the liability for nuclear
decommissioning over the service life of the plants as an increase to
accumulated depreciation. As discussed in Notes 2 and 3, Niagara Mohawk Power
has announced an agreement to sell its nuclear assets. As part of the
agreement, Niagara Mohawk Power will transfer its decommissioning liability,
as well as the balance in the external decommissioning funds at the time of
the transfer. See Note 3 for more information on the decommissioning funds.
Absent such a nuclear sale, Niagara Mohawk Power plans to decommission both
units using a method which removes or decontaminates the units' components.
Amortisation of the cost of nuclear fuel is determined on the basis of the
quantity of heat produced for the generation of electric energy. The cost of
disposal of nuclear fuel, which is currently $.001 per kWh of net generation
available for sale, is based upon a contract with the US Department of Energy
("DOE"). These costs are charged to operating expense as part of fuel for
electric generation.
Regulated Revenues
Niagara Mohawk Power bills its customers on a monthly cycle basis at approved
tariffs based on energy delivered and a minimum customer service charge.
Revenues are determined based on these bills plus an estimate for unbilled
energy delivered between the cycle billing date and the end of the accounting
period. In February 1999, a new customer service billing system was
implemented which converted all customers previously billed on a bi-monthly
cycle to a monthly basis. The unbilled revenues included in accounts
receivable at 31 December 2000 and 1999 were $153.6 million and $143.9
million, respectively.
In accordance with Power Choice, Niagara Mohawk Power recognises changes in
accrued unbilled electric revenues in its results of operations. Previously,
Niagara Mohawk Power did not recognise accrued unbilled electric revenues in
its results of operations until authorised and used them to reduce future
revenue requirements. Such amounts were included in "Other Liabilities"
pending regulatory disposition. Under the Power Choice agreement, $8.6 million
of unrecognised unbilled electric revenues as of 1 September 1998, the
implementation date of Power Choice, were netted with certain other regulatory
assets and liabilities and any subsequent changes in the estimated unbilled
electric revenues are recognised currently in results of operations.
Pursuant to Niagara Mohawk Power's 2000 three-year gas settlement, changes in
accrued unbilled gas revenues are deferred. At 31 December 2000 and 1999,
$18.9 million and $14.6 million, respectively, of unbilled gas
103
revenues remain unrecognised in results of operations. Niagara Mohawk Power
cannot predict when unbilled gas revenues will be allowed to be recorded as
revenues.
Prior to 1 September 1998, Niagara Mohawk Power's tariffs included an electric
fuel adjustment clause, such that electricity costs above or below the levels
allowed in approved rate schedules were billed or credited to customers.
Niagara Mohawk Power, as authorised by the NYPSC, charged operations for
electricity cost variances in the period of recovery. Under the Power Choice
agreement, the electric fuel adjustment clause was discontinued as of 1
September 1998.
The NYPSC approved a three-year gas rate settlement agreement on 19 July 2000
that includes a provision for the continuation of a full gas cost collection
mechanism, effective 1 August 2000. This gas cost collection mechanism was
originally reinstated in an interim agreement that became effective 1 November
1999. The Niagara Mohawk Power gas cost collection mechanism provides for the
collection or pass back of increases or decreases in purchased gas costs.
Unregulated Revenues
Unregulated revenues and the related costs of gas and electricity are accrued
and recorded in the month of delivery, based on contract price and quantity of
natural gas and electricity transmission reservation volumes contracted for.
Adjustments are made to reflect actual volumes delivered or purchased when the
actual volumetric information becomes available from the transporters. Such
adjustments have been historically immaterial. With respect to the accounting
related to revenues that Niagara Mohawk Energy receives from energy trading,
see "Niagara Mohawk Energy - Trading Activities" below.
Federal and State Income Taxes
As directed by the NYPSC, Niagara Mohawk Power defers any amounts payable
pursuant to the alternative minimum tax rules. Deferred investment tax credits
are amortised over the useful life of the underlying property. Deferred
investment tax credits related to the assets that have been sold are taken
into income in accordance with Internal Revenue Service ("IRS") rules. Niagara
Mohawk and its US subsidiaries file a consolidated federal and state income
tax return. Income taxes are allocated to each company based on its taxable
income. Regulated federal and state income taxes are recorded under the
provisions of SFAS 109.
Unregulated Federal and State Income Taxes
Unregulated federal and state income taxes are recorded under the provisions
of SFAS 109.
Statements of Cash Flows
Niagara Mohawk considers all highly liquid investments, purchased with an
original maturity of three months or less, to be cash equivalents.
Treasury Stock
In 1999 and 2000 Niagara Mohawk Power repurchased Niagara Mohawk's common
stock. The cost to acquire Niagara Mohawk's common stock by Niagara Mohawk
Power is presented as "Treasury stock" in Niagara Mohawk's financial
statements.
Earnings per Share
Basic EPS is computed based on the weighted average number of common shares
outstanding for the period. Treasury stock is not considered outstanding and
thus reduces the weighted average shares outstanding. The number of options
outstanding at 31 December 2000, 1999 and 1998 that could potentially dilute
basic EPS is immaterial. Therefore, the calculation of both basic and dilutive
EPS is the same for each period.
Derivatives
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." Niagara Mohawk will be required to adopt this
standard beginning 1 January 2001. SFAS 133 requires companies to record all
derivatives, as defined by SFAS 133, on the balance sheet as assets or
liabilities, measured at fair value. If certain conditions are met, entities
may elect to designate a derivative instrument as one of the following:
o Fair-value hedge - a hedge of the exposure to changes, attributable to
a particular risk, in the fair value of (1) a recognised asset or
liability or (2) an unrecognised firm commitment.
104
o Cash-flow hedge - a hedge of the exposure to variability, attributable
to a particular risk, in the cash flows of (1) a recognised asset or
liability or (2) a forecasted transaction.
Gains or losses resulting from the changes in the fair values of the
derivatives will be accounted for depending on the use of the derivative,
whether it qualifies for hedge accounting, and if the hedge is effective.
Effectiveness is defined to mean that cumulative changes in the value of the
hedging instrument should be between 80 per cent. and 125 per cent. of the
inverse cumulative changes in the fair value or cash flows of the hedged item.
Where the instrument is exchange traded, the fair value of the hedge is
determined by reference to published market prices. Where the instrument is
not exchange traded, fair value is measured by referring to various brokers'
quotations, published forecasts, or other available market data.
The effective portion of gains or losses on derivatives designated and
qualifying as cash flow hedges are deferred in Other Comprehensive Income
until the hedged transaction is settled. The ineffective portion of gains or
losses on derivatives designated and qualifying as cash flow hedges is
recorded in earnings. At the time the hedged transaction is settled, the gain
or loss is reclassified into earnings from Other Comprehensive Income. Gains
or losses on derivatives designated as hedging the exposure to changes in the
fair value of an asset or liability are recognised in earnings in the period
of the change together with the offsetting gain or loss on the value of the
hedged item. The effect is to reflect in earnings the extent to which the
hedged item is ineffective in achieving offsetting changes in fair value. The
gains or losses from derivative instruments that do not qualify for hedge
accounting must be recorded directly to earnings in the period of the change
in value.
In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133." Among the amendments was the expansion of the normal purchase and sale
exclusion to contracts that implicitly or explicitly permit net settlement and
to contracts for which a market exists that facilitates net settlement. In
serving its gas and electric customers, Niagara Mohawk Power procures gas and
electricity and obtains gas transportation and electric transmission services
in quantities that are expected to be used or sold over a reasonable period of
time in the normal course of business. Niagara Mohawk Power estimates amounts
to be provided based on projections of future sales, which consider historical
results, economic trends and the potential for customers to switch to
alternative suppliers. At the inception and throughout the term of these
contracts, Niagara Mohawk Power believes, based upon past history, that the
contracts will result in physical delivery. As such, these contracts meet the
exclusionary criteria under SFAS 133 and SFAS 138 and are excluded from the
accounting and disclosure requirements.
Upon implementation, Niagara Mohawk Power will be designating the following
financial instruments as derivatives and will account for them as noted.
Derivatives Not Qualifying For Hedge Accounting:
o IPP indexed swap contracts,
o Swap contracts with the buyers of Niagara Mohawk Power's generating
assets (Huntley, Dunkirk, Albany),
o New York Mercantile Exchange ("NYMEX") gas futures contracts purchased
to hedge the natural gas component of the contract payment of the IPP
indexed swap contracts,
o NYMEX gas futures contracts purchased to hedge a gas fired non-MRA IPP
purchased power contract,
o Oil Commodity Swap agreement to hedge the oil price component of the
Albany swap contract, and
o Gas Basis swap agreements that hedge the gas transportation portion of
the natural gas component of the IPP indexed swap contract payments.
Derivatives Qualifying For Hedge Accounting:
o NYMEX gas futures contracts purchased to hedge natural gas purchases
for customer sales requirements, and
o Fixed for floating electricity swaps that hedge the price of New York
Independent System Operator ("NYISO") purchases of electricity.
See Note 9 for a further discussion of the terms of each of the above
derivative financial agreements.
105
(i) Derivatives Not Qualifying For Hedge Accounting
The IPP indexed swap contracts, Huntley and Dunkirk, and Albany swap
contracts were entered into in connection with the MRA and the sale of
the generation assets to limit Niagara Mohawk Power's exposure to
electricity prices. Each of these swaps are an exchange of a contract
price for the floating market price for a notional amount of power and
offer some degree of hedge protection against volatile market prices.
However, with the IPP indexed swaps and the Albany swap, the contract
payments are primarily indexed to fuel prices (natural gas and oil).
Increases in fuel costs tend to drive up the cost of electricity in New
York State. Therefore, with both sides of the swap payment increasing
based on a common variable, these swaps do not provide the necessary
offset in cash flows needed to qualify for hedge accounting. However,
the Huntley and Dunkirk swaps have fixed contract prices, and
therefore, operate more effectively as hedges.
Under the accounting treatment currently followed in applying SFAS 80
to all three of these swaps, Niagara Mohawk Power believes that the
rate-making afforded these contracts permits the deferral and
amortisation of their above-market value in accordance with SFAS 71.
The IPP indexed swaps and the swap contracts entered into with the sale
of the generation assets (Huntley, Dunkirk, Albany) were negotiated in
Power Choice, consistent with the restructuring of the New York State
electricity markets. As long as Niagara Mohawk Power expects recovery
of the above market costs within the terms of the existing Power Choice
rate agreement, there will be no earnings impact from periodically
marking these contracts to market under SFAS 133.
As noted in Note 2, if Niagara Mohawk Power determines that its
regulatory asset for the swap contracts is not probable of recovery, it
could no longer apply SFAS 71 and would be required to record an after-
tax, non-cash charge against income for any remaining unamortised
regulatory assets and liabilities not probable of recovery. The IPP
swap liability would remain according to SFAS 133.
The NYMEX gas futures and gas basis swaps that are hedging the IPP swap
payments, and the Albany Oil swap are all derivative instruments used
to hedge the effects that fuel prices have on the aforementioned swaps.
While these instruments are effective in achieving offsetting cash
flows, they do not qualify for hedge accounting because, by rule in
SFAS 133, the forecasted transaction being hedged cannot also be a
liability that is re-measured at fair value, such as swaps. It was
determined that the gains or losses on these instruments, although not
qualifying for deferral under SFAS 133, would be deferred under the
same application of SFAS 71 that applies to the swap liabilities. The
aggregate deferred gain from these instruments is recorded as a
regulatory liability "Deferred gain on swap contracts" with the
unrealised portion of the gain recorded in a Current Asset titled "Swap
hedges receivable".
(ii) Derivatives Qualifying For Hedge Accounting
The NYMEX gas futures used to hedge gas supply purchases and the
electric swaps hedging NYISO power purchases are expected to be highly
effective in achieving offsetting cash flows and are accordingly
qualified and documented as cash flow hedges. Under SFAS 80, the
deferred gains are recorded as a Current Liability as "Deferred gain on
hedging activity" with the unrealised portion in "Other Current
Assets." Upon the adoption of SFAS 133, the deferred gain will be
reclassified as a component of Other Comprehensive income. The entire
amount of deferred gains from both the NYMEX futures and the electric
swaps will be reclassified to earnings in the year 2001 to offset
projected higher costs of gas and electricity.
(iii) Transmission Congestion Contracts
Transmission congestion is a component of the difference in the price
of electricity between two geographic locations. A Transmission
Congestion Contract ("TCC") confers the right to collect or the
obligation to pay congestion for energy associated with a single
megawatt of transmission between those locations.
The NYISO conducts a TCC auction twice each year. Niagara Mohawk Power
only bids on TCCs along transmission pathways it owns and in quantities
of power that will be used in the normal course of business. The cost
of TCCs purchased is collected by the NYISO, and redistributed to the
owners of the lines. Since Niagara Mohawk Power owns the lines upon
which it purchases TCCs, this cost is received back from the NYISO as
auction revenue. Niagara Mohawk Power pays the actual cost of
congestion, into the NYISO, as it is incurred. As the holder of the
TCC, Niagara Mohawk Power then receives this money back from the NYISO.
106
Niagara Mohawk Power's intention in purchasing TCCs is to hedge the
cost of transmitting power to serve native load. Niagara Mohawk Power
believes that TCCs purchased along transmission pathways owned by
Niagara Mohawk Power do not meet the definition of a derivative under
SFAS 133. However, as this issue has not been concluded, if it is
determined that TCCs are derivatives, Niagara Mohawk Power believes
that these instruments will qualify for hedge accounting under SFAS 133
and has documented those positions accordingly.
(iv) Niagara Mohawk Energy - Trading Activities
The Emerging Issues Task Force ("EITF") of the Financial Accounting
Standards Board ("FASB") reached a consensus on Issue No. 98-10,
"Accounting for Contracts Involved in Energy trading and Risk
Management Activities", to be applied for fiscal years beginning after
15 December 1998. EITF 98-10 requires that certain energy trading
contracts be recorded at fair value and, at each financial reporting
period, mark-to-market changes in the fair value should be recorded as
gains or losses in earnings. Contracts not designated as energy trading
activities were outside the scope of EITF 98-10. In 1999, Niagara
Mohawk Energy was not engaged in energy trading as defined by EITF 98-
10 and therefore did not account for its energy contracts on a mark-to-
market basis.
During the period through 30 September 2000, the business activities of
Niagara Mohawk Energy evolved to the point that, at 1 October 2000, the
company reassessed its contracts based on the definition of trading in
EITF 98-10 and began to account for that portion of its portfolio
designated as trading on a mark-to-market basis. Accordingly, mark-to-
market gains from 1 October 2000 to 31 December 2000 have been
recognised in earnings. These gains amounted to approximately $7.9
million as of 31 December 2000. The mark-to-market gains on the trading
portion of the portfolio at adoption, 1 October 2000 were approximately
$16 million. These gains have been deferred and are included in
"Current Assets - Other". Effective 1 January 2000, with the
implementation of SFAS 133, these deferred gains will be recognised in
earnings as the cumulative effect of an accounting change.
Niagara Mohawk Energy has purchased TCCs through the NYISO auction. The
TCCs are recognised in "Other Assets" at the time of purchase and are
amortised over the life of the contracts. Since Niagara Mohawk Energy
is not the original owner of the transmission rights, unlike Niagara
Mohawk Power, it has designated TCCs as energy trading contracts and
included them in the contracts that are marked-to-market each period.
Sale of Customer Receivables
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Niagara
Mohawk will be required to adopt this standard beginning 1 April 2001. SFAS
140 deals with issues surrounding transfers of financial assets in which the
transferor maintains a continuing involvement with the transferred assets or
the transferee. Such involvement raises issues about whether the transfer
should be accounted for as a sale or as a secured borrowing. The new statement
establishes standards to resolve those issues.
Niagara Mohawk Power established a single-purpose financing subsidiary, NM
Receivables LLC ("NMR"), to purchase and resell a financial interest in a pool
of Niagara Mohawk Power customer receivables. See Note 8 for a complete
description of the operations of NMR.
Niagara Mohawk Power's program for selling its accounts receivable meets the
requirements outlined in SFAS 140 for recognition and accounting as a sale
transaction and therefore the adoption of SFAS 140 will not have an impact on
the reported financial information of Niagara Mohawk.
Comprehensive Income
Comprehensive income is the change in the equity of a company, not including
those changes that result from shareholder transactions. While the primary
component of comprehensive income is reported net income or loss, the other
components of comprehensive income relate to foreign currency translation
adjustments, additional minimum pension liability recognition and unrealised
gains and losses associated with certain investments held as available for
sale. Upon the implementation of SFAS 133, Niagara Mohawk will reflect the
gains or losses on derivatives qualifying as cash flow hedges as a component
of comprehensive income (see above information on "Derivatives" for a further
discussion of this).
107
Foreign Currency Accounting Policy
Niagara Mohawk's wholly-owned subsidiary, Opinac, owns a Canadian subsidiary
which has liquid portfolio investments and a 50 per cent. interest in an
electric utility, CNP. Balance sheet accounts of foreign operations are
translated from foreign currencies into US dollars at year-end rates, while
income statement accounts are translated at the monthly average exchange rates
for the relevant period. The resulting translation adjustments are included in
"Accumulated other comprehensive income/(loss)", on the Consolidated Balance
Sheets, with the changes for the year shown in the Consolidated Statements of
Comprehensive Income. Gains and losses resulting from foreign currency
transactions are included in "Net Income."
Power Purchase Agreements
Niagara Mohawk Power accounts for its power purchase agreements as executory
contracts. Niagara Mohawk Power assesses several factors in determining how to
account for its power purchase contracts. These factors include:
o the term of the contract compared to the economic useful life of the
facility generating the electricity;
o the involvement, if any, that Niagara Mohawk Power has in operating the
facility;
o the amount of any fixed payments Niagara Mohawk Power must make, even
if the facility does not generate electricity; and
o the level of control Niagara Mohawk Power has over the amount of
electricity generated by the facility, and who bears the risk in the
event the facility is unable to generate.
Reclassifications
Certain amounts from prior years have been reclassified on the accompanying
Consolidated Financial Statements to conform with the 2000 presentation.
Note 2 - Rate and Regulatory Issues and Contingencies
Niagara Mohawk's financial statements conform to US GAAP, including the
accounting principles for rate-regulated entities with respect to its
regulated operations. Niagara Mohawk Power discontinued application of
regulatory accounting principles to its fossil and hydro generation business
as of 31 December 1996. Substantively, SFAS 71 permits a public utility,
regulated on a cost-of-service basis, to defer certain costs, which would
otherwise be charged to expense, when authorised to do so by the regulator.
These deferred costs are known as regulatory assets, which in the case of
Niagara Mohawk, are approximately $5.3 billion at 31 December 2000. These
regulatory assets are probable of recovery.
MRA Regulatory Asset
Under Power Choice, a regulatory asset was established for the costs of the
MRA and represents the cost to terminate, restate, or amend IPP Party
contracts. This regulatory asset is being amortised generally over ten years,
beginning 1 September 1998. Niagara Mohawk Power's rates under Power Choice
have been designed to permit recovery of the MRA regulatory asset.
Swap Contract Regulatory Asset
The swap contract regulatory asset represents the expected future recovery of
the swap contract liabilities. The swap contract liability is the present
value of the forecasted difference between estimated future market prices and
the contract prices for the notional quantities of power in the restated Power
Purchase Agreement ("PPA") contracts with the IPPs and in the financial swaps
associated with the PPAs from the sale of the Huntley and Dunkirk coal-fired
and the Albany oil and gas-fired generation plants. In the balance sheet
presentation, a portion of the Swap Contracts Regulatory Asset is recorded
within the MRA Regulatory Asset. The portion of this regulatory asset
associated with the restated IPP contracts will be amortised over ten years
ending in June 2008, in accordance with the MRA and Power Choice, as notional
quantities are settled. The portion of this regulatory asset associated with
the Huntley and Dunkirk PPAs will be amortised over the remaining term of the
swaps through June 2003. During the second quarter of 2000, Niagara Mohawk
Power completed the sale of its Albany oil and gas-fired generation plant.
Niagara Mohawk Power entered into a financial swap as part of the sale.
Approximately $17.5 million is included in the swap contract regulatory asset
at 31 December 2000 as part of this agreement. The Albany contract expires on
30 September 2003, and the portion of the swap contract regulatory asset
associated with the agreement will be amortised over the life of the contract
as notional quantities are settled. See Note 8 and Note 9 for a further
discussion of the several PPAs and other financial agreements that
108
Niagara Mohawk Power has entered into as part of the MRA and the sale of its
generation assets. The amount of this regulatory asset will fluctuate as
estimates of future market and contract prices change over the terms of the
contracts and will decline as the remaining contract periods shorten. The
asset balance at 31 December 2000, is significantly higher than the previous
year due to a number of factors. The contract prices paid by Niagara Mohawk
Power under the IPP and Albany swaps are indexed to the cost of fuel,
primarily natural gas. Recent increases in gas costs have caused an increase
in forecasted payments. The addition of the Albany swap also increased the
asset and liability. These changes were partly offset by a reduction in the
forecasted liability for Huntley and Dunkirk swaps and normal amortisation of
the swaps. Payments under these arrangements are included in the "Electricity
Purchased" line item in the Consolidated Statements of Income and Retained
Earnings.
Regulatory Tax Asset
The regulatory tax asset represents the expected future recovery from
ratepayers of the tax consequences of temporary differences between the
recorded book bases and the tax bases of assets and liabilities. This amount
is primarily timing differences related to depreciation. These amounts are
recovered and amortised as the related temporary differences reverse. The
NYPSC required adoption of SFAS 109 on a revenue-neutral basis.
IPP Buyout Costs
Niagara Mohawk Power is also permitted to defer and amortise the cost of any
additional IPP contract buyouts. In 1999 and 2000, there have been 13 IPP
contracts for approximately 161 MW terminated for a total consideration (cash
and/or notes) of $242.1 million. Deferred costs associated with IPP buyouts
will generally be amortised over five years in accordance with Power Choice,
unless NYPSC approval is obtained for a different amortisation period. Niagara
Mohawk Power retains the annual net savings of the buyouts during the
remaining term of Power Choice to offset the amortisation expense. Niagara
Mohawk Power continues to evaluate opportunities related to buyouts and
amendments of other IPP contracts.
Deferred Environmental Restoration Costs
The deferred environmental restoration costs regulatory asset represents
Niagara Mohawk Power's share of the estimated costs to investigate and perform
certain remediation activities at both Niagara Mohawk Power-owned sites and
non-owned sites with which it may be associated. Niagara Mohawk Power has
recorded a regulatory asset representing the remediation obligations to be
recovered from ratepayers. Power Choice and Niagara Mohawk Power's gas rates
decisions provide for specific rate allowances, with variances deferred for
future recovery or pass-back to customers. Niagara Mohawk Power believes
future costs, beyond the settlement periods, will continue to be recovered in
rates.
Deferred Loss on the Sale of Assets
Power Choice requires Niagara Mohawk Power to divest its portfolio of fossil
and hydro generation assets. During 1999, Niagara Mohawk Power completed the
sale of its hydroelectric generation plants, its coal-fired generation plants
and its Oswego oil and gas-fired plant for $860 million. These assets had a
combined net book value of approximately $957 million (including materials,
supplies and fuel) at the time of their sale. In addition, there were purchase
price adjustments of approximately $27 million, primarily due to a lower
amount of fuel being delivered to the new owners of the Oswego generation
assets than originally anticipated and provided for in the sales agreement.
On 12 May 2000, Niagara Mohawk Power completed the sale of its Albany oil and
gas-fired plant to PSEG Power LLC ("PSEG") for $47.5 million. The Albany plant
had a net book value of approximately $36.4 million (including materials,
supplies and fuel) at the time of the sale. Niagara Mohawk Power could also
receive up to an additional $11.5 million if PSEG chooses to pursue the
redevelopment of the Albany plant and the redevelopment is in service by 1
July 2003. The $11.5 million is reduced by $8,219 per day beginning on 2 July
2003 and continues until the earlier of the date the amount is reduced to zero
or the redevelopment goes into service. The agreement with PSEG includes a
"Post Closing Property Tax Adjustment" to be settled on the first ten
anniversaries of the closing date. If actual annual property taxes exceed a
predetermined amount, Niagara Mohawk Power will pay PSEG. If the property
taxes are lower, then PSEG will pay Niagara Mohawk Power. The predetermined
amount is based upon the taxes paid by Niagara Mohawk Power at the time of the
sale, which should approximate $6.7 million. During the ten years, the
predetermined amount will be lowered by $0.5 million each year. Niagara Mohawk
Power is pursuing a reduction in the taxes paid on the facility. The proceeds
from the sale of Albany do not include an amount for the redevelopment fee or
the post closing property tax adjustment.
109
On 30 January 2001, Niagara Mohawk Power sold its 25 per cent. interest in the
Roseton Steam Station to Dynegy Inc. ("Dynegy"), pursuant to which Niagara
Mohawk Power received approximately $83.9 million. Niagara Mohawk Power's
share of the plant has a net book value of approximately $38.3 million (which
includes materials, supplies and fuel) as of the closing.
The Power Choice agreement provides for deferral and future recovery of net
losses resulting from the sale of the fossil and hydro generation asset
portfolio. As of 31 December 2000, Niagara Mohawk Power has recorded a
regulatory asset of $158.3 million for the net loss on the sale of its coal-
fired generation plants, its hydro generation assets, and its oil and gas
fired plants at Oswego and Albany. The net loss is included in Niagara Mohawk
Power's balance sheet as "Deferred Loss on Sale of Assets." In accordance with
Power Choice, Niagara Mohawk Power will not earn a return on the deferred loss
during the Power Choice period and would have to request a return to be
applicable after the expiration of Power Choice (31 August 2003), subject to
the approval of the NYPSC. The amount of this regulatory asset is subject to
change as a result of post closing adjustments on the sales, transaction
costs, subsequent costs associated with contract clauses, the accounting
treatment relating to the hydro PPAs, as discussed below, the amount of
severance and other costs, and NYPSC review of the amounts deferred. The NYPSC
has allowed Niagara Mohawk Power to offset the proceeds from the sale of the
fossil and hydro generation assets, by the net present value of the amount
which the actual amount incurred on the hydro PPAs exceeds the forecasted
amount reflected in Power Choice. On 10 July 2000, Niagara Mohawk Power filed
a report with the NYPSC outlining the accounting of the costs and proceeds
from the sale of the generation assets sold through 31 May 2000. The amount
recorded as a loss reflects NYPSC Staff recommended adjustments based on their
review to date. The 10 July filing will be updated now that the Roseton sale
has closed. Niagara Mohawk Power will begin recovery of the loss in 2003, over
a period not to exceed the average remaining life of the assets sold,
estimated at 20 years. Niagara Mohawk Power has recorded a non-cash incentive
as provided for in Power Choice of $11.8 million based on the asset sales, of
which $9.0 million is reflected in income in 1999 and $2.8 million is
reflected in income in 2000 in the "Other income (deductions)" line item of
the Consolidated Income Statements. The incentive earned reflects NYPSC Staff
recommended adjustments based on their review to date and is included in the
other regulatory assets on the Consolidated Balance Sheets. Niagara Mohawk
Power will begin recovery of the incentive in 2001, over a period not to
exceed five years. The merger rate plan proposal modifies the recovery period
of stranded costs and incentives.
Niagara Mohawk Power has also announced an agreement to sell its nuclear
generation assets. Niagara Mohawk Power estimates its stranded costs from the
nuclear sale to be approximately $1.2 billion. Niagara Mohawk Power has
petitioned the NYPSC for approval to defer these stranded costs for future
recovery, which approval is a condition of the closing of the sale of the
nuclear assets. See Note 3 for a complete discussion regarding this announced
sale of Niagara Mohawk Power's nuclear generation assets and its regulatory
treatment.
Post-retirement Benefits other than Pensions
The post-retirement benefits other than pensions regulatory asset represent
the excess of such costs recognised in accordance with SFAS 106 over the
amount received in rates. In accordance with a NYPSC policy statement, post-
retirement benefit costs other than pensions were phased into rates generally
over a five-year period and amounts deferred are being amortised and recovered
over a period of approximately 15 years.
Unamortised Debt Expense
The unamortised debt expense regulatory asset represents the costs to issue
and redeem certain long-term debt securities, which were retired prior to
maturity. These amounts are amortised as interest expense ratably over the
lives of the related issues in accordance with NYPSC directives.
Other
Included in the other regulatory asset is the accumulation of numerous
miscellaneous regulatory deferrals, including the deferral of nuclear outage
costs, uncollectible accounts receivable, nuclear decontamination and
decommissioning fund costs, income earned on gas rate sharing mechanisms and
the incentive earned on the sale of the fossil and hydro generation assets.
SFAS 71 and Other Accounting Matters
The EITF reached a consensus on Issue No. 97-4, "Deregulation of the Pricing
of Electricity - Issues Related to the Application of SFAS 71 and SFAS 101:
`Regulated Enterprises - Accounting for the Discontinuance of Application of
FASB Statement No. 71' " in July 1997. EITF 97-4 does not require a company to
earn a return on regulatory assets that arise from a deregulating transition
plan in assessing the applicability of SFAS 71. Niagara Mohawk Power believes
that the regulated cash flows to be derived from prices it will charge for
electric service
110
in the future, including the Competitive Transition Charges ("CTC") and
assuming no unforeseen reduction in demand or bypass of the CTC or exit fees,
will be sufficient to recover the MRA regulatory asset over its planned
amortisation period and to provide recovery of and a return on the remainder
of its assets, as appropriate. In the event Niagara Mohawk Power determines,
as a result of lower than expected revenues and/or higher than expected costs,
that its net regulatory assets are not probable of recovery, it can no longer
apply the principles of SFAS 71 and would be required to record an after-tax,
non-cash charge against income for any remaining unamortised regulatory assets
and liabilities. If Niagara Mohawk Power could no longer apply SFAS 71, the
resulting charge would be material to Niagara Mohawk's reported financial
condition and results of operations and adversely affect Niagara Mohawk
Power's, and therefore, Niagara Mohawk's ability to pay dividends.
Under Power Choice, Niagara Mohawk Power's remaining electric business
(electric transmission, distribution and nuclear business) continues to be
rate-regulated on a cost-of-service basis and, accordingly, Niagara Mohawk
Power continues to apply SFAS 71 to these businesses. Also, Niagara Mohawk
Power's IPP contracts, including those restructured under the MRA, as well as
the PPAs entered into in connection with the generation divestiture, continue
to be the obligations of the regulated business.
Note 3 - Nuclear Operations
Niagara Mohawk Power is the owner and operator of the 609 MW Unit 1 and the
operator and a 41 per cent. co-owner of the 1,148 MW Unit 2. The remaining
ownership interests are Long Island Power Authority - 18 per cent., New York
State Electric & Gas Corporation ("NYSEG") - 18 per cent., Rochester Gas &
Electric Corporation ("RG&E") - 14 per cent. and Central Hudson Gas & Electric
Corporation ("CH") - 9 per cent. Unit 1 was placed in commercial operation in
1969 and Unit 2 in 1988.
Announced Sale
On 12 December 2000, Niagara Mohawk Power announced agreements to sell its
nuclear assets to Constellation Nuclear, LLC ("Constellation"), a wholly-owned
subsidiary of Constellation Energy Group, Inc. for approximately $610 million
(principal and interest), which is subject to price adjustments depending,
among other things, on the time of closing. Subject to such adjustments,
Niagara Mohawk Power will receive $262 million in cash at closing and five
annual principal and interest payments totalling $348 million. The sale is
targeted to close in mid-2001. Along with the asset purchase agreements,
Niagara Mohawk Power also signed PPAs with Constellation to purchase energy at
negotiated competitive prices for approximately ten years. After the
completion of the PPAs, revenue sharing agreements begin which will provide a
hedge against electricity price increases and could provide Niagara Mohawk
Power additional future revenue through 2021. Both the PPAs and the revenue
sharing agreements are based on plant output. See Note 8 for a further
discussion of these PPAs.
NYSEG, RG&E and CH were also parties to the Unit 2 agreement to sell their
combined 41 per cent. share of Unit 2 to Constellation. The sellers' pre-
existing decommissioning funds with respect to both units will be transferred
to Constellation, who will take responsibility for all future decommissioning
funding. No additional funding from the sellers is required above what was
already planned between now and closing.
At 31 December 2000, the net book value of Niagara Mohawk Power's nuclear
generation assets (including materials, supplies and nuclear fuel) was
approximately $1.7 billion, excluding the reserve for decommissioning related
to the external trusts. Of this amount, $0.5 billion relates to Unit 1 and
$1.2 billion relates to Unit 2. These amounts also include other nuclear-
related assets of approximately $0.2 billion. These assets include regulatory
assets, which are primarily related to the flow-through to customers of prior
year income tax benefits.
Notwithstanding the announced sale, because Unit 2 has multiple owners (and
the sale of Unit 1 is contingent on the sale of Unit 2) and because any sale
will be subject to regulatory hurdles that must be overcome, including
stranded cost recovery, Niagara Mohawk does not believe that a sale is any
more likely to occur than other possible outcomes, including the possible
continued operation of the plants by Niagara Mohawk Power for the remainder of
their useful lives.
In the event that the sale of the nuclear assets does not occur, Niagara
Mohawk Power will continue to recover the costs to run the nuclear generation
plants in its Power Choice rates. In addition, Niagara Mohawk Power would
continue to participate in the NYPSC regulatory proceeding regarding the
future of nuclear assets in New York State.
Because of the uncertainty as to whether the NYPSC will approve any sale of
the nuclear generating plants on terms acceptable to Niagara Mohawk Power, and
the outcome of other regulatory approvals, Niagara Mohawk
111
Power has continued to utilise its best estimate of cash flows based on a
held-and-used (regulated) model for purposes of assessing whether an asset
impairment existed as of 31 December 2000. Under this assumption, the nuclear
generating assets are not impaired.
If, and when, Niagara Mohawk Power concludes that its best estimate of future
cash flows is from the sale of the power plants, the impairment test will be
performed taking into consideration the expected cash flows from operations
until the sale and expected cash proceeds from the sale of the assets. In that
event, Niagara Mohawk Power estimates its stranded costs from the nuclear sale
would be approximately $1.2 billion.
Niagara Mohawk Power submitted a petition to the NYPSC on 30 January 2001 for
approval to defer the stranded costs that would be recognised on the sale for
future recovery, the approval of which is a condition of the closing of the
sale of the nuclear assets. Accordingly, Niagara Mohawk Power plans to record
a regulatory asset for the amount of the estimated stranded costs, as
calculated pursuant to the assumptions and circumstances described in the
preceding section. However, the ability to record the regulatory asset is
ultimately conditioned on an assessment by Niagara Mohawk Power that the
amounts are probable of future recovery in rates and that the rates ultimately
approved by the NYPSC can be charged to and collected from customers without
unanticipated reduction in demand.
The amount of the stranded costs on the sale of the nuclear assets is subject
to change as a result of closing price adjustments and transaction costs. This
sale is also contingent upon approval by, among others, the NYPSC, the US
Nuclear Regulatory Commission ("NRC"), the FERC and the SEC.
Until the sale is closed, Niagara Mohawk Power generally bears the risks
associated with any unscheduled outages at both units, including
investigations and unexpected maintenance and capital costs. The purchase
agreement with Constellation terminates if the sale has not occurred before 31
December 2001.
Certain liabilities related to events and actions occurring during the period
of ownership of the units by the sellers prior to the closing date will remain
the obligation of the sellers, including offsite environmental remediation and
all spent nuclear fuel fees associated with electricity generated and sold at
Unit 1 and Unit 2 prior to the closing. As of the closing date, Constellation
will assume title to and responsibility for storage and disposal of the spent
nuclear fuel. See "Nuclear Fuel Disposal Cost" for a discussion of the Nuclear
Waste Policy Act of 1982 and Niagara Mohawk Power's determination of its
liability. This liability will remain with the sellers until the DOE provides
disposal facilities. The sellers also retain liability for changes enacted
prior to closing, if any, in the disposal fees already paid to the DOE for
fuel burned from 1983 through closing of the sale or in the pre-1983
liability. Niagara Mohawk Power has recovered these costs in rates in the past
and believes that any increases in these costs would ultimately be included in
the rate process.
The sellers will also remain liable to pay all decommissioning and
decontamination fees established by the Energy Policy Act of 1992. Such fees
support decommissioning and decontamination associated with pre-existing
conditions at DOE gaseous diffusion plants. The Energy Policy Act of 1992
authorised annual deposits for 15 years. The sellers have made nine payments
to date and have a remaining liability of $15.4 million, of which Niagara
Mohawk Power has a remaining liability recorded of $12.9 million.
112
Nuclear Plant Decommissioning
If the sale does not occur, Niagara Mohawk Power estimates its site specific
costs for decommissioning Unit 1 and its ownership interest in Unit 2 at 31
December 2000 are as follows:
--------------------------------------------------------------------------------
Unit 1 Unit 2
--------------------------------------------------------------------------------
Site Study (year) 1995 1995
End of Plant Life (year) 2009 2026
Radioactive Dismantlement to Begin
(year) (1) 2028
Method of Decommissioning (1) Immediate
Dismantlement
Cost of Decommissioning
(in January 2001 dollars)
$m
Radioactive Components (1) 221
Non-radioactive Components (1) 54
Fuel Dry Storage/Continuing Care (1) 48
------------------
323
==================
--------------------------------------------------------------------------------
Note:
(1) Niagara Mohawk Power has not made a final decision on the timing of
decommissioning for Unit 1. Decommissioning could occur immediately after
end of licence shutdown in 2009 or coincident with Unit 2 decommissioning
which would commence in 2026. The cost of decommissioning Unit 1 in
January 2001 dollars is estimated to be $614 million for immediate
dismantlement or $750 million for delayed dismantlement. Projected
earnings from the decommissioning fund are expected to approximate the
cost impact of inflation and continuing care under a delayed scenario. The
final decision to decommission Unit 1 immediately after shutdown or to
delay will occur much closer to the end of licence shutdown date of 2009
so that Niagara Mohawk Power can adequately evaluate the variables that
could impact total costs. These variables include but are not limited to
the inflation projections, actual earnings rate on the decommissioning
fund, the uncertainty of the availability of a low level waste disposal
site and the DOE acceptance date and rate of spent fuel disposal.
Niagara Mohawk Power estimates that by the time decommissioning is completed,
the above costs will ultimately amount to $1.0 billion (immediate
dismantlement) or $1.7 billion (delayed dismantlement) for Unit 1 and $0.9
billion for Niagara Mohawk Power's share of Unit 2, using approximately 3.5
per cent. as an annual inflation factor.
In addition to the costs mentioned above, Niagara Mohawk Power would expect to
incur post-shutdown costs for plant ramp down, insurance and property taxes.
In 2001 dollars, these costs are expected to amount to $121 million (immediate
dismantlement) or $132 million (delayed dismantlement) for Unit 1 and $67
million for Niagara Mohawk Power's share of Unit 2. The amounts will escalate
to $193 million (immediate dismantlement) or $210 million (delayed
dismantlement) and $190 million for Unit 1 and Niagara Mohawk Power's share of
Unit 2, respectively, by the time decommissioning is expected to be completed.
NRC regulations require owners of nuclear power plants to place funds into an
external trust to provide for the cost of decommissioning radioactive portions
of nuclear facilities and establish minimum amounts that must be available in
such a trust at the time of decommissioning. The annual rate allowance for
Unit 1 and Niagara Mohawk Power's share of Unit 2 was approximately $43.3
million for the year ended 31 December 2000. Power Choice permits rate
recovery for all radioactive and non-radioactive cost components for both
units, including post-shutdown costs, based upon the amounts estimated in the
1995 site specific studies, which are higher than the NRC minimum. The annual
decommissioning allowance (which includes funds to be placed into the external
trust plus internal reserves) for 2001 will increase to $44.9 million of which
$28.0 million is for radioactive components and $16.9 million is for non-
radioactive components. There is no assurance that the decommissioning
allowance recovered in rates will ultimately aggregate a sufficient amount to
decommission the units. Niagara Mohawk Power believes that if decommissioning
costs are higher than currently estimated, the costs would ultimately be
included in the rate process.
Decommissioning costs recovered in rates are reflected in "Accumulated
depreciation and amortisation" on the balance sheet and amount to $408.2
million and $353.1 million at 31 December 2000 and 1999, respectively for both
units. Additionally, at 31 December 2000, the fair value of funds accumulated
in Niagara Mohawk Power's external trusts were $242.4 million for Unit 1 and
$78.5 million for its share of Unit 2. The trusts are included in "Other
Property and Investments." Earnings on the external trust aggregated $57.7
million through 31 December
113
2000, and because the earnings are available to fund decommissioning, have
also been included in "Accumulated depreciation and amortisation." For a
further discussion on the earnings on the external trust, see Note 9. Amounts
recovered for non-radioactive dismantlement are accumulated in an internal
reserve fund, which has an accumulated balance of $80.3 million at 31 December
2000.
Nuclear Liability Insurance
The Atomic Energy Act of 1954, as amended, requires the purchase of nuclear
liability insurance from the Nuclear Insurance Pools in amounts as determined
by the NRC. At the present time, Niagara Mohawk Power maintains the required
$200 million of nuclear liability insurance.
With respect to a nuclear incident at a licensed reactor, the statutory limit
for the protection of the public under the Price-Anderson Amendments Act of
1988, which is in excess of the $200 million of nuclear liability insurance,
is currently $8.89 billion without the 5 per cent. surcharge discussed below.
This limit would be funded by assessments of up to $83.9 million for each of
the 106 presently licensed nuclear reactors in the US, payable at a rate not
to exceed $10 million per reactor, per year, per incident. Such assessments
are subject to periodic inflation indexing and to a 5 per cent. surcharge if
funds prove insufficient to pay claims. With the 5 per cent. surcharge
included, the statutory limit is $9.34 billion.
Niagara Mohawk Power's interest in Unit 1 and Unit 2 could expose it to a
maximum potential loss, for each accident, of $124.2 million (with 5 per cent.
assessment) through assessments of $14.1 million per year (before any
inflation adjustments) in the event of a serious nuclear accident at its own
or another licensed U.S. commercial nuclear reactor. The amendments also
provide, among other things, that insurance and indemnity will cover
precautionary evacuations, whether or not a nuclear incident actually occurs.
Upon the closing of the sale to Constellation, Niagara Mohawk Power would only
be liable for events that occurred prior to closing.
Nuclear Property Insurance
The Nine Mile Point Nuclear Site has $2.75 billion nuclear property insurance
with Nuclear Electric Insurance Limited ("NEIL"). NEIL also provides insurance
coverage against the extra expense incurred in purchasing replacement power
during prolonged accidental outages. The insurance provides coverage for
outages for 162 weeks, after a 12-week waiting period. NEIL insurance is
subject to retrospective premium adjustment under which Niagara Mohawk Power
could be assessed up to approximately $13.8 million per loss.
If the sale of the nuclear generation assets occurs, Niagara Mohawk Power will
still be liable for retrospective premium adjustments that are associated with
NEIL losses that occurred prior to the date of the sale for up to a period of
six years following the sale. Likewise Niagara Mohawk Power would also be
entitled to refunds of premiums paid, if any. As of 31 December 2000, Niagara
Mohawk Power has not been made aware of any material retrospective premium
adjustments.
Low Level Radioactive Waste
Niagara Mohawk Power currently uses the Barnwell, South Carolina waste
disposal facility for low level radioactive waste. However, continued access
to Barnwell is not assured, and Niagara Mohawk Power has implemented a low
level radioactive waste management program so that Unit 1 and Unit 2 are
prepared to handle properly interim on-site storage of low level radioactive
waste for at least a ten-year period.
Under the Federal Low Level Waste Policy Amendment Act of 1985, New York State
was required by 1 January 1993 to have arranged for the disposal of all low
level radioactive waste within the state or in the alternative, contracted for
the disposal at a facility outside the state. To date, New York State has made
no funding available to support siting for a disposal facility.
Nuclear Fuel Disposal Cost
In January 1983, the Nuclear Waste Policy Act of 1982 (the "Nuclear Waste
Act") established a cost of $.001 per kWh of net generation for current
disposal of nuclear fuel and provides for a determination of Niagara Mohawk's
liability to the DOE for the disposal of nuclear fuel irradiated prior to
1983. The Nuclear Waste Act also provides three payment options for
liquidating such liability and Niagara Mohawk Power has elected to delay
payment, with interest, until the year in which Niagara Mohawk Power initially
plans to ship irradiated fuel to an approved DOE disposal facility. Progress
in developing the DOE facility has been slow and it is anticipated that the
DOE facility will not be ready to accept deliveries until at least 2010. In
July 1996, the United States Circuit Court of Appeals for the District of
Columbia ruled that the DOE had an obligation to accept spent fuel from the
nuclear industry by 31 January 1998 even though a permanent storage site would
not be ready by then. The DOE did not
114
appeal this decision. On 31 January 1997, Niagara Mohawk Power joined a number
of other utilities, states, state agencies and regulatory commissions in
filing a suit in the U.S. Court of Appeals for the District of Columbia
against the DOE. The suit requested the court to suspend the utilities
payments into the Nuclear Waste Fund and to place future payments into an
escrow account until the DOE fulfills its obligation to accept spent fuel. The
DOE did not meet its 31 January 1998 deadline and indicated it was not
obligated to provide a financial remedy for delay. On 14 November 1997, the
United States Court of Appeals for the District of Columbia Circuit issued a
writ of mandamus precluding DOE from excusing its own delay on the grounds
that it has not yet prepared a permanent repository or interim storage
facility. On 11 December 1997, 27 utilities, including Niagara Mohawk Power,
petitioned the DOE to suspend their future payments to the Nuclear Waste Fund
until the DOE begins moving fuel from their plant sites. The petition further
sought permission to escrow payments to the waste fund beginning in February
1998. On 12 January 1998, the DOE denied the petition. As of 31 December 2000,
Niagara Mohawk Power has recorded a liability of $133.6 million in other long-
term debt for the disposal of nuclear fuel irradiated prior to 1983.
Niagara Mohawk Power has several alternatives under consideration to provide
additional spent fuel storage facilities, as necessary. Each alternative will
likely require NRC approval, may require other regulatory approvals and would
likely require incurring additional costs, which Niagara Mohawk Power has
included in its decommissioning estimates for both Unit 1 and its share of
Unit 2. Niagara Mohawk Power does not believe that the possible unavailability
of the DOE disposal facility until 2010 will inhibit operation of either Unit.
Note 4 - Capitalisation
Niagara Mohawk Capital Stock
Niagara Mohawk is authorised to issue 300,000,000 shares of common stock,
$0.01 par value. In addition, Niagara Mohawk is authorised to issue 50,000,000
shares of preferred stock, $0.01 par value. The table below summarises changes
in the capital stock issued and outstanding and the related capital account
for 1999 and 2000:
-----------------------------------------------------------------------------------------------------------------------------------
Capital Stock Accumulated
Common Stock Premium and Other
$0.01 Par Value Treasury Stock Expense Comprehensive
Shares Amount(1) (at cost)(1) (Net)(1) Income(1)
-----------------------------------------------------------------------------------------------------------------------------------
31 December 1998(2) -- -- -- -- --
Exchange(2) 187,364,863 1,874 2,548,022 (29,722)
Issued by subsidiary (1,479)
Redemptions by subsidiary 87
Treasury stock, at cost (10,000,000) (157,167)
Other comprehensive income adjustments 3,522
-------------- -------------- -------------- -------------- --------------
31 December 1999 177,364,863 1,874 (157,167) 2,546,630 (26,200)
Amortisation by subsidiary(3) 1,178
Redemption by subsidiary 87
Treasury stock, at cost (17,125,045) (250,026)
Other comprehensive income adjustments (5,661)
-------------- -------------- -------------- -------------- --------------
31 December 2000 160,239,818 1,874 (407,193) 2,547,895 (31,861)
============== ============== ============== ============== ==============
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) In thousands of dollars
(2) On 18 March 1999, the common stock of Niagara Mohawk Power was exchanged
on a share for share basis with Niagara Mohawk (see Note 1).
(3) Pursuant to a 1999 NYPSC rate order, Niagara Mohawk Power is amortising
the capital stock expense of the Adjustable Rate Series D preferred stock
over five years (ends in 2004).
115
The cumulative amount of foreign currency translation adjustment was
$(24,402), the unrealised gain on securities was $157 and the additional
minimum pension liability was $7,616 at 31 December 2000.
Niagara Mohawk Power Capital Stock
Niagara Mohawk Power is authorised to issue 250,000,000 shares of common
stock, $1 par value; 3,400,000 shares of preferred stock, $100 par value;
19,600,000 shares of preferred stock, $25 par value; and 8,000,000 shares of
preference stock, $25 par value. The table below summarises changes in the
capital stock issued and outstanding and the related capital accounts for
1998, 1999, and 2000:
---------------------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock
$1 Par Value $100 Par Value $25 Par Value
Non- Non-
Shares Amount(1) Shares Redeemable(1) Redeemable(1) Shares Redeemable(1) Redeemable(1)
31 December 1997 144,419,351 144,419 2,322,000 210,000 22,200(2) 11,781,204 230,000 64,530(2)
Issued 42,945,512 42,946 -- -- -- -- -- --
Redemptions (18,000) -- (1,800) (332,801) -- (8,320)
Other comprehensive
income adjustments
----------- -------- ------------ -------- ---------- ------------ ---------- ----------
31 December 1998 187,364,863 187,365 2,304,000 210,000 20,400(2) 11,448,403 230,000 56,210(2)
----------- -------- ------------ -------- ---------- ------------ ---------- ----------
Issued -- -- -- 3,000,000(3) 150,000 --
Redemptions (18,000) -- (1,800) (6,232,801)(3) (150,000) (5,820)
Repurchase Niagara
Mohawk's
common stock
Dividend of Opinac
Other comprehensive
income adjustments
----------- -------- ------------ -------- ---------- ------------ ---------- ----------
31 December 1999 187,364,863 187,365 2,286,000 210,000 18,600(2) 8,215,602 230,000 50,390(2)
----------- -------- ------------ -------- ---------- ------------ ---------- ----------
Amortisation(5)
Redemptions (18,000) -- (1,800) (232,801) -- (5,820)
Repurchased Niagara
Mohawk's common
stock
Other comprehensive
income adjustments
----------- -------- ------------ -------- ---------- ------------ ---------- ----------
31 December 2000 187,364,863 187,365 2,268,000 210,000 16,800(2) 7,982,801 230,000 44,570(2)
=========== ======== ============ ======== ========== ============ ========== ==========
---------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------
Repurchased
Capital Stock Accumulated Niagara
Premium and Other Mohawk
Expense Comprehensive Common
(Net)(1) Income(1) Stock(1)
31 December 1997 1,798,890 (19,202) --
Issued 563,540
Redemptions 101
Other comprehensive
income adjustments (6,592)
------------ -------- ----------
31 December 1998 2,362,531 (25,794) --
------------ -------- ----------
Issued (1,479)
Redemptions 87
Repurchase Niagara
Mohawk's
common stock (157,167)
Dividend of Opinac 25,186(4)
Other comprehensive
income adjustments (4,545)
------------ -------- ----------
31 December 1999 2,361,139 (5,153) (157,167)
------------ -------- ----------
Amortisation(5) 1,178
Redemptions 87
Repurchased Niagara
Mohawk's common
stock (250,026)
Other comprehensive
income adjustments (2,306)
------------ -------- ----------
31 December 2000 2,362,404 (7,459) (407,193)
============ ======== ==========
------------------------------------------------------------
Notes:
(1) In thousands of dollars.
(2) Includes sinking fund requirements due within one year.
(3) The fixed-adjustable rate preferred stock issued during 1999 has a $25 par
value with a $50 liquidation preference.
(4) On 31 March 1999, Niagara Mohawk Power distributed its ownership interest
in the stock of Opinac as a dividend to Niagara Mohawk. As a result, the
accumulated other comprehensive income of Opinac of $25,186 million, which
is entirely made up of foreign currency translation adjustment, is no
longer included in Niagara Mohawk Power's "Accumulated Other Comprehensive
Income" (See Note 1).
(5) Pursuant to a 1999 NYPSC rate order, Niagara Mohawk is amortising the
capital stock expense of the Adjustable Rate Series D preferred stock over
five years (ends in 2004).
The cumulative amount of unrealised gain on securities was $157 and the
additional minimum pension liability was $7,616 at 31 December 2000.
Purchase of Niagara Mohawk Common Stock
Niagara Mohawk Power purchased 10 million shares of Niagara Mohawk's common
stock through 31 December 1999 for $157.2 million.
Niagara Mohawk Power purchased 17,125,045 additional shares for approximately
$250 million in 2000. Niagara Mohawk Power has suspended the program to
repurchase Niagara Mohawk's common stock as a result of the pending merger
with National Grid.
116
Niagara Mohawk Power Non-Redeemable Preferred Stock
(Optionally Redeemable)
Niagara Mohawk Power had certain issues of preferred stock, which provide for
optional redemption at 31 December as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Redemption price per
share (Before adding
Series Shares 2000 1999 accumulated dividends)
$'000s $'000s ($)
-----------------------------------------------------------------------------------------------------------------------------------
Preferred $100 par value:
3.40% 200,000 20,000 20,000 103.50
3.60% 350,000 35,000 35,000 104.85
3.90% 240,000 24,000 24,000 106.00
4.10% 210,000 21,000 21,000 102.00
4.85% 250,000 25,000 25,000 102.00
5.25% 200,000 20,000 20,000 102.00
6.10% 250,000 25,000 25,000 101.00
7.72% 400,000 40,000 40,000 102.36
Preferred $25 par value:
Adjustable Rate
Series A 1,200,000 30,000 30,000 25.00
Series C 2,000,000 50,000 50,000 25.00
Series D 3,000,000 150,000 150,000 50.00
------------ ------------
440,000 440,000
============ ============
-----------------------------------------------------------------------------------------------------------------------------------
Niagara Mohawk Power Mandatorily Redeemable Preferred Stock
At 31 December, Niagara Mohawk Power had certain issues of preferred stock, as
detailed below, which provide for mandatory and optional redemption. These
series require mandatory sinking funds for annual redemption and provide
optional sinking funds through which Niagara Mohawk Power may redeem, at par,
a like amount of additional shares (limited to 120,000 shares of the 7.45 per
cent. series). The option to redeem additional amounts is not cumulative.
-----------------------------------------------------------------------------------------------------------------------------------
Redemption price per share (before
adding accumulated dividends)
2000 1999 2000 1999 2000 Eventual Minimum
Series Shares Shares $'000s $'000s ($) ($)
-----------------------------------------------------------------------------------------------------------------------------------
Preferred $100 par value: 7.45% 168,000 186,000 16,800 18,600 100.97 100.00
Preferred $25 par value: 7.85% 182,801 365,602 4,570 9,140 25.00 25.00
Adjustable Rate - Series B 1,600,000 1,650,000 40,000 41,250 25.00 25.00
--------- ---------
61,370 68,990
Less sinking fund requirements 7,620 7,620
--------- ---------
53,750 61,370
========= =========
-----------------------------------------------------------------------------------------------------------------------------------
Niagara Mohawk Power's five-year mandatory sinking fund redemption
requirements for preferred stock are as follows:
--------------------------------------------------------------------------------
Redemption Requirement
$'000s
--------------------------------------------------------------------------------
2001 7,620
2002 3,050
2003 3,050
2004 3,050
2005 3,050
--------------------------------------------------------------------------------
117
Niagara Mohawk Power Long-Term Debt
Long-term debt at 31 December consisted of the following:
--------------------------------------------------------------------------------
Due 2000 1999
Series $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
First Mortgage Bonds:
9 1/2% 2000 -- 150,000
6 7/8% 2001 210,000 210,000
9 1/4% 2001 100,000 100,000
5 7/8% 2002 230,000 230,000
6 7/8% 2003 85,000 85,000
7 3/8% 2003 220,000 220,000
8% 2004 232,425 232,425
6 5/8% 2005 110,000 110,000
9 3/4% 2005 137,981 137,981
7 3/4% 2006 275,000 275,000
6 5/8%(1) 2013 45,600 45,600
8 3/4% 2022 119,012 136,597
8 1/2% 2023 122,020 146,020
7 7/8% 2024 170,257 170,257
5.15%(1) 2025 75,000 75,000
7.2%(1) 2029 115,705 115,705
------------- -------------
Total First Mortgage Bonds 2,248,000 2,439,585
------------- -------------
Senior Notes
7% 2000 -- 340,244
7 1/8% 2001 302,439 302,439
7 1/4% 2002 302,439 302,439
7 3/8% 2003 302,439 302,439
7 5/8% 2005 302,439 302,439
8 7/8% 2007 200,000 --
7 3/4% 2008 600,000 600,000
8 1/2% 2010 500,000 500,000
------------- -------------
Unamortised discount on 8 1/2% Senior Note (93,940) (126,374)
------------- -------------
Total Senior Notes 2,415,816 2,523,626
------------- -------------
Promissory notes:
Adjustable Rate Series(1)
2015 100,000 100,000
2023 69,800 69,800
2025 75,000 75,000
2026 50,000 50,000
2027 25,760 25,760
2027 93,200 93,200
Revolving Credit Facility 60,000 105,000
Other 180,363 186,902
Unamortised discount (10,651) (12,545)
------------- -------------
Total long-term debt 5,307,288 5,656,328
Less long-term debt due with one year 628,325 613,740
------------- -------------
4,678,963 5,042,588
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Note:
(1) Tax-exempt pollution control related issues.
118
Niagara Mohawk Power's long-term debt increased significantly upon the closing
of the MRA on 30 June 1998. The MRA was primarily financed through the Senior
Notes. The Senior Notes are unsecured obligations of Niagara Mohawk Power and
rank pari passu in right of payment to its First Mortgage Bonds, the senior
bank financing and unsecured medium term notes.
Niagara Mohawk Power is obligated to use 85 per cent. of the net proceeds of
the sales of the generation assets to reduce its senior debt outstanding
within 180 days after the receipt of such proceeds. To date, Niagara Mohawk
Power has received $907.5 million on the sale of a substantial portion of its
non-nuclear generation assets. During 1999 and 2000, Niagara Mohawk Power's
net reduction in debt was approximately $1.1 billion and $283.1 million,
respectively, using the proceeds from the assets sales and from improved cash
flow. See Notes 2 and 3 for a discussion of the status of the remaining
generation asset sales.
Several series of First Mortgage Bonds and Promissory Notes were issued to
secure a like amount of tax-exempt revenue bonds issued by the New York State
Energy Research and Development Authority ("NYSERDA"). Approximately $414
million of such securities bear interest at a daily adjustable interest rate
(with an option to convert to other rates, including a fixed interest rate
which would require Niagara Mohawk Power to issue First Mortgage Bonds to
secure the debt) which averaged 4.06 per cent. for 2000 and 3.23 per cent. for
1999 and are supported by bank direct pay letters of credit. Pursuant to
agreements between NYSERDA and Niagara Mohawk Power, proceeds from such issues
were used for the purpose of financing the construction of certain pollution
control facilities at Niagara Mohawk Power's generation facilities or to
refund outstanding tax-exempt bonds and notes (see Note 5).
Other long-term debt in 2000 consists of obligations under capital leases of
approximately $18.8 million, a liability to the DOE for nuclear fuel disposal
of approximately $133.6 million and a liability for IPP contract terminations
not related to the MRA of approximately $27.9 million. The aggregate
maturities of long-term debt for the five years subsequent to 31 December
2000, excluding capital leases, in millions, are approximately $625.1, $544.9,
$611.6, $233.0 and $610.6, respectively. A reduction in debt that will occur
from applying proceeds from additional generation asset sales may impact the
schedule of maturities of long-term debt.
Early Extinguishment of Debt
During 2000 and 1999, Niagara Mohawk Power redeemed approximately $95 million
and $822 million, respectively, in long-term debt prior to its scheduled
maturity. Niagara Mohawk charged to earnings, as an extraordinary item
approximately $0.9 million and $23.8 million, after tax, for redemption
premiums incurred, and unamortised debt expense and issuance costs. This
extraordinary item had a one cent and 13 cents per share after-tax effect on
Niagara Mohawk's 2000 and 1999 earnings per share, respectively.
Note 5 - Bank Credit Arrangements
Niagara Mohawk Power has a senior bank facility agreement that provides
Niagara Mohawk Power with $804 million of credit consisting of a $280 million,
364 day revolving credit facility (expires 31 May 2001, with the option to
convert the loans outstanding at the termination date to a one-year term
loan), a five-year $100 million revolving credit facility (expires 31 May
2005), and $424 million for letters of credit with a three-year term (expires
2 June 2003). The letter of credit facility provides credit support for
Niagara Mohawk Power's adjustable rate pollution control revenue bonds issued
through the New York State Energy Research and Development Authority,
discussed in Note 4. As of 31 December 2000, Niagara Mohawk Power borrowed
$170 million from the revolving credit facility, consisting of $110 million
from the 364 day revolving credit facility and $60 million from the five year
revolving credit facility, leaving Niagara Mohawk Power with $210 million of
borrowing capability under the bank facility agreement. The interest rate
applicable to the facility is variable based on certain rate options available
under the agreement and currently approximates 7.8 per cent.
Niagara Mohawk Energy has a $50 million bank facility secured by certain
assets of Opinac. The facility provides for letters of credit and a $10
million line of credit. The line of credit expires on 31 December 2001. As of
31 December 2000, approximately $36.9 million letters of credit were
outstanding and there were no borrowings against the line of credit. In
addition, Niagara Mohawk had issued guarantees of $8 million as of 31 December
2000 to trade counter-parties of Niagara Mohawk Energy.
Niagara Mohawk had short-term debt of $110 million outstanding at 31 December
2000 and no short-term debt outstanding at 31 December 1999 or 31 December
1998.
119
Note 6 - Federal, State And Foreign Income Taxes
Components of US and foreign income before income taxes:
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
US (8,501) 25,276 (206,372)
Foreign 8,845 6,124 8,227
Consolidating eliminations (21,310) 16,074 10,952
------------- ------------- -------------
Income/(loss) before income taxes and preferred dividend requirement of
subsidiary (20,966) 47,474 (187,193)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Following is a summary of the components of federal, state and foreign income
tax and a reconciliation between the amount of federal income tax expense
reported in the Consolidated Statements of Income and the computed amount at
the statutory tax rate:
Components of federal, state and foreign income taxes:
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Current tax expenses:
Federal 18,592 24,637 (155,320)
State(1) 528 2,767 360
------------- ------------- -------------
19,120 27,404 (154,960)
------------- ------------- -------------
Deferred tax expenses:
Federal (22,127) (6,931) 84,466
State(1) (5,744) -- --
Foreign 1,982 1,474 4,126
------------- ------------- -------------
(25,889) (5,457) 88,592
------------- ------------- -------------
Total(2) (6,769) 21,947 (66,368)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Effective date of New York state income tax implementation for Niagara
Mohawk Power was 1 January 2000.
(2) Does not include the tax benefits of $0.489 million and $12.819 million
associated with the extraordinary item for the loss on the extinguishment
of debt in 2000 and 1999, respectively.
120
Reconciliation between federal and foreign income taxes and the tax computed
at prevailing US statutory rate on income before income taxes:
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Computed tax (7,338) 15,648 (65,644)
Increase (reduction) including those attributable to flow-through of certain
tax adjustments:
Depreciation 27,366 21,380 20,808
Cost of removal (6,936) (6,809) (7,859)
Allowance for funds used during construction (254) (2,442) (4,207)
State income taxes(1) (5,216) 2,767 360
Expiring foreign tax credits -- 692 10,053
Pension settlement amortisation -- (278) (3,317)
Debt premium & mortgage recording tax 806 14,402 (9,408)
Real estate taxes (5,860) 3,540 1,968
Amortisation of capital stock 634 99 108
Dividends exclusion - federal income tax returns (517) (449) (172)
Vacation pay adjustment 420 (36) (230)
Provided at other than statutory rate (1,186) 1,185 --
SERP trust fund (446) (268) (483)
Settlement of IRS exams (1,852) -- --
Subsidiaries (979) (2,294) 3,853
Reserve for Hydra-Co sale expenses -- (1,181) (15)
Deferred investment tax credit reversal(3) (6,110) (23,539) (7,454)
Other 699 (470) (4,729)
------------- ------------- -------------
569 6,299 (724)
------------- ------------- -------------
Federal and foreign income taxes(2) (6,769) 21,947 (66,368)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Effective date of New York state income tax implementation for Niagara
Mohawk Power was 1 January 2000. There was a state income tax for Niagara
Mohawk's unregulated subsidiaries prior to 2000.
(2) Does not include the tax benefits of $0.489 million and $12.819 million
associated with the extraordinary item for the loss on the extinguishment
of debt in 2000 and 1999, respectively.
(3) Deferred investment tax credits of $0.8 million and $16.2 million related
to the fossil and hydro generation assets that have been sold have been
taken into income in 2000 and 1999, respectively, in accordance with IRS
rules.
At 31 December, the deferred tax liabilities (assets) were comprised of the
following:
--------------------------------------------------------------------------------
2000 1999
$'000s $'000s
--------------------------------------------------------------------------------
Alternative minimum tax (93,228) (97,652)
Unbilled revenues (13,964) (12,771)
Non-utilised NOL carry-forward (805,261) (930,117)
Other (430,257) (336,478)
------------- -------------
Total deferred tax assets (1,342,710) (1,377,018)
------------- -------------
Depreciation related 1,278,966 1,275,804
Investment tax credit related 62,734 65,554
MRA terminated IPP contracts 1,037,106 1,172,380
Other 436,722 432,237
------------- -------------
Total deferred tax liabilities 2,815,528 2,945,975
------------- -------------
Accumulated deferred income taxes 1,472,818 1,568,957
============= =============
--------------------------------------------------------------------------------
121
In December 1998, Niagara Mohawk Power received a ruling from the IRS which
provided that the amount of cash and the value of common stock that was paid
by Niagara Mohawk Power to the terminated IPP Parties was deductible in 1998
which resulted in Niagara Mohawk Power not paying any regular federal income
taxes for 1998, and further generated a substantial net operating loss for
federal income tax purposes. Niagara Mohawk Power carried back a portion of
the unused Net Operating Losses ("NOL") NOL to the years 1996 and 1997, and
also for the years 1988 through 1990, which resulted in federal income tax
refunds of $135 million that were received in January 1999. Niagara Mohawk
currently anticipates that it will be able to utilise the remaining NOL
carryforward prior to its expiration in 2019. The amount of the NOL
carryforward as of 31 December 2000 is $2.294 billion. Niagara Mohawk's
ability to utilise the NOL carryforward generated, as a result of the MRA and
utilisation of alternative minimum tax credits, could be limited under the
rules of section 382 of the Internal Revenue Code if certain changes in
Niagara Mohawk's common stock ownership were to occur in the future. The
merger would trigger such a limitation. Notwithstanding a limitation of the
NOLs resulting from the merger, Niagara Mohawk anticipates that it will be
able to utilise the remaining NOLs prior to their expiration in 2019. See Note
12 for a further discussion of the pending merger.
Note 7 - Pension and Other Retirement Plans
Niagara Mohawk Power and its affiliates have a non-contributory defined
benefit pension plan covering substantially all employees. The plan was
amended during 1998 to include a cash balance benefit in which the participant
has an account to which amounts are credited based on qualifying compensation
and with interest determined annually based on average annual 30-year Treasury
bond yield. The majority of the costs and benefits associated with this plan
are attributable to Niagara Mohawk Power employees. Supplemental non-
qualified, non-contributory executive retirement programs provide additional
defined pension benefits for certain officers. In addition, Niagara Mohawk
Power, and its affiliates provide certain contributory health care and life
insurance benefits for active and retired employees and dependants.
122
The changes in benefit obligations, plan assets and plan funded status for
these pension and other retirement plans as of, and for the year ended 31
December, are summarised as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Retirement Benefits
------------------------------- -------------------------------
2000 1999 2000 1999
$'000s $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation at 1 January 1,111,833 1,302,197 519,058 547,620
Service cost 32,502 34,743 11,784 15,367
Interest cost 86,262 85,821 39,601 35,555
Benefits paid to participants (92,313) (234,683) (40,528) (35,568)
Plan amendments 390 19,300 -- --
Curtailments (178) (4,818) (1,514) 7,287
Settlements (12,728) (32,058) -- --
Actuarial (gain)/loss 58,007 (58,669) 34,193 (51,203)
------------- ------------- ------------- -------------
Benefit obligation at 31 December 1,183,775 1,111,833 562,594 519,058
------------- ------------- ------------- -------------
Change in plan assets:
Fair value of plan assets at 1 January 1,344,647 1,446,512 245,090 210,046
Contributions 29,247 11,878 -- 9,435
Net return on plan assets (10,856) 157,627 26,883 25,609
Benefits paid to participants (91,085) (234,152) -- --
Settlements (15,233) (37,218) -- --
------------- ------------- ------------- -------------
Fair value of plan assets at 31 December 1,256,720 1,344,647 271,973 245,090
------------- ------------- ------------- -------------
Funded status 72,945 232,814 (290,621) (273,968)
Unrecognised initial obligation 10,253 12,788 130,680 141,570
Unrecognised net gain from actual return on plan assets (249,756) (366,232) -- --
Unrecognised net loss/(gain) from past experience different
from that assumed 39,939 (17,612) 9,262 (14,507)
Unrecognised prior service cost 73,290 81,178 (6,166) (15,508)
Accumulated other comprehensive income (8,395) (6,746) -- --
------------- ------------- ------------- -------------
Benefits liability on Niagara Mohawk's consolidated balance
sheet (61,724) (63,810) (156,845) (162,413)
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
In 2000, Niagara Mohawk Power experienced a net curtailment/settlement gain of
$1.2 million due to the employee transfers associated with the sales of the
Oswego and Albany generating plants. This gain is included in the deferred
loss on the sale of the assets. In 1999, there was a net curtailment/
settlement gain of $35.3 million due to employee transfers associated with
generation asset sales and normal terminations.
The non-qualified executive pension plan has no plan assets due to the nature
of the plan, and therefore, has an accumulated benefit obligation in excess of
plan assets of $16.5 million and $12.4 million at 31 December 2000 and 1999,
respectively.
123
The following table summarises the components of the net annual benefit costs.
-----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Retirement Benefits
------------------------------------------------ ------------------------------------------------
2000 1999 1998 2000 1999 1998
$'000s $'000s $'000s $'000s $'000s $'000s
Service cost 32,502 34,743 30,430 11,784 15,367 14,338
Interest cost 86,262 85,821 79,748 39,601 35,555 35,338
Expected return on plan
assets (95,399) (97,151) (95,472) (21,277) (17,501) (16,752)
Amortisation of the
initial obligation 2,381 2,526 2,559 10,890 10,890 10,890
Amortisation of gains and
losses (5,028) (1,574) (8,408) 4,841 10,695 8,367
Amortisation of prior
service costs 7,230 7,675 4,899 (9,244) (10,271) (9,508)
------------- ------------- ------------- ------------- ------------- -------------
Net benefit cost before
curtailments and
settlements 27,948 32,040 13,756 36,595 44,735 42,673
Curtailment (gain)/loss 1,025 6,470 -- (1,635) 5,370 --
Settlement gain (2,232) (47,102) -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Net benefit cost (1) 26,741 (8,592) 13,756 34,960 50,105 42,673
============= ============= ============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Note:
(1) A portion of the benefit costs relates to construction labour, and
accordingly, is allocated to construction projects.
-----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Retirement Benefits
------------------------------- -------------------------------
2000 1999 2000 1999
($'000) ($'000) ($'000) ($'000)
Weighted average assumptions as of December 31:
Discount rate 7.75% 7.75% 7.75% 7.75%
Expected return on plan assets 9.50% 9.25% 9.50% 9.25%
Rate of compensation increase (plus merit increases) 2.50% 2.50% N/A N/A
Health care cost trend rate:
Under age 65 N/A N/A 9.00% 6.00%
Over age 65 N/A N/A 9.00% 5.50%
-----------------------------------------------------------------------------------------------------------------------------------
The assumed health cost trend rates decline to 5 per cent. in 2004 and remain
at that level thereafter. The assumed health cost trend rates can have a
significant effect on the amounts reported for the health care plans.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
--------------------------------------------------------------------------------
1% increase 1% decrease
$'000s $'000s
--------------------------------------------------------------------------------
Effect on total of service and interest cost
components of net periodic post-retirement
health care benefit cost 4,961 (4,201)
Effect on the health care component of the
accumulated post-retirement benefit
obligations 45,742 (39,391)
--------------------------------------------------------------------------------
124
Niagara Mohawk recognises the obligation to provide post-employment benefits
if the obligation is attributable to employees' past services, rights to those
benefits are vested, payment is probable and the amount of the benefits can be
reasonably estimated. At 31 December 2000 and 1999, Niagara Mohawk's post-
employment benefit obligation is approximately $21.5 million and $15.7
million, respectively.
Note 8 - Commitments and Contingencies
Long-Term Contracts for the Purchase of Electric Power
Niagara Mohawk Power has several types of long-term contracts for the purchase
of electric power. Niagara Mohawk Power's commitments under these long-term
contracts, as of 1 January 2001, excluding its commitments with the New York
Power Authority ("NYPA"), which are shown separately, are summarised in the
table below. Following the table are descriptions of the different types of
these long-term contracts. For a detailed discussion of the financial swap
agreements that Niagara Mohawk Power has entered into as part of the MRA and
the sale of its generation assets (the sale of the Huntley and Dunkirk coal-
fired generation plants and the sale of the Albany oil and gas-fired
generation plant) which are not included in the table below, see Note 9.
-----------------------------------------------------------------------------------------------------------------------------
Estimated Fixed Estimated Variable
Costs Costs Capacity, Estimated Purchased Estimated Purchased
Capacity Energy and Taxes(2) Total Capacity Energy
Year $'000s $'000s $'000s (MW) (MWh)
-----------------------------------------------------------------------------------------------------------------------------
2001 102,157 206,698 308,855 1,933 3,940,284
2002 40,288 188,792 229,080 1,294 3,416,549
2003 30,226 183,627 213,853 1,271 3,324,143
2004 15,218 177,637 192,855 406 3,144,561
2005 15,354 178,084 193,438 400 3,125,016
2006-2015 79,498 1,655,730 1,735,228 377(1) 30,938,423
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) MW value represents the average annual quantity of purchased capacity.
(2) Does not include puts (see below).
PURPA Contracts
Under the requirements of the Public Utility Regulatory Policies Act of 1978,
as amended ("PURPA"), Niagara Mohawk Power is required to purchase power
generated by IPPs, as defined therein. Niagara Mohawk Power has 112 PPAs with
120 IPP facilities, amounting to approximately 635 MW of capacity at 31
December 2000. All of this capacity amount is considered firm and excludes
PPAs that provide energy only. The table above includes the estimated payments
for fixed costs (capacity) and variable costs (capacity, energy and related
taxes) that Niagara Mohawk Power estimates it will be obligated to make under
these 112 IPP contracts, excluding the put contracts (see below) and the
financial obligation under the swap contracts. The payments to the IPPs are
subject to the tested capacity and availability of the facilities, scheduling
and price escalation. These payments have been significantly reduced by the
consummation of the MRA and additional IPP buyouts made in 1999 and 2000. See
Note 2 for a further discussion of the additional IPP buyouts made in 1999 and
2000.
Fixed capacity costs (in the table above) relate to three contracts as
follows: 1) a contract with an IPP (that was a party to the MRA), 2) a
contract entered into along with the sale of the Oswego generation assets as
discussed further below, and 3) the contract entered into along with the sale
of the hydroelectric generation assets as discussed further below. With
respect to the IPP contract, Niagara Mohawk Power is required to make capacity
payments, including payments when the facility is not operating but available
for service. The terms of this contract allow Niagara Mohawk Power to schedule
energy deliveries and then pay for the energy delivered. Contracts relating to
the remaining IPP facilities in service at 31 December 2000 require Niagara
Mohawk Power to pay only when energy is delivered. Niagara Mohawk Power paid
approximately $415 million, $435 million and $785 million in 2000, 1999 and
1998 for 5,077,000 MWh, 6,765,000 MWh and 9,700,000 MWh, respectively, of
electric power under all IPP contracts.
125
Fossil/Hydro Contracts
As part of the sale of Niagara Mohawk Power's fossil and hydro generation
assets, Niagara Mohawk Power entered into PPAs with the buyers of these assets
for the purchase of capacity and energy as discussed in more detail below. The
table above includes the estimated payments for variable costs and quantities
(capacity and energy) associated with the PPAs that Niagara Mohawk Power
estimates it will make under these contracts. Niagara Mohawk Power paid
approximately $137.0 million in 2000 and $123.7 million in 1999 for 1,948 MW
and 2,409 MW of capacity and 3,274,000 MWh and 3,490,000 MWh of electric
power, respectively, under these PPAs.
The hydro PPA calls for the purchase of all energy and capacity through
September 2001 at prices that approximate forecasted future market prices.
Niagara Mohawk Power anticipates that the energy and capacity to be purchased
under the hydro PPA to be at quantities approximating historical generation
levels, subject to the effects of water flow availability. The Oswego PPA is
primarily a contract for capacity with a nominal amount of energy at prices
above forecasted future market prices.
Nuclear Contracts
The table above does not include the estimated payments for the PPAs entered
into with the buyers of the nuclear generation assets, since Niagara Mohawk
Power has not closed on these asset sales. As part of the agreement with
Constellation to sell its nuclear generation assets, Niagara Mohawk Power
would enter into PPAs to purchase 90 per cent. of the actual hourly nuclear
plant output for its percentage interest of the nuclear plants at negotiated
competitive prices for approximately 10 years. Niagara Mohawk Power would pay
only for delivered output from the units. Upon the expiration of the PPAs,
there would be revenue sharing agreements whereby Niagara Mohawk Power would
be entitled to future payments from Constellation over a ten-year period if
electric energy and capacity market prices exceed certain amounts during the
ten-year sharing period. Niagara Mohawk Power would not be required to buy
energy from Constellation, LLC under the revenue sharing agreements. See Note
3 for a discussion of the proposed sale of the nuclear generation assets.
Put Contracts
As part of the MRA, Niagara Mohawk Power signed put agreements with eight of
the IPP Parties whereby the IPP Parties have an option to put the physical
delivery of energy to Niagara Mohawk Power at market prices. These put
agreements will be in effect until the NYISO meets certain volume and capacity
conditions for a consecutive six-month period. If the NYISO does not meet the
defined volume and capacity transactions that are outlined in the put
agreements, then the put agreements are in effect until June 2008. Although
the volume and capacity conditions have not yet been met in all of the
contracts, Niagara Mohawk Power negotiated during 2000 to terminate the
requirement to purchase physical energy from six of the eight IPP Parties with
put agreements. Since Niagara Mohawk Power cannot predict if and when the
NYISO will meet the volume and capacity conditions, the cost and quantity of
energy associated with the remaining put agreements have not been included in
the table above. Niagara Mohawk Power paid approximately $46.4 million in 2000
and $75.9 million in 1999 for 898,037 MWh and 2,782,678 MWh, respectively, of
electric power received as part of these put agreements. If the remaining two
put agreements remain in effect, Niagara Mohawk Power expects to pay
approximately $19.5 million to $38.8 million for 509,000 MWh to 1,025,000 MWh
of electric power in each of the years 2001 to 2008.
While the PPAs for the generation asset sales, which were entered into as an
integral part of the generation sales, are above market, they are designed to
help Niagara Mohawk Power meet the objectives of rate reduction and price cap
commitments as well as meet expected demand as the "provider of last resort"
as outlined in the Power Choice agreement.
126
At 1 January 2001, Niagara Mohawk Power had long-term contracts to purchase
electric power from the following generation facilities owned by NYPA:
-----------------------------------------------------------------------------------------------------------------------------------
Estimated
Expiration Purchase annual
date of capacity in capacity
Facility contract (MW) (dollars)
-----------------------------------------------------------------------------------------------------------------------------------
Niagara - hydroelectric project 2007 927 28,355,000
St. Lawrence - hydroelectric project 2007 104 1,248,000
Blenheim-Gilboa - pumped storage generation station 2002 270 7,452,000
------------- -------------
1,301 37,055,000
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The purchase capacities shown above are based on the contracts currently in
effect. The estimated annual capacity costs are subject to price escalation
and are exclusive of applicable energy charges. The total cost of purchases
under these contracts, plus other miscellaneous NYPA purchases, was
approximately, in millions, $144.3, $112.4 and $93.1 for the years 2000, 1999
and 1998, respectively. Niagara Mohawk Power continues to have a contract with
NYPA's Fitzpatrick nuclear facility to purchase for resale up to 46 MW of
power for NYPA's economic development customers.
In addition to the contractual commitments described above, Niagara Mohawk
Power entered into a four-year contract, expiring in June 2003, that gives it
the option to buy additional power at market prices from the Huntley coal-
fired generation plant, now owned by NRG Energy, Inc. ("NRG"). If Niagara
Mohawk Power needs any additional energy to meet its load it can purchase the
electricity from other IPPs, other utilities, other energy merchants or
through the NYISO at market prices.
At 1 January 2001, Niagara Mohawk Energy had long-term contracts to purchase
electric power from various generation facilities as follows:
--------------------------------------------------------------------------------
Estimated Energy
Costs Purchased energy
Year (dollars) (MWh)
--------------------------------------------------------------------------------
2001 38,010,736 1,165,080
2002 12,744,720 438,000
2003 12,722,160 438,000
2004 12,758,320 438,000
--------------------------------------------------------------------------------
The purchase capacities above are based on the contracts currently in effect.
Gas Supply, Storage And Pipeline Commitments
In connection with its regulated gas business, Niagara Mohawk Power 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.
127
The table below sets forth Niagara Mohawk Power's estimated commitments at 31
December 2000, for the next five years, and thereafter.
--------------------------------------------------------------------------------
Gas
Gas Supply Storage/Pipeline
Year $'000s $'000s
--------------------------------------------------------------------------------
2001 118,266 66,359
2002 86,031 32,421
2003 86,031 13,696
2004 86,219 13,696
2005 86,031 13,696
Thereafter 71,661 35,603
--------------------------------------------------------------------------------
With respect to firm gas supply commitments, the amounts are based upon
volumes specified in the contracts giving consideration for the minimum take
provisions. Commodity prices are based 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 31 December 2000,
Niagara Mohawk Power's firm gas supply commitments extend through October
2006, while the gas storage and transportation commitments extend through
October 2012.
The table below sets forth Niagara Mohawk Energy's estimated commitments at 31
December 2000, for the next five years, and thereafter.
--------------------------------------------------------------------------------
Gas Commitments
Year $'000s
--------------------------------------------------------------------------------
2001 301
2002 301
2003 116
2004 54
2005 54
Thereafter 14
--------------------------------------------------------------------------------
The prices listed above are based on the contracts currently in effect.
Niagara Mohawk Energy has long-term commitments with a variety of suppliers
and pipelines to purchase commodity, provide gas storage capability and
transport gas commodity on interstate gas pipelines.
Sale of Customer Receivables
Niagara Mohawk Power has established a single-purpose financing subsidiary,
NMR, whose business consists of the purchase and resale of an undivided
interest in a designated pool of Niagara Mohawk Power customer receivables,
including accrued unbilled revenues. For receivables sold, Niagara Mohawk
Power has retained collection and administrative responsibilities as agent for
the purchaser. As collections reduce previously sold undivided interests, new
receivables are customarily sold. NMR has its own separate creditors which,
upon liquidation of NMR, will be entitled to be satisfied out of its assets
prior to any value becoming available to Niagara Mohawk Power. The sale of
receivables are in fee simple for a reasonably equivalent value and are not
secured loans. Some receivables have been contributed in the form of a capital
contribution to NMR in fee simple for reasonably equivalent value, and all
receivables transferred to NMR are assets owned by NMR in fee simple and are
not available to pay Niagara Mohawk Power's creditors.
At 31 December 2000 and 1999, $230.1 million and $215.1 million, respectively,
of receivables had been sold by NMR to a third party. The undivided interest
in the designated pool of receivables was sold with limited recourse. The
agreement provides for a formula based loss reserve pursuant to which
additional customer receivables are assigned to the purchaser to protect
against bad debts. At 31 December 2000, the amount of additional receivables
assigned to the purchaser, as a loss reserve, was approximately $71.2 million.
128
To the extent actual loss experience of the pool receivables exceeds the loss
reserve, the purchaser absorbs the excess. Concentrations of credit risk to
the purchaser with respect to accounts receivable are limited due to Niagara
Mohawk Power's large, diverse customer base within its service territory.
Niagara Mohawk Power generally does not require collateral (i.e. customer
deposits).
From the fourth quarter of 1999 through April 2000, and in September 2000
through December 2000, NMR was not in compliance with a certain statistical
ratio relating to the pool of receivables sold. The purchaser granted waivers
for this period. NMR was in compliance with the ratio for the months of May
through August 2000. While NMR is working to return to compliance with this
ratio, it is possible a non-compliance condition could continue to exist. NMR
is unable to predict whether further waivers would be granted.
Environmental Contingencies
The public utility industry typically utilises and/or generates in its
operations a broad range of hazardous and potentially hazardous wastes and by-
products. Niagara Mohawk Power believes it is handling identified wastes and
by-products in a manner consistent with federal, state, and local requirements
and has implemented an environmental audit program to identify any potential
areas of concern and aid in compliance with such requirements. Niagara Mohawk
Power is also currently conducting a program to investigate and remediate, as
necessary, to meet current environmental standards, certain properties
associated with former gas manufacturing and other properties which Niagara
Mohawk Power has learned may be contaminated with industrial waste, as well as
investigating identified industrial waste sites as to which it may be
determined that Niagara Mohawk Power has contributed. Niagara Mohawk Power has
also been advised that various federal, state, or local agencies believe
certain properties require investigation and has prioritised the sites based
on available information in order to enhance the management of investigation
and remediation, if necessary.
Niagara Mohawk Power is currently aware of 132 sites with which it may be
associated, including 70 which are Niagara Mohawk Power-owned. With respect to
non-owned sites, Niagara Mohawk Power may be required to contribute some
proportionate share of remedial costs. Although one party can, as a matter of
law, be held liable for all of the remedial costs at a site, regardless of
fault, in practice costs are usually allocated among Potentially Responsible
Parties ("PRPs"). Niagara Mohawk Power has denied any responsibility at
certain of these PRP sites and is contesting liability accordingly.
Investigations at each of the Niagara Mohawk Power-owned sites are designed to
(1) determine if environmental contamination problems exist; (2) if necessary,
determine the appropriate remedial actions; and (3) where appropriate,
identify other parties who should bear some or all of the cost of remediation.
Legal action against such other parties will be initiated where appropriate.
As site investigations are completed, Niagara Mohawk Power expects to
determine site-specific remedial actions and to estimate the attendant costs
for restoration. However, since investigations and regulatory reviews are
ongoing for most sites, the estimated cost of remedial action is subject to
change.
Estimates of the cost of remediation and post-remedial monitoring are based
upon a variety of factors, including identified or potential contaminants,
location, size and use of the site, proximity to sensitive resources, status
of regulatory investigation, and knowledge of activities at similarly situated
sites. Additionally, Niagara Mohawk Power's estimating process includes an
initiative where these factors are developed and reviewed using direct input
and support obtained from the New York State Department of Environmental
Conservation ("DEC"). Actual Niagara Mohawk Power expenditures are dependent
upon the total cost of investigation and remediation and the ultimate
determination of Niagara Mohawk Power's share of responsibility for such
costs, as well as the financial viability of other identified responsible
parties since clean-up obligations are joint and several.
As a consequence of site characterisations and assessments completed to date
and negotiations with PRPs, Niagara Mohawk Power has accrued a liability in
the amount of $285 million, which is reflected in Niagara Mohawk's
Consolidated Balance Sheet at 31 December 2000. The potential high end of the
range is presently estimated at approximately $496 million, including
approximately $235 million in the unlikely event Niagara Mohawk Power is
required to assume 100 per cent. responsibility at non-owned sites. Niagara
Mohawk Power increased its environmental liability by $45 million in 2000 as
compared to 1999 primarily as a result of the availability of information on
certain sites resulting from the progress made on feasibility studies and the
issuance of a proposed remedial action plan on one site. Such information
revealed that the extent of soil contamination on certain sites was greater
than originally anticipated. In addition, there were more stringent regulatory
requirements being imposed on Niagara Mohawk Power. The probabilistic method
was used to determine the amount to be accrued for 21 of Niagara Mohawk
Power's largest sites. The amount accrued for Niagara Mohawk Power's remaining
sites is determined through feasibility studies or engineering estimates,
Niagara Mohawk
129
Power's estimated share of a PRP allocation or where no better estimate is
available, the low end of a range of possible outcomes is used. In response to
an October 1999 request for information, Niagara Mohawk Power informed the DEC
of 24 additional former manufactured gas plant sites that it may be associated
with, including two sites that are currently owned by Niagara Mohawk Power.
Niagara Mohawk Power is currently negotiating a voluntary clean-up agreement
with the DEC for the investigation and, as required, the remediation of these
additional sites. Niagara Mohawk Power has included amounts for the
investigation of these sites in the estimated liability.
Niagara Mohawk Power has recorded a regulatory asset representing the
investigation, remediation and monitoring obligations to be recovered from
ratepayers. Power Choice and the gas rate settlements provide for the
continued application of deferral accounting for variations in spending from
amounts provided in rates. As a result, Niagara Mohawk Power does not believe
that site investigation and remediation costs will have a material adverse
effect on its results of operations or financial condition.
Based on previously submitted feasibility studies and the DEC's ongoing
regulatory review process for Niagara Mohawk Power's Harbor Point site, the
estimated total cost range for this site consists of a high end of $86.2
million, with an expected value calculation of $62.3 million, which is
included in the amounts accrued at 31 December 2000. The DEC has categorised
this site into three operating units. With respect to one operating unit, the
DEC issued a proposed remedial action plan ("PRAP") in October 2000. Based on
this PRAP and legal settlement efforts with respect to another responsible
party, the estimated range for this operating unit consists of a high end of
$15.6 million and an expected value calculation of $13.6 million. With respect
to another operating unit, the DEC is expected to issue a PRAP in the summer
of 2001. Currently, the high end of this unit is estimated to be $63.5
million, with an expected value calculation of $43.2 million. With respect to
the last operating unit, the DEC is requiring additional investigations and a
feasibility study. Currently, the high end of this unit is estimated to be
$7.1 million, with an expected value calculation of $5.5 million. The
estimated costs for the latter two operating units do not consider
contributions from other PRPs, the amount of which Niagara Mohawk Power is
unable to estimate.
In May 1995, Niagara Mohawk Power filed a complaint pursuant to applicable
federal and New York State law in the U.S. District Court for the Northern
District of New York against several defendants seeking recovery of past and
future costs associated with the investigation and remediation of the Harbor
Point and surrounding sites. The New York State Attorney General moved to
dismiss Niagara Mohawk Power's claims against the state of New York, the New
York State Department of Transportation and the Thruway Authority and Canal
Corporation under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"). Niagara Mohawk Power opposed this motion. On 3 April
1998, the Court denied the New York State Attorney General's motion as it
pertains to the Thruway Authority and Canal Corporation, and granted the
motion relative to the state of New York and the Department of Transportation.
In a Memorandum - Decision and Order, dated 28 September 2000, the Court: 1)
denied Niagara Mohawk Power's CERCLA and New York Navigation Law motions for
summary judgment on liability; 2) denied defendant Beazer East, Inc.'s motions
for summary judgment under New York CPLR section 1401 and the New York
Navigation Law; and 3) granted defendant Mohawk Valley Oil's ("MVO") cross-
motions for summary judgment with respect to Niagara Mohawk Power's CERCLA and
New York Navigation Law claims. The Court further ordered that MVO be
dismissed from the case. Niagara Mohawk Power filed a motion seeking leave to
file an interlocutory appeal of the court rulings with respect to MVO. The
court denied Niagara Mohawk Power's motion, thus Niagara Mohawk Power cannot
file an appeal until after the conclusion of the trial, or following
settlement with the remaining defendants.
To date, Niagara Mohawk Power has settled with Jones Chemicals, Inc., the
Thruway Authority and the Canal Corporation. Niagara Mohawk Power is engaged
in settlement negotiations with the remaining defendants. Should the case
proceed to trial, the court has established 19 March 2001 as the trial ready
date. As a result, Niagara Mohawk Power cannot predict the outcome of the
pending litigation against the remaining defendants or the allocation of
Niagara Mohawk Power's share of the costs to remediate the Harbor Point and
surrounding sites.
Construction Program
Niagara Mohawk is committed to an ongoing construction program to assure
transmission and delivery of its electric and gas services. Niagara Mohawk
presently estimates that the construction program for the years 2001 through
2003 will require approximately $658 million, excluding AFC and nuclear fuel.
For the years 2001 through 2003, the estimates, in millions, are $232, $214,
and $212, respectively, which includes amounts relating to Niagara Mohawk
Power's nuclear assets through 1 June 2001. If the nuclear sale does not
occur, Niagara Mohawk Power estimates it will incur expenditures for
construction and nuclear fuel of $34.1 million for 2001
130
and $71 million and $34 million for 2002 and 2003, respectively. Any delay in
the timing or outcome of these remaining generation asset sales will effect
Niagara Mohawk Power's capital expenditure requirements.
Note 9 - Fair Value of Financial and Derivative Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and Temporary Cash Investments
The carrying amount approximates fair value because of the short maturity of
the financial instruments.
Long-Term Debt and Mandatorily Redeemable Preferred Stock
The fair value of fixed rate long-term debt and redeemable preferred stock is
estimated using quoted market prices where available or discounting remaining
cash flows at Niagara Mohawk Power's incremental borrowing rate. The carrying
value of NYSERDA bonds and other long-term debt is considered to approximate
fair value.
Derivative Financial Instruments
The fair value of futures and swap contracts are determined using quoted
market prices or broker quotes, where available, and various financial
modeling tools. See Note 8 for a discussion of the financial sharing agreement
that Niagara Mohawk Power has entered into concerning the announced sale of
the nuclear generation assets.
The financial instruments held or issued by Niagara Mohawk Power are used for
hedging or cost control and not for trading. Niagara Mohawk Energy, Opinac's
energy marketing subsidiary, also holds financial instruments and is engaged
in trading activities. The estimated fair values of their financial
instruments are as follows:
-----------------------------------------------------------------------------------------------------------------------------------
At 31 December 2000 At 31 December 1999
------------------------------- -------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
$'000s $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments 108,343 108,343 116,164 116,164
Mandatorily redeemable preferred stock 61,370 60,684 68,990 66,564
Long-term debt:
First Mortgage bonds 2,248,000 2,265,265 2,439,585 2,380,992
Senior Notes 2,415,816 2,420,143 2,523,626 2,423,611
Promissory notes 413,760 413,760 413,760 413,760
Other 331,535 331,535 269,827 269,827
Swap contract regulatory asset(1) 778,229 778,229 663,718 663,718
-----------------------------------------------------------------------------------------------------------------------------------
Note:
(1) Includes a portion reported in MRA regulatory asset.
Swap Contract Regulatory Asset
Niagara Mohawk Power has three different types of swap contracts (1) eight IPP
indexed swap contracts that resulted from the MRA, (2) swap contracts from the
sale of Niagara Mohawk Power's Huntley and Dunkirk coal-fired generation
plants and (3) a swap contract resulting from the sale of the oil and gas-
fired plant at Albany. Niagara Mohawk Power has recorded a liability for these
contractual obligations and recorded a corresponding regulatory asset since
payments under these contracts are authorised and are currently being
recovered under Power Choice. The amount of this liability and regulatory
asset will fluctuate as estimates of future market and contract prices change
over the term of the contracts, and will decrease over the life of the
contracts as notional quantities are settled. Significant terms of the
contracts are as follows:
IPP Indexed Swap Contracts
Niagara Mohawk Power, as part of the MRA, entered into restated contracts with
eight IPPs. The contracts began in July 1998 and expire in June 2008. They are
structured as indexed swap contracts where Niagara Mohawk Power receives or
makes payments based upon the differential between the contract price and a
market reference price for electricity. As of 31 December 2000 and 1999,
Niagara Mohawk Power has recorded a $747.1 million
131
and $607.3 million in the liability for swap contracts, respectively, and has
recorded a corresponding swap contracts regulatory asset. In the balance sheet
presentation, a portion of the swap regulatory asset is contained within the
MRA Regulatory Asset based on the timing of when it was recorded and the
regulatory treatment it receives. As of 31 December 2000 and 1999, this
portion was $153.1 million and $158.0 million, respectively.
The contract prices were fixed for the first two years and in July 2000
changed to an indexed pricing formula primarily related to natural gas prices.
The indexed pricing structure ensures that the price paid for energy and
capacity will fluctuate relative to the underlying market cost of gas and
general indices of inflation. Contract quantities are fixed for each year of
the full ten-year term of the contracts and average 4.1 million MWh.
During 2000, there were significant increases in the cost of natural gas.
These increases, when factored into the indexing formulas of the IPP swaps,
created larger than anticipated contract payments under these swaps. The
increased gas costs also triggered increases in the price of electricity,
which, since the swap payment is based on the difference between the contract
prices and referenced electricity prices, has tended to mitigate the overall
impact of the gas price increase on the swap payments. Niagara Mohawk Power
took steps in the latter part of 2000 to further mitigate such increases. See
the discussion on the "Gas Futures Contracts - IPP Indexed Swaps" and "Gas
Basis Swaps - Indexed Swaps," later in this note.
Huntley and Dunkirk Swap Contracts
Concurrent with the sale of the generating stations, Niagara Mohawk Power
signed agreements to purchase capacity and energy from the new owners. The
amount of power was set by the contract with a call option on additional
amounts. The contracts began at the sale date, June 1999, and converted to
financial swaps at 1 December 1999 triggered by the ISO implementation. The
contracts are financial only; no electricity is delivered under these
agreements. Each month, the payment is the net of a fixed charge and a
financial swap. The swap payment is based on the difference between fixed
contract prices and referenced market prices applied to stated notional
quantities. Contract notional quantities average 2.9 million MWh annually.
These agreements expire in June 2003.
The anticipated overmarket payments under the swap contracts represent a
liability of Niagara Mohawk Power. As of 31 December 2000 and 1999, Niagara
Mohawk Power has recorded $13.6 million and $56.4 million in the liability for
swap contracts, respectively, and has recorded a corresponding swap contract
regulatory asset. The asset and liability will be amortised over the remaining
term of the swaps as nominal energy quantities are settled and may be adjusted
as periodic reassessments are made of future energy prices.
The reason for the decrease in the swap liability from 31 December 1999, apart
from amortisation of the contract quantities, is the increase in the market
price of power during 2000. Since Niagara Mohawk Power's swap payment is based
on fixed prices, and the counterparty's payment to Niagara Mohawk Power is
based on the market price of power, the monthly settlement has shifted from a
net payment to a net receipt for those months with a notional quantity. This
has reduced the overall liability for the life of these contracts.
Albany Swap Contract
In connection with the sale of the Albany generating station, Niagara Mohawk
Power entered into a financial contract with the new owner. The contract began
in June 2000 and will expire 30 September 2003. The contract is a financial
agreement with no physical energy being delivered. Each month, the payment is
the net of a fixed charge and the financial swap. The swap payment is based on
the difference between contract, indexed prices, and referenced market prices
applied to a notional amount based on a call quantity of power. The call
quantity is capped each year and totals 1,300 GWh for the life of the
contract. Niagara Mohawk Power has two options in the execution of this
contract: (1) Niagara Mohawk Power decides, within limits stated in the
contract, how much power to call on for the purposes of calculating the swap
and (2) Niagara Mohawk Power can also choose between using the price of oil or
natural gas in the indexing of the contract prices.
The anticipated payments under the swaps represent a liability of Niagara
Mohawk Power. As of 31 December 2000, Niagara Mohawk Power has recorded $17.5
million in the liability for swap contracts and has recorded a corresponding
swap contract regulatory asset. The asset and liability will be amortised over
the remaining term of the swaps as nominal energy quantities are settled and
may be adjusted as periodic reassessments are made of future energy prices.
During 2000, there were significant increases in the cost of natural gas.
These increases when factored into the indexing formulas of the Albany swaps,
created larger than anticipated contract payments under these swaps. The
increased gas costs also triggered increases in the price of electricity.
Since the swap payment is based on the
132
difference between the contract prices and referenced electricity prices, this
has tended to mitigate the overall impact on the swap payments. Further
mitigating this increase in contract price was the ability for Niagara Mohawk
Power to call on notional power when it was most advantageous. Niagara Mohawk
Power took steps in the latter part of 2000 to mitigate such increases. See
the discussion on the "Oil Commodity Swap" later in this note.
At 31 December 2000, Niagara Mohawk Power projects that it will make the
following payments in connection with the IPP, Huntley/Dunkirk and Albany swap
contracts for the years 2001 to 2005, and thereafter subject to changes in
market prices and indexing provisions:
--------------------------------------------------------------------------------
Year Projected Payment
$'000s
--------------------------------------------------------------------------------
2001 106,490
2002 167,366
2003 177,171
2004 147,524
2005 135,472
Thereafter 364,491
--------------------------------------------------------------------------------
Derivative Hedging Instruments
Niagara Mohawk Power believes that the above-market payments under the IPP
indexed swaps, Huntley and Dunkirk swaps and Albany swap, are, in aggregate,
included within the forecast used in setting the Power Choice prices. However,
through August 2001, prices for approximately three-quarters of its sales are
fixed. Therefore, significant increases in the swap payments could pose a risk
to earnings. The price of natural gas is the major component in the indexing
of the IPP swap contracts. Natural gas or oil is the primary component of the
indexing of the Albany swap. The prices for the Huntley and Dunkirk payments
are fixed by the contracts. As noted in the discussion above on the various
swap liabilities, increases in the price of natural gas have adversely
impacted the payments Niagara Mohawk Power has and will continue to make.
During 2000, Niagara Mohawk Power took steps to mitigate this risk by a
combination of NYMEX gas futures, fixed for floating gas basis swaps, and an
oil commodity swap.
Niagara Mohawk Power has also been making payments to a non-MRA IPP under a
contract to buy power. The price for this power is indexed to natural gas.
Recent increases in the price of gas have caused this contract to be more
costly. Niagara Mohawk Power has purchased NYMEX gas futures contracts to
mitigate the impact the price of gas has on this contract.
Purchases of electricity and natural gas for distribution to its customers can
expose Niagara Mohawk Power to price risk for those commodities. During 2000,
Niagara Mohawk Power took steps to mitigate these risks through the purchase
of NYMEX gas futures and by entering into fixed for floating electric swaps.
These hedging contracts have been accounted for under SFAS 80, "Accounting for
Futures Contracts" with the gain on the instruments deferred until the month
in which the hedged purchases occur. The hedges are expected to be highly
effective in achieving offsetting cash flows. Changes in market value of
futures contracts relating to hedged items are deferred until the physical
transaction occurs, at which time, income or loss is recognised. Details of
all derivatives used for hedging are in the sections that follow:
Gas Futures Contracts - IPP Indexed Swaps
Beginning in July 2000, the payments Niagara Mohawk made on the eight IPP swap
contracts began indexing with natural gas as the primary component of the
indexing formula. Through renegotiations, Niagara Mohawk Power was able remove
the gas price risk on two of the IPP swaps. Beginning in August 2000, Niagara
Mohawk Power began purchasing NYMEX gas futures to hedge the gas commodity
component of the indexed contract payments for the remaining six IPP indexed
swap contracts for the period September 2000 through August 2001. The NYMEX
futures cover all of the quantity of gas impacting these payments during this
time frame. At 31 December 2000, a deferred gain of $59.7 million was recorded
in Regulatory and Other Liabilities, "Deferred gain on swap hedges", with
$44.9 million recorded in "Swap Hedges Receivable" and $14.8 million recorded
in "Cash."
133
Gas Futures Contracts - Non-MRA IPP Contract
One non-MRA IPP contract includes a provision which indexes the price Niagara
Mohawk Power pays to the IPP to the price of natural gas. This is a physical
delivery power contract and not a financial instrument. In the fourth quarter
of 2000, Niagara Mohawk Power began purchasing NYMEX gas futures as a means to
mitigate the gas price risk associated with this contract. At 31 December
2000, a deferred gain of $7.0 million was recorded in Regulatory and Other
Liabilities, "Deferred gain on swap hedges" with $5.3 million recorded in
"Swap Hedges Receivable" and $1.7 million recorded in "Cash."
Gas Basis Swaps - Indexed Swaps
The gas factor in the indexing formula for each of the six IPPs designates a
particular geographic pricing point for the referenced price of natural gas.
NYMEX futures contracts are predicated on the commodity price of gas at the
Henry Hub in Louisiana. The term "basis" refers to the price differential
between the price of gas at the Henry Hub and the price at some other
particular pricing point. The gas component to the indexing formula in each of
the IPP contracts encompasses both the commodity price and the basis cost for
gas to the particular pricing point identified in the contract.
To more fully hedge the impact that gas prices have on the indexed price,
Niagara Mohawk Power entered into fixed for floating gas basis swap agreements
with several counterparties. These contracts fix the basis cost of gas between
the Henry Hub and each of the pricing points stated in the IPP swaps. This
hedging was undertaken for the period of October 2000 through August 2001. The
quantities hedged were the same quantities as determined for the NYMEX futures
contracts used to hedge the commodity. At 31 December 2000, a deferred gain of
$2.5 million was recorded in Regulatory and Other Liabilities, "Deferred gain
on swap hedges," with a corresponding entry recorded in "Swap Hedges
Receivable."
Oil Commodity Swap
The floating payment Niagara Mohawk Power makes on the Albany swap contract is
indexed to the price of either natural gas or oil. Niagara Mohawk Power has
the option of selecting which fuel is used in the calculation. Increases in
gas and oil could adversely impact the cash flows of this contract. In order
to mitigate the risk of exposure to the increased fuel cost, Niagara Mohawk
Power chose to enter a fixed for floating swap on the price of oil for
quantities that would offset the rise in the price of oil used in the Albany
swap formula. If gas prices exceed oil prices, payments are based on oil
prices, for which Niagara Mohawk Power has a hedge. If oil prices exceed gas
prices, the swap payments will be based on gas prices.
Under the Oil Commodity swap, Niagara Mohawk Power pays a fixed price for a
set quantity of oil in specific months between January and August 2001. The
counterparty pays a market price for oil that is highly correlated with the
oil price referenced in the Albany swap contract. Price movements in the oil
swap are expected to correlate with changes in the cost of oil used in the
Albany swap. The results should substantially offset the effects that oil
price changes have on the indexed contract price. At 31 December 2000, a
deferred loss of $2.7 million was netted in the Regulatory Liability,
"Deferred gain on swap hedges" with an offsetting entry to "Swap Hedges
Receivable."
Gas Futures Contracts - Gas for Resale to Customers
For purchases of natural gas used to supply customers, Niagara Mohawk Power's
exposure to gas commodity price fluctuations is limited by a regulatory ruling
that transfers the commodity price risk to the customer for prudently incurred
commodity costs. In June 2000, Niagara Mohawk Power began using NYMEX gas
futures as hedges to manage those costs effectively and prudently.
The item to be hedged, purchased natural gas, exposes Niagara Mohawk Power's
customers to commodity price volatility. The anticipated transactions being
hedged are the purchases of natural gas for resale to customers for the winter
heating season of November 2000 through March 2001. At 31 December 2000, a
deferred gain of $13.0 million was recorded in "Deferred Gain on Hedging
Activity" with $8.0 million recorded in "Current Assets - Other" and $5.0
million recorded in "Cash."
Electricity Swaps
During several months of 2001, Niagara Mohawk Power projects that it will be
in a short position for electricity needed to supply customers. For those
months, electricity would need to be purchased through the NYISO at market
prices. In order to maintain internal limits on exposure to market risks,
Niagara Mohawk Power locked in the price for a portion of this shortage
through fixed for floating swaps on electricity.
134
Niagara Mohawk Power pays a fixed rate and the counterparty pays the NYISO
market rate for contractually set quantities of on-peak and off-peak power
through May 2001. Since Niagara Mohawk Power is purchasing power through the
NYISO in those same quantities and for the same periods, these swaps will be
highly effective in achieving offsetting cash flows. At 31 December 2000, a
deferred gain of $4.4 million was recorded in "Deferred Gain on Hedging
Activity" with the corresponding entry to "Current Assets - Other."
Niagara Mohawk Power's open positions in derivative instruments consisted of
long positions with fair values as follows:
-----------------------------------------------------------------------------------------------------------------------------------
At 31 December 2000 At 31 December 1999
------------------------------- -------------------------------
Fair Value Units Fair Value Units
Instrument Position $'000s (000's) $'000s (000's)
-----------------------------------------------------------------------------------------------------------------------------------
NYMEX Gas Futures - IPP Swaps Long 44,882 16460 Dth -- --
NYMEX Gas Futures - Non-MRA IPP Long 5,262 1930 Dth -- --
Gas Basis Swap Long 2,486 20170 Dth -- --
Oil Commodity Swap Long (2,719) 772 bbl -- --
------------- ------------- -------------
Swap Hedges Receivable 49,911 -- --
============= ============= =============
NYMEX Gas Futures - Gas Supply Long 8,000 1600 Dth -- --
Electricity Swap Long 4,442 714 MWh -- --
------------- ------------- -------------
In Current Assets - Other 12,442 -- --
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Derivative Financial Instruments - Niagara Mohawk Energy
Niagara Mohawk Energy has its own risk management policy, which defines the
limits within which it can carry out its commercial activities. The purpose of
the risk management program is to mitigate risks associated with various
energy commodities. Niagara Mohawk Energy is permitted to carry open positions
and accordingly is exposed to market risks. The risk management program
systematically identifies, measures, evaluates and actively manages, and
reports on the market driven risks associated with Niagara Mohawk Energy's
commercial activities.
Niagara Mohawk Energy, within its trading portfolio, takes certain positions
to mitigate risks associated with the physical sale or purchase contracts and
takes certain positions to take advantage of market conditions. Niagara Mohawk
Energy uses various forms of financial instruments, including futures,
forwards, swaps, TCCs, and options. Each of these instruments involves
different risks. Niagara Mohawk Energy believes these instruments help to
manage the exposure to changes in market prices and take advantage of selected
opportunities.
Niagara Mohawk Energy's portfolio has net open positions. Open positions
create exposure to fluctuations in market prices that may adversely impact the
reported financial position and results of operation. A value at risk model is
used to access market risk within the portfolio. The model utilises a
variance/co-variance methodology with a 95 per cent. confidence level and a
five-day holding period. Throughout 2000, Niagara Mohawk Energy's value at
risk has ranged from $1.1 million to $5.8 million.
In 1999, non-trading activities were, generally, transactions entered into to
hedge the market fluctuations of contractual and anticipated commitments. Gas
futures were used for hedging purposes. Changes in the market value of
contracts relating to hedged items were deferred until the physical
transaction occurred, at which time income or loss was recognised. During
2000, activities for non-trading purposes generally consisted of gas and
electric retail contracts with gas futures now included in the trading
portfolio. Changes in the market value of the gas futures contracts are
recorded in earnings.
135
At 31 December 2000 and 1999, Niagara Mohawk Energy's open non-trading
positions consisted of long and short gas and electric retail contracts.
Futures contracts are included in 1999 only. The approximate fair values are
as follows:
---------------------------------------------------------------------------------------------------------
At 31 December 2000 At 31 December 1999
------------------------------------ ------------------------------------
Fair Value Units Fair Value Units
Non Trading Positions $'000s (000's) $'000s (000's)
---------------------------------------------------------------------------------------------------------
Gas - Long 28,509 3,274 Dth 9,596 3,920 Dth
Gas - Short 23,209 2,769 Dth 4,725 2,020 Dth
Electric - Long 14,404 365 MWh 125,026 4,493 MWh
Electric - Short 154,766 3,180 MWh -- --
-----------------------------------------------------------------------------------------------------------------------------------
The fair value of non-trading positions was determined using quoted market
prices or broker's quotes.
During 2000, Niagara Mohawk Energy used futures, forwards, swaps, TCCs, and
options for trading purposes. Transactions used for trading purposes are
accounted for on a mark-to-market basis with changes in the fair value
recognised as a gain or loss in the period of the change. At 31 December 2000,
and 1999, Niagara Mohawk Energy's open trading positions had approximate fair
values as follows:
-----------------------------------------------------------------------------------------------------------------------------------
At 31 December 2000 At 31 December 1999
------------------------------------ ------------------------------------
Fair Value Units Fair Value Units
Trading Positions $'000s (000's) $'000s (000's)
-----------------------------------------------------------------------------------------------------------------------------------
Gas - Long 46,250 4,534 Dth -- --
Gas - Short 59,574 6,841 Dth -- --
Electric - Long 509,606 14,529 MWh -- --
Electric - Short 485,669 13,495 MWh -- --
-----------------------------------------------------------------------------------------------------------------------------------
The fair values of these instruments are determined by reference to published
market prices, broker's quotations, published forecasts, or other available
market data.
Investments In Debt And Equity Securities
Niagara Mohawk Power's investments in debt and equity securities consist of
trust funds for the purpose of funding the nuclear decommissioning of Unit 1
and its share of Unit 2 (see Note 3), investments held by Opinac and a trust
fund for certain pension benefits. Niagara Mohawk has classified all
investments in debt and equity securities as available for sale and has
recorded all such investments at their fair market value at 31 December 2000.
The nuclear decommissioning trust funds comprise over 71 per cent. of the
investments in debt and equity securities. The agreement to sell the nuclear
generation assets includes the transfer of the decommissioning trust funds to
the buyer. In anticipation of that sale, and to reduce the risk of a
detrimental market shift affecting the funds, Niagara Mohawk Power converted
all decommissioning assets to high grade, short-term commercial paper in
October and November of 1999. The instruments purchased have specified coupon
rates and maturity dates of generally one to four months. Remaining cash is
invested in an overnight, short-term investment fund. Due to the current
makeup of the funds the book and market values are approximately equal
therefore the decommissioning funds no longer experience any substantial
unrealised gains or losses. These actions tended to increase the sales
activity for 1999 with lesser sales activity in 2000. Most of the current
activity in the funds is comprised of maturing funds rolled into new
commercial paper.
The proceeds from the sale of investments were $177.7 million, $463.9 million,
and $202.1 million in 2000, 1999, and 1998, respectively. Net realised and
unrealised gains and losses related to the nuclear decommissioning trust are
reflected in "Accumulated Depreciation and Amortisation" on the Consolidated
Balance Sheets, which is consistent with the method used by Niagara Mohawk
Power to account for the decommissioning costs
136
recovered in rates. The unrealised gains and losses related to the investments
held by the pension trust and Opinac for the period ending 31 December 2000
are not material to Niagara Mohawk's results of operations.
The recorded fair values and cost basis of Niagara Mohawk's investments in
debt and equity securities is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
At 31 December 2000 At 31 December 1999
----------------------------------------------------- -----------------------------------------------------
Gross Unrealised Gross Unrealised
------------------------ Fair ------------------------ Fair
Security Type Cost Gain (Loss) Value Cost Gain (Loss) Value
$'000s $'000s $'000s $'000s $'000s $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper 375,228 1,982 -- 377,210 346,181 1,812 -- 347,993
Tax Exempt
Obligations 8,588 308 (19) 8,877 8,143 33 (311) 7,865
Corporate
Obligations 52,103 90 (108) 52,085 8,057 1,532 (1) 9,588
Other 15,233 -- -- 15,233 18,542 -- -- 18,542
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
451,152 2,380 (127) 453,405 380,923 3,377 (312) 383,988
========== ========== ========== ========== ========== ========== ========== ==========
-----------------------------------------------------------------------------------------------------------------------------------
Using the specific identification method to determine cost, the gross realised
gains and gross realised losses were:
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December
------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Realised gains 1,993 26,609 5,350
Realised losses 26 15,140 2,221
-----------------------------------------------------------------------------------------------------------------------------------
The contractual maturities of Niagara Mohawk's investments in debt securities
is as follows:
---------------------------------------------------------
At 31 December 2000
-------------------------------
Fair Value Cost
$'000s $'000s
---------------------------------------------------------
Less than 1 year 390,889 388,908
1 year to 5 years 2,018 1,999
5 years to 10 years 1,598 1,552
Due after 10 years 5,261 5,037
--------------------------------------------------------------------------------
137
Note 10 - Stock Based Compensation
Under Niagara Mohawk's stock compensation plans, stock units and stock
appreciation rights ("SARs") may be granted to officers, key employees and
directors. In addition, Niagara Mohawk's plans allow for the grant of stock
options to officers. The table below sets forth the activity under Niagara
Mohawk's stock compensation plans for the years 1998 through 2000. On 18 March
1999, Niagara Mohawk Power's common stock was exchanged for Niagara Mohawk's
common stock and the SARs, the stock units and the options were likewise
exchanged. See Note 1.
-----------------------------------------------------------------------------------------------------------------------------------
Wtd. Avg.
Exercise
SARs Units Options Price
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding at 31 December 1997 1,086,900 666,964 298,583 17.87
Granted 1,723,500 488,428 --
Exercised (42,700) (211,403) --
Forfeited (28,000) (10,550) (12,000) 17.94
------------- ------------- ------------- -------------
Outstanding at 31 December 1998 2,739,700 933,439 286,583 17.87
Granted 253,200 148,531 --
Exercised (5,500) (173,991) --
Forfeited (134,838) (42,985) (39,208) 18.56
------------- ------------- ------------- -------------
Outstanding at 31 December 1999 2,852,562 864,994 247,375 17.76
Granted 574,500 647,049 --
Exercised (44,700) (478,470) --
Forfeited (29,500) (29,097) (54,000) 17.94
------------- ------------- ------------- -------------
Outstanding at 31 December 2000 3,352,862 1,004,476 193,375 17.71
============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Stock units are payable in cash at the end of a defined vesting period,
determined at the date of the grant, based upon Niagara Mohawk's stock price
for a defined period. SARs become exercisable, as determined at the grant date
and are payable in cash based upon the increase in Niagara Mohawk's stock
price from a specified level. As such, for these awards, compensation expense
is recognised based upon the value of Niagara Mohawk's stock price over the
vesting period of the award. Options granted over the period 1992 to 1995 are
currently exercisable with expirations ten years from the grant date. The
majority of these options are considered to be antidilutive for EPS
calculations. Included in Niagara Mohawk's results of operations for the years
ending 2000, 1999 and 1998, is approximately $5.4 million, $(1.9) million and
$9.8 million, respectively, related to these plans.
Upon the closing of the pending merger, each stock option outstanding shall be
cancelled and shall only entitle the holder to receive an amount in cash.
Based on the number of stock options outstanding at 31 December 2000, Niagara
Mohawk would have to record approximately $300,000 in compensation expense at
the time of the closing of the pending merger.
Niagara Mohawk's SARs and Units provide for the acceleration of the vesting
period upon the occurrence of certain events relating to a change in control,
merger, sale of assets or liquidation of the company. Niagara Mohawk estimates
that it will have to record approximately $23 million in compensation expense
for these awards upon the consummation of the pending merger. This estimate
could vary for a number of reasons, including forfeitures of awards due to
employees resigning from Niagara Mohawk Power, certain awards being converted
into shares of the merged company and the actual date upon which the merger
occurs. See Note 12 for further information regarding the pending merger.
138
The following table provides certain information with respect to stock options
outstanding and exercisable at 31 December 2000:
-----------------------------------------------------------------------------------------------------------------------------------
Stock Options
Outstanding and Wtd. Avg. Wtd. Avg. Remaining
Range of Exercise Prices Exercisable Exercise Price Contractual Life
-----------------------------------------------------------------------------------------------------------------------------------
$10 - $15 61,125 14.63 4 years
$15 - $20 132,250 19.13 2 years
----------------- ----------------- -----------------
$10 - $20 193,375 17.71 3 years
================= ================= =================
-----------------------------------------------------------------------------------------------------------------------------------
As permitted by SFAS 123 - "Accounting for Stock-Based Compensation", Niagara
Mohawk has elected to follow APB 25 - "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options. Since stock units and SARs are payable in cash, the accounting under
APB 25 and SFAS 123 is the same. Therefore, the pro forma disclosure of
information regarding net income, as required by SFAS 123, relates only to
Niagara Mohawk's outstanding stock options, the effect of which is immaterial
to the financial statements for the years ended 2000, 1999 and 1998. There is
no effect on earnings per share for these years resulting from the pro forma
adjustments to net income.
139
Note 11 - Segment Information
Niagara Mohawk is organised between regulated and unregulated activities.
Within the regulated business, Niagara Mohawk Power, which has 97 per cent. of
total assets and 86 per cent. of total revenues, there are two principal
business units: Energy Delivery and Nuclear. As discussed in Note 2, Niagara
Mohawk Power has closed on its remaining share of a fossil generation asset
and has a proposed sale of the nuclear generation assets. Although there are
two identified business units, financial performance and resource allocation
are measured and managed at the regulated business level.
Niagara Mohawk uses a shareholder value based management system. The measure
of shareholder value creation is Economic Value Added ("EVA(R)"). EVA(R) is
the financial measure used to evaluate projects, allocate resources, and
report and provide performance incentives. EVA(R) is a registered trademark of
Stern Stewart & Co.
-----------------------------------------------------------------------------------------------------------------------------------
Depreciation
Total & Economic Construction Identifiable
Revenues Amortisation(1) Income Taxes(2) Value Added Expenditures Assets
$'000s $'000s $'000s $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
2000
Regulated Company 3,897,755 687,290 (9,526) (612,932) 273,830 12,307,238
Unregulated 641,538 534 2,757 (26,349) -- 335,097
Eliminations (21) -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Consolidated 4,539,272 687,824 (6,769) (639,281) 273,830 12,642,335
============= ============= ============= ============= ============= =============
1999
Regulated Company 3,827,340 731,429 19,026 (732,041) 298,081 12,445,608
Unregulated 257,614 543 2,634 (27,374) -- 224,827
Eliminations (768) -- 287 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Consolidated 4,084,186 731,972 21,947 (759,415) 298,081 12,670,435
============= ============= ============= ============= ============= =============
1998
Regulated Company 3,826,373 484,250 (62,771) (697,948) 392,200 13,733,055
Unregulated 169,039 502 (3,597) (31,471) -- 128,132
Eliminations (2,962) -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Total Consolidated 3,992,450 484,752 (66,368) (729,419) 392,200 13,861,187
============= ============= ============= ============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Includes amortisation of the MRA regulatory asset.
(2) Excludes the tax benefit of $0.489 million and $12.189 million associated
with the extraordinary item for the loss on extinguishment of debt
recorded in 2000 and 1999, respectively.
EVA(R) is calculated as Net Operating Profit after Taxes less a charge for the
use of capital employed. The capital charge is determined by applying a rate
representing an estimate of investors' expected return given the risk of the
business and a targeted capital structure. The rate is not the same as the
embedded cost of capital, and in particular does not reflect the return on
equity that may be established in a rate proceeding. Certain adjustments to
accounting data are made to more closely reflect operating or economic
results. In each of the three years, an adjustment is made to include the
recognition of the estimated net present value of remaining future above-
market contract payments to IPPs, which is calculated annually, and the
corresponding recognition of imputed interest as shown in the table below.
-------------------------------------------------------------------------------------------
Year ended 31 December
------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-------------------------------------------------------------------------------------------
Estimated net present value of the
remaining future above market
contract payments to IPPs 1,383,600 1,987,643 1,008,427
Corresponding recognition of imputed
interest 40,752 58,536 129,702
-----------------------------------------------------------------------------------------------------------------------------------
140
EVA(R) is further segmented between EVA(R) from Operations and EVA(R) related
to the IPPs. This distinction is used to allow management to focus on
operating performance separate from the consequences of the IPP contracts, the
MRA regulatory asset and finance decisions related to managing the
capitalisation of Niagara Mohawk.
A reconciliation of total segment Economic Value Added to total consolidated
net loss for the years ended 31 December 2000, 1999 and 1998 is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Economic Value Added:
Operations (252,910) (261,697) (248,624)
IPP-related (386,371) (497,718) (480,795)
------------- ------------- -------------
Total Economic Value Added (639,281) (759,415) (729,419)
Charge for use of investors' capital 932,676 1,163,596 1,225,437
Interest component of IPP payments (net of taxes) (40,752) (58,535) (129,702)
Power choice charge (net of taxes) -- -- (171,098)
1998 storm recovery/(costs) (net of taxes) 19,443 -- (50,588)
Interest charges (net of taxes) (286,283) (320,119) (265,455)
Extraordinary item (net of taxes) (909) (23,807) --
Niagara Mohawk Power preferred dividends (31,437) (36,808) (36,555)
------------- ------------- -------------
Consolidated net loss (46,543) (35,088) (157,380)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
Note 12 - Pending Merger with National Grid
In September 2000, Niagara Mohawk entered into a merger agreement with
National Grid, under which National Grid will acquire Niagara Mohawk. Niagara
Mohawk shares will be exchanged for a combination of cash and ADSs in a new
holding company of National Grid.
The pending merger has been approved by Niagara Mohawk's shareholders as well
as National Grid shareholders. However, the pending merger is contingent on
the sale of Niagara Mohawk's nuclear facilities or other satisfactory
arrangements being reached and is subject to a number of regulatory and other
approvals and consents, including approvals by the SEC under the Public
Utility Holding Company Act of 1935, the FERC, the NYPSC, and clearance under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The
pending merger is also contingent on the approval of National Grid's
shareholders, at a subsequent meeting, of the new holding company structure.
The pending merger is currently anticipated to be completed by late 2001.
Niagara Mohawk shareholders will receive $19 per share, subject to the dollar
value of five National Grid ordinary shares being between $32.50 and $51.00 in
a specified period shortly before the closing of the pending merger. In the
event that the dollar value of five National Grid ordinary shares is greater
than $51.00 during such period, the per share consideration received by
Niagara Mohawk shareholders will increase by two-thirds of the percentage of
the increase in value over $51.00. In the event that the dollar value of five
National Grid ordinary shares is less than $32.50 during such period, the per
share consideration received by Niagara Mohawk's shareholders will decrease by
two-thirds of the percentage of the decrease in value below $32.50.
Shareholders can elect to receive their consideration either in cash or ADSs,
or a combination of both, subject to the aggregate cash consideration offered
being at least $1.015 billion. If cash elections received from Niagara Mohawk
shareholders exceed $1.015 billion, National Grid has the option to increase
the cash element of the consideration.
Note 13 - Quarterly Financial Data (Unaudited)
Operating revenues, operating income (loss), income (loss) before
extraordinary item, net income (loss) and basic and diluted earnings (loss)
per common share by quarters from 2000, 1999 and 1998, respectively, are shown
in the following tables. Quarterly information for Niagara Mohawk prior to
1999 is Niagara Mohawk Power's, but has been reclassified to reflect Niagara
Mohawk's structure. Niagara Mohawk and Niagara Mohawk Power, in their opinion,
have included all adjustments necessary for a fair presentation of the results
of operations for the
141
quarters. Due to the seasonal nature of the regulated utility business, the
annual amounts are not generated evenly by quarter during the year. Niagara
Mohawk Power's quarterly results of operations reflect the seasonal nature of
its business, with peak electric loads in summer and winter periods. Gas sales
peak in the winter.
-----------------------------------------------------------------------------------------------------------------------------------
Basic and
Diluted
Income (Loss) Earnings
Operating Operating Before Extra- Net Income (Loss) per
Quarter Ended Revenues Income (Loss) Ordinary Item (Loss) Common Share
$'000s $'000s $'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
31 December 2000 1,199,589 47,339 (44,023) (44,023) (0.27)
1999 1,016,504 94,830 (18,163) (18,166) (0.10)
1998 904,066 99,666 (26,457) (26,457) (0.14)
30 September 2000 1,099,604 121,114 2,724 2,724 0.02
1999 1,034,227 100,238 (18,653) (31,707) (0.17)
1998 979,774 111,231 8,516 8,516 0.05
30 June 2000 1,045,494 74,991 (18,809) (19,718) (0.12)
1999 914,321 81,153 (25,297) (36,047) (0.19)
1998 944,684 (193,538) (150,579) (150,579) (1.04)
31 March 2000 1,194,585 186,406 14,474 14,474 0.08
1999 1,119,134 251,848 50,832 50,832 0.27
1998 1,163,897 131,569 11,140 11,140 0.08
-----------------------------------------------------------------------------------------------------------------------------------
In the fourth quarter of 2000, Niagara Mohawk expensed $10.2 million (6 cents
per common share) for adjustments based on the regulatory review of the
deferred costs related to the sale of the generation assets in 1999 and 2000.
In the third quarter of 2000, Niagara Mohawk recorded earnings of $19.4
million (12 cents per common share) of insurance proceeds and disaster relief
associated with the January 1998 ice storm restoration effort. In the first
quarter of 1998, Niagara Mohawk expensed $70.2 million associated with the
January 1998 ice storm (of which $62.9 million was considered incremental) or
28 cents per common share. In the second quarter of 1998, Niagara Mohawk
recorded a non-cash write-off of $263.2 million ($1.18 per common share)
associated with the portion of the MRA disallowed in rates by the NYPSC.
142
Electric Statistics
--------------------------------------------------------------------------
2000 1999 1998
In millions of kWh
--------------------------------------------------------------------------
Regulated electric
sales:
Residential 9,840 10,227 9,643
Commercial 10,051 11,838 11,560
Industrial 5,934 6,985 6,843
Industrial - Special 4,285 4,506 4,568
Other 167 200 241
Distribution of
energy (delivery
only) 4,012 1,334 --
Other electric
systems 2,017 1,666 3,577
------------- ------------- -------------
Total regulated
electric sales 36,306 36,756 36,432
Unregulated electric
sales 10,459 6,355 4,571
------------- ------------- -------------
Total electric sales 46,765 43,111 41,003
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
--------------------------------------------------------------------------
Regulated electric
revenues:
Residential 1,187,151 1,250,295 1,201,697
Commercial 1,033,783 1,192,390 1,220,067
Industrial 453,430 485,009 480,942
Industrial - Special 62,805 65,178 63,870
Other 39,765 50,294 55,119
Other electric
systems 112,970 47,851 94,756
Distribution of
energy 179,821 56,068 30,761
Transmission of
energy 149,075 100,455 94,545
Miscellaneous 20,453 217 19,387
------------- ------------- -------------
Total regulated
electric revenue 3,239,253 3,247,757 3,261,144
Unregulated electric
revenue 560,673 217,144 129,357
------------- ------------- -------------
Total electric
revenue 3,799,926 3,464,901 3,390,501
============= ============= =============
Regulated electric
customers (average) 1,532,140 1,550,225 1,550,770
-----------------------------------------------------------------------------------------------------------------------------------
143
Gas Statistics
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
In thousands of Dth
-----------------------------------------------------------------------------------------------------------------------------------
Regulated gas sales:
Residential 54,299 51,624 47,250
Commercial 16,193 16,505 17,023
Industrial 493 453 752
------------- ------------- -------------
Total regulated sales 70,985 68,582 65,025
Other gas systems 13 10 17
Spot market 592 1,834 4,501
Transportation of customer-owned gas 140,127 137,240 127,850
------------- ------------- -------------
Total regulated gas delivered 211,717 207,666 197,393
Unregulated gas sales: 17,831 11,020 13,863
------------- ------------- -------------
Total gas sales 229,548 218,686 211,256
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
$'000s $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Regulated gas revenues:
Residential 457,929 390,208 378,150
Commercial 126,853 107,669 110,499
Industrial 3,037 2,340 3,618
Other gas systems 105 57 69
Spot market 1,604 4,277 8,749
Transportation of customer-owned gas 62,350 58,032 54,091
Miscellaneous 6,624 17,000 10,053
------------- ------------- -------------
Total regulated gas revenues 658,502 579,583 565,229
Unregulated gas revenues: 74,695 31,643 36,047
------------- ------------- -------------
Total gas revenues 733,197 611,226 601,276
============= ============= =============
Regulated gas customers (average) 544,070 541,956 530,633
-----------------------------------------------------------------------------------------------------------------------------------
144
2. Financial information on Niagara Mohawk for the nine months ended 30
September 2001
The following financial information has been extracted without material
adjustment from the unaudited report of Niagara Mohawk filed on Form 10-Q with
the SEC for the nine months ended 30 September 2001. Following the adoption of
SFAS 133 with effect from 1 January 2001, certain restatements have been made
to the comparative balance sheet as at 31 December 2000 reported in unaudited
financial information of Niagara Mohawk for the nine months ended 30 September
2001, set out in this section 2. These restatements have not been reflected in
section 1 above.
The financial information is prepared in accordance with US GAAP and under the
accounting policies set out in the notes below. US GAAP differs from UK GAAP
in certain material respects. A summary of the main differences between the
accounting policies adopted by Niagara Mohawk under US GAAP and those adopted
by National Grid under UK GAAP is set out in section 3 below.
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Statements of Income (Unaudited)
-----------------------------------------------------------------------------------------------------------------------------------
Nine months ended 30 September
-------------------------------
2001 2000
Note $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Operating revenues:
Electric 2,937,947 2,827,261
Gas 652,784 507,130
Other 718 5,292
------------- -------------
3,591,449 3,339,683
------------- -------------
Operating expenses:
Electricity purchased 1,352,964 1,265,078
Fuel for electric generation 30,985 48,077
Gas purchased 418,794 282,630
Other operation and maintenance expenses 741,926 636,598
Disallowed nuclear investment costs 123,000 --
Amortisation/accretion of MRA/IPP buyout costs 272,888 281,539
Depreciation and amortisation 236,503 233,804
Other taxes 181,283 209,446
------------- -------------
3,358,343 2,957,172
------------- -------------
Operating income 233,106 382,511
Impairment charge on investment (44,000) --
Other deductions (9,947) (6,538)
------------- -------------
Income before interest charges 179,159 375,973
Interest charges 297,581 329,146
Preferred dividend requirement of subsidiary 23,239 23,679
------------- -------------
Income (loss) before income taxes (141,661) 23,148
Income taxes (93,936) 24,759
------------- -------------
Loss before extraordinary item and cumulative effect of a change in accounting
principle (47,725) (1,611)
Extraordinary item - Loss from the extinguishment of debt, net of income taxes -- (909)
Cumulative effect of a change in accounting principle, net of income taxes 1 12,790 --
------------- -------------
Net loss 1 (34,935) (2,520)
============= =============
Average number of shares of common stock outstanding (in thousands) 160,240 169,782
Basic and diluted loss per average share of common stock before extraordinary
item and cumulative effect of a change in accounting principle $ (0.30) $ (0.01)
Cumulative effect of a change in accounting principle 0.08 --
------------- -------------
Basic and diluted loss per average share of common stock $ (0.22) $ (0.01)
============= =============
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
145
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Balance Sheets
-----------------------------------------------------------------------------------------------------------------------------------
30 September 2001 31 December 2000
(Unaudited)
Notes $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Assets
Utility plant:
Electric plant 6,175,430 7,179,329
Nuclear fuel 674,729 672,259
Gas plant 1,336,269 1,310,649
Common plant 358,985 349,751
Construction work in progress 226,251 289,634
--------------------- ---------------------
Total utility plant 8,771,664 9,801,622
Less - Accumulated depreciation and amortisation 4,184,350 4,019,282
--------------------- ---------------------
Net utility plant 4,587,314 5,782,340
--------------------- ---------------------
Other property and investments 584,219 596,036
--------------------- ---------------------
Current assets:
Cash, including temporary cash investments of $412,759
and $66,796, respectively 470,737 108,343
Accounts receivable (less allowance for doubtful
accounts of $63,900 and $62,600, respectively) 323,269 470,820
Materials and supplies, at average cost:
Gas storage 70,137 53,863
Other 91,023 93,431
Assets from price risk management activities 1 15,958 67,603
Prepaid taxes 38,732 19,393
Other 21,497 37,745
--------------------- ---------------------
1,031,353 851,198
--------------------- ---------------------
Regulatory assets: 3
MRA regulatory asset 3,062,480 3,328,720
Swap contracts regulatory asset 623,819 625,103
Regulatory tax asset 409,549 408,303
IPP restructuring costs 206,052 234,117
Deferred environmental restoration costs 2 305,000 285,000
Deferred loss on sale of assets 1,114,971 158,333
Post retirement benefits other than pensions 42,204 45,084
Unamortised debt expense 36,584 39,823
Other 197,542 191,524
--------------------- ---------------------
5,998,201 5,316,007
--------------------- ---------------------
Other assets 95,456 78,081
--------------------- ---------------------
12,296,543 12,623,662
===================== =====================
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
146
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Balance Sheets
-----------------------------------------------------------------------------------------------------------------------------------
30 September 2001 31 December 2000
(Unaudited)
Notes $'000s $'000s
-----------------------------------------------------------------------------------------------------------------------------------
Capitalisation and liabilities
Capitalisation: 1
Common stockholders' equity:
Common stock - $0.01 par value; authorised 300,000,000
shares;
issued 187,364,863 shares; outstanding 160,239,818
shares 1,874 1,874
Treasury stock, at cost - 27,125,045 shares (407,193) (407,193)
Capital stock premium and expense 2,548,995 2,547,885
Accumulated other comprehensive income (56,851) (31,861)
Retained earnings 529,474 564,409
--------------------- ---------------------
2,616,299 2,675,114
Preferred stock of subsidiary:
Not subject to mandatory redemption 440,000 440,000
Subject to mandatory redemption 50,700 53,750
Long-term debt 4,815,410 4,678,963
--------------------- ---------------------
Total capitalisation 7,922,409 7,847,827
--------------------- ---------------------
Current liabilities:
Short-term debt 250,000 110,000
Long-term debt due within one year 340,907 628,325
Sinking fund requirements on redeemable preferred stock
of subsidiary 3,050 7,620
Accounts payable 320,211 482,965
Payable on outstanding bank cheques 19,793 28,536
Customers' deposits 20,180 18,807
Accrued taxes 23,707 9,881
Accrued interest 114,194 98,408
Accrued vacation pay 35,623 34,607
Liabilities from price risk management activities 1 33,359 2,719
Deferred gain on hedging activity 1 -- 17,409
Other 159,345 137,953
--------------------- ---------------------
1,320,369 1,577,230
--------------------- ---------------------
Regulatory and other liabilities: 3
Accumulated deferred income taxes 1,373,016 1,472,818
Liability for swap contracts 765,376 778,229
Employee pension and other benefits 245,376 218,569
Deferred gain on swap hedges -- 66,405
Other 364,997 377,584
--------------------- ---------------------
2,748,765 2,913,605
--------------------- ---------------------
Commitments and contingencies: 2,3
Liability for environmental restoration 305,000 285,000
--------------------- ---------------------
12,296,543 12,623,662
===================== =====================
-----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
147
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash
(Unaudited)
--------------------------------------------------------------------------------
Nine months ended
30 September
-------------------------------
2001 2000
$'000s $'000s
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss (34,935) (2,520)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Extraordinary loss on extinguishment of
debt, net of taxes -- 887
Cumulative effect of a change in accounting
principle, net of taxes (8,826) --
Depreciation and amortisation 236,503 233,804
Impairment charge of investment 44,000 --
Disallowed nuclear investment costs 123,000 --
Amortisation/accretion of MRA/IPP buyout
costs 272,888 281,539
Amortisation of nuclear fuel 19,984 21,619
Reversal of deferred nuclear investment tax
credits (79,711) --
Provision for deferred income taxes (26,090) 14,605
Net accounts receivable (net of changes in
accounts receivable sold) 134,851 (103,522)
Materials and supplies (18,129) (27,551)
Accounts payable and accrued expenses (135,286) 25,646
Accrued interest and taxes 29,612 84,506
Changes in MRA and IPP buyout costs
regulatory assets 36,101 24,538
Deferral of MRA interest rate savings 11,733 16,240
Changes in other assets and liabilities (20,490) (5,921)
------------- -------------
Net cash provided by operating activities 585,205 563,870
------------- -------------
Cash flows from investing activities:
Construction additions (181,491) (142,197)
Nuclear fuel (2,470) (17,477)
------------- -------------
Acquisition of utility plant (183,961) (159,674)
Materials and supplies related to
construction (520) (512)
Accounts payable and accrued expenses
related to construction (33,822) 6,412
Proceeds from the sale of generation assets 83,838 47,500
Other investments (32,502) (91,923)
Other (1,460) 375
------------- -------------
Net cash used in investing activities (168,427) (197,822)
------------- -------------
Cash flows from financing activities:
Net change in short-term debt 140,000 --
Reduction in preferred stock of subsidiary (3,050) (7,620)
Reduction in long-term debt (712,742) (312,241)
Proceeds from long-term debt 530,000 200,000
Purchase of treasury stock -- (250,026)
Other (8,592) 1,354
------------- -------------
Net cash used in financing activities (54,384) (368,533)
------------- -------------
Net increase (decrease) in cash 362,394 (2,485)
Cash at beginning of period 108,343 116,164
------------- -------------
Cash at end of period 470,737 113,679
============= =============
Supplemental disclosures of cash flow
information:
Interest paid 254,103 235,188
Income taxes paid 5,839 10,699
============= =============
--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
148
Niagara Mohawk Holdings, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
Note 1. Summary of significant accounting policies
Basis of Presentation
The Notes to the Consolidated Financial Statements apply to both Niagara
Mohawk and Niagara Mohawk Power unless otherwise stated. Niagara Mohawk's
consolidated financial statements include the accounts of Niagara Mohawk and
its wholly owned subsidiaries, including Niagara Mohawk Power.
Niagara Mohawk and Niagara Mohawk Power, in the opinion of management, have
included all adjustments (which include normal recurring adjustments)
necessary for a fair statement of the results of operations for the interim
periods presented. These financial statements for 2001 are subject to
adjustment at the end of the year when they will be audited by independent
accountants. These financial statements and notes thereto should be read in
conjunction with the audited financial statements included in section 1 above.
Niagara Mohawk Power's electric sales tend to be substantially higher in
summer and winter months as related to weather patterns in its service
territory; gas sales tend to peak in the winter. Notwithstanding other
factors, Niagara Mohawk Power's quarterly net income will generally fluctuate
accordingly. Therefore, the earnings for the nine-month period ended 30
September 2001 should not be taken as an indication of earnings for all or any
part of the balance of the year.
The closing of the MRA, which occurred on 30 June 1998, and the implementation
of Power Choice on 1 September 1998 have depressed and will continue to
substantially depress earnings during the five-year term of Power Choice. The
ability of Niagara Mohawk to improve earnings in the future will depend on the
outcome of the regulatory process, including the effect on rates proposed in
connection with the pending merger with National Grid. The closing of the sale
of the generation assets at various times during 2000 and 2001 has also
affected the comparability of the financial statements.
The consolidated cash flow statements for Niagara Mohawk have been presented
to reflect the closings of the sales of the fossil generation assets, such
that certain individual line items are net of the effects of the sales.
Comprehensive Income
Comprehensive income is the change in the equity of a company, not including
those changes that result from shareholder transactions. While the primary
component of comprehensive income is reported net income or loss, the other
components of comprehensive income relate to foreign currency translation
adjustments, additional minimum pension liability recognition, deferred gains
and losses associated with hedging activity and unrealised gains and losses
associated with certain investments held as available for sale. Total
comprehensive loss for the nine months ended 30 September 2001 and 2000 were
$(59.9 million) and $(5.7 million) respectively.
New Accounting Standards
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended became effective for fiscal years beginning after 15 June 2000. In
June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement
133" which, among other changes, modified the type and number of transactions
to which the new standard would need to be applied. Niagara Mohawk adopted
this standard beginning 1 January 2001.
In June 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS 142,
"Goodwill and Other Intangible Assets." SFAS 141 requires that all business
combinations be accounted for under the purchase method for all business
combinations initiated after 30 June 2001 and for all business combinations
accounted for by the purchase method for which the date of acquisition is
after 30 June 2001. SFAS 142 requires that ratable amortisation of goodwill be
replaced with periodic tests of the goodwill's impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortised over their useful lives. The provisions of SFAS 142 will be
effective for fiscal years beginning after 15 December 2001. Niagara Mohawk is
currently evaluating these new standards in light of the pending merger.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalises the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period and the
capitalised cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, the entity either settles the
149
obligation for the amount recorded or incurs a gain or loss. The provisions of
SFAS 143 will be effective for fiscal years beginning after 15 June 2002, with
earlier application encouraged. Niagara Mohawk is currently evaluating the
effect of this statement on Niagara Mohawk's results of operations and
financial position.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," and the accounting and reporting provisions of APB 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
related to the disposal of a segment of a business. SFAS 144 establishes a
single accounting model for long-lived assets to be disposed of by sale and
resolves significant implementation issues related to SFAS 121. SFAS 144 is
effective for fiscal years beginning after 15 December 2001. Niagara Mohawk is
currently evaluating the impact of SFAS 144 on its financial position and
results of operations.
Note 2. Contingencies
Environmental issues
The public utility industry typically utilises and/or generates in its
operations a broad range of hazardous and potentially hazardous wastes and by-
products. Niagara Mohawk Power believes it is handling identified wastes and
by-products in a manner consistent with federal, state, and local requirements
and has implemented an environmental audit program to identify any potential
areas of concern and aid in compliance with such requirements. Niagara Mohawk
Power is also currently conducting a program to investigate and remediate, as
necessary, to meet current environmental standards at certain properties
associated with former gas manufacturing and other properties which Niagara
Mohawk Power has learned may be contaminated with industrial waste, as well as
investigating identified industrial waste sites as to which it may be
determined that Niagara Mohawk Power has contributed. Niagara Mohawk Power has
also been advised that various federal, state, or local agencies believe
certain properties require investigation and has prioritised the sites based
on available information in order to enhance the management of investigation
and remediation, if necessary.
Niagara Mohawk Power is currently aware of 121 sites that comprise the current
liability estimates, including 65 which are Niagara Mohawk Power-owned. With
respect to non-owned sites, Niagara Mohawk Power may be required to contribute
some proportionate share of remedial costs. Although one party can, as a
matter of law, be held liable for all of the remedial costs at a site,
regardless of fault, in practice, costs are usually allocated among PRPs.
Niagara Mohawk has denied any responsibility at certain of these PRP sites and
is contesting liability accordingly.
Investigations at each of the Niagara Mohawk Power-owned sites are designed to
(1) determine if environmental contamination problems exist, (2) if necessary,
determine the appropriate remedial actions, and (3) where appropriate,
identify other parties who should bear some or all of the cost of remediation.
Legal action against such other parties will be initiated where appropriate.
As site investigations are completed, Niagara Mohawk Power expects to
determine site-specific remedial actions and to estimate the attendant costs
for restoration. However, since investigations and regulatory reviews are
ongoing for most sites, the estimated cost of remedial action is subject to
change.
Estimates of the cost of remediation and post-remedial monitoring are based
upon a variety of factors, including identified or potential contaminants;
location, size and use of the site; proximity to sensitive resources; status
of regulatory investigation and knowledge of activities at similarly situated
sites. Additionally, Niagara Mohawk Power's estimating process includes an
initiative where these factors are developed and reviewed using direct input
and support obtained from the New York State Department of Environmental
Conservation ("DEC"). Actual Niagara Mohawk Power expenditures are dependent
upon the total cost of investigation and remediation and the ultimate
determination of Niagara Mohawk Power's share of responsibility for such
costs, as well as the financial viability of other identified responsible
parties since clean-up obligations are joint and several. Niagara Mohawk Power
has denied any responsibility at certain of these PRP sites and is contesting
liability accordingly.
As a consequence of site characterisations and assessments completed to date
and negotiations with other PRPs or with the appropriate environmental
regulatory agency, Niagara Mohawk Power has accrued a liability in the amount
of $305 million and $285 million, which is reflected in Niagara Mohawk's
Consolidated Balance Sheets at 30 September 2001 and 31 December 2000,
respectively. The potential high end of the range is presently estimated at
approximately $530 million. Niagara Mohawk increased its environmental
liability by $20 million in 2001 as compared to 2000 primarily as a result of
the availability of information on certain sites resulting from progress made
on the remediation of one site and the issuance of a feasibility study on
another site in October 2001. Such information revealed that the soil
contamination on the site being remediated was greater than
150
originally anticipated. The probabilistic method was used to determine the
amount to be accrued for 21 of Niagara Mohawk Power's largest sites. The
amount accrued for Niagara Mohawk Power's remaining sites is determined
through feasibility studies or engineering estimates, Niagara Mohawk Power's
estimated share of a PRP allocation or where no better estimate is available,
the low end of a range of possible outcomes is used. In response to an October
1999 request for information, Niagara Mohawk Power informed the DEC of 24
additional former manufactured gas plant sites that it may be associated with,
including two sites that are currently owned by Niagara Mohawk Power. Niagara
Mohawk Power has executed a voluntary clean-up order with the DEC for the
investigation and, as required, the remediation of these additional sites. The
order is awaiting execution by the DEC. Niagara Mohawk Power has included
amounts for only the investigation of these sites in the estimated liability.
Niagara Mohawk Power is currently unable to estimate the costs to remediate
these additional sites, since they primarily relate to non-owned sites that
have been owned and operated by other parties, as well as by some former
manufactured gas plant-related predecessor companies of Niagara Mohawk Power,
and because they have not been subjected to site investigations.
Niagara Mohawk Power has recorded a regulatory asset representing the
investigation, remediation and monitoring obligations to be recovered from
ratepayers. Power Choice and the gas rate settlements provide for the
continued application of deferral accounting for variations in spending from
amounts provided in rates. As a result, Niagara Mohawk Power does not believe
that site investigation and remediation costs will have a material adverse
effect on its results of operations or financial condition.
Based on previously submitted feasibility studies and the DEC's ongoing
regulatory review process for Niagara Mohawk Power's Harbor Point site, the
estimated total cost range for this site consists of a high end of
$86.2 million, with an expected value calculation of $62.3 million, which is
included in the amounts accrued at 30 September 2001 and 31 December 2000. The
DEC has categorised this site into three operating units. With respect to one
operating unit, the DEC issued a record of decision in March 2001. Based on
this record of decision and legal settlement efforts with respect to another
responsible party, the estimated range for this operating unit consists of a
high end of $15.6 million and an expected value calculation of $13.6 million.
With respect to another operating unit, the DEC is expected to issue a PRAP
within the next six months. Currently, the high end of this unit is estimated
to be $63.5 million, with an expected value calculation of $43.2 million. With
respect to the last operating unit, the DEC is requiring additional
investigations and a feasibility study. Currently, the high end of this unit
is estimated to be $7.1 million, with an expected value calculation of $5.5
million. The estimated costs for the latter two operating units do not
consider contributions from other PRPs, the amount of which Niagara Mohawk
Power is unable to estimate.
Note 3. Rate and regulatory issues and contingencies
Niagara Mohawk's financial statements conform to US GAAP, including the
accounting principles for rate-regulated entities with respect to its
regulated operations. Substantively, SFAS 71 permits a public utility,
regulated on a cost-of-service basis, to defer certain costs, which would
otherwise be charged to expense, when authorised to do so by the regulator.
These deferred costs are known as regulatory assets, which in the case of
Niagara Mohawk Power are approximately $6.0 billion at 30 September 2001.
These regulatory assets are probable of recovery.
MRA regulatory asset
Under Power Choice, a regulatory asset was established for the costs of the
MRA and represents the cost to terminate, restate, or amend IPP Party
contracts. This regulatory asset is being amortised generally over ten years,
beginning 1 September 1998. Niagara Mohawk Power's rates under Power Choice
have been designed to permit recovery of the MRA regulatory asset.
Swap contract regulatory asset
The swap contracts regulatory asset represents the expected future recovery of
the swap contract liabilities. The swap contract liability is the present
value of the forecasted difference between estimated future market prices and
the contract prices for the notional quantities of power in the restated PPA
contracts with the IPPs and in the financial swaps associated with the PPAs
from the sale of the Huntley and Dunkirk coal-fired and the Albany oil and
gas-fired generation plants. In the balance sheet presentation, a portion of
the Swap Contracts Regulatory Asset is recorded within the MRA Regulatory
Asset. The portion of this regulatory asset associated with the restated IPP
contracts will be amortised over ten years ending in June 2008, in accordance
with the MRA and Power Choice, as notional quantities are settled. The portion
of this regulatory asset associated with the Huntley and Dunkirk PPAs will be
amortised over the remaining terms of these contracts ending in June 2003. The
Albany contract expires on 30 September 2003. The amount of this regulatory
asset will fluctuate as estimates of
151
future market and contract prices change over the terms of the contracts and
will decline as the remaining contract periods shorten.
IPP Restructuring Costs
Niagara Mohawk Power is also permitted to defer and amortise the cost of any
additional IPP contract restructurings. Through 30 September 2001, there have
been 13 IPP contracts for approximately 161 MWs terminated for a total
consideration (cash and/or notes) of $242.1 million. Deferred costs associated
with IPP restructurings will generally be amortised over five years in
accordance with Power Choice, unless PSC approval is obtained for a different
amortisation period. Niagara Mohawk Power retains the annual net savings of
the restructurings during the remaining term of Power Choice to offset the
amortisation expense. Niagara Mohawk Power continues to evaluate opportunities
related to restructurings and amendments of other IPP contracts.
Deferred loss on sale of assets
Power Choice required Niagara Mohawk Power to divest its portfolio of fossil
and hydro generation assets and provided for deferral and future recovery of
net losses resulting from the sale of the fossil and hydro generation asset
portfolio. Niagara Mohawk Power has completed the sales of these assets and
has recorded a regulatory asset of $122.7 million as of 30 September 2001, for
the net loss on the sale of its coal-fired generation plants, its hydro
generation assets, and its oil and gas fired plants. The net loss is included
in Niagara Mohawk's balance sheet as "Deferred Loss on Sale of Assets." In
accordance with Power Choice, Niagara Mohawk Power will not earn a return on
the deferred loss during the Power Choice period and would have to request a
return to be applicable after the expiration of Power Choice (31 August 2003),
subject to the approval of the PSC. The net loss or stranded cost balance of
$122.7 million at 30 September 2001 reflects the results of the PSC Staff's
recommended adjustments based on their review of the generation asset sales
through year end 2000, as well as the results of the Roseton sale. Niagara
Mohawk Power will begin recovery of the loss in 2003, over a period not to
exceed the average remaining life of the assets sold, estimated at 20 years.
Niagara Mohawk Power has recorded a non-cash incentive as provided for in
Power Choice of $18.6 million based on the asset sales, of which $6.8 million
is reflected in income in 2001 in the "Other Deductions" line item of the
Consolidated Income Statements and $11.8 million was reflected in income in
1999 and 2000. The incentive earned reflects PSC Staff recommended adjustments
based on their review to date and is included in the other regulatory assets
on the Consolidated Balance Sheet. The merger rate plan proposal would modify
the recovery period of stranded costs and incentives.
Earlier in 2001, the Nuclear Regulatory Commission and the FERC approved the
sale of the nuclear assets to Constellation. On 24 October 2001, the PSC
approved the sale and the associated rate treatment and the sale transaction
to Constellation was closed on 7 November 2001. The rate treatment approved is
consistent with the settlement reached by Niagara Mohawk Power with Multiple
Intervenors (an association of large customers on behalf of its members in
Niagara Mohawk Power's service territory) and the staff of the PSC. The key
provisions of the rate treatment include:
o Full recovery of all stranded costs (other than $123 million),
including a return, over a period projected not to exceed ten years.
o Approval of 2 PPAs, 1 for 41 per cent. (Niagara Mohawk Power's
ownership share) of 90 per cent. of the output of Unit 2 for a term of
10 years, and another for 90 per cent. of the output of Unit 1 until
the end of its current licence life (2009).
o Return on the nuclear regulatory asset as applies to Niagara Mohawk
Power's transmission and distribution assets.
o Niagara Mohawk Power retains any interest payments that Constellation
makes.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," requires that all long-lived assets for
which management has committed to a plan of disposal be reported at the lower
of carrying amount or fair value less costs to sell. Since the PSC approved
the sale and the transaction with Constellation closed on 7 November 2001,
Niagara Mohawk Power's best estimate of future cash flows is from the sale of
the power plants and, taking into consideration the expected cash proceeds
from the sale of the assets, Niagara Mohawk Power determined the assets' book
value to be impaired as of 30 September 2001. Accordingly, as of 30 September
2001, Niagara Mohawk Power recorded the write-off of $123 million before tax
with a corresponding reduction in electric plant and based upon the adjusted
purchase price of $521 million and assuming an allocation of proceeds first to
materials and supplies, nuclear fuel (net of amortisation) and
152
construction work in progress and direct selling expenses. Niagara Mohawk
Power further reduced its nuclear plant by $965.4 million to its sale value
and recorded a regulatory asset for the same amount. In addition, Niagara
Mohawk Power recorded $26.9 million estimated pension and postretirement
benefits other than pensions curtailment and settlement losses as a result of
the employees transferring to the buyer. This loss is included in the Deferred
Loss on Sale of Assets line item of the balance sheet and is subject to change
based on final numbers to be received from the actuary. Now that the sale of
the nuclear assets has occurred, Niagara Mohawk Power will complete the
accounting for the sale including the reclassification of all the other
nuclear regulatory assets and liabilities to the Deferred Loss on the Sale of
Assets.
In addition, Niagara Mohawk recorded in third quarter earnings the previously
deferred nuclear investment tax credits of approximately $79.7 million.
SFAS 71 and other accounting matters
The EITF reached a consensus on Issue No. 97-4, "Deregulation of the Pricing
of Electricity - Issues Related to the Application of SFAS 71 and SFAS 101,
`Regulated Enterprises - Accounting for the Discontinuance of Application of
FASB Statement 71'" in July 1997. EITF 97-4 does not require a company to earn
a return on regulatory assets that arise from a deregulating transition plan
in assessing the applicability of SFAS 71. Niagara Mohawk Power believes that
the regulated cash flows to be derived from prices it will charge for electric
service in the future, including the CTC and assuming no unforeseen reduction
in demand or bypass of the CTC or exit fees, will be sufficient to recover the
MRA regulatory asset over its planned amortisation period and to provide
recovery of and a return on the remainder of its assets, as appropriate. In
the event Niagara Mohawk Power determines, as a result of lower than expected
revenues and/or higher than expected costs, that its net regulatory assets are
not probable of recovery, it can no longer apply the principles of SFAS 71 and
would be required to record an after-tax, non-cash charge against income for
any remaining unamortised regulatory assets and liabilities. If Niagara Mohawk
Power could no longer apply SFAS 71, the resulting charge would be material to
Niagara Mohawk's reported financial condition and results of operations and
adversely affect Niagara Mohawk's ability to pay dividends.
Under Power Choice, Niagara Mohawk Power's remaining electric business
(electric transmission, distribution and nuclear business) continues to be
rate-regulated on a cost-of-service basis and, accordingly, Niagara Mohawk
Power continues to apply SFAS 71 to these businesses. Also, Niagara Mohawk
Power's IPP contracts, including those restructured under the MRA, as well as
the PPAs entered into in connection with the generation divestiture, continue
to be the obligations of the regulated business.
Note 4. Segment information
Niagara Mohawk is organised between regulated and unregulated activities.
Within the regulated business, Niagara Mohawk Power, which has 98 per cent. of
total assets and 87 per cent. of total revenues, there are two principal
business units: Energy Delivery and Nuclear. As discussed in Note 3 above,
Niagara Mohawk Power has sold the nuclear generation assets. Although there
are two identified business units, financial performance and resource
allocation are measured and managed at the regulated business level. On 2
October 2001, Niagara Mohawk's management announced an agreement to sell
Niagara Mohawk Energy's energy marketing business, Niagara Mohawk Energy
Marketing, Inc. ("NMEM") to Select Energy, Inc., the energy marketing and
services subsidiary of Northeast Utilities. The sale of NMEM is subject to
approval by the FERC and is expected to close in late November 2001.
Niagara Mohawk use a shareholder value based management system. The measure of
shareholder value creation is EVA. EVA(R) is the financial measure used to
evaluate projects, allocate resources and report and provide performance
incentives.
153
--------------------------------------------------------------------------------
Nine months ended
30 September
Total Economic
Revenues Value Added
$'000s $'000s
--------------------------------------------------------------------------------
2001
Regulated 3,135,803 (354,872)
Unregulated 455,646 (69,256)
------------- -------------
Total Consolidated 3,591,449 (424,128)
============= =============
2000
Regulated 2,890,634 (430,398)
Unregulated 449,069 (24,905)
Eliminations (20) --
------------- -------------
Total Consolidated 3,339,683 (455,303)
============= =============
--------------------------------------------------------------------------------
EVA(R) is calculated as net operating profit after taxes less a charge for the
use of capital employed. The capital charge is determined by applying a rate
representing an estimate of investors' expected return given the risk of the
business and a targeted capital structure. The rate is not the same as the
embedded cost of capital, and in particular does not reflect the return on
equity that may be established in a rate proceeding. Certain adjustments to
accounting data are made to more closely reflect operating or economic
results. For the three months and nine months ending 30 September 2001 and
2000, an adjustment is made to include the recognition of the estimated net
present value of remaining future above-market contract payments to IPPs,
which is calculated annually, and the corresponding recognition of imputed
interest as shown in the table below.
---------------------------------------------------------
Nine months ended September 30,
2001 $'000s 2000 $'000s
---------------------------------------------------------
Estimated net present
value of the
remaining future
above market
contracts with the
IPPs 1,314,600 1,383,600
Corresponding
recognition of
imputed interest 29,034 30,564
---------------------------------------------------------
EVA(R) is further segmented between EVA(R) from Operations and EVA(R) related to
the IPPs. This distinction is used to allow management to focus on operating
performance separate from the consequences of the IPP contracts, the MRA
regulatory asset and finance decisions related to managing the capitalisation of
Niagara Mohawk.
154
A reconciliation of total segment EVA(R) to total consolidated net loss for the
nine months ended 30 September 2001 and 2000 is as follows:
--------------------------------------------------------------------------------
Nine months ended 30 September
2001 $'000s 2000 $'000s
--------------------------------------------------------------------------------
Economic Value Added:
Operations (127,228) (162,079)
Stranded costs (307,606) (293,224)
------------- -------------
Total Economic Value Added (434,834) (455,303)
Charge for use of investors' capital 647,018 704,095
Interest components of IPP payments (net of
taxes) (29,034) (30,564)
1998 storm recovery costs -- 19,443
Interest charges (net of taxes) (194,846) (215,603)
Extraordinary item (net of taxes) -- (909)
Niagara Mohawk preferred dividends (23,239) (23,679)
------------- -------------
Consolidated net loss (34,935) (2,520)
============= =============
--------------------------------------------------------------------------------
Note 5. Derivatives and hedging activities
Niagara Mohawk Power has six types of derivative instruments: (1) financial
swap agreements based on notional quantities of electric power (IPP swaps,
Huntley, Dunkirk, and Albany swaps), (2) NYMEX gas futures, gas basis swaps,
and an oil swap acquired to offset price escalation in the aforementioned
swaps, (3) NYMEX gas futures hedging a power purchase agreement indexed to gas
prices, (4) fixed for floating electricity swaps designated as cash flow
hedges of anticipated purchases of electricity, (5) NYMEX gas futures, and (6)
Combination Call and Put Options designated as cash flow hedges of anticipated
purchases of natural gas.
The derivative financial instruments held by Niagara Mohawk Power are used for
hedging or cost control and not for trading. Niagara Mohawk Power has an
Exposure Management Committee ("EMC") to monitor and control efforts to manage
risks. The EMC oversees the Financial Risk Management Policy (the "Policy")
applicable to the regulated company that outlines the parameters within which
corporate managers are to engage in, manage, and report on various areas of
risk exposure. At the core of the Policy is a condition that Niagara Mohawk
Power will engage in activities at risk only to the extent that those
activities fall within commodities and financial markets to which it has a
physical market exposure in terms and in volumes consistent with its core
business.
The IPP indexed swaps, Huntley, Dunkirk, and Albany swap contracts were
entered into in connection with the MRA and the sale of the generation assets
and serve to limit Niagara Mohawk Power's exposure to electricity prices.
These swaps are an exchange of a contract price for the floating market price
based on a notional amount of power and offer some degree of hedge protection
against volatile market prices. However, with the IPP indexed swaps and the
Albany swap, the contract payments are indexed, primarily to fuel prices
(natural gas and oil), and therefore, the payments Niagara Mohawk Power must
make fluctuate with the prices for these commodities. To mitigate exposure,
Niagara Mohawk Power acquired NYMEX gas futures, gas basis swaps, and the
Albany Oil swap. The gas basis swaps and Albany Oil swap expired at the end of
August 2001. The NYMEX gas futures are currently extended through March 2002.
Niagara Mohawk Power has also been making payments to a non-MRA IPP under a
contract to buy power where the price for this power is indexed to natural
gas. Volatility in the price of gas impacts the cost of this contract. Niagara
Mohawk Power purchases NYMEX gas futures contracts to mitigate the impact the
price of gas has on this contract.
Purchases of electricity and natural gas for distribution to its customers can
expose Niagara Mohawk Power to price risk for those commodities. Niagara
Mohawk Power attempts to mitigate these risks using fixed for floating
electric swaps and through the purchase of NYMEX gas futures.
155
During several months of 2001, ending in July, Niagara Mohawk Power was in a
short position for electricity needed to supply customers. Electricity was
purchased through the NYISO at market prices. Niagara Mohawk Power locked in
the price for a portion of this shortage through fixed for floating swaps on
electricity. At 30 September 2001 there were no open electric swap contracts.
Through 30 September 2001, Niagara Mohawk Power has recorded a decrease of
$5.9 million to "Electricity purchased" from the settlement of these cash flow
hedges.
For purchases of natural gas used to supply customers, Niagara Mohawk Power's
exposure to gas commodity price fluctuations is limited by a regulatory ruling
that transfers the commodity price risk to the customer for prudently incurred
commodity costs. A related regulatory ruling requires that gas utilities in
New York State include volatility of customers bills as one of the criteria to
be used in developing their gas supply purchasing strategies. Niagara Mohawk
Power is using NYMEX gas futures, and, beginning in April 2001, combinations
of NYMEX call options and put options as hedges to effectively and prudently
manage the volatility of those costs. The combination options are financial
instruments called collars. Like the futures contracts, the collars are
designated and documented as cash flow hedges of the anticipated purchases of
natural gas. The use of collars, along with the purchase of gas futures
contracts, is consistent with Niagara Mohawk Power's overall strategy of
mitigating the volatility in gas prices. For the first nine months of 2001,
Niagara Mohawk Power has recorded a decrease of $2.6 million to "Gas
purchased" from the settlement of these cash flow hedges.
The EMC has approved the use of gas basis swaps as an additional tool in
hedging the cost of natural gas. Niagara Mohawk Power anticipates entering
this market sometime during the fourth quarter.
The transactions that result in the reclassification to earnings of the gains
or losses from the cash flow hedges are the purchases of natural gas in each
of the months hedged. Net deferred losses at 30 September 2001 for gas cash
flow hedges is $ 19.9 million based on September market prices. The deferral
is recorded in "Accumulated other comprehensive income". Since none of Niagara
Mohawk Power's cash flow hedges extend beyond one year, the net settlement
gains or losses resulting from these hedges will be reclassified to earnings
within the next 12 months. There were no gains or losses reclassified into
earnings resulting from the discontinuance of cash flow hedges.
The application of SFAS 133 in the accounting for TCCs is discussed in section
1 of Part V of this document. It has been determined that TCCs, as used by
Niagara Mohawk Power, are excluded from the application of SFAS 133.
Niagara Mohawk Energy, through its subsidiary NMEM also holds financial
instruments and is engaged in trading activities. Niagara Mohawk Energy
maintains a separate Risk Management and Trading Policy Manual that allows for
transactions such as marketing and trading in retail and wholesale, physically
and financially settled, energy based instruments. Like Niagara Mohawk Power's
Policy, the energy trading policy seeks to assure that risks are identified,
evaluated, and actively managed. The NMEM portfolio of contracts will be sold
along with NMEM in the deal announced on 2 October 2001 (See Note 4. Segment
Information.) Normal trading activities within this portfolio will continue
until the closing of the sale.
156
3. Summary of differences from the accounting policies of National Grid under
UK GAAP
The main differences between the accounting policies adopted by Niagara Mohawk
and Niagara Mohawk Power under US GAAP and those currently adopted by National
Grid (and as will be adopted by New National Grid) under UK GAAP, which impact
on net income and common stockholders' equity, relate to the accounting for
pension costs, deferred taxation, the allowance for equity funds used during
construction, and derivative financial instruments.
Pension costs
Under UK GAAP, pension costs are accounted for and disclosures are provided in
accordance with UK Statement of Standard Accounting Practice 24. Under US
GAAP, pension costs are determined in accordance with the requirements of SFAS
87 and SFAS 88 and pension disclosures are presented in accordance with SFAS
132. Differences between UK GAAP and US GAAP figures arise from the
requirements to use different actuarial methods and assumptions and a
different method of amortising certain surpluses and deficits.
Deferred taxation
Under UK GAAP, as applied by National Grid in the accounts for the year ended
31 March 2001, provision is made for deferred taxation to the extent that a
liability or asset will crystallise in the foreseeable future, in accordance
with UK Statement of Standard Accounting Practice 15. However, in the interim
results announcement for the six months ended 30 September 2001 (see section 2
of Part IV) National Grid adopted FRS 19 which requires full provisioning for
deferred taxation liabilities and requires deferred tax assets to be
recognised if their realisation is considered more likely than not.
US GAAP is broadly similar to FRS 19 and therefore there are no longer any
material differences relating to Niagara Mohawk's deferred taxation between US
GAAP, as applied by Niagara Mohawk, and UK GAAP, as now applied by National
Grid, other than deferred taxation on the other UK to US GAAP differences.
Allowance for equity funds used during construction
Under US GAAP, the cost of equity funds used to finance construction of
tangible fixed assets is recognised in other income as an allowance for equity
funds used during the course of construction and capitalised in fixed assets.
The capitalised allowance for equity funds used during construction is
depreciated over the course of the estimated lives of the relevant tangible
fixed assets. Under UK GAAP this accounting treatment is not permitted.
However, it is anticipated that upon acquisition this US to UK GAAP adjustment
would result in an equal and opposite revaluation adjustment which has not
been recognised in the tables below.
Derivative financial instruments
Under US GAAP, Niagara Mohawk implemented a change in accounting policy with
effect from 1 January 2001, to account for derivative financial instruments in
accordance with SFAS 133. This requires derivative financial instruments to be
recognised in the balance sheet as either assets or liabilities at fair value.
Changes in fair value are either recorded in net income, for those instruments
that do not qualify for hedge accounting, or in other comprehensive income,
for those that do qualify for hedge accounting.
Under UK GAAP, where derivative financial instruments qualify for hedge
accounting, there is no requirement to recognise them in the balance sheet.
Those that do not qualify for hedge accounting are recognised at fair value in
the same way as US GAAP. The criteria to qualify for hedge accounting are
different under UK and US GAAP.
157
The following unaudited statements summarise the material adjustments which
reconcile the consolidated net loss of Niagara Mohawk for each of the years
ended 31 December 1999 and 2000, and for the nine months ended 30 September
2000 and 2001, and of Niagara Mohawk Power for the year ended 31 December 1998
and the consolidated common stockholders' equity of those companies as at 31
December 1998, 1999 and 2000 and 30 September 2001 from that reported under US
GAAP to estimates of those which would have been reported in accordance with
the current accounting policies of National Grid and as will be applied by New
National Grid under UK GAAP. No adjustments have been made to reflect any fair
value adjustments that may be recorded upon completion of the acquisition by
National Grid.
-----------------------------------------------------------------------------------------------------------------------------------
Year ended 31 December
------------------------------------------------
2000 1999 1998
$m $m $m
-----------------------------------------------------------------------------------------------------------------------------------
Net loss under US GAAP (47) (35) (157)
------------- ------------- -------------
Pension costs 7 (31) (4)
Derivative financial instruments 13 -- --
Allowance for equity funds used during construction 14 12 7
Deferred taxation (12) 7 (1)
------------- ------------- -------------
Total adjustments 22 (12) 2
------------- ------------- -------------
Net loss under UK GAAP (25) (47) (155)
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
At 31 December
------------------------------------------------
2000 1999 1998
$m $m $m
-----------------------------------------------------------------------------------------------------------------------------------
Common stockholders' equity under US GAAP 2,675 2,976 3,170
------------- ------------- -------------
Pension costs (20) (35) (4)
Derivative financial instruments 13 -- --
Allowance for equity funds used during construction (296) (310) (322)
Deferred taxation 106 121 114
------------- ------------- -------------
Total adjustments (197) (224) (212)
------------- ------------- -------------
Common stockholders' equity under UK GAAP 2,478 2,752 2,958
============= ============= =============
-----------------------------------------------------------------------------------------------------------------------------------
158
--------------------------------------------------------------------------------
Nine months ended
30 September
-------------------------------
2001 2000
$m $m
--------------------------------------------------------------------------------
Net loss under US GAAP (35) (3)
------------- -------------
Pension costs 6 6
Derivative financial instruments (13) --
Allowance for equity funds used during
construction 13 11
Deferred taxation (2) (6)
------------- -------------
Total adjustments 4 11
------------- -------------
Net (loss)/profit under UK GAAP (31) 8
============= =============
--------------------------------------------------------------------------------
---------------
At 30 September
---------------
2001
$m
----------------------------------------------------------
Common stockholders equity under US GAAP 2,616
-------------
Pension costs (14)
Derivative financial instruments 20
Allowance for equity funds used
during construction (283)
Deferred taxation 97
-------------
Total adjustments (180)
-------------
Common stockholders equity under UK GAAP 2,436
=============
----------------------------------------------------------
159
4. The following is the text of a report from PricewaterhouseCoopers
[graphic]
PricewaterhouseCoopers
1 Embankment Place
London WC2N 6RH
The Directors and Proposed Directors
New National Grid plc
15 Marylebone Road
London
NW1 5JD
The Directors
National Grid Group plc
15 Marylebone Road
London
NW1 5JD
N M Rothschild & Sons Limited
New Court
St Swithin's Lane
London
EC4P 4DU
10 December 2001
Dear Sirs
New National Grid plc ("New National Grid")
We report on the unaudited restatements, under UK Generally Accepted
Accounting Principles ("UK GAAP") as currently applied by National Grid Group
plc ("National Grid") and as will be applied by New National Grid ("the UK
GAAP restatements"), in respect of the consolidated net loss of Niagara Mohawk
Holdings, Inc. ("Niagara Mohawk") for each of the years ended 31 December 1999
and 2000 and for the nine months ended 30 September 2001, and of Niagara
Mohawk Power Corporation ("Niagara Mohawk Power") for the year ended
31 December 1998 and in respect of the consolidated common stockholders'
equity of those companies as at those dates prepared under US Generally
Accepted Accounting Principles ("US GAAP") as applied in the financial
statements of Niagara Mohawk and Niagara Mohawk Power. The UK GAAP
restatements are set out in section 3 of Part V of the Listing Particulars of
New National Grid dated 10 December 2001.
Responsibilities
It is the responsibility solely of the Directors of New National Grid to
prepare the UK GAAP restatements in accordance with paragraph 12.11 of the
Listing Rules of the UK Listing Authority ("the Listing Rules"). It is our
responsibility to form an opinion, as required by the Listing Rules, on the UK
GAAP restatements and to report our opinion to you.
The UK GAAP restatements incorporate significant adjustments to the historical
consolidated financial statements of Niagara Mohawk and Niagara Mohawk Power.
The historical consolidated financial statements of Niagara Mohawk Power for
the year ended 31 December 1998 and for Niagara Mohawk for the years ended
31 December 1999 and 2000 were prepared under US GAAP and were audited by
PricewaterhouseCoopers LLP, who gave an unqualified report thereon. The
historical consolidated financial statements for the nine months ended
30 September 2001 are unaudited. We do not take any responsibility for any of
the historical consolidated financial statements of Niagara Mohawk or Niagara
Mohawk Power.
160
Basis of opinion
We conducted our work in accordance with the Statements of Investment Circular
Reporting Standards issued by the Auditing Practices Board. Our work, which
involved no independent examination of any historical underlying financial
information, consisted primarily of making enquiries of management of Niagara
Mohawk and Niagara Mohawk Power to establish the accounting policies which
were applied in the preparation of the historical underlying financial
information.
We have considered the evidence supporting the UK GAAP restatements and have
discussed the UK GAAP restatements with the Directors of New National Grid and
National Grid.
Our work has not been carried out in accordance with auditing standards
generally accepted in the United States of America and accordingly should not
be relied upon as if it had been carried out in accordance with those
standards.
Opinion
In our opinion, the adjustments made are those appropriate for the purpose of
presenting the consolidated net loss of Niagara Mohawk for each of the years
ended 31 December 1999 and 2000, and for the nine months ended 30 September
2001, and of Niagara Mohawk Power for the year ended 31 December 1998, and the
consolidated common stockholders' equity of those companies as at those dates
on a basis consistent in all material respects with UK GAAP as currently
applied by National Grid and as will be applied by New National Grid, and the
UK GAAP restatements have been properly compiled on the bases stated.
Yours faithfully
PricewaterhouseCoopers
Chartered Accountants
161
PART VI
WORKING CAPITAL
New National Grid is of the opinion that the Group as enlarged by the
Acquisition has sufficient working capital for its present requirements, that
is for at least 12 months from the date of publication of this document.
162
PART VII
ADDITIONAL INFORMATION
1. Responsibility
The Directors and the Proposed Directors, whose names appear in sections 7.1
and 7.2 below, accept responsibility for the information contained in this
document. To the best of the knowledge and belief of the Directors and the
Proposed Directors (who have taken all reasonable care to ensure that such is
the case) the information contained in this document is in accordance with the
facts and does not omit anything likely to affect the import of such
information.
2. Incorporation and activity of New National Grid
2.1 New National Grid was originally incorporated and registered in England
and Wales under the Act as a private limited company under the name
Intercede 1610 Limited with registered number 4031152 on 11 July 2000.
Its name was changed to New National Grid Limited on 30 August 2000 and
it was re-registered as a public limited company, New National Grid
plc, on 29 November 2000. The principal legislation under which New
National Grid operates is the Act and the regulations thereunder.
2.2 The registered office of New National Grid is at 15 Marylebone Road,
London NW1 5JD.
2.3 New National Grid has entered into the Merger Agreement, the Financing
Documents, the Exchangeable Bonds Trust Deed, the Undertaking, the
service agreement with William E. Davis described in section 7.7.7
below and the Sponsor's Agreement. New National Grid has established a
wholly-owned subsidiary, Grid Delaware, Inc. A copy of the audited
accounts for New National Grid for the period from incorporation to 31
March 2001 has been filed with the Registrar of Companies.
3. Share capital
3.1 The authorised, issued and fully paid share capital of New National
Grid as at the date of this document is as follows:
-----------------------------------------------------------------------------------------------------------
Authorised Authorised Issued
Number Amount Number
-----------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 500,000(1)
1 (L)1 New National Grid Special Share --
-----------------------------------------------------------------------------------------------------------
-------------------------------------------
Authorised Issued
Number Amount
-------------------------------------------
2,500,000,000 (L)50,000
1 --
-------------------------------------------
Note:
(1) The 500,000 New National Grid Shares have been issued and are paid
up as to one-quarter. National Grid Nominees Limited holds 499,990
New National Grid Shares and Fiona Smith, Group General Counsel and
Company Secretary of National Grid, holds 10 New National Grid
Shares as nominee for National Grid Nominees Limited. Subject to
the sanction of the Court, these New National Grid Shares will be
cancelled immediately prior to the Scheme becoming effective.
3.2 On incorporation, New National Grid had an authorised share capital of
(L)100 divided into 100 ordinary shares of (L)1 each, of which one
ordinary share of (L)1 was issued. By a resolution of New National Grid
passed on 28 November 2000: (i) the authorised share capital comprising
ordinary shares of (L)1 was sub-divided into ordinary shares of 10
pence each; and (ii) the authorised share capital was increased to
(L)250,000,000 by the creation of 2,499,999,000 new ordinary shares of
10 pence each. On 28 November 2000, 499,990 New National Grid Shares
were issued to National Grid Nominees Limited.
3.3 By resolutions of New National Grid passed on 7 December 2001:
3.3.1 the authorised share capital of New National Grid was increased
from (L)250,000,000 to (L)250,000,001 by the creation of the
New National Grid Special Share;
3.3.2 the directors of New National Grid were generally and
unconditionally authorised, pursuant to section 80 of the Act,
to allot relevant securities (as defined in the said section
80) up to an aggregate nominal value of (L)200,000,000 in
respect of allotments of relevant securities in connection
with: (a) the Scheme; (b) the Acquisition; and (c) the exchange
of any of the Exchangeable Bonds, such authority to expire on
the conclusion of the first Annual General Meeting of New
National Grid to be held following the Scheme Effective Date,
provided that New
163
National Grid may at any time before such expiry make an offer
or agreement which would or might require relevant securities
to be allotted after such expiry and the directors of New
National Grid may allot relevant securities in pursuance of any
such offer or agreement as if the authority conferred hereby
had not expired;
3.3.3 conditional on the Scheme becoming effective, the directors of
New National Grid were generally authorised, pursuant to
section 80 of the Act, to allot relevant securities (as defined
in the said section 80) up to an aggregate nominal amount of
(L)66,666,666 provided always that following implementation of
the Scheme the authority conferred by this section 3.3.3 shall
be limited to the allotment of relevant securities up to an
aggregate nominal amount of one-third of the ordinary share
capital of New National Grid in issue immediately following
implementation of the Scheme or, if the Acquisition completes,
Completion, such authority to expire on the conclusion of the
first Annual General Meeting of New National Grid to be held
following the Scheme Effective Date, provided that New National
Grid may at any time before such expiry make an offer or
agreement which would or might require relevant securities to
be allotted after such expiry and the directors of New National
Grid may allot relevant securities in pursuance of any such
offer or agreement as if the authority conferred hereby had not
expired;
3.3.4 conditional on the Scheme becoming effective and pursuant to
the general authority granted to the directors of New National
Grid by the resolution referred to in section 3.3.3 above the
directors of New National Grid were empowered pursuant to
section 95 of the Act to allot equity securities (as defined in
section 94(2) of the Act) for cash as if section 89(1) of the
Act did not apply to such allotment provided that such power
shall be limited to:
(i) the allotment of equity securities in connection with a
rights issue, open offer or any other pre-emptive offer
in favour of ordinary shareholders where the equity
securities respectively attributable to the interests of
ordinary shareholders on a fixed record date are
proportionate (as nearly as may be) to the respective
numbers of ordinary shares deemed to be held by them,
subject to such exclusions or other arrangements as the
directors of New National Grid may deem necessary or
expedient to deal with fractional entitlements, legal or
practical problems arising in any overseas territory or
by virtue of shares represented by depositary receipts,
the requirements of any regulatory body or stock
exchange or any other matter whatsoever; and
(ii) the allotment, otherwise than pursuant to section
3.3.4(i) above, of equity securities for cash up to an
aggregate nominal value of (L)10,000,000 provided always
that the authority conferred by this section 3.3.4(ii)
shall be limited to the allotment of equity securities
for cash as if section 89(1) of the Act did not apply to
such allotment up to an aggregate nominal amount of 5
per cent. of the ordinary share capital of New National
Grid in issue immediately following implementation of
the Scheme or, if the Acquisition completes, Completion.
This power shall expire on the conclusion of the first Annual
General Meeting of New National Grid to be held following the
Scheme Effective Date except that the directors of New National
Grid shall be entitled, at any time prior to the expiry of this
power, to make any offer or agreement which would or might
require equity securities to be allotted after such expiry and
to allot equity securities in accordance with such offer or
agreement as if the power conferred hereby had not expired; and
3.3.5 conditional upon the Scheme becoming effective, the directors
of New National Grid were generally authorised to make market
purchases (as defined in section 163(3) of the Act) of up to
200,000,000 New National Grid Shares provided always that the
authority conferred by this section 3.3.5 shall be limited to
the market purchase of such number of New National Grid Shares
as shall be equal to or less than 10 per cent. of the number of
New National Grid Shares in issue immediately following
implementation of the Scheme or, if the Acquisition completes,
Completion, at a price not less than 10 pence per New National
Grid share nor more than a price per New National Grid share of
105 per cent. of the average of the middle market quotation for
a New National Grid Share according to the Daily Official List
for the five business days before the purchase is made, such
authority to expire on the conclusion of the first Annual
General Meeting of New National Grid to be held following the
Scheme Effective Date, except that New
164
National Grid may enter into a contract to purchase such shares
which would or might be completed wholly or partly after such
expiry.
3.4 Under the Scheme, New National Grid will issue New National Grid
Shares, credited as fully paid, to the Scheme Shareholders on the basis
of one New National Grid Share for each Scheme Share held and will
issue the New National Grid Special Share to the Special Shareholder.
Accordingly, the proposed authorised, issued and fully paid share
capital of New National Grid immediately before completion of the
Acquisition will be as follows:
----------------------------------------------------------------------------------------------------------
Authorised Authorised Issued
Number Amount Number
----------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 1,486,906,935
1 (L)1 New National Grid Special Share 1
----------------------------------------------------------------------------------------------------------
-------------------------------------------
Authorised Issued
Number Amount
-------------------------------------------
2,500,000,000 (L)148,690,693.50
1 (L)1
-------------------------------------------
Note: The table set out above assumes no issues of shares by New
National Grid or National Grid after 7 December 2001 (being the
latest practicable date prior to the publication of this
document), whether pursuant to the exercise of options or
otherwise, other than in connection with the Scheme.
3.5 Under the terms of the Merger Agreement, Niagara Mohawk Shareholders
will receive consideration of $19.00 per Niagara Mohawk Share, subject
to adjustment. This adjustment will be made by reference to the closing
price of a National Grid Share and the prevailing (L):$ exchange rate
on 20 trading days selected at random from 40 consecutive trading days
ending on the tenth trading day prior to the deadline for Niagara
Mohawk Shareholders to make the election described below. At the date
of its announcement, the terms of the Acquisition valued the equity of
Niagara Mohawk at approximately $3.0 billion and the enterprise value
of Niagara Mohawk at approximately $8.9 billion. Under the Merger
Agreement, Niagara Mohawk Shareholders will be able to elect to receive
their consideration in cash, New National Grid ADSs or a combination
thereof, with the aggregate cash consideration offered to all Niagara
Mohawk Shareholders being $1.015 billion. Assuming this level of cash
consideration, a price of 435.5 pence per National Grid Share and an
exchange rate of (L)1: $1.432 (being the Closing Price of a National
Grid Share and Exchange Rate on 7 December 2001, the latest practicable
date prior to the publication of this document), the maximum number of
New National Grid Shares which could be issued pursuant to the
Acquisition is 312,238,507.
However, under the terms of the Merger Agreement, if cash elections
received from all Niagara Mohawk Shareholders exceed $1.015 billion,
National Grid may, at its sole discretion, reduce the total number of
New National Grid ADSs to be issued and increase the aggregate cash
portion of the purchase price. On 20 November 2001, National Grid
announced that it will increase the aggregate cash portion of the price
paid to 50 per cent., assuming receipt of sufficient cash elections.
Assuming that the aggregate cash portion of the price paid represents
50 per cent. of the total consideration, a price per National Grid
Share of 435.5 pence and an exchange rate of (L)1: $1.432 (being the
Closing Price of a National Grid Share and Exchange Rate on 7 December
2001, the latest practicable date prior to the publication of this
document), the authorised, issued and fully paid share capital of New
National Grid immediately following completion of the Acquisition will
be as follows:
---------------------------------------------------------------------------------------------------------
Authorised Authorised Issued
Number Amount Number
---------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 1,724,403,787
1 (L)1 New National Grid Special Share 1
---------------------------------------------------------------------------------------------------------
--------------------------------------------
Authorised Issued
Number Amount
--------------------------------------------
2,500,000,000 (L)172,440,378.70
1 (L)1
--------------------------------------------
Note: The table set out above also assumes no issues of shares by New
National Grid, National Grid or Niagara Mohawk after 7 December
2001 (being the latest practicable date prior to the publication
of this document), whether pursuant to the exercise of options or
otherwise, other than in connection with the Scheme and the
Acquisition.
No fractions of New National Grid ADSs will be issued in connection
with the Acquisition. Niagara Mohawk Shareholders who would otherwise
have been entitled to receive a fraction of a New National Grid ADS
under the terms of the Acquisition will receive cash in lieu of such
fraction.
165
3.6 Other than pursuant to: (i) the Scheme; (ii) the exercise of options
under the National Grid Share Schemes and the New National Grid Share
Plans; (iii) the Exchangeable Bonds; and (iv) the Acquisition, New
National Grid has no intention of issuing any of its authorised
unissued share capital and no issue of New National Grid Shares will be
made which will effectively alter control of New National Grid without
the prior approval of shareholders in general meeting.
3.7 Save as disclosed in this section 3: (i) there has been no issue of
share or loan capital of New National Grid since its incorporation; and
(ii) no share or loan capital of New National Grid is under option or
agreed to be put under option.
3.8 No commissions, discounts, brokerages or other special terms have been
granted in respect of the issue of any share capital of New National
Grid.
3.9 The New National Grid Shares to be issued pursuant to the Scheme and
the Acquisition have not been sold and are not being made available to
the public in conjunction with the application for Admission.
3.10 The New National Grid Shares to be issued pursuant to the Scheme and
the Acquisition will, when issued, be in registered form and will be
capable of being held in uncertificated form. No temporary documents of
title have been or will be issued in respect of the New National Grid
Shares.
3.11 The trustee of the National Grid Qualifying Employee Share Ownership
Trust has agreed to waive all but 0.0001 pence of any dividend per
share due, or to become due, on any New National Grid Shares held in
the National Grid Qualifying Employee Share Ownership Trust. In
addition, the trustee of the National Grid 1996 Employee Benefit Trust
has agreed to waive all dividends on any New National Grid Shares held
in that trust. The trustees of each of the National Grid Qualifying
Employee Share Ownership Trust (No. 2), the National Grid Employee
Trust 2001 and the UK Trust, in respect of unallocated shares, have
agreed to waive any dividends per share due, or to become due, on any
New National Grid Shares held in those trusts.
3.12 During the three years immediately preceding the date of this document
the only change in the issued share capital of National Grid has been
the issue of 12,536,603 National Grid Shares in connection with options
granted under the National Grid Share Schemes, the issue of 5,499
National Grid Shares at an issue price of 417p each issued in
connection with the Exchangeable Bonds and the cancellation of 232,524
National Grid Shares following their repurchase by National Grid.
4. Substantial shareholdings
4.1 In so far as is known to National Grid, as at 6 December 2001 (being
the latest practicable date prior to publication of this document), the
following parties are interested, directly or indirectly, in 3 per
cent. or more of National Grid's issued ordinary share capital:
---------------------------------------------------------------------------
Percentage of issued
Shareholder National Grid Shares
---------------------------------------------------------------------------
The Capital Group Companies, Inc. 7.05
Prudential Corporation plc 3.96
Deutsche Bank AG(1) 3.86
HSBC Investment Bank plc(1) 3.72
Credit Suisse First Boston Equities Limited(1) 3.36
---------------------------------------------------------------------------
Notes:
(1) National Grid has been notified that HSBC Investment Bank plc, in
respect of 3.70 per cent., Deutsche Bank AG in respect of 3.80 per
cent. and Credit Suisse First Boston Equities Limited in respect of
its total holding had each hedged their economic risk to National
Grid Shares pursuant to structured derivative transactions entered
into with the Olayan Group. As a result of these transactions, the
Olayan Group retains an economic exposure to some 10.86 per cent.
of issued National Grid Shares.
Save as disclosed in this section 4, the Directors are not aware of any
interest which as at 6 December 2001 represented 3 per cent. or more of
the issued ordinary share capital of National Grid.
166
4.2 The following table shows the persons who are expected to be
interested, directly or indirectly, in 3 per cent. or more of the
issued share capital of New National Grid following completion of the
Acquisition, assuming that:
(i) the aggregate cash portion of the purchase price for the
Acquisition represents 50 per cent. of the total consideration
and all Niagara Mohawk Shareholders receive 50 per cent. of the
consideration due to them in the form of New National Grid
ADSs;
(ii) the price per National Grid Share used to calculate the
Acquisition consideration is 435.5 pence (being the Closing
Price of a National Grid Share on 7 December 2001, the latest
practicable date prior to the publication of this document);
(iii) the Exchange Rate is (L)1:$1.432 (being the Exchange Rate on
7 December 2001, the latest practicable date prior to the
publication of this document);
(iv) there is no increase in the issued share capital of National
Grid or in New National Grid after 7 December 2001 (being the
latest practicable date prior to the publication of this
document) save in connection with the implementation of the
Scheme and the Acquisition;
(v) there is no increase in the issued share capital of Niagara
Mohawk after 7 December 2001 (being the latest practicable date
prior to the publication of this document);
(vi) there are no dealings in National Grid Shares or New National
Grid Shares after 7 December 2001 (being the latest practicable
date prior to the publication of this document); and
(vii) the shareholdings in Niagara Mohawk are the same as those at 30
September 2001 (being the latest date on which the top 50
shareholdings in Niagara Mohawk were published):
---------------------------------------------------------------------------
Percentage of
issued New National
Shareholder Grid Shares
---------------------------------------------------------------------------
The Capital Group Companies, Inc. 7.60
Prudential Corporation plc 3.42
Deutsche Bank AG(1) 3.45
HSBC Investment Bank plc(1) 3.30
Credit Suisse First Boston Equities
Limited(1) 3.05
---------------------------------------------------------------------------
Note:
(1) HSBC Investment Bank plc, in respect of 3.19 per cent., Deutsche
Bank AG in respect of 3.28 per cent. and Credit Suisse First Boston
Equities Limited in respect of 2.90 per cent., have each hedged
their economic risk to National Grid Shares pursuant to structured
derivative transactions entered into with the Olayan Group. As a
result of these transactions, the Olayan Group is expected to have
an economic exposure to 9.37 per cent. of issued New National Grid
Shares.
5. Summary of the Memorandum and Articles of Association of New National Grid
5.1 Memorandum of Association
The memorandum of association of New National Grid provides that its principal
object is to carry on business as a holding company. The objects of New
National Grid are set out in full in clause 4 of its memorandum of association
and provide, among other things, that New National Grid may carry on any other
activity which can, in the opinion of the board, be conveniently carried on in
connection with any of its objects and do all such things as may be deemed
incidental or conducive to the objects or any of them.
5.2 Summary of the New National Grid Articles
The New National Grid Articles contain provisions, inter alia, to the
following effect:
5.2.1 New National Grid Special Share
The New National Grid Special Share may only be held by one of Her Majesty's
Secretaries of State, another Minister of the Crown, the Solicitor for the
affairs of HM Treasury or any other person acting on behalf of the Crown. The
Special Shareholder may, after consulting New National Grid and subject to the
provisions of the Act, require New National Grid to redeem the New National
Grid Special Share at par at any time by giving notice to New National Grid
and delivering to it the relevant share certificate.
167
The Special Shareholder is entitled to receive notice of, and to attend and
speak at, any general meeting or any separate meeting of the holders of any
class of shares, but the New National Grid Special Share confers no right to
vote nor any other rights at any such meeting. The New National Grid Special
Share confers no right to participate in the capital or profits of New
National Grid except that, on a distribution of capital in a winding-up, the
Special Shareholder is entitled to repayment of (L)1 in priority to other
shareholders.
Each of the following matters is effective only with the consent in writing of
the Special Shareholder:
(i) the amendment, removal or alteration of the effect of (including the
ratification of any breach of) certain provisions of the Articles,
including the Article relating to the New National Grid Special Share,
the Article on general limitations on shareholdings (as described in
section 5.2.7 below) and on shareholding restrictions on persons who
are bound by the Balancing and Settlement Code by virtue of being a
party to the BSC Framework Agreement dated 14 August 2000 or licence
holders (as described in section 5.2.8 below) and the Article relating
to the disclosure of interests in shares under section 212 of the Act
(as described in sections 5.2.2, 5.2.3 and 5.2.5 below) save to the
extent that any amendment, removal or alteration of that Article is
required to comply with the Listing Rules, as amended from time to
time;
(ii) the creation or issue of any shares in New National Grid carrying
voting rights other than (a) shares carrying voting rights in all
circumstances at general meetings of New National Grid and (b) shares
which do not constitute equity share capital (as defined in section 744
of the Act) and which, when aggregated with all other such shares,
carry the right to cast less than 15 per cent. of the votes capable of
being cast on a poll on any resolution at any general meeting of New
National Grid;
(iii) the variation of any rights (save for dividend rights and rights to
repayment of capital) attached to any shares in New National Grid;
(iv) the disposal by New National Grid of any shares in National Grid
Company to any person who is not a wholly-owned subsidiary of New
National Grid;
(v) any scheme or arrangement which, if put into effect, would relieve
National Grid Company of, or otherwise modify, the obligations imposed
on National Grid Company by New National Grid by virtue of the
provisions described in section 5.2.9 below;
(vi) the voluntary winding-up of New National Grid, a special resolution to
the effect that New National Grid should be wound up by the Court, the
presentation by New National Grid or by the board of a petition for the
winding-up of New National Grid by the Court, or any proposal for any
of the foregoing;
(vii) the presentation by New National Grid or by the board of a petition
applying for an administration order or a proposal by the board for a
voluntary arrangement, in each case pursuant to the Insolvency Act
1986; or
(viii) the establishment of a holding company for New National Grid.
5.2.2 Voting rights
Subject to any rights or restrictions attached to any shares and to any other
provisions of the Articles, at any general meeting on a show of hands every
shareholder who is present in person will have one vote and on a poll every
shareholder will have one vote for every share of which he is the holder. On a
poll, votes may be cast either personally or by proxy and a proxy need not be
a shareholder of New National Grid. All special and extraordinary resolutions
must be decided on a poll.
In the case of joint holders of a share, the vote of the senior who tenders a
vote, whether in person or by proxy, will be accepted to the exclusion of the
votes of the other joint holders and seniority will be determined by the order
in which the names of the holders appear in the register of shareholders of
New National Grid.
Unless the board otherwise determines, no shareholder, or person to whom any
of that shareholder's shareholding is transferred other than by a transfer
approved under the Articles (see section 5.2.5 below), is entitled to vote at
any general meeting or at any separate meeting of holders of any class of
shares in New National Grid either in person or by proxy in respect of any
share in New National Grid held by him (i) if all monies presently payable by
him in respect of that share have not been paid or (ii) if he or any other
person appearing to be interested in the share has been given a notice under
section 212 of the Act (disclosure of interests in shares) and has failed to
give New National Grid the information required by the notice within 14 days
from the date of service of the notice (or in the case of shares representing
less than 0.25 per cent. of their class within 28 days of service of the
notice) or in the circumstances referred to in sections 5.2.7 and 5.2.8 below.
168
5.2.3 Dividends and other distributions
Subject to the Statutes, New National Grid may, by ordinary resolution,
declare dividends in accordance with the respective rights of the shareholders
but not exceeding the amount recommended by the board. The board may pay
interim dividends or any dividend payable at a fixed date, if it appears to
the board that the financial position of New National Grid justifies the
payment.
Except insofar as the rights attaching to any share otherwise provide, all
dividends will be apportioned and paid proportionately to the amounts paid up
(otherwise than in advance of calls) on the shares.
Dividends may be satisfied wholly or partly by the distribution of assets and
may be declared or paid in any currency. The board may, if authorised by an
ordinary resolution of New National Grid, offer the holders of ordinary shares
the right to elect to receive new ordinary shares credited as fully paid,
instead of cash for all or part of the dividend specified by that ordinary
resolution and, if authorised by a special resolution of New National Grid,
may do so on a basis which is more advantageous to those so electing than if
they had not done so.
New National Grid may cease to send any cheque or warrant through the post or
by a delivery agent or to effect payment by any other means for any dividend
or other monies payable in respect of a share if in respect of at least two
consecutive dividends, through no fault of New National Grid, payment in that
manner has not been effected (or, following one such occasion, reasonable
enquiries have failed to establish any new address of the holder or
appropriate details for effecting payment by other means). New National Grid
must resume payment by that means if the shareholder or person entitled by
transmission claims the arrears.
Any dividend unclaimed for 12 years from the date when it became due for
payment will, unless the board otherwise resolves, be forfeited and revert to
New National Grid.
In a winding-up, a liquidator may, with the sanction of a special resolution
of New National Grid and any other sanction required by the Statutes, divide
among the shareholders the whole or any part of the assets of New National
Grid (whether the assets are of the same kind or not) and may for such purpose
value any assets and determine how the division shall be carried out as
between the shareholders or different classes of shareholders.
Unless the board determines otherwise, no shareholder holding shares
representing 0.25 per cent. or more in number or nominal value of the issued
shares of New National Grid or in any class of such shares will be entitled to
receive payment of any dividend or other distribution if he or any person
appearing to be interested in such shares has been given a notice under
section 212 of the Act and has failed to give New National Grid the
information required by the notice within 14 days from the date of service of
the notice.
5.2.4 Variation of rights
Subject to the Statutes, all or any of the rights attached to any class of
share may (unless otherwise provided by the terms of issue of the shares of
that class) be varied with the written consent of the holders of three-fourths
in nominal value of the issued shares of that class, or with the sanction of
an extraordinary resolution passed at a separate meeting of the holders of the
shares of that class. The provisions of the Statutes and of the Articles
relating to general meetings will, mutatis mutandis, apply to any such
separate meeting except that: (i) the necessary quorum will be two persons
holding or representing by proxy not less than one-third in nominal amount of
the issued shares of that class or, at any adjourned meeting of holders of
shares of that class at which such a quorum is not present, will be any such
holder who is present in person or by proxy whatever the number of shares held
by him; (ii) any holder of shares of that class present in person or by proxy
may demand a poll; and (iii) every holder of shares of that class will, on a
poll, have one vote in respect of every share of that class held by him.
5.2.5 Transfer of shares
A shareholder may transfer all or any of his shares in certificated form by an
instrument of transfer in any usual form or in any other form which the board
may approve. A transfer must be executed by or on behalf of the transferor and
(unless the share is fully paid) by or on behalf of the transferee. Transfers
of uncertificated shares must be carried out using a relevant system as
defined in the CREST Regulations. The transferor will be deemed to remain the
holder of the share until the name of the transferee is entered in the
register of shareholders in respect of it.
The board may refuse to register the transfer of a share which is not fully
paid without giving any reason for so doing, provided that where such shares
are admitted to the Official List such discretion may not be exercised in such
a way as to prevent dealings in shares of that class from taking place on an
open and proper basis.
169
The board may also refuse to register the transfer of a share: (i) in the case
of a certificated share if it is not lodged, duly stamped (if necessary), at
the registered office of New National Grid or at such other place as the board
may appoint and accompanied by the certificate for the shares to which it
relates (where a certificate has been issued in respect of the shares) and/or
such other evidence as the board may reasonably require to show the right of
the transferor to make the transfer; (ii) if it is not in respect of one class
of share only; (iii) if it is in favour of more than four transferees jointly;
and (iv) if it is in favour of a minor, bankrupt or person of mental ill
health. In addition, the board may refuse to register a transfer of an
uncertificated share in the circumstances stated in the CREST Regulations.
If the board refuses to register a transfer it will, within two months after
the date on which the transfer was lodged in the case of a certificated share,
or a transfer instruction was received in the case of an uncertificated share,
send to the transferee a notice of refusal. The registration of transfers may
be suspended by closing the register of shareholders at such times and for
such period (not exceeding 30 days in any calendar year) as the board may
determine, but while New National Grid is a participating issuer within the
meaning of the CREST Regulations the register of shareholders will not be
closed without the consent of the operator of the relevant system.
No fee will be charged for the registration of any instrument of transfer or
other document relating to or affecting the title to any share.
Unless the board otherwise determines, no shareholder holding shares
representing 0.25 per cent. or more in number or nominal value of the issued
shares of New National Grid or in any class of such shares who has failed to
comply with a notice served under section 212 of the Act will be entitled to
transfer any of those shares other than by accepting a take-over offer, a sale
of shares on a recognised investment exchange or an investment exchange on
which shares in New National Grid are normally traded, or a sale of a
shareholder's entire beneficial interest to a person who has no interest in
those shares at the time the notice under section 212 of the Act was served
and who is not an associate of a person who had such an interest and who is
not acting in concert with a person who had such an interest.
The board must also decline to register a transfer which is made in the
circumstances referred to in sections 5.2.7 and 5.2.8 below.
5.2.6 Alteration of capital
New National Grid may by ordinary resolution increase, consolidate and divide
and sub-divide its share capital. Subject to the Statutes, New National Grid
may by special resolution reduce its share capital, any capital redemption
reserve and any share premium account or other undistributable reserve in any
manner. Subject to the Statutes and to any rights conferred on the holder of
any class of shares, New National Grid may purchase all or any of its shares
of any class (including any redeemable shares).
5.2.7 General limitations on shareholdings
The Articles contain provisions the purpose of which is to limit interests in
voting shares. These provisions are described briefly below.
(i) If any person (other than a person not subject to the restriction
described in this section 5.2.7) has, or appears to the board to have,
an interest (as defined in the Articles) in shares which carry 15 per
cent. or more of the total votes attaching to the relevant share
capital (as defined in section 198(2) of the Act) of New National Grid
and capable of being cast on a poll or is deemed to have such an
interest, the board shall give notice to all persons who appear to the
board to have interests in the shares concerned and, if different, to
the registered holders of those shares requiring the interest concerned
to be reduced to less than 15 per cent. by disposal of shares within 21
days of the notice (or such longer period as the board considers
reasonable). No transfer of the shares to which the interest relates
may then be registered except for the purpose of reducing the interest
to less than 15 per cent. or until the notice has been withdrawn.
(ii) If such a notice is given and is not complied with in all respects to
the satisfaction of the board and has not been withdrawn, the board
shall, so far as it is able, make such a disposal on such terms as it
may determine. The proceeds of such disposal shall be received by New
National Grid and paid (without interest and after deduction of any
expenses of sale) to the former registered holder.
(iii) A registered holder to whom such a notice has been given is not
entitled, until the notice has been complied with to the satisfaction
of the board or withdrawn, in respect of any of his shares to which the
interest concerned relates, to attend or vote at any general meeting of
New National Grid or meeting of the holders of voting shares or of any
class thereof or to exercise any other right conferred by membership in
170
relation to such meeting, and those rights will vest in the chairman of
any such meeting, who may exercise them or refrain from doing so at his
discretion.
(iv) Any resolution or determination of, or decision or exercise of any
discretion or power by, the board or any director or the chairman of
any meeting under or pursuant to the relevant Article shall be final
and conclusive; and any disposal or transfer made by or on behalf of or
on the authority of the board or any director pursuant to the relevant
Article shall be conclusive and binding on all persons concerned and
shall not be open to challenge. The board is not required to give any
reasons for any decision, determination or declaration taken or made in
accordance with the relevant Article.
There are limited exceptions to these restrictions relating principally to
holdings of a trustee or fiduciary nature and market clearing arrangements.
5.2.8 Shareholding restrictions on persons who are bound by the Balancing
and Settlement Code or licence holders
The Articles contain additional restrictions which are intended to prevent any
person who is bound by the Balancing and Settlement Code by virtue of being a
party to the BSC Framework Agreement dated 14 August 2000, a holder of a
licence under the Electricity Act or, in either case, any affiliate thereof
("Restricted Persons") from having an interest in shares which carry 1 per
cent. or more of the total votes attaching to the relevant share capital of
New National Grid and capable of being cast on a poll.
The board has the same rights as those set out in section 5.2.7 above to
require the disposal or to dispose of sufficient numbers of shares to bring
the relevant interest within the permitted limit where these provisions are
breached.
5.2.9 Obligations relating to the transmission licence holder
New National Grid shall procure that, without the consent in writing of the
the Special Shareholder:
(i) the transmission licence shall not be held by any person which is not a
wholly-owned subsidiary of New National Grid;
(ii) New National Grid and its wholly-owned subsidiaries shall not cease to
carry on, or dispose of or relinquish operational control over any
asset required to carry on, the transmission business or the
interconnectors business (as defined in the transmission licence at 11
December 1995) save where such cessation, disposal or relinquishment is
required by law or is permitted pursuant to or by virtue of the terms
of the transmission licence;
(iii) neither New National Grid nor any affiliate of New National Grid is
permitted to carry on in the UK any activity which requires a
generation or supply licence or which is exempted from such requirement
under or by virtue of the Electricity Act, save where such activity is
expressly permitted under the terms of the transmission licence and
that neither New National Grid nor any affiliate of New National Grid
is permitted to engage outside the UK in the generation of electricity
to be imported into the UK;
(iv) no employee or director of any person who is bound by the Balancing and
Settlement Code by virtue of being a party to the BSC Framework
Agreement dated 14 August 2000 or the holder of a licence under the
Electricity Act or, in either case, any affiliate thereof which is
neither New National Grid nor any other wholly-owned subsidiary of New
National Grid, is permitted to be a director of New National Grid or
the transmission licence holder; and
(v) the transmission licence holder is not permitted to carry on activities
other than:
(a) those required or contemplated on the part of the transmission
licence holder (in its capacity as the holder of a transmission
licence) by the transmission licence or the Electricity Act or
connected therewith or consequential thereto; or
(b) those carried on by National Grid Company at or prior to 11
December 1995,
provided that (but subject to paragraph (iii)) the restrictions set out
in this paragraph (v) do not prevent the acquisition of any share
capital by the transmission licence holder in any company.
5.2.10 Directors
(i) Appointment of directors
Directors may be appointed by New National Grid by ordinary resolution or by
the board. A director appointed by the board holds office only until the next
following annual general meeting.
171
Unless otherwise determined by ordinary resolution of New National Grid, the
number of directors (disregarding alternate directors) will not be less than
two. The directors are not required to hold any qualification shares in New
National Grid.
There are also restrictions on persons being appointed directors as referred
to in section 5.2.9 above.
(ii) Age of directors
No person will be disqualified from being appointed a director, and no
director will be required to vacate that office, by reason only of the fact
that he has attained the age of 70 years or any other age, nor will it be
necessary by reason of his age to give special notice of any resolution.
(iii) Remuneration of directors
Each of the non-executive directors will be paid a fee for his services at
such rate as may from time to time be determined by the board or by a
committee authorised by the board provided that the aggregate of such fees
(excluding any amounts payable under any other provision of the Articles) will
not exceed (L)500,000 per annum or such higher amount as New National Grid, by
ordinary resolution, may determine from time to time. Directors' fees are
deemed to accrue from day to day.
(iv) Pensions and gratuities for directors
The board or any committee authorised by the board may exercise all the powers
of New National Grid to provide benefits, whether by payment of gratuities,
pensions, annuities, allowances, bonuses or by insurance or otherwise, for any
director or former director who holds or has held but no longer holds any
executive office, other office, place of profit or employment with New
National Grid or a member or former member of the group or a predecessor in
business of New National Grid or of any member or former member of the group
and for any member of his family or other dependants and may establish,
maintain, support, subscribe to and contribute to any scheme, trust or fund
for the benefit of all or any such persons. No director or former director
will be accountable for any benefit so provided and the receipt of any such
benefit will not disqualify him from being or becoming a director.
(v) Permitted interests of directors
Subject to the Statutes and provided he has declared the nature of his
interest to the board (if he knows of it), a director is not disqualified by
his office from contracting with New National Grid in any manner nor is any
contract in which he is interested liable to be avoided and any director who
is so interested is not liable to account to New National Grid or the
shareholders for any benefit realised by the contract by reason of the
director holding that office.
(vi) Restrictions on voting
Except as mentioned below, a director will not vote on, or be counted in the
quorum in relation to, any resolution of the board or of a committee of the
board concerning any matter in which he has to his knowledge, directly or
indirectly, an interest (other than his interest in shares or debentures or
other securities of or otherwise in or through New National Grid) or duty
which (together with any interest of a person connected with him, as described
in the Articles) is material and if he does so vote his vote will not be
counted.
A director will be entitled to vote on and be counted in the quorum in respect
of any resolution concerning any of the following matters, namely:
- the giving of any guarantee, security or indemnity in respect of money
lent or obligations incurred by him or by any other person at the
request of, or for the benefit of, New National Grid or any of its
subsidiary undertakings;
- the giving by New National Grid of any guarantee, security or indemnity
to a third party in respect of a debt or obligation of New National
Grid or any of its subsidiary undertakings for which he himself has
assumed responsibility in whole or in part and whether alone or jointly
with others under a guarantee or indemnity or by the giving of
security;
- his subscribing or agreeing to subscribe for, or purchasing or agreeing
to purchase, any shares, debentures or other securities of New National
Grid or any of its subsidiary undertakings as a holder of securities or
his being, or intending to become, a participant in the underwriting or
sub-underwriting of an offer of any such shares, debentures or other
securities by New National Grid or any of its subsidiary undertakings
for subscription, purchase or exchange;
172
- any contract concerning any company, not being a company in which the
director owns 1 per cent. or more (as defined in the Articles), in
which he is interested, directly or indirectly, and whether as an
officer, shareholder, creditor or otherwise;
- any arrangement for the benefit of employees of New National Grid or
any of its subsidiary undertakings under which he benefits in a similar
manner as the employees and which does not accord to any director as
such any privilege or advantage not accorded to the employees to whom
the arrangement relates; and
- any contract concerning any insurance which New National Grid is
empowered to purchase or maintain for, or for the benefit of, any
directors or for persons who include directors.
A director shall not vote or be counted in the quorum in relation to any
resolution of the board concerning his own appointment as the holder of any
office or place of profit with New National Grid or any company in which New
National Grid is interested, including settling or varying the terms, or the
termination, of his appointment.
5.2.11 Borrowing and other powers
Subject to the Statutes, to the memorandum of association and the
Articles and to any directions given by New National Grid in general
meeting by special resolution, the business of New National Grid will
be managed by the board, which may exercise all the powers of New
National Grid. In particular, the board may exercise all the powers of
New National Grid to borrow money and to mortgage or charge all or any
part of the undertaking, property and assets (present and future) and
uncalled capital of New National Grid and, subject to the Statutes, to
issue debentures and other securities whether outright or as collateral
security for any debt, liability or obligation of New National Grid or
of any third party. The board will restrict the borrowings of New
National Grid and exercise all voting and other rights or powers of
control exercisable by New National Grid in relation to its subsidiary
undertakings (if any) so as to secure (but as regards subsidiary
undertakings only insofar as by the exercise of such rights or powers
of control the board can secure) that the aggregate principal amount
from time to time outstanding of all borrowings by the group (exclusive
of borrowings owing by one member of the group to another member of the
group) will not at any time without the previous sanction of an
ordinary resolution of New National Grid exceed an amount equal to four
times the adjusted capital and reserves (as defined in the Articles).
5.2.12 Untraced shareholders
Subject to the CREST Regulations, where, for a period of at least 12
years, New National Grid has paid at least three dividends to
shareholders but has been unable to effect payment on particular shares
in accordance with the Articles and the unpaid dividends have not been
claimed, New National Grid may sell those shares at the best price
reasonably obtainable. It must, however, give notice of its intention
by two advertisements and may only proceed to sell the shares if, so
far as the board is aware, New National Grid has not during the 12-year
period or the three months after the later of the advertisements and
before exercising the power of sale received any communication from the
shareholder (or any person entitled by transmission). On the sale, New
National Grid will become indebted to the former holder (or person
entitled by transmission) for an amount equal to the net proceeds of
sale.
5.2.13 Shareholders resident abroad
Any shareholder with a registered address outside the UK who has given
New National Grid an address within the UK (including, at the board's
discretion, an electronic address) at which notices, documents or other
communications may be served on or delivered to him is entitled to
receive notices, documents or other communications at that address, but
not otherwise. The board may, at its discretion, refuse to send
communications to an electronic address if it believes that its refusal
is necessary or expedient for any reason.
6. Summary of the principal differences between the New National Grid
Articles and the National Grid Articles
The principal differences between the New National Grid Articles and the
National Grid Articles are explained below. A copy of the New National Grid
Articles and of the National Grid Articles will be available for inspection as
referred to in section 22 below. A copy of the National Grid Articles
(including amendments proposed to be made at the Scheme EGM) will also be
available during, and for at least 15 minutes prior to, the Scheme EGM.
173
6.1 New National Grid Special Share
This Article reflects changes in the structure of the electricity supply
industry in England and Wales since the flotation of National Grid in 1995 and
in particular the introduction of new electricity trading arrangements
introduced in March 2001. For example, the "Pool", which used to be the
electricity trading market, no longer exists and accordingly references to
"Pool Members", as used in relation to the definition of "Restricted Person",
have been replaced by references to persons who are bound by the Balancing and
Settlement Code.
6.2 CREST
The New National Grid Articles expressly permit shares to be held in
uncertificated form in accordance with the CREST Regulations and the rules of
CREST (the electronic settlement system).
6.3 Electronic communications
Following various amendments to company law as a result of the Electronic
Communications Order, formal electronic communication with shareholders became
legally possible. The Electronic Communications Order provides that where
there is agreement between New National Grid and the shareholder(s) concerned,
the annual report and accounts and notices of meetings may be sent to
shareholders electronically, or New National Grid may publish the relevant
documents on a website and send a notice by electronic means informing
shareholders that these documents are available. The Electronic Communications
Order also allows a shareholder to appoint a proxy by electronic means.
Provisions have been included in the New National Grid Articles to give effect
to the Electronic Communications Order.
In accordance with the Electronic Communications Order, New National Grid will
only communicate electronically with those shareholders who specifically elect
for electronic communications.
6.4 Number of directors to retire
This Article relates to the number of directors to retire from office by
rotation and requires that all directors shall retire by rotation at least
every three years, in accordance with corporate governance best practice.
6.5 Removal of interim privatisation arrangements
Articles 1 ("Definitions") and 56 ("Limitations on Shareholdings") in the New
National Grid Articles do not contain references to certain interim
arrangements originally included in the National Grid Articles in relation to
the flotation of National Grid.
6.6 ADS holders
The New National Grid Articles allow ADS holders to attend, speak and vote at
general meetings. Accordingly, the Depositary will be able to appoint holders
of New National Grid ADSs as proxies and these proxies will have the right to
attend, speak and vote at general meetings. Such proxies appointed by the
Depositary will be able, in turn, to appoint proxies to attend, speak and vote
at a general meeting instead of them. To ensure that ADS holders will be able
to vote on special and extraordinary resolutions, the New National Grid
Articles require such resolutions to be decided on a poll. All ordinary
resolutions will be decided on a show of hands or, if a poll is demanded in
accordance with the New National Grid Articles, on a poll. The board, when
declaring a sterling dividend, can elect to pay dividends to the Depositary in
US dollars.
174
7. Directors, Secretary and Proposed Directors of New National Grid
7.1 Directors and Secretary
The Directors and their functions are set out below:
--------------------------------------------------------------------------------
Name Function
--------------------------------------------------------------------------------
James Hood Ross Chairman (Non-executive)
Roger John Urwin Group Chief Executive
Stephen John Box Group Finance Director
Richard Paul Sergel Group Director, North America
Steven Holliday John Group Director, UK and Europe
Edward Morrison Astle Group Director, Telecommunications
Robert Frederick
William Faircloth Non-executive Director
John Albert Martin Grant Non-executive Director
Paul Joskow Lewis Non-executive Director
Richard Gurdon Reynolds Non-executive Director
--------------------------------------------------------------------------------
The business address of each of the Directors is 15 Marylebone Road, London
NW1 5JD, with the exceptions of Richard Sergel and Paul Joskow, each of whose
business address is 25 Research Drive, Westborough, Massachusetts, MA01582.
Fiona Smith is Group General Counsel and Company Secretary of New National
Grid.
7.2 Proposed Directors
It is proposed that, following Completion, William E. Davis, chairman and
chief executive officer of Niagara Mohawk, will be appointed Chairman of
National Grid USA for a period of two years from Completion to help ensure a
smooth transition and rapid integration and will also be appointed as an
Executive Director of New National Grid. One of Niagara Mohawk's non-executive
directors, Dr Bonnie G. Hill, will also join the Board as a Non-executive
Director.
7.3 Directors' and Proposed Directors' backgrounds
James Ross, Chairman, 63
Appointed as a director of National Grid on 1 March 1999, he became Chairman
in July 1999. He is also chairman of Littlewoods plc, having been chief
executive of Cable and Wireless plc from 1992 to 1995. Before that he was a
managing director of British Petroleum Company plc and chairman and chief
executive officer of BP America. He is a non-executive director of McGraw Hill
and Datacard, both based in the US, and Schneider Electric based in France.
Roger Urwin, Group Chief Executive, 55
Appointed as a director of National Grid and of National Grid Company in 1995,
Roger Urwin became Group Chief Executive in April 2001. He was previously
chief executive of London Electricity plc and, prior to this, held a number of
appointments within the Central Electricity Generating Board before joining
Midlands Electricity Board as director of engineering. He is a non-executive
director of Energis, The Special Utilities Investment Trust PLC and
TotalFinaElf Exploration UK plc and is a Fellow of the Royal Academy of
Engineering.
Stephen Box, Group Finance Director, 51
Appointed as a director of National Grid and of National Grid Company in
August 1997. Formerly with Coopers & Lybrand, where he was a partner
specialising in corporate finance. He is a non-executive director of Energis
and of Michael Page International PLC and a member of the Financial Reporting
Review Panel.
Rick Sergel, Group Director, North America, 52
Appointed as a director of National Grid in 2000, Rick Sergel is President,
Chief Executive Officer and a director of National Grid USA. From February
1998 until the acquisition of NEES by the Group, he served as its president
and chief executive officer. His previous positions with NEES include senior
vice president in charge of retail operations and unregulated ventures, vice
president and treasurer. He serves as chairman of the board of the
175
distribution companies owned by National Grid USA and is also a non-executive
director of State Street Corporation.
Steven Holliday, Group Director, UK and Europe, 45
Appointed as a director of National Grid and Chief Executive of National Grid
Company in March 2001. Steven Holliday was an executive director of British
Borneo Oil and Gas. Prior to this he spent 19 years with the Exxon Group,
where he held senior positions in the operations and business development
areas.
Edward Astle, Group Director, Telecommunications, 47
Appointed as a director of National Grid in September 2001. Edward Astle was
managing director of BICC Communications from 1997 to 1999. Prior to that he
held a number of positions with Cable & Wireless. He is chairman of 3G Lab Ltd
and a non-executive director of Intec Telecom Systems plc and Ilotron Limited.
Bob Faircloth, Non-executive Director, Chairman of the Remuneration Committee
and a member of the Audit and Nominations Committees, 65
Appointed as a director of National Grid in 1995, Bob Faircloth was chief
operating officer and an executive director of BTR until 1995 and a non-
executive director until May 1998. Before joining BTR in 1980, Bob Faircloth
held technical and management posts, mainly in the petrochemicals and paper
industries in Canada and Europe. He is engaged in international management
consulting with involvement with international banks, industrial companies and
government agencies.
John Grant, Non-executive Director, Chairman of the Audit Committee and a
member of the Nominations and Remuneration Committees, 56
Appointed as a director of National Grid in 1995, John Grant is executive
chairman of Hasgo Group Limited and of Peter Stubs Limited. He was chief
executive of Ascot Plc from 1997 to June 2000, finance director of Lucas
Industries plc (subsequently LucasVarity plc) from 1992 to 1996 and held a
number of senior executive positions during 25 years with Ford Motor Company,
including vice president, Ford of Europe, director of corporate strategy, Ford
USA and executive deputy chairman of Jaguar. He is also a non-executive
director of Torotrak plc, Corac Group Plc and Cordex plc.
Paul Joskow, Non-executive Director and a member of the Audit Committee, 54
Appointed as director of National Grid in 2000, Paul Joskow is a Professor of
Economics and Management at the Massachusetts Institute of Technology (MIT)
and is director of the MIT Center for Energy and Environmental Policy
Research. He is a research associate of the US National Bureau of Economic
Research and a Fellow of the Econometric Society and of the American Academy
of Arts and Sciences. Paul Joskow served as a director of NEES from 1987 until
its acquisition by the Group. He is a Trustee of the Putman Mutual Funds, a
director of State Farm Indemnity Company and a director of the Whitehead
Institute for Biomedical Research.
Richard Reynolds, Non-executive Director and a member of the Audit and
Remuneration Committees, 62
Appointed as a director of National Grid in 1998, Richard Reynolds was a
director of GEC 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 Wavionix Software Limited. He is also a non-executive
director of Photobition Group plc and Telme Group plc.
William E. Davis, 59
Appointed chairman and chief executive of Niagara Mohawk on 17 March 1999,
William Davis joined Niagara Mohawk in 1990 and became chairman and chief
executive of Niagara Power Corporation in 1993. He was previously an Executive
Deputy Commissioner with the New York State Energy Office. He is also a member
of a number of boards and committees including The Business Council of New
York State, Inc., Edison Electric Institute, Energy Association of New York
and Syracuse University.
Dr Bonnie G. Hill, 60
Elected as a non-executive director of Niagara Mohawk in 1991, Bonnie Hill is
chair of the Committee of Corporate Public Policy and Environmental Affairs
and a member of both the Executive and Compensation and Succession Committees.
Prior to July 2001, she was president and chief executive officer of The Times
Mirror Foundation and was senior vice president of the Los Angeles Times
newspaper. Bonnie Hill is involved in a variety of civic, educational and
community bodies and serves on the boards of AK Steel Corporation, Hershey
176
Foods Corporation and The Home Depot, Inc. She is president of B. Hill
Enterprises, LLC, a consulting firm, and the chief operating officer of Icon
Blue, a brand marketing company.
7.4 Details of those companies and partnerships outside the Group of which the
Directors are or have been directors or partners at any time since 7
December 1996, are as follows:
Name Directorships or partnerships
James Ross Datacard Group, Liverpool Vision Partnership, The
McGraw-Hill Companies, Inc., Northwest Business
Leadership Team Limited, Schneider Electric S.A.,
The Classical Opera Company*, The Littlewoods
Organisation Public Limited Company
Roger Urwin Energis plc, The Special Utilities Investment
Trust plc, TotalFinaElf Exploration UK plc
Edward Astle 3G Lab Limited, BICC Group plc (now named Balfour
Beatty plc)*, Cable and Wireless plc*, Cambridge
3G Limited, Dataflex Holdings plc*, Fine Wires
Limited*, Intec Telecom Systems plc, Ilotron
Limited, Motiv Systems Limited*
Stephen Box Coopers & Lybrand*, Electricity Pensions Limited*,
Electricity Pensions Trustee Limited*, Energis
plc, Michael Page International plc
Bob Faircloth BTR plc*
John Grant Corac Group Plc, Cordex Plc, Torotrak Plc, Hasgo
Group Limited, Peter Stubs Limited, Ascot Plc*,
Adengate Limited*, Lynshield Limited*
Steven Holliday AGIP (BB) Limited*, AGIP (BBI) Limited*, AGIP
(UKCS) Limited*, AGIP Australia Limited*, AGIP
Exploration and Production Limited*, AGIP Oil and
Gas Limited*, AGIP North Sea Limited*, British
Borneo Oil and Gas Limited*, British Borneo Expro
Limited*, British Borneo Petroleum Syndicate
Limited, Brupex Holdings Limited*, Brupex
Limited*, Hireswitch Limited*
Paul Joskow Putnam Mutual Funds, State Farm Indemnity Company,
Whitehead Institute for Biomedical Research
Richard Reynolds E-Granite Limited, Photobition Group plc, Prospect
Industries plc, Telme Group plc, Warwick Arts
Society Limited, Warwick Castle Park Trust
Limited, Wavionix Software Limited
Rick Sergel State Street Corporation
Note:
* indicates that the directorship or partnership is no longer current.
7.5 Save as disclosed in section 7.6 below, none of the Directors or Proposed
Directors has:
(i) any unspent convictions in relation to indictable offences;
(ii) at any time been adjudged bankrupt;
(iii) at any time been a party to a deed of arrangement or form of
voluntary arrangement (as defined in Part VII of the Insolvency
Act 1986);
(iv) been a director of a company which has been placed in
receivership, compulsory liquidation, creditors voluntary
liquidation, administration, been subject to a company
voluntary arrangement or any composition or arrangement with
its creditors generally or any class of its creditors whilst he
was a director with an executive function of that company or
within the twelve months preceding such events;
(v) been a partner in any partnership which has been placed in
compulsory liquidation, administration or been subject of a
partnership voluntary arrangement whilst he was a partner in
that partnership or within the twelve months preceding such
events;
(vi) has any asset which has been placed in receivership or been a
partner in any partnership from which have been placed in
receivership whilst as a partner of such partnership or within
the twelve months preceding such events;
(vii) been publicly criticised by any statutory or regulatory
authority (including recognised professional bodies); or
177
(viii) been disqualified by a Court from acting as a director of a
company or from acting in the management or conduct of the
affairs of any company.
7.6
7.6.1 Edward Astle was a director of Motiv Systems Limited from 30 September
1997 to 15 July 1998. The company went into voluntary liquidation on 17
August 1998 and was dissolved on 6 May 2001. The liquidator's statement
of account filed at Companies House reported an initial deficit of
(L)416,312.14, including a secured creditor of (L)43,031.25. After
payment to the secured creditor, and a 1p in the pound payment on
(L)133,233.96 due to preferential creditors, no payment was made to
unsecured creditors.
7.6.2 Edward Astle has been a director of Ilotron Limited since 30 March
2000. The company is subject to an Administration Order dated 1 June
2000, as petitioned by its directors. The liquidation is ongoing with
any shortfall to creditors to be determined.
7.6.3 Richard Reynolds is a non-executive director of Photobition Group plc
which announced on 31 October 2001 that it had ceased trading and asked
its lenders to appoint an administrative receiver. As at 7 December
2001 (being the latest practicable date prior to the publication of
this document), eight of the group's subsidiaries were in company
voluntary arrangements and another five were in administration. Service
Graphics Limited, a company set up to allow the business of the UK
Photobition Graphics division to continue to trade, had purchased 14
group companies from the receiver. As at 7 December 2001 (being the
latest practicable date prior to the publication of this document),
Richard Reynolds is not aware of whether there will be any shortfall to
creditors.
7.7 Details of the Directors' and the Proposed Directors' service contracts
with a period of notice or contract period of one year or more are as
follows:
7.7.1 On 17 November 1995, Roger Urwin entered into a service agreement
jointly with the Companies pursuant to which he was employed as
Managing Director Transmission. Roger Urwin was subsequently appointed
as Group Chief Executive on 1 April 2001. Roger Urwin currently
receives a base salary of (L)500,000 (which is reviewed annually on 1
April) and has an annual bonus opportunity under the Group Directors'
performance-related bonus plan. Long-term incentives are provided
through an executive share option plan. Roger Urwin is provided with a
car and receives death-in-service life cover. Roger Urwin is entitled
to personal accident insurance, reimbursement for all expenses properly
incurred and private medical expenses. The Companies (subject to Inland
Revenue limits from to time) make pension contributions under a
defined-benefit pension scheme.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies' request, remain as
directors until the Companies' normal retirement age (currently 63). If
the employment of Roger Urwin is terminated following a change of
control of the Company or as a result of redundancy, and the
termination is with the consent of the Company, Roger Urwin may choose
to receive a pension with the option to commute part of this pension
for a lump sum, payable from the date of termination. The pension is
calculated on Pensionable Service (as defined) and Pensionable Salary
(as defined) at the date of termination. Subject to mutual agreement to
the contrary, Roger Urwin's service agreement is terminable by him on
12 months' written notice and by the Companies on 12 months' written
notice.
7.7.2 On 16 July 1997, Stephen Box entered into a service agreement jointly
with the Companies pursuant to which he is employed as Group Finance
Director. Stephen Box currently receives a base salary of (L)350,000
(which is reviewed annually on 1 April) and has an annual bonus
opportunity under the Group Directors' performance-related bonus plan.
Long-term incentives are provided through an executive share option
plan. Stephen Box is provided with a car and receives death-in-service
life cover. Stephen Box is entitled to personal accident insurance,
reimbursement for all expenses properly incurred and private medical
expenses. The Companies (subject to Inland Revenue limits from to time)
make pension contributions under a defined-benefit pension scheme.
Because Stephen Box is subject to a pensions earnings cap, the
Companies have put in place pension arrangements, which are partially
funded, to provide a pension covering the difference between base
salary and the pensions cap.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies' request, remain as
directors until the Companies' normal retirement age (currently 63).
Subject to mutual agreement to the contrary, Stephen Box's service
agreement is terminable by him on 12 months' written notice and by the
Companies on 12 months' written notice.
178
7.7.3 On 22 March 2000, Rick Sergel entered into a service agreement jointly
with the Company and National Grid USA pursuant to which he is employed
as President and Chief Executive Officer of National Grid USA. Rick
Sergel receives no additional salary for being a director of National
Grid. His base salary as President and Chief Executive Officer of
National Grid USA is currently $700,000 and he has an annual bonus
opportunity under the National Grid USA annual bonus arrangement. Long-
term incentives are provided through an executive share option plan. He
participates in National Grid USA's Executive Supplemental Retirement
Plan and in other welfare plans, retirement, incentive and fringe
benefit plans on the same basis as other executive officers in National
Grid USA. The National Grid USA Executive Supplemental Retirement Plan
does not mandate a retirement age.
Subject to mutual agreement to the contrary, Rick Sergel's service
agreement is for an initial fixed term until March 2003, subject to a
one year notice period by the Company after March 2002, although the
service agreement is terminable by him on six months' written notice at
any time.
In the event that National Grid USA terminates Rick Sergel's service
agreement other than for Cause (as defined), death or Disability (as
defined) or Rick Sergel terminates the service agreement for Good
Reason (as defined), National Grid USA is obliged to make various
payments to Rick Sergel and he also has the right to receive certain
benefits. The quantum of the termination payments depends upon the
length of time that Rick Sergel has been employed and also whether the
termination event has arisen as a result of a Change in Control (as
defined) of either National Grid USA or National Grid. The payments and
benefits are intended as liquidated damages and the sole and exclusive
remedy of Rick Sergel in the relevant circumstances.
7.7.4 On 6 March 2001, Steven Holliday entered into a service agreement
jointly with the Companies pursuant to which he is employed as Group
Director, Europe. Steven Holliday currently receives a base salary of
(L)270,000 (which is reviewed annually on 1 April) and has an annual
bonus opportunity under the Group Directors' performance-related bonus
plan. Long-term incentives are provided through an executive share
option plan. Steven Holliday is provided with a car and receives death-
in-service life cover. Steven Holliday is entitled to personal accident
insurance, reimbursement for all expenses properly incurred and private
medical expenses. The Companies (subject to Inland Revenue limits from
to time) make pension contributions under a defined-benefit pension
scheme. Because Steven Holliday is subject to a pensions earnings cap,
the Companies have put in place pension arrangements, which are
partially funded, to provide a pension covering the difference between
base salary and the pensions cap.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies' request, remain as
directors until the Companies' normal retirement age (currently 63).
Subject to mutual agreement to the contrary, Steven Holliday's service
agreement is terminable by him on 12 months' written notice and by the
Companies on 24 months' written notice for the first year, declining on
a straight-line basis in the second year to 12 months.
7.7.5 On 27 July 2001, Edward Astle entered into a service agreement jointly
with the Companies pursuant to which he is employed as Group Director,
Telecommunications. This appointment was effective from 1 September
2001. Edward Astle currently receives a base salary of (L)310,000
(which will be reviewed annually on 1 April). In addition to the annual
bonus opportunity under the Group Directors' performance-related bonus
plan, Edward Astle has special bonus plan arrangements under which he
is entitled to a bonus of (L)100,000 for the period up until 31 March
2002 on completing a telecommunications strategic review which is
approved by the Board. Thereafter, the special bonus arrangements will
be reviewed. Long-term incentives are provided through an executive
share option plan. Edward Astle is provided with a choice of car or car
allowance and receives death-in-service life cover. Edward Astle is
entitled to personal accident insurance, reimbursement for all expenses
properly incurred and private medical expenses. The Companies (subject
to Inland Revenue limits from time to time) make pension contributions
under a defined-benefit pension scheme. Because Edward Astle is subject
to a pensions earnings cap, the Companies have put in place pension
arrangements, which are partially funded, to provide a pension covering
the difference between base salary and the pensions cap.
Pension arrangements for UK based Directors provide for them to retire
at age 60, although they may, at the Companies request, remain as
directors until the Companies' normal retirement age (currently 63).
Subject to mutual agreement to the contrary, Edward Astle's service
agreement is terminable by him on 12 months' written notice and by the
Companies on 24 months' written notice for the first year, declining on
a straight-line basis in the second year to 12 months
179
7.7.6 The service agreements of each of the above-named Directors will be
novated to New National Grid, with effect from the Scheme Effective
Date.
7.7.7 On 7 December 2001, William E. Davis entered into a service agreement
jointly with New National Grid and National Grid USA pursuant to which,
following Completion, he will be employed as Chairman of National Grid
USA and as an Executive Director of New National Grid for a fixed
period of 24 months. The service agreement can be terminated by William
Davis if he provides National Grid USA with three months' written
notice. William Davis will receive a payment equal to four times his
base salary on joining New National Grid and National Grid USA, if he
has not received such a payment immediately before Completion. William
Davis will receive no additional salary for being a director of New
National Grid. His base salary as Chairman of National Grid USA will be
no less than $820,000 (reviewed annually) and he will have an annual
bonus opportunity under National Grid USA's annual bonus arrangements.
Long-term incentives may be provided through an executive share option
plan. He will participate in National Grid USA's Executive Supplemental
Retirement Plan and any National Grid USA ICP I bonus plans/programs
and also in other welfare plans, retirement, incentive and fringe
benefit plans on the same basis as other executive officers of National
Grid USA. The provisions of some of these benefits plans and programs
shall continue to be effective for certain time periods following
termination of William Davis' employment. The National Grid USA
Executive Supplemental Retirement Plan does not mandate a retirement
age.
7.7.8 The aggregate remuneration (including salaries, fees, pension
contributions, bonus payments and benefits in kind) of the Directors
for the year ended 31 March 2001 amounted to (L)2,808,000. The
remuneration policy of the National Grid Group will be reviewed by the
Remuneration Committee after the Acquisition, in the light of the
responsibilities to be undertaken by the Directors and Proposed
Directors within the Combined Group. Subject to this, it is estimated
that for the year ending 31 March 2002 the Directors of New National
Grid will be paid a total of approximately (L)3,326,000 by the Combined
Group. The Remuneration Committee comprises Bob Faircloth, John Grant
and Richard Reynolds.
7.7.9 There will be no variation in the total emoluments receivable by any of
the Directors under the Merger Agreement.
7.7.10 There is no arrangement under which a Director has agreed to waive
future emoluments nor have there been any such waivers during the
financial year immediately preceding the date of this document.
8. Directors' interests in National Grid and New National Grid
8.1 On the basis of the assumptions set out in section 4.2 of this Part
VII, the interests, all of which are beneficial, of the Directors in:
(i) National Grid Shares as at 6 December 2001 (being the latest
practicable date prior to the publication of this document) (which in
aggregate represent approximately 0.014 per cent. of the issued
ordinary share capital of National Grid); (ii) in New National Grid
Shares immediately following the Scheme Effective Date (which in
aggregate will represent approximately 0.014 per cent. of the issued
ordinary share capital of New National Grid); and (iii) in New National
Grid Shares immediately following completion of the Acquisition (which
in aggregate will represent approximately 0.012 per cent. of the issued
ordinary share capital of New National Grid), are set out in the table
below. In each case, the figures are based upon the interests in
National Grid Shares which have been notified by each Director to
National Grid pursuant to section 324 or section 328 of the Act as at 6
December 2001 (being the latest practicable date prior to the
publication of this document) or are required pursuant to section 325
of the Act to be entered into the register of Directors' interests
maintained under that section or are interests of a connected person
(within the meaning of section 346 of the Act) of a Director which
would, if the connected person were a Director, be required to be
disclosed under those sections of the Act, and the existence of which
is known to or could with reasonable diligence be ascertained by that
Director:
180
------------------------------------------------------------------------------------------------------------------------------
Interest in Expected interest in New National Expected interest in New
National Grid Grid Shares immediately after the National Grid Shares
Name Shares Scheme Effective Date immediately after Completion
------------------------------------------------------------------------------------------------------------------------------
James Ross 19,000 19,000 19,000
Roger Urwin 147,920 147,920 147,920
Edward Astle -- -- --
Stephen Box 18,459 18,459 18,459
Bob Faircloth -- -- --
John Grant 10,000 10,000 10,000
Steven Holliday -- -- --
Paul Joskow 5,000 5,000 5,000
Richard Reynolds 10,000 10,000 10,000
Rick Sergel 1,404 1,404 1,404
--------------------------------------------------------------------------------------------------------------------------
8.2 The following Directors have the options set out in the table below (all
of which have been granted for no consideration) under the Executive Share
Option Scheme (1990) and the Executive Share Option Plan 2000:
------------------------------------------------------------------------------------------------------------------------------
Outstanding
Exercise price per National Grid
National Grid Share Shares under
Name Date of grant (pence) Normal exercise periods option
------------------------------------------------------------------------------------------------------------------------------
Roger Urwin 29 Sep 1997 280.50 Sep 2000 - Sep 2007 169,340
16 Jun 1998 375.75 Jun 2001 - Jun 2008 91,656
15 Jun 1999 455.25 Jun 2002 - Jun 2009 22,098
5 Jun 2000 531.50 Jun 2003 - Jun 2010 33,867
18 Jun 2001 563.00 Jun 2004 - Jun 2011 133,214
Edward Astle 6 Sep 2001 479.50 Sep 2004 - Sep 2011 193,952
Stephen Box 29 Sep 1997 280.50 Sep 2000 - Sep 2007 160,427
16 Jun 1998 375.75 Jun 2001 - Jun 2008 93,147
15 Jun 1999 455.25 Jun 2002 - Jun 2009 43,931
5 Jun 2000 531.50 Jun 2003 - Jun 2010 37,630
18 Jun 2001 563.00 Jun 2004 - Jun 2011 93,250
Steven Holliday 30 Mar 2001 540.00 Mar 2004 - Mar 2011 150,000
18 Jun 2001 563.00 Jun 2004 - Jun 2011 71,936
Rick Sergel 31 Mar 2000 566.50 Mar 2003 - Mar 2010 201,845
18 Jun 2001 563.00 Jun 2004 - Jun 2011 134,321
------------------------------------------------------------------------------------------------------------------------------
181
The following Directors have the options set out in the table below
(all of which have been granted for no consideration) under the
National Grid Share Matching Scheme (1996):
-------------------------------------------------------------------------------------------------------------------------------
Outstanding
Exercise price in National Grid
total Shares under
Name Date of grant (pence) Normal exercise periods option
-------------------------------------------------------------------------------------------------------------------------------
Roger Urwin 16 Jun 1998 100.00 Jun 2001 - Jun 2005 4,047
11 Jun 1999 100.00 Jun 2002 - Jun 2006 3,884
26 Jun 2000 100.00 Jun 2003 - Jun 2007 3,859
8 Jun 2001 100.00 Jun 2004 - Jun 2008 5,635
Stephen Box 11 Jun 1999 100.00 Jun 2002 - Jun 2006 3,844
26 Jun 2000 100.00 Jun 2003 - Jun 2007 4,122
8 Jun 2001 100.00 Jun 2004 - Jun 2008 6,134
-------------------------------------------------------------------------------------------------------------------------------
Rick Sergel participates in the Incentive Compensation Plan which is a
comparable plan to the Share Matching Scheme (1996). On 5 June 2001,
Rick Sergel received an award under this plan which he chose to invest
into the Deferred Compensation Plan resulting in an entitlement to
4,353 notional National Grid ADSs which, as a result of a dividend
reinvestment, accrued a further 87 notional National Grid ADSs on 15
August 2001.
The following Directors have the options set out in the table below
(all of which have been granted for no consideration) under the 1999
Savings Related Share Option Scheme:
-------------------------------------------------------------------------------------------------------------------------------
Exercise price Outstanding
per National National Grid
Grid Share Shares under
Name Date of grant (pence) Normal exercise periods option
-------------------------------------------------------------------------------------------------------------------------------
Roger Urwin 22 Jun 2001 457.00 Sep 2006 - Feb 2007 3,692
Steven Holliday 22 Jun 2001 457.00 Sep 2006 - Feb 2007 3,692
-------------------------------------------------------------------------------------------------------------------------------
8.3 Each of the current Executive Directors (Roger Urwin, Edward Astle,
Stephen Box, Steven Holliday and Rick Sergel) is deemed for the
purposes of the Act to be a potential beneficiary under the National
Grid Qualifying Employee Share Ownership Trust ("QUEST") and the
National Grid 1996 Employee Benefit Trust and thereby to have an
interest as at 6 December 2001 (being the latest practicable date prior
to the publication of this document) in the 1,568,424 National Grid
Shares held by the QUEST and the 888,840 National Grid Shares held by
the 1996 Employee Benefit Trust.
8.4 Save as disclosed in this section 8, none of the Directors has any
interest in the share or loan capital of National Grid or any of its
subsidiaries, nor has National Grid or any of its subsidiaries provided
any guarantees for the benefit of the Directors as at 6 December 2001
(being the latest practicable date prior to the publication of this
document).
8.5 There are no outstanding loans or guarantees granted or provided by any
member of the National Grid Group to or for the benefit of any
Directors.
8.6 No Director has any interest in any transaction which is or was unusual
in its nature or conditions or significant to the business of National
Grid and any of its subsidiaries and which was effected by National
Grid during the current or immediately preceding financial year or
which was effected by National Grid during any earlier financial year
and remains in any respect outstanding or unperformed.
182
9. Options over National Grid Shares
9.1 As at 6 December 2001 (being the latest practicable date prior to the
publication of this document), the following options granted to
Directors and employees of the Group under the National Grid Share
Schemes (other than the Share Matching Scheme (1996)), were
outstanding:
-------------------------------------------------------------------------------------------------------------------------------
Exercise
price per National Outstanding
Grid Share National Grid
Scheme or Plan Date of grant (pence) Normal exercise periods Shares under option
-------------------------------------------------------------------------------------------------------------------------------
Executive Share Option 20 Dec 91 64.60 Dec 1994 - Dec 2001 100,000
Scheme (1990) 17 Dec 92 90.20 Dec 1995 - Dec 2002 38,609
17 Dec 93 118.90 Dec 1996 - Dec 2003 47,801
28 Nov 96 194.50 Nov 1999 - Nov 2006 15,424
10 Feb 97 205.50 Feb 2000 - Feb 2007 217,402
4 Aug 97 258.00 Aug 2000 - Aug 2007 179,263
29 Sep 97 280.50 Sep 2000 - Sep 2007 711,611
16 Jun 98 375.75 Jun 2001 - Jun 2008 1,138,659
21 Dec 98 490.00 Dec 2001 - Dec 2008 14,489
15 Jun 99 455.25 Jun 2002 - Jun 2009 278,267
6 Jul 99 435.75 Jul 2002 - Jul 2009 353,533
27 Sep 99 424.00 Sep 2002 - Sep 2009 56,603
31 Mar 00 566.50 Mar 2003 - Mar 2010 1,509,615
5 Jun 00 531.50 Jun 2003 - Jun 2010 456,130
5 Jul 00 526.00 Jul 2003 - Jul 2010 958,515
Executive Share Option 8 Sep 00 500.35 Sep 2003 - Sep 2010 64,971
Plan 2000 15 Sep 00 548.00 Sep 2003 - Sep 2010 20,088
2 Feb 01 623.00 Feb 2004 - Feb 2011 48,955
30 Mar 01 540.00 Mar 2004 - Mar 2011 150,000
18 Jun 01 563.00 Jun 2004 - Jun 2011 1,916,282
5 Jul 01 527.00 Jul 2004 - Jul 2011 453,210
6 Sep 01 479.50 Sep 2004 - Mar 2011 242,907
Savings Related Share 5 Jul 96 146.00 Aug 2001 - Feb 2002 138,409
Option Scheme (1990) 15 Jul 97 171.00 Aug 2002 - Feb 2003 2,223,351
3 Jul 98 312.00 Sep 2001 - Feb 2002 37,711
3 Jul 98 312.00 Sep 2003 - Feb 2004 1,327,756
2 Jul 99 337.00 Sep 2002 - Feb 2003 979,221
2 Jul 99 337.00 Sep 2004 - Feb 2005 2,021,912
1999 Savings Related 23 Jun 00 416.00 Sep 2003 - Feb 2004 544,805
Share Option Scheme 23 Jun 00 416.00 Sep 2005 - Feb 2006 745,605
22 Jun 01 457.00 Sep 2004 - Feb 2005 750,051
22 Jun 01 457.00 Sep 2006 - Feb 2007 1,663,537
-------------------------------------------------------------------------------------------------------------------------------
Each of these options may be satisfied on exercise either by the issue
of new shares or by the transfer of market-purchased shares. In respect
of options granted to US employees, the exercise of options will be
satisfied by the issue of new shares.
183
9.2 As at 6 December 2001 (being the latest practicable date prior to the
publication of this document), the following awards granted to
Directors and certain employees of the Group under the Share Matching
Scheme (1996), which will be satisfied by the transfer of market-
purchased shares, were outstanding:
-------------------------------------------------------------------------------------------------------------------------------
Exercise
price in Outstanding
total National Grid
Scheme Date of grant (pence) Normal exercise periods Shares under option
-------------------------------------------------------------------------------------------------------------------------------
Share Matching 23 Jun 97 100.00 Jun 2000 - Jun 2004 8,594
Scheme (1996) 30 Sep 97 100.00 Sep 2000 - Sep 2004 5,274
16 Jun 98 100.00 Jun 2001 - Jun 2005 9,919
11 Jun 99 100.00 Jun 2002 - Jun 2006 27,355
26 Jun 00 100.00 Jun 2003 - Jun 2007 29,786
8 Jun 01 100.00 Jun 2003 - Jun 2007 11,769
25 Jun 01 100.00 Jun 2003 - Jun 2007 28,162
-------------------------------------------------------------------------------------------------------------------------------
9.3 Options granted under the National Grid Share Schemes have all been
granted for no consideration.
9.4 As at 6 December 2001 (being the latest practicable date prior to the
publication of this document), the total number of National Grid Shares
under option or the subject of awards under the National Grid Share
Schemes was 19,525,551. At the same date, 1,568,424 National Grid
Shares were held by the National Grid Qualifying Employee Share
Ownership Trust ("QUEST") and 888,840 National Grid Shares were held by
the National Grid 1996 Employee Benefit Trust.
9.5 The trustee of the QUEST has agreed to waive all but 0.0001 pence of
any dividend per share due, or to become due, on any National Grid
Shares held in the QUEST. In addition, the trustee of the National Grid
1996 Employee Benefit Trust has agreed to waive all dividends on any
National Grid Shares held in that Trust.
10. Effect of the Scheme on the National Grid Share Schemes
Assuming that the Scheme becomes effective, no further awards will be made
under any of the existing National Grid Share Schemes, except for the National
Grid USA Incentive Thrift Plans (which will be amended as set out in section
11.7 below) and the Deferred Compensation Plan (which is summarised in section
10.11 below and will continue to operate without significant amendment).
10.1 Executive Share Option Scheme (1990)
Outstanding options to purchase National Grid Shares (which may be satisfied
either through newly-issued or market-purchased shares) become exercisable for
a period of six months following the Court sanctioning the Scheme whether or
not performance targets have been satisfied.
The Remuneration Committee will offer optionholders replacement options over
New National Grid Shares. Replacement options will have the same effective
date of grant, exercise prices and terms as existing options. Performance
conditions will continue to apply except that the performance of New National
Grid will be measured rather than the performance of National Grid.
The Executive Directors of National Grid have agreed not to exercise any
options granted to them under the Executive Share Option Scheme (1990) which
would become exercisable as a result of the Scheme and, instead, to accept the
offer of replacement options.
10.2 Executive Share Option Plan 2000
This plan replaced the Executive Share Option Scheme (1990) in respect of
options granted from September 2000. Certain executives and employees hold
options to purchase National Grid Shares under this plan.
Outstanding options granted prior to 17 January 2001 will become exercisable
for a period of one month on notification being sent to optionholders that the
Court has sanctioned the Scheme, but only to the extent that the Remuneration
Committee certifies that the performance targets have been met to date.
184
The Remuneration Committee will offer optionholders replacement options over
New National Grid Shares. In respect of the replacement options and, pursuant
to the provisions contemplating such an exchange contained within the plan
rules, any performance targets will cease to apply.
Options granted on or after 17 January 2001 do not become exercisable and,
instead, such options will compulsorily be exchanged for an equivalent option
over New National Grid Shares and the relevant performance targets will
continue to apply.
No Executive Director received any options under this plan prior to 17 January
2001.
10.3 Savings Related Share Option Scheme (1990)
Options granted under the Savings Related Share Option Scheme (1990) will
become exercisable for a period of six months following the Court sanctioning
the Scheme. However, options can only be exercised to the extent that money
has been saved with the savings contract (i.e. the options will not become
exercisable in full unless they are about to mature). Again, replacement
options will be offered.
10.4 1999 Savings Related Share Option Scheme
The 1999 Savings Related Share Option Scheme replaced the Savings Related
Share Option Scheme (1990) in respect of options granted from June 2000.
The Scheme will have the same implications as for the Savings Related Share
Option Scheme (1990) except that options will only become exercisable for a
period of one month from the Remuneration Committee notifying participants
that the Court has sanctioned the Scheme.
10.5 Profit Sharing Scheme (1990)
The Profit Sharing Scheme (1990) permitted the award to UK employees of free
National Grid Shares. Under its rules, National Grid Shares awarded are held
on the participants' behalf for a minimum of two years. If shares are held in
trust for the maximum period of three years, no tax is payable on release of
the National Grid Shares from trust. The final award of free shares under the
Profit Sharing Scheme (1990) was made in January 2001.
The Scheme will not trigger early release from the trust of the National Grid
Shares being held on behalf of the employees. National Grid Shares will be
exchanged for an equivalent holding of New National Grid Shares and
participants will have the same rights in respect of these New National Grid
Shares.
10.6 Employee Share Ownership Plan (UK) (2000)
No awards have been made under this plan.
10.7 1999 US Employee Stock Purchase Plan
No awards have been made under this plan.
10.8 Share Matching Scheme (1996)
Under the Share Matching Scheme (1996), the Remuneration Committee required
certain Executive Directors (and permitted certain other executives) to invest
a proportion of their annual bonus in National Grid Shares. In return for
making such investment, the participant received a matching option which
permitted him to acquire, for a nominal sum, such number of shares as had a
value equal to the pre-tax value of the bonus used to purchase the investment
shares. The matching options can generally only be exercised if the
participant remains employed for at least three years and to the extent that
he retains the investment shares until the matching option is exercised. In
limited circumstances, a participant may be permitted to retain his option
following cessation of employment.
The matching options become exercisable on the Court sanctioning the Scheme
except for matching options granted on or after 17 January 2001 which will
automatically be exchanged for options over New National Grid Shares.
Awards granted under the Share Matching Scheme (1996) can only be satisfied
through market-purchased shares; no new shares may be issued.
On an ex-gratia basis, the Remuneration Committee has tended to award a
payment to participants equal to the dividends which would have been earned on
those shares subject to the matching options. As explained at section 11.6, it
is proposed that this practice be entrenched within the rules of the
replacement plan.
185
10.9 Incentive Compensation Plan
Executives of National Grid USA receive an integrated annual bonus comprising
both a cash and share element. The share element involves participants
receiving market-purchased National Grid ADSs, except to the extent that the
bonus is deferred under the Deferred Compensation Plan. The National Grid ADSs
are generally vested immediately although participants may be prohibited from
selling National Grid ADSs for a period. Following the Scheme becoming
effective, all of these National Grid ADSs will convert into equivalent New
National Grid ADSs.
10.10 National Grid USA Incentive Thrift Plans
These are tax sponsored 401(k) plans for US based employees. There is one plan
for the union workforce and another for the non-union workforce. Broadly,
subject to statutory limits, substantially all employees may make a cash
contribution under the applicable plan and receive a matching contribution
from National Grid USA. Certain management participants earning more than the
statutory limit are entitled to "top-up" their entitlement via the Deferred
Compensation Plan. Any matching contributions are currently invested in
National Grid ADSs. In addition, participants may choose to invest their
contributions in National Grid ADSs (as well as a number of other investment
choices).
Following the Scheme becoming effective, investments held in such National
Grid ADSs will convert into equivalent New National Grid ADSs.
10.11 Deferred Compensation Plan
In keeping with normal remuneration practice in the US, National Grid USA
permits certain management employees to defer a proportion of their net income
through a tax deferred plan. Such deferred income is credited with earnings/
losses based upon a proxy investment option selected among several available,
including National Grid ADSs. Following the Scheme becoming effective, the
National Grid ADS tracking option will convert into a New National Grid ADS
tracking option.
10.12 Consequences of an employee exercising an option over National Grid
Shares
Where options over National Grid Shares are exercised following Court sanction
of the Scheme, National Grid Shares will be issued in the normal way. However,
as part of the reorganisation, a resolution will be proposed at the Scheme EGM
to amend the National Grid Articles to provide, inter alia, that, if any
person becomes a National Grid Shareholder after the Scheme Effective Date,
they are required to exchange their National Grid Shares in consideration of
the same number of New National Grid Shares.
11. Proposed New National Grid Share Plans
At the Scheme EGM, resolutions will be proposed to approve the adoption of the
following New National Grid employee share plans and new employee trusts which
will operate in conjunction with the New National Grid Share Plans:
(i) National Grid Executive Share Option Plan 2002 ("Executive Plan")
(ii) National Grid Employee Share Ownership Plan 2002 ("UK Plan") and the
associated trust ("UK Trust")
(iii) National Grid Savings Related Share Option Plan 2002 ("Sharesave Plan")
(iv) National Grid Employee Stock Purchase Plan 2002 ("US Plan")
(v) National Grid Share Matching Plan 2002 ("Matching Plan")
(vi) National Grid USA Incentive Thrift Plans I and II ("Thrift Plans")
(vii) National Grid Employee Trust 2002 ("Employee Trust")
(viii) National Grid Qualifying Employee Share Ownership Trust (No. 2) 2002
("QUEST No. 2")
In addition, the current Deferred Compensation Plan will continue to operate
for US based executives and employees with participants being able to choose
New National Grid ADSs as an investment proxy.
11.1 Principal features common to all the New National Grid Share Plans
11.1.1 Limits on the issue of shares under the New National Grid Share Plans
Each of the New National Grid Share Plans may operate over newly-issued shares
or market-purchased shares.
186
The number of shares which may be issued under the New National Grid Share
Plans in any year is limited to:
(i) 10 per cent. of New National Grid's ordinary issued share capital in
respect of options granted (or shares issued otherwise than pursuant to
the exercise of options) in the ten calendar years ending with that
year under the New National Grid Share Plans or any other employee
share plan adopted by New National Grid or any subsidiary; and
(ii) 5 per cent. of New National Grid's ordinary issued share capital in
respect of options granted (or shares issued otherwise than pursuant to
the exercise of options) in the ten calendar years ending with that
year under the Executive Plan, the Matching Plan or any other executive
share plan adopted by New National Grid or any subsidiary.
In calculating the above limits, any National Grid Shares issued pursuant to
the National Grid Share Schemes will count as though those shares had been New
National Grid Shares.
11.1.2 Rights attaching to shares
New National Grid Shares allotted under the New National Grid Share Plans will
rank pari passu with all other New National Grid Shares in issue, but will not
normally qualify for dividends or other rights for which the record date is
earlier than the date of allotment of the shares. Application will be made to
the UK Listing Authority for the New National Grid Shares to be admitted to
the Official List and to trading on the London Stock Exchange's market for
listed securities and/or for the New National Grid ADSs to be listed on the
NYSE.
11.1.3 Variation of capital
Other than for the UK Plan and the Thrift Plans, in the event of any variation
of share capital, or (except in the case of Inland Revenue-approved options)
of a demerger or the payment of a capital or special dividend or of any other
circumstances similarly affecting options, the Remuneration Committee may make
such adjustments as it considers appropriate to adjust:
(i) in the case of share options, the number of shares under option and the
price payable on their exercise; and
(ii) in the case of other awards, the number of shares subject to the award.
For the UK Plan and the Thrift Plans, this is not necessary because the
participants will be shareholders and will be treated accordingly in this
capacity.
11.1.4 Alterations to the New National Grid Share Plans
The Remuneration Committee may at any time alter or add to the New National
Grid Share Plans in any respect, provided that the prior approval of
shareholders is obtained for any alterations or additions to the advantage of
participants in respect of eligibility, limits on participation, the overall
limits on the issue of shares, terms of exercise, the rights attaching to the
shares acquired, non-assignability of options (or other awards) and the terms
of the options (or other awards) in the event of a variation of capital.
The requirement to obtain the prior approval of shareholders will not,
however, apply to any minor alteration made to benefit the administration of
the New National Grid Share Plans, to take account of a change in legislation
or to obtain or maintain favourable tax, exchange control or regulatory
treatment for participants or for any participating company in the Group. The
above does not restrict the ability of the Remuneration Committee to adjust
performance conditions (if any) to take account of supervening events. No
alteration to the terms of the Inland Revenue approved part of the Executive
Plan, the UK Plan or the Sharesave Plan may be made while it is so approved
without the Inland Revenue's approval.
11.1.5 Extension of the New National Grid Share Plans overseas
At the Scheme EGM a resolution will be proposed to give the Directors power to
extend the New National Grid Share Plans to countries outside the UK (or US in
respect of the US Plan and the Thrift Plans). To do this, the Remuneration
Committee may need either to add schedules to the New National Grid Share
Plans or to establish other plans based on the New National Grid Share Plans
which will take account of local tax, exchange control or securities laws in
the relevant jurisdictions.
11.1.6 Non-transferability of awards/options
Awards/options are not transferable other than to the participant's personal
representatives in the event of his death.
187
11.1.7 Reorganisations
In the event of an internal reorganisation, including a future scheme of
arrangement, the rules of the relevant New National Grid Share Plans provide
that this will not accelerate the vesting of any awards or options granted
under the New National Grid Share Plans and that performance conditions will
continue to apply. Instead, options/awards would be replaced by new options/
awards over shares in the new holding company or, if participants do not agree
to such an exchange, lapse.
11.1.8 Pensionability
No benefits received under the New National Grid Share Plans will be
pensionable except that:
(i) a decision by an employee to invest his own normal salary in buying
Partnership Shares (as explained in section 11.3.2(ii)) under the UK
Plan will not reduce pension benefits provided by the Company except to
the extent required by law; and
(ii) US participants in the US Schedule to the Matching Plan, in accordance
with local practice, determine their entitlement to pensions by
reference to salary plus bonuses (and include the value of any shares
awarded in calculating this amount). Participant contributions to the
Thrift Plans are included when calculating pension benefits, but
company matching contributions are not. Further, amounts deferred under
the Deferred Compensation Plan are generally not included in the
calculation of participants' pensions, with the exception of senior
management.
11.1.9 Amendments
The Directors reserve the right up to the Scheme EGM to make any amendments
and additions to the New National Grid Share Plans as they consider
appropriate, provided that amendments and additions do not conflict in any
material respect with this summary of the New National Grid Share Plans.
11.2 Executive Plan
11.2.1 General
The Executive Plan is divided into three parts, one of which will qualify for
beneficial tax treatment in the UK, one of which will qualify for beneficial
tax treatment in the US and the final part which will not qualify for any
specific beneficial tax treatment. The three parts are identical in all
material respects unless indicated to the contrary in this summary.
The Remuneration Committee will be responsible for operating the Executive
Plan.
11.2.2 Eligibility
Employees (including Executive Directors) of New National Grid; its
subsidiaries and joint venture companies in which the Group has a sufficient
interest to permit participation under the relevant Inland Revenue rules
(currently 50 per cent.) ("Joint Venture Companies"), will be eligible to
participate in the Executive Plan, provided that they are not within one year
of contractual retirement age or otherwise excluded by the relevant
legislation.
11.2.3 Grant of options
Options may be granted within the six weeks following the approval of the
Executive Plan by shareholders or (in the case of Inland Revenue-approved
options) its approval by the Inland Revenue and thereafter within the six
weeks following the announcement by New National Grid of its results for any
period, or in other exceptional circumstances.
No options may be granted more than ten years after the approval of the
Executive Plan by shareholders. The Remuneration Committee will formally
review the operation of the Executive Plan after no more than five years.
No payment will be required for the grant of an option.
11.2.4 Limit on individual participation
The rules limit the value of shares which can be placed under option to an
individual participant in any 12 month period to three times his base salary
except where the Remuneration Committee concludes in exceptional circumstances
that it is necessary to exceed this limit (e.g. on recruitment or to meet
competitive pressures, particularly in the US). Pursuant to this limit, the
Remuneration Committee will decide the level of awards in each year,
reflecting the performance over the preceding 12 months both of the individual
and of New National Grid, and considering general market practice at the time.
At this time, the Remuneration Committee considers
188
that the maximum market value of shares which will normally be placed under
option to any UK-based individual in any 12 month period will be 1.5 times the
individual's base salary.
Under the Inland Revenue-approved part of the Executive Plan or any other
approved executive share option plan established by New National Grid or an
associated company, the aggregate market value at the date of grant of shares
under option to an individual shall not exceed (L)30,000, or such other limit
as may from time to time apply under the relevant legislation.
11.2.5 Exercise price
The price per ordinary share payable on the exercise of an option will be the
higher of:
(i) the price of an ordinary share on the Daily Official List on a business
day or the average over a number of business days in the 30 days before
grant of the option, or in the case of Inland Revenue-approved options,
any other day or days agreed with the Inland Revenue, provided that no
such day may fall before New National Grid last announced its results
for any period; and
(ii) the nominal value of an ordinary share, if the option relates to new
ordinary shares.
11.2.6 Exercise of options
An option will not normally be exercisable until three years after its grant.
Options will lapse ten years from the date granted or such shorter period as
determined by the Remuneration Committee at the time of grant.
The Executive Plan includes the flexibility to grant options subject to pre-
grant conditions, rather than pre-exercise conditions, as recently endorsed by
the Association of British Insurers. While the Remuneration Committee has no
current intention of utilising this flexibility, it will monitor evolving best
practice in this regard in deciding whether it becomes appropriate to do so
and will liaise with the Association of British Insurers before using such
flexibility.
The Remuneration Committee intends to set demanding performance conditions on
the exercise of options. Initially, these will be that an option may not be
exercised unless New National Grid's total shareholder return over a period of
at least three years, beginning with the financial year in which the option is
granted, is at least median as compared with a group of approximately 20 UK
and US energy utilities.
For the first tranche, options over shares worth up to an individual's base
salary will become exercisable in full if New National Grid's total
shareholder return is at least median. If the shares are worth more than the
individual's base salary, the rest will be exercisable on a sliding scale,
becoming fully exercisable if New National Grid's total shareholder return is
in the upper quartile of the group of comparable utilities. In addition, for
options to become exercisable, the Remuneration Committee must be satisfied
that there has been a sustained improvement in underlying financial
performance over the relevant period.
If the performance condition is not satisfied after the first three years, it
will be re-measured on the fourth, and if necessary, the fifth anniversary of
the date of grant.
Options normally lapse on cessation of employment. However, exercise is
permitted for a limited period:
(i) following cessation of employment for reasons of death, injury,
disability, pregnancy, redundancy or the employee's business unit
ceasing to be part of the Group, or otherwise at the Remuneration
Committee's discretion; and
(ii) on a reconstruction, take-over or winding-up of New National Grid
provided that it is not part of a reorganisation.
In the cases referred to in (i) above, the performance conditions cease to
apply, but will still apply in the case of normal retirement. In these cases,
the option may only be exercised within 12 months (six months in the case of
retirement) unless the Remuneration Committee determines otherwise. In the
cases referred to in (ii) above, the performance targets will be measured over
the reduced period to the date of reconstruction, take-over or winding-up, but
the Remuneration Committee has discretion to permit exercise even when the
targets have not been satisfied over this period (in exceptional circumstances
where the Remuneration Committee considers that the reduced period does not
properly reflect New National Grid's performance).
189
11.2.7 US schedule
This part of the Executive Plan will permit US incentive stock options to be
granted. These have certain tax advantages for participants and may be granted
over such number of shares and/or ADSs as will become exercisable in any
calendar year, having a value (as of the time of grant) of no more than
$100,000 per participant. The rules of this part are substantially the same as
explained above for the other parts of the Executive Plan except for the
following modifications:
(i) to comply with applicable anti-discrimination law in the US, the
general prohibition on grants within one year of contractual retirement
age does not apply; and
(ii) to comply with the applicable tax rules, the periods during which a
participant may exercise his options following cessation of employment
are slightly different.
The number of New National Grid Shares which may be acquired on the vesting of
awards granted under the US schedule to the Executive Plan may not exceed
200,000,000. This limit is required by US tax legislation. In practice, fewer
shares are likely to be used as the general limits set out in section 11.1.1
above will also apply.
11.3 UK Plan
11.3.1 General
New National Grid intends to obtain Inland Revenue approval for the UK Plan
and the UK Trust under the Finance Act 2000.
11.3.2 Operation
The UK Plan may be operated each year at the discretion of the Board, but may
not be operated more than ten years after its approval by shareholders. The UK
Plan consists of three elements:
(i) "Free Shares" which may be allocated to an employee by New National
Grid
The market value of Free Shares allocated to any employee in any tax
year may not exceed (L)3,000 or such other limit as may from time to
time be permitted by the relevant legislation. Free Shares may be
allocated to employees equally, on the basis of salary, length of
service or hours worked, or on the basis of performance, as permitted
by legislation.
(ii) "Partnership Shares" which an employee may purchase out of his pre-tax
earnings
The market value of Partnership Shares which an employee can agree to
purchase in any tax year may not exceed (L)1,500 (or 10 per cent. of
the employee's remuneration, if lower), or such other limit as may be
permitted by the relevant legislation. The funds used to purchase
shares will be deducted from the employee's salary and will be held on
the employee's behalf for up to 12 months until they are used to buy
Partnership Shares. Where deductions are accumulated, the employee will
be entitled to buy shares at the market price of New National Grid
Shares at the start or end of the accumulation period, whichever is the
lower.
(iii) "Matching Shares" which may be allocated to an employee who purchases
Partnership Shares
Matching Shares are additional Free Shares. New National Grid may
allocate to an employee who purchases Partnership Shares up to a
maximum of two Matching Shares for every one Partnership Share
purchased or such other ratio as may from time to time be permitted by
the legislation. There is no minimum ratio of Matching Shares which New
National Grid must provide following a purchase of Partnership Shares.
The same ratio or ratios will apply to all employees who purchase
Partnership Shares under the UK Plan at a given time.
11.3.3 Eligibility
Employees (including Executive Directors) of New National Grid and
participating subsidiaries (including for this purpose, Joint Venture
Companies) who are resident in the UK and who have been employed at all times
by the Group for up to approximately 18 months may be allocated Free Shares or
Matching Shares or invited to purchase Partnership Shares under the UK Plan.
The Board may amend the eligibility conditions and have discretion to allow
other employees to participate.
190
11.3.4 Retention of shares
The trustee of the UK Trust will initially hold all Free Shares or Matching
Shares allocated to employees and any Partnership Shares acquired on behalf of
employees. Employees can withdraw Partnership Shares from the UK Trust at any
time. Free Shares and Matching Shares must generally be retained by the
trustee of the UK Trust for a period of at least three to five years after the
initial allocation.
The Board may stipulate at the time of award that an employee who ceases to be
employed by the Group within a period of up to three years of being allocated
Free Shares or Matching Shares will forfeit his rights to those shares.
However, Free Shares and Matching Shares will not be forfeited in certain
circumstances, for example death, redundancy or retirement on or after
reaching a specified retirement age.
If an employee ceases to be employed by the Group at any time after acquiring
Partnership Shares, he will be required to withdraw the shares from the UK
Trust.
11.3.5 Dividends on shares held by the trustee of the UK Trust
An employee will be treated as the beneficial owner of shares held on his
behalf by the trustee of the UK Trust. Any dividends on shares held by the
trustee of the UK Trust may be used to acquire additional shares for employees
or may be distributed to employees.
11.3.6 Unapproved Appendix
If the statutory limits referred to above are reduced at any time, the Board
shall have the power to adopt an unapproved top-up arrangement to maintain the
higher limits referred to in this section 11.3.
11.4 Sharesave Plan
11.4.1 General
New National Grid intends to obtain Inland Revenue approval for the Sharesave
Plan under the Income and Corporation Taxes Act 1988.
11.4.2 Eligibility
Employees (including Executive Directors) of New National Grid and
participating subsidiaries (including, for this purpose, Joint Venture
Companies) who are resident in the UK will be eligible to participate. The
Board can restrict participation to full-time directors and employees who have
completed a qualifying period of service (within the limits set by the
relevant legislation) and they also have discretion to allow other employees
to participate.
11.4.3 Grant of options
Invitations to participate in the Sharesave Plan may only be issued within the
six week period following the approval of the Sharesave Plan by the Inland
Revenue and thereafter in the six week period following the announcement by
New National Grid of its results for any period or in exceptional
circumstances. Options may not normally be granted later than 30 days after
the date invitations are made. Options may only be granted to employees who
enter into Inland Revenue-approved savings contracts under which monthly
savings are made over a period of three or five years.
The number of shares over which an option is granted will be such that the
total amount payable on its exercise will correspond to the expected proceeds
on maturity of the related savings contract.
Options may not be granted later than ten years after the approval of the
Sharesave Plan by shareholders.
11.4.4 Individual participation
Monthly savings by an employee under all savings contracts linked to options
granted under any approved savings related share option scheme may not exceed
the statutory maximum (currently (L)250 per month). If this limit is reduced,
the Board shall have the power to adopt an unapproved top-up arrangement to
maintain this higher limit.
191
11.4.5 Acquisition price
The price per ordinary share payable upon the exercise of options will not be
less than the higher of:
(i) 80 per cent. of the average of the price of an ordinary share on the
Daily Official List on the dealing day prior to the day on which
options are offered or the average of such prices over the three
dealing days prior to the day on which the options are offered (or on
such other day or days as may be agreed with the Inland Revenue,
provided that no such days may fall before New National Grid last
announced its results for any period); and
(ii) the nominal value of an ordinary share, if the option relates to new
ordinary shares.
11.4.6 Exercise of options
Options will normally be exercisable only for six months from the third, fifth
or seventh anniversary of the commencement of the related savings contracts.
Earlier exercise is permitted following death or cessation of employment by
reason of injury, disability, redundancy, retirement on reaching age 65 or
contractual retirement age, if different, or where the optionholder's employer
ceases to be within the Group. Options will otherwise lapse on cessation of
employment, although they may be exercisable for a limited period if they have
been held for at least three years. Early exercise is also permitted in the
event of a take-over, amalgamation or winding-up of New National Grid other
than in the case of an internal reorganisation, or if the participant reaches
normal contractual retirement age but remains with a Group company.
11.4.7 Participating companies
The Board can decide which subsidiaries participate in the Sharesave Plan.
Certain Joint Venture Companies may participate in the Sharesave Plan,
although the consent of the Inland Revenue will be required.
For legal reasons, it may be necessary for certain subsidiaries to adopt their
own plans operating over shares in New National Grid, which will be identical
to the Sharesave Plan in all material respects.
11.5 US Plan
11.5.1 General
The proposed National Grid Employee Stock Purchase Plan 2001 has been designed
to qualify under section 423 of the US Internal Revenue Code of 1986, as
amended. The US Plan will enable US employees (including Executive Directors)
to receive awards over New National Grid Shares or New National Grid ADSs on
an all-employee basis.
11.5.2 Eligibility
US-based employees of New National Grid and its subsidiaries are eligible to
participate in the US Plan. Participation can be restricted to employees who
have completed a qualifying period of service within the limits set by the
relevant US legislation.
Individuals may not be granted awards under the US Plan if they own shares
possessing 5 per cent. or more of the voting power or value of New National
Grid.
11.5.3 Grant of awards
Awards may be granted over a number of New National Grid Shares which will be
determined by the amount employees have saved by the end of a specified
savings period, subject to a maximum number of shares to be specified in the
award. At the end of that savings period, the awards will become exercisable.
Any surplus savings will be automatically carried over into the next savings
period.
Awards may not be granted under the US Plan later than ten years after it is
approved by shareholders.
11.5.4 Savings
An eligible employee who applies for an award under the US Plan must agree to
savings being deducted from his after-tax pay. Total deductions in any
calendar year may not accrue at a rate which exceeds such amount (up to
$25,000) as the Board may resolve. However, in setting any relevant limit, the
Board will have regard to the comparable position under the UK Plan and the
Sharesave Plan.
192
11.5.5 Purchase price
The price payable for each share shall be a price determined by the Board,
provided that it shall be not less than the lower of 85 per cent. of the
market value of a share on the date of grant and the date of purchase.
However, in setting any purchase price for the US Plan, the Board will have
regard to the comparable provisions under the UK Plan and the Sharesave Plan.
11.5.6 Limits
The number of shares which may be acquired on the vesting of awards granted
under the US Plan may not exceed 200,000,000. US tax legislation requires that
the US Plan specify a maximum number of shares over which options may be
granted during the term of the US Plan. In practice, fewer shares are likely
to be used as the general limits set out in section 11.1.1 above will also
apply.
11.5.7 Purchase of shares
Shares subject to an award under the US Plan may normally only be purchased at
the end of the savings period specified in the US Plan's Rules, provided that
the optionholder is still in the employment of the Group. Shares cannot be
purchased pursuant to an award later than the earlier of five years after it
was granted and any other time determined by the Board at the date of grant.
Special provisions will allow for early purchase in the case of certain
compassionate leavers and in the event of a take-over of New National Grid
other than in the case of an internal reorganisation.
11.6 Matching Plan
11.6.1 Eligibility
Employees (including Executive Directors) of New National Grid, its
subsidiaries and joint venture companies in which the Group has a significant
interest, who are not within one year of reaching age 65 or their contractual
retirement age (if earlier) at the time the annual bonus is due to be paid,
are eligible to participate at the discretion of the Remuneration Committee;
those who are between 12 and 24 months from their normal retirement age may be
allowed to participate but with a matching award at only one-half of the level
applicable to all other participants.
11.6.2 Grant of matching awards
If invited to do so by the Remuneration Committee, an eligible executive may
invest all (or such lower proportion as the Remuneration Committee may decide)
of his performance-tested cash annual bonus (net of tax and any other
deductions). At present, the Remuneration Committee only permit up to one-
third of a participant's bonus to be invested in this way. As soon as
practical thereafter, New National Grid will then procure the grant of a
matching award over matching shares equal in value to the amount of annual
bonus invested (prior to tax and any other deductions).
A matching award consists of the right to purchase New National Grid Shares
for a nominal payment, although the rules permit the structure of awards to be
changed if this would be advantageous from a tax perspective (including
dispensing with the need for payment of a nominal amount).
Matching awards can only be granted within the six weeks following the
approval of the Matching Plan by shareholders and thereafter within the six
weeks following the announcement of New National Grid's results for the full
year, or in other exceptional circumstances.
No matching awards can be granted later than ten years after the approval of
the Matching Plan by shareholders and the Remuneration Committee will formally
review the operation of the Matching Plan after no more than five years.
11.6.3 Exercise of awards
A matching award will normally be exercisable on or after the third
anniversary of its grant and to the extent that the shares purchased with the
associated annual bonus have been retained up to that date by the participant
and the participant is still employed by a Group company (or was so employed
at his actual retirement date). On exercise, a participant will receive a cash
payment broadly equal to the value of accrued dividends on the shares
representing the matching award.
A matching award may be exercisable early for a limited period on an
amalgamation, take-over or winding up of New National Grid (not being an
internal reorganisation). If the participant ceases employment with a Group
193
company, he will not be able to exercise the matching award at all, unless the
Remuneration Committee otherwise determines. The Remuneration Committee will
adopt guidelines indicating when this discretion will be used, the extent to
which an award may be exercised and the exercise period.
A matching award cannot be exercised later than the tenth anniversary of its
date of grant in any circumstances.
11.6.4 US schedule
National Grid USA currently operates a separate but similar plan for US
executives, the Incentive Compensation Plan. A separate schedule to the
Matching Plan is proposed which will allow the US executives to participate on
the same basis as currently.
The key differences are that US participants automatically receive a
proportion of their annual bonus in shares or ADSs (there is no requirement to
invest part of their bonus to receive a matching award) and, at the discretion
of the Remuneration Committee, a shorter (or no) vesting period may be set.
This additional flexibility (which may only be used for US-based executives)
enables the Matching Plan to operate on a competitive basis in the US, taking
proper account of local practice.
As may be necessary to comply with applicable anti-discrimination law in the
US, the general prohibition on grants within one year of contractual
retirement age does not apply.
11.7 Thrift Plans
It is proposed that the existing National Grid USA Incentive Thrift Plans
continue to operate but that certain amendments be made to permit the plans to
operate over new issue shares. No awards which relate to New National Grid
Shares or ADSs will be made later than ten years after the Thrift Plans'
approval by shareholders.
11.7.1 Eligibility
All employees (including Executive Directors) of National Grid USA and other
nominated companies are generally eligible to participate, subject to meeting
pre-determined service requirements before being eligible to receive company
matching contributions.
11.7.2 Savings
Participants may contribute a proportion of their income into the plans,
subject to certain legal limits, and direct how this is invested among various
investment options. One investment choice will be New National Grid ADSs.
11.7.3 Company contributions
Participating companies will make matching contributions under the Thrift
Plans which, it is anticipated, will be invested in New National Grid ADSs,
although the rules have flexibility to permit other investment options.
11.7.4 Release of investments
The plans are long-term savings plans and are designed to provide benefits to
participants on or towards retirement. However, the plans, following the
applicable statutory rules, allow funds to be withdrawn early in a number of,
broadly, compassionate situations.
11.8 Employee Trust
The Employee Trust will be constituted by a trust deed to be entered into
between New National Grid and an offshore, independent professional trustee.
New National Grid will have power to appoint and remove the trustee. This
Employee Trust is distinct from the UK Trust constituting part of the UK Plan.
The Employee Trust can be used to benefit employees and former employees of
New National Grid and its subsidiaries and certain of their dependants. The
Employee Trust will have the power to acquire New National Grid Shares. Any
shares so acquired can be used for the purposes of the employees' share plans
operated by New National Grid as described above.
New National Grid and its subsidiaries may fund the Employee Trust by loan or
gift to acquire New National Grid Shares either by market purchase or by
subscription. Any options to subscribe for shares granted to the Employee
Trust or shares issued to the Employee Trust will be treated as counting
against the relevant dilution limits described more fully at section 11.1.1
above.
194
The Employee Trust will not, without shareholder approval, make an acquisition
of shares if, as a result of that acquisition, it together with the trust
associated with the UK Plan (but excluding shares allocated under the UK
Plan), the QUEST No. 2 and the existing National Grid trusts hold more than 5
per cent. of New National Grid's share capital.
The trustees of the Employee Trust will waive all dividends on any New
National Grid Shares held in trust unless directed otherwise by New National
Grid.
11.9 QUEST No. 2
The principal terms are as set out for the Employee Trust except that certain
additional restrictions apply to meet the statutory requirements set out in
Schedule 5 to the Finance Act 1989. The trustee will be a wholly owned
subsidiary of New National Grid.
In practice, the QUEST No.2 is likely to operate in conjunction with the
Sharesave Plan.
12. Long-term incentive plans operated by Niagara Mohawk
Completion of the Acquisition will affect the various long-term incentive
plans operated by Niagara Mohawk as follows:
(i) stock options granted under the Niagara Mohawk 1992 Stock Option Plan
will, with the consent of participants, be cancelled, as provided for
in the Merger Agreement, for a cash payment being the difference
between the consideration payable for a Niagara Mohawk Share and the
stock options' exercise prices;
(ii) in respect of the phantom (cash) incentive schemes operated by Niagara
Mohawk, the decision has been taken to cancel all the awards on the
same basis as described above, except for:
(a) stock appreciation rights awards made under the Niagara Mohawk
1995 Stock Incentive Plan and the Niagara Mohawk Long Term
Incentive Plan, which will be replaced by equivalent stock
appreciation rights relating to New National Grid ADSs; and
(b) deferred stock units made under the Niagara Mohawk Outside
Director Deferred Stock Unit Plan which will be cashed out
either immediately or over a period of time, as prescribed in
the rules of that plan; and
(iii) Niagara Mohawk Shares held by employees within the Niagara Mohawk Non-
Represented Employees' Savings Fund Plan and the Niagara Mohawk Power
Corporation Represented Employees' Savings Fund Plan may be exchanged
for equivalent holdings of New National Grid ADSs.
No further awards will be made under these plans following Completion.
195
13. Principal subsidiaries and other principal undertakings of New National
Grid
Following implementation of the Scheme, New National Grid will be the
principal holding company of the Group.
13.1 Principal subsidiaries of New National Grid
The principal subsidiaries of New National Grid, immediately following the
Scheme Effective Date and prior to completion of the Acquisition, will be as
follows:
-----------------------------------------------------------------------------------------------------------------------------------
Name of company Registered office Principal activities Interest held
-----------------------------------------------------------------------------------------------------------------------------------
National Grid Holdings One plc 15 Marylebone Road Acting as a holding company 100%
London
NW1 5JD
National Grid Holdings Limited 15 Marylebone Road Acting as a holding company 100%
London
NW1 5JD
The National Grid Company plc National Grid House Transmission of electricity 100%
Kirby Corner Road in England and Wales
Coventry
CV4 8JY
NGG Telecoms Limited 15 Marylebone Road Acting as a holding company 100%
London
NW1 5JD
National Grid Four Limited 15 Marylebone Road Acting as a holding company 100%
London
NW1 5JD
NGG Telecoms Investment Limited 15 Marylebone Road Acting as a holding company 100%
London
NW1 5JD
National Grid (US) Holdings Limited 15 Marylebone Road Acting as a holding company 100%
London
NW1 5JD
National Grid USA 25 Research Drive Acting as a holding company 100%
Westborough
Massachusetts
MA 01582
Massachusetts Electric Company, Inc. 55 Bearfoot Road Distribution of electricity 100%
Northborough in Massachusetts
Massachusetts
MA 01532
The Narragansett Electric Company, Inc. 280 Melrose Street Distribution and 100%
Providence transmission of electricity
Rhode Island in Rhode Island
RI 02901
New England Power Company, Inc. 25 Research Drive Transmission and generation 100%
Westborough of electricity in New
Massachusetts England
MA 01582
196
13.2 Other principal undertakings of New National Grid
The other principal undertakings of New National Grid, following the
Scheme Effective Date will be as follows:
13.2.1 Energis, whose registered office is at Carmelite, 50 Victoria
Embankment, London EC4Y 0DE, is a company incorporated in England and
Wales whose securities are traded on the London Stock Exchange's market
for listed securities and on the NASDAQ National Market in the US. It
carries on the business of providing telecommunications and internet
services in the UK and certain countries in Continental Europe.
National Grid is the registered shareholder of, in aggregate, 36.8 per
cent. of the issued share capital of Energis. Of this amount, 4.2 per
cent. is reserved for holders of the 6 per cent. mandatorily
exchangeable bonds due 2003 issued by National Grid. The Company does
not exercise its rights in relation to these shares and as such, the
Group has an economic interest of 32.6 per cent. in Energis. As at
31 March 2001, the end of its last financial year, Energis had capital
and reserves totalling, in aggregate, (L)1,319.7 million and, for the
year ended 31 March 2001, losses on ordinary activities after tax of
(L)100.1 million as reported in Energis' annual report for the year
ended 31 March 2001. As at 7 December 2001 (being the latest
practicable date prior to the publication of this document), Energis
had an issued share capital of 1,738,590,359 ordinary shares of 10
pence each. Based on a price of 75.5p per Energis share (being the
Closing Price of an Energis share on 7 December 2001, the latest
practicable date prior to the publication of this document), the
Group's economic interest in Energis was valued at (L)427.4 million. As
at 7 December 2001 (being the latest practicable date prior to the
publication of this document), there were no amounts still to be paid
up on any Energis shares held by the Group, no dividends had been paid
by Energis to any of its shareholders including the Group and there
were no borrowings owed to or by the Group to Energis; and
13.2.2 JVCO, whose registered address is Praia de Botafogo, No. 300-13 Andar,
Sala 1301, Rio de Janeiro, Brazil is a company incorporated in Brazil,
50 per cent. of which is owned by National Grid Brazil BV. It is a
joint venture whose wholly-owned subsidiary, Intelig, has been awarded
a licence to provide telecommunications services in Brazil. The
remaining 50 per cent. of JVCO is owned by Telecom Entity Participacoes
Limitada ("Telecom Entity"), a company which is owned 50 per cent. each
by France Telecom and Sprint. As at 31 December 2000, the end of its
last financial year, JVCO had capital and reserves totalling, in
aggregate, R$912.4 million and, for the year ended 31 December 2000,
losses on ordinary activities after tax of R$633.4 million. As at
7 December 2001, being the latest practicable date prior to the
publication of this document, the Group's interest in JVCO had been
written down to nil, there were no amounts still to be paid up on any
shares in JVCO held by the Group and no dividends had been paid by JVCO
to any of its shareholders including the Group. Details of the
borrowings owed by JVCO and Intelig to the Group are set out in section
14.1 below.
14. Principal investments of the Group
The main investments of the Group in other undertakings over the last three
financial years and during the current financial year are as follows:
14.1 On 10 December 1998, the Group, through its indirect wholly owned
subsidiary, National Grid Brazil BV, entered into a quotaholders
agreement with Telecom Entity, a company owned 50 per cent. each by
France Telecom and Sprint, for the development of a telecommunications
services joint venture in Brazil. The Group and Telecom Entity each
have a 50 per cent. interest in JVCO, which is the ultimate holding
company of Intelig. As at 7 December 2001, being the latest practicable
date prior to the publication of this document, the Group had invested,
in aggregate, $429.3 million in the equity of JVCO, and $80 million in
aggregate in shareholder loans to either JVCO or Intelig together with
accrued interest thereon;
14.2 On 22 March 2000, the Group acquired NEES, an electricity transmission
business operating in the north-eastern US, at a cost of (L)2,070.8
million. Following its acquisition, NEES was renamed National Grid USA;
14.3 On 19 April 2000, National Grid USA acquired EUA, an electricity
transmission and distribution business operating in Massachusetts and
Rhode Island, at a cost of (L)414.0 million. EUA's business was
subsequently merged into National Grid USA; and
14.4 On 5 September 2000, the Group announced that it had agreed to acquire
Niagara Mohawk, the principal activities of which are the delivery of
electricity and natural gas in New York State. At the date of its
announcement, the terms of the Acquisition valued the equity of Niagara
Mohawk at approximately
197
$3.0 billion and the enterprise value of Niagara Mohawk at
approximately $8.9 billion. Further details of the Acquisition are set
out in section 7 of Part I and section 3.5 above.
15. Principal establishments of the Group
The following are the principal establishments of the Group:
-----------------------------------------------------------------------------------------------------------------------------------
Approximate gross
internal area (sq. Unexpired term and
Description Location ft.) Tenure rent
-----------------------------------------------------------------------------------------------------------------------------------
Registered office and corporate centre 15 Marylebone Road London 20,750 Leasehold Approximately 12
NW1 5JD years, rent
currently
(L)700,000 per
annum
UK head office National Grid House 84,270 Leasehold Approximately 125
Kirby Corner Road years, peppercorn
Coventry CV4 8JY rent
England and Wales transmission grid St Catherine's Lodge 73,900 Freehold --
control centre Bearwood Road
Wokingham RG11 5BN
US head office 25 Research Drive 316,420 Freehold --
Westborough
Massachusetts MA 01582
US distribution centre 55 Bearfoot Road 155,200 Freehold --
Northborough
Massachusetts MA 01532
-----------------------------------------------------------------------------------------------------------------------------------
In addition to the principal establishments listed above, in England and Wales
the Group owns or leases approximately 280 properties, approximately 250 of
which are sites or substations and the remainder of which are offices and
other premises and in the US, the Group owns or leases approximately 600
properties, 560 of which are substations and 40 are offices or other premises.
16. UK taxation
The following is a summary of certain aspects of UK taxation and is included
as a general guide only. It is based on current UK legislation and what is
understood to be current Inland Revenue practice, both of which are subject to
change, possibly with retrospective effect. It applies only to persons who are
resident or ordinarily resident in the UK for UK tax purposes and who hold
their National Grid Shares beneficially and as an investment. The information
is general in character, is not exhaustive and may not apply to certain
classes of shareholder (including, but not limited to, dealers in securities).
Any person who is in any doubt as to his tax position or who may be subject to
tax in any jurisdiction outside the UK should consult an appropriate
professional adviser.
16.1 The Scheme
Appropriate clearances have been obtained from the Inland Revenue for the
Scheme under section 138 of the Taxation of Chargeable Gains Act 1992 and
section 707 of the Income and Corporation Taxes Act 1988, such that UK
resident National Grid Shareholders should not be treated as making a disposal
of their National Grid Shares, or as receiving taxable income, under the
Scheme.
Any subsequent disposal of New National Grid Shares may, depending on the
shareholder's personal circumstances, give rise to a charge to UK tax on
chargeable gains. New National Grid Shares issued under the Scheme should be
regarded as having been acquired on the same date and for the same
consideration as the National Grid Shares in respect of whose cancellation
they are issued.
198
For the purposes of UK tax on chargeable gains, a holder of ADSs is treated as
holding a beneficial interest in the underlying shares. In practice, no
liability to UK tax is likely to arise to a holder of National Grid ADSs in
connection with the Scheme.
No stamp duty or SDRT should generally be payable on the cancellation of
National Grid Shares or the issue of New National Grid Shares under the
Scheme. Special rules may apply to shares held in or issued to depositary
receipt or clearance service arrangements, although no stamp duty or SDRT
should generally be payable by holders of National Grid ADSs in connection
with the Scheme.
16.2 Capital Gains
A disposal of New National Grid Shares by a shareholder resident or ordinarily
resident for tax purposes in the UK or a shareholder who carries on a trade,
profession or vocation in the UK through a branch or agency and has used, held
or acquired the New National Grid Shares for the purposes of such trade,
profession or vocation or such branch or agency may, depending on the
shareholder's circumstances, and subject to any available exemption or relief,
give rise to a chargeable gain or an allowable loss for the purpose of UK
taxation of chargeable gains. A shareholder who is an individual and who has
on or after 17 March 1998 ceased to be resident or ordinarily resident for tax
purposes in the UK for a period of less than five tax years and who disposes
of New National Grid Shares during that period may also be liable to UK
taxation on chargeable gains (subject to any available exemption or relief).
16.3 Dividends
New National Grid will not be required to withhold tax at source from dividend
payments it makes.
Individual shareholders resident in the UK should generally be entitled to a
tax credit in respect of any dividend paid by New National Grid which they can
offset against their total income tax liability. The amount of the tax credit
for dividends is one-ninth of the amount of the net cash dividend. The amount
of the net cash dividend received by such an individual shareholder and the
associated tax credit are both included in computing the shareholder's income
for UK tax purposes.
The rate of income tax on dividends is 10 per cent. for lower rate and basic
rate taxpayers. The tax credit will discharge the income tax liability of an
individual shareholder who is not liable to income tax at a rate greater than
the basic rate. Higher rate taxpayers will be liable to tax on such dividends
at the rate of 32.5 per cent., so that an individual shareholder who is a
higher rate taxpayer will have a liability, after taking account of the tax
credit, equal to 25 per cent. of the net cash dividend.
A UK resident corporate shareholder will not normally be liable to corporation
tax in respect of any dividend received.
Shareholders who are not resident in the UK for tax purposes will generally
not benefit from any entitlement to a refund of any part of the tax credit.
16.4 Stamp duty and stamp duty reserve tax
A transfer for value of New National Grid Shares will generally be subject to
UK ad valorem stamp duty or to SDRT. Stamp duty and SDRT are normally a
liability of the purchaser. The amount of stamp duty or SDRT payable is
generally calculated at the applicable rate on the consideration for the
transfer of the New National Grid Shares, being currently 0.5 per cent. of the
amount or value of the consideration (currently rounded up to the nearest (L)5
in the case of stamp duty).
Paperless transfers of New National Grid Shares within CREST are generally
liable to SDRT, rather than stamp duty, at the rate of 0.5 per cent. of the
amount or value of the consideration payable. CREST is obliged to collect SDRT
on relevant transactions settled within the system. Deposits of New National
Grid Shares into CREST will generally not be subject to SDRT, unless the
transfer into CREST is itself for consideration.
No UK stamp duty will be payable on the acquisition or transfer of New
National Grid ADSs or beneficial ownership of New National Grid ADSs, provided
that any instrument of transfer or written agreement to transfer remains at
all times outside the UK, and further provided that any instrument of transfer
or written agreement to transfer is not executed in the UK and the transfer
does not relate to any matter or thing done or to be done in the UK. An
agreement for the transfer of depositary receipts representing New National
Grid ADSs or beneficial ownership of such depositary receipts will not give
rise to a liability for SDRT.
Any transfer for value of the underlying New National Grid Shares represented
by New National Grid ADSs may give rise to a liability on the transferee to
stamp duty or SDRT. A holder of New National Grid Shares who
199
transfers or deposits those shares into any depositary receipt or clearance
service arrangement may incur a liability to SDRT of 1.5 per cent. of the
value of the shares so transferred or deposited. However, any SDRT or stamp
duty arising in relation to the issue of the New National Grid ADSs to Niagara
Mohawk Shareholders will be paid by New National Grid. On a transfer of New
National Grid Shares from the custodian of the Depositary to a holder of New
National Grid ADSs upon cancellation of the New National Grid ADSs, only a
fixed UK stamp duty of (L)5 per instrument of transfer will be payable.
Special rules apply to market intermediaries.
17. US taxation
The following is a summary of certain US federal income tax consequences of
the ownership of New National Grid ADSs or New National Grid Shares to a US
Holder (as defined below) that receives New National Grid ADSs or New National
Grid Shares in connection with the Scheme and holds New National Grid ADSs or
New National Grid Shares as capital assets. This summary does not purport to
address all material US federal income tax consequences of the ownership of
New National Grid ADSs or New National Grid Shares, and does not take into
account the specific circumstances of any particular investor (such as tax-
exempt entities, certain insurance companies, banks, dealers, traders in
securities that elect to mark to market, investors liable for alternative
minimum tax, investors that actually or constructively own 10 per cent. or
more of the voting shares of New National Grid, investors that hold New
National Grid ADSs or New National Grid Shares as part of a straddle, hedging
or conversion transaction or investors whose functional currency is not the US
dollar), some of whom may be subject to special rules.
This summary is based on the current tax laws of the US (including the
Internal Revenue Code, its legislative history, existing and proposed
regulations thereunder, published rulings and court decisions), as well as on
the Treaty, all of which are subject to change, possibly with retrospective
effect. On 24 July 2001, the governments of the UK and the US signed a
convention for the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income and capital gains (the "New Treaty")
that will replace the existing Treaty. The US Senate and the UK Parliament
must ratify the New Treaty. The New Treaty will come into force once each
country has notified the other of the completion of its ratification
procedure. However, the timing of the ratification by the UK and US
governments is unknown. In addition, this summary is based in part upon the
representations of the Depositary and the assumption that each obligation in
the deposit agreement and any related agreement will be performed in
accordance with its terms.
17.1 Definition of "US Holder"
For purposes of this summary, the term "US Holder" means a beneficial owner of
New National Grid ADSs or New National Grid Shares and the cash dividends paid
with respect thereto that: (i) is an individual citizen or resident of the US
for US federal tax purposes, a corporation created or organised in or under
the laws of the US, any state therein or the District of Columbia, an estate
whose income is subject to US federal income tax regardless of its source, or
a trust if a US court can exercise primary supervision over the trust's
administration and one or more US persons are authorised to control all
substantial decisions of the trust; (ii) is resident in the US for purposes of
the Treaty (and, in case of a corporation, is not also resident in the UK for
UK tax purposes); (iii) is not a corporation which, alone or together with one
or more associated corporations, controls, directly or indirectly, 10 per
cent. or more of the voting shares of New National Grid; (iv) holds the New
National Grid ADSs or New National Grid Shares in a manner which is not
effectively connected with a permanent establishment in the UK from which such
person performs independent personal services; and (v) is not otherwise
ineligible for benefits under the Treaty with respect to income and gains
derived in connection with the New National Grid ADSs or New National Grid
Shares.
17.2 Taxation of dividends
Distributions paid to a US Holder by New National Grid will be taxable as
ordinary income to the US Holder for US federal income tax purposes to the
extent paid out of New National Grid's current or accumulated earnings and
profits, as determined for US federal income tax purposes, based upon the US
dollar value of the distribution on the date it is actually or constructively
received. In determining the amount of dividend income, a US Holder will use
the spot currency exchange rate on the day the dividend is included in income.
Any difference between the amount of dividend income and the dollars actually
received may constitute a foreign currency gain or loss, which is an ordinary
gain or loss. Individual US Holders, however, are not required to recognise a
gain of less than $200 from the exchange of foreign currency in a "personal
transaction" as defined in paragaph 988(e) of the Internal Revenue Code. The
dividend will not be eligible for the dividends-received deduction generally
allowed to US corporations in respect of dividends received from other US
corporations. Distributions by New National
200
Grid in excess of its current and accumulated earnings and profits will be
treated as a return of capital to the extent of the US Holder's tax basis in
the New National Grid ADSs or New National Grid Shares and thereafter as a
capital gain.
17.3 UK tax credit
A US Holder is entitled to a UK tax credit for the UK tax notionally withheld
with respect to such dividend. A US Holder will include as ordinary income the
amount of any dividend paid by New National Grid out of its current or
accumulated earnings and profits (the "base dividend") plus the amount of any
UK credit (before reduction for UK withholding tax). For example, if New
National Grid paid a dividend of $90 to a US Holder, for US federal income tax
purposes, the US Holder would recognise ordinary income of $90 plus the $10 UK
tax credit, or a total of $100. The income is recognised when the dividend is
actually or constructively received by the Depositary (in the case of New
National Grid ADSs) or by the US Holder (in the case of New National Grid
Shares).
Subject to certain limitations and requirements, a US Holder will be entitled
under the Treaty to credit the UK withholding tax against the US Holder's US
federal income tax liability. A US Holder that does not elect to claim a
foreign tax credit for the UK withholding tax may instead claim a deduction
for such tax. For foreign tax credit limitation purposes, the dividend will be
income from sources without the US, but generally will be treated separately,
together with other items of "passive income" (or, in the case of certain
holders, "financial services income"). The rules relating to foreign tax
credits are complex and US Holders should consult their own tax advisers to
determine whether and to what extent a foreign tax credit would be available
and whether any filings or other actions may be required to substantiate a US
Holder's foreign tax credit claim. Each eligible US Holder that relies on the
Treaty must file IRS Form 8833 disclosing this reliance with its US tax
return.
17.4 Information reporting requirements
Information reporting requirements may apply to dividend payments (or other
taxable distributions) in respect of New National Grid ADSs and New National
Grid Shares made within the US to a non-corporate US person and may also apply
to proceeds from the disposition of New National Grid ADSs and New National
Grid Shares, and "backup withholding" at the rate of 31 per cent. may apply to
such payments unless a US Holder provides certification of its entitlement to
an exemption. Amounts withheld under the backup withholding rules may be
credited against a US Holder's US federal income tax liability, and a US
Holder may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the Internal
Revenue Service.
17.5 Sale of New National Grid ADSs or New National Grid Shares
Upon a sale or other disposition of New National Grid ADSs or New National
Grid Shares, a US Holder will recognise gain or loss for US federal income tax
purposes in an amount equal to the difference between the US dollar value of
the amount realised and the US Holder's tax basis in the New National Grid
ADSs or New National Grid Shares. A gain or loss recognised by a US Holder
will be a long-term capital gain or loss with respect to New National Grid
ADSs or New National Grid Shares held for more than 12 months at the time of
the sale or other disposition, and any gain or loss recognised generally will
be income or loss from sources within the US for foreign tax credit limitation
purposes. A long-term capital gain of a non-corporate US holder is generally
subject to tax at a minimum tax rate of 20 per cent.
18. Material contracts
18.1 New National Grid and the National Grid Group
Save for the contracts described in this section 18.1 and the agreements which
have been made available for inspection within the last two years being:
(i) the Merger Agreement summarised in the circular to National Grid
Shareholders dated 2 January 2001;
(ii) the trust deeds, subscription agreements and paying agency agreements
relating to the (E)1,250,000,000 5.25 per cent. guaranteed bonds due
2006 and the (E)750,000,000 6.125 per cent. guaranteed bonds due 2001
issued by NGG Finance plc and guaranteed by National Grid, which were
summarised in the offering circular issued by NGG Finance plc on 20
August 2001; and
(iii) the trust deeds subscription agreements and paying agency agreements
relating to the (L)200,000,000 3.806 per cent. Retail Price Index-
linked bonds due 2020, the (L)40,000,000 3.589 per cent. limited Retail
Price Index-linked bonds due 2030 and the (L)360,000,000 6.50 per cent.
bonds due 2028 issued by
201
National Grid Company, which were summarised in the offering circular
issued by National Grid Company on 23 July 2001,
no contracts (other than contracts entered into in the ordinary course
of business) have been entered into by New National Grid or any member
of the Group: (a) within the two years immediately preceding the date
of this document which are, or may be, material; or (b) which contain
any provision under which New National Grid or any member of the Group
has any obligation or entitlement which is material to New National
Grid or the Group as at the date of this document.
18.1.1 A credit agreement dated 22 November 2001 (the "Credit Agreement")
between (1) New National Grid (as guarantor and borrower); (2) NGG
Finance plc ("NGGF") (as borrower); (3) National Grid (as guarantor
and borrower); (4) Dresdner Kleinwort Wasserstein Limited, J.P.
Morgan plc, ABN AMRO Bank N.V., Bank of America Securities, The Bank
of Tokyo-Mitsubishi Ltd, Barclays Capital, Bayerische Landesbank
Girozentrale London Branch, Citibank N.A., HSBC Investment Bank plc
and TD Bank Europe Limited (the "Arrangers"); (5) HSBC Investment
Bank plc (the "Agent"); (6) HSBC (USA) Inc. (the "Swingline Agent");
and (7) certain banks and financial institutions (the "Banks") which
provides for:
(a) a US$1.7 billion committed 364 day dollar denominated
multicurrency revolving credit facility extending for a
further 364 days (subject to the consent of each Bank in
relation to extension of that Bank's commitment) and/or
converting to a term loan maturing no later than the third
anniversary of signing of the Credit Agreement (at the option
of the listed National Grid Group holding company from time to
time) to be made available to the listed National Grid Group
holding company from time to time, National Grid, NGGF or any
approved nominated subsidiary and to be used in or towards
financing the Acquisition (together with acquisition costs and
other expenses and the refinancing of existing Niagara Mohawk
borrowings) ("Facility A");
(b) a US$600 million committed dollar denominated multicurrency
five year revolving credit facility including a US$300 million
swingline facility to be made available to the listed National
Grid Group holding company from time to time, National Grid,
NGGF and approved nominated subsidiaries and to be used for
general corporate purposes ("Facility B") (Facility B together
with Facility A being the "Facilities").
The rate of interest payable on the Facilities is LIBOR together with
margins of 37.5 basis points for Facility A and 42.5 basis points for
Facility B which margins may be increased or reduced according to
certain formulae depending on percentage utilisation and partial
cancellation. Interest on the swingline facility would be the higher
of the Swingline Agent's prime rate and the Federal Funds Rate.
Certain fees and expenses will be payable in connection with the
Credit Agreement including a bookrunners' fee, underwriting and
participation fees, commitment fees and agency fees.
18.1.2 A letter agreement dated 20 November 2001 between New National Grid,
National Grid Company, National Grid and the European Investment Bank
("EIB") setting out the terms under which a guarantee to be given by
New National Grid in respect of the obligations of National Grid
Company under a finance contract for (L)200 million between EIB and
National Grid Company will become effective.
18.1.3 The Exchangeable Bonds Trust Deed relating to the substitution of New
National Grid for National Grid as the issuer of shares under the
exchange right in relation to the Exchangeable Bonds.
18.1.4 The Undertaking.
18.1.5 The Sponsor's Agreement which provides for the payment by New
National Grid (or, if the Scheme does not become effective or New
National Grid fails to pay, National Grid) of certain expenses
incurred by Rothschild in connection with the Sponsor's Agreement and
Admission, including its legal fees. The Sponsor's Agreement contains
(i) certain warranties by New National Grid and National Grid as to
the accuracy of the information contained in the Listing Particulars,
and in relation to other matters relating to the National Grid Group
and its businesses; (ii) an indemnity from New National Grid and, to
the extent lawful, National Grid in favour of Rothschild; and (iii)
certain undertakings from New National Grid and National Grid
relating, inter alia, to consultation with, and the provision of
information to, Rothschild in its capacity as sponsor. The Sponsor's
Agreement also sets out certain circumstances in which it will or may
be terminated.
202
18.2 Niagara Mohawk
Save for the contracts described in this section 18.2, no contracts (not being
contracts entered into in the ordinary course of business) have been entered
into by any member of the Niagara Mohawk Group: (a) within the two years
immediately preceding the date of this document which are, or may be,
material; or (b) which contain any provision under which any member of the
Niagara Mohawk Group has any obligation or entitlement which is material to
the Niagara Mohawk Group as at the date of this document.
(i) the Merger Agreement;
(ii) an Asset Purchase and Sale Agreement dated as of 7 August 2000, and
made by and among Niagara Mohawk Power, Central Hudson, Consolidated
Edison Company of New York, Inc. ("Con Ed"), and Dynegy Power Corp.
("Dynegy"), whereby:
(a) Dynegy agreed to purchase the Roseton generating facility and
related assets;
(b) Dynegy agreed to purchase and assume Niagara Mohawk Power's 25
per cent. undivided interest in the assets acquired under the
Asset Purchase and Sale Agreement for $78.8 million, plus
$1.2 million for retained facilities; and
(c) Dynegy assumed most of Niagara Mohawk Power's obligations as
related to the assets, including responsibility for all
liabilities and obligations of Niagara Mohawk Power under
transferable permits associated with the assets, contractual
obligations relating to the assets, liabilities for stores in
transit, certain liabilities and obligations with respect to
the employees employed at the facilities, and responsibility
for environmental conditions at the facilities except for pre-
closing violations and off-site (not including migration of
waste) disposal, storage, and discharge of waste occurring
prior to the closing date;
(iii) an Asset Purchase Agreement dated as of 11 December 2000 and made
between Niagara Mohawk Power, Constellation Nuclear and Constellation
Energy Group, Inc., as Guarantor of Constellation Nuclear, whereby:
(a) Constellation Nuclear agreed to purchase the Nine Mile Point
No. 1 nuclear generating facilities from Niagara Mohawk Power;
(b) Constellation Nuclear agreed to pay $235.2 million (subject to
adjustment) to Niagara Mohawk Power for the assets acquired
under the Asset Purchase Agreement; and
(c) Constellation Nuclear assumed most of Niagara Mohawk Power's
obligations as related to the Nine Mile Point No. 1 nuclear
generating facilities, including responsibility for all
liabilities and obligations of Niagara Mohawk Power under
transferable permits associated with the assets, contractual
obligations relating to the assets, certain liabilities and
obligations with respect to the employees employed at the
facilities, and responsibility for environmental conditions at
the facilities except for pre-closing violations and off-site
(not including migration of waste) disposal, storage, and
discharge of waste occurring prior to the closing date;
(iv) an Asset Purchase Agreement dated as of 11 December 2000 and made
between Niagara Mohawk Power, RG&E, Central Hudson, NYSEG,
Constellation Nuclear and Constellation Energy Group, Inc. as Guarantor
of Constellation Nuclear, whereby:
(a) Constellation Nuclear agreed to purchase Niagara Mohawk Power's
41 per cent. interest in the Nine Mile Point No. 2 nuclear
generating facilities from Niagara Mohawk Power, together with
the interests of RG&E, Central Hudson and NYSEG in Nine Mile
Point No. 2 (a total of 82 per cent. of the interests in Nine
Mile Point No. 2);
(b) Constellation Nuclear agreed to pay an aggregate of $582.8
million (subject to adjustment) to Niagara Mohawk Power and the
other sellers for the assets acquired under the Asset Purchase
Agreement; and
(c) Constellation Nuclear assumed most of the sellers' obligations
as related to the Nine Mile Point No. 2 nuclear generating
facilities, including responsibility for all liabilities and
obligations of Niagara Mohawk Power under transferable permits
associated with the assets, contractual obligations relating to
the assets, certain liabilities and obligations with respect to
the employees
203
employed at the facilities, and responsibility for
environmental conditions at the facilities except for pre-
closing violations and off-site (not including migration of
waste) disposal, storage, and discharge of waste occurring
prior to the closing date; and
(v) a Stock Purchase Agreement dated as of 28 September 2001 and made
between Niagara Mohawk and Select Energy, Inc. ("Select") whereby:
(a) Select agreed to purchase all of the outstanding shares of
Niagara Mohawk Energy Marketing, Inc., an indirect wholly-owned
subsidiary of Niagara Mohawk; and
(b) Select agreed to pay $38.5 million (subject to adjustment) to
Niagara Mohawk for the outstanding shares to be acquired under
the Stock Purchase Agreement.
19. Litigation
19.1 New National Grid and National Grid Group
There are no legal or arbitration proceedings (including any such
proceedings which are pending or threatened of which New National Grid
or National Grid is aware) which may have, or have had during the 12
months preceding the date of this document, a significant effect on the
financial position of New National Grid, National Grid or the Group.
19.2 Niagara Mohawk
19.2.1 On 12 November 1993, Fourth Branch Associates Mechanicville ("FBAM")
filed an action against Niagara Mohawk Power and various officers,
directors and employees of Niagara Mohawk Power for fraud, negligence
and misrepresentation, breach of contract, breach of a duty of good
faith and fair dealing and intentional destruction of business. In its
complaint, FBAM sought compensatory and punitive damages. Subsequently,
FBAM discontinued its action with respect to the individual defendants
and eleven of the thirteen original causes of action were dismissed,
leaving only two causes of action which seek recovery for alleged
breach of contract and an alleged breach of a duty of good faith and
fair dealing by Niagara Mohawk Power. Discovery proceedings have been
completed. FBAM, filed a Trial Term Note of Issue on 30 August 2001
placing the case on the Albany County Supreme Court trial calendar and
the case was assigned a trial date of 1 April 2002. A pre-trial
conference was held on 9 October 2001 and a motion for summary judgment
was filed on behalf of Niagara Mohawk Power on 15 November 2001.
FBAM submitted an amended unilateral offer of settlement to FERC and
Niagara Mohawk Power responded to this offer. On 23 November 1999, FERC
issued a comprehensive order rejecting FBAM's unilateral offer of
settlement, dismissing FBAM's complaint of anti-competitive conduct by
Niagara Mohawk Power, and determining that there had been an implied
surrender of the FERC licence for the Mechanicville Project. A petition
for rehearing was denied. On 21 April 2000, FBAM filed a Petition for
review of the FERC orders with the US Court of Appeals for the D.C.
Circuit, which is still pending. On 16 August 2000, FERC staff directed
Niagara Mohawk Power and FBAM to file a plan to cover decommissioning
or any other proposed alternatives and both parties have submitted such
plans.
Niagara Mohawk Power believes that it has meritorious defences to the
remaining claims of FBAM and intends to defend them vigorously. At the
present time, Niagara Mohawk is unable to estimate the exposure, if
any, which Niagara Mohawk Power might incur as a result of this
litigation.
19.2.2 On 25 May 2000, the New York State Department of Environmental
Conservation ("DEC") issued an air pollution notice of violation to
Niagara Mohawk regarding the operation of its two formerly owned coal-
fired generation plants (Huntley and Dunkirk). The notice of violation
was also issued to NRG Energy, Inc. ("NRG"), the current owner and
operator of both plants. While no specific relief was sought in the
notice of violation, the DEC and the New York State Attorney General
have indicated in meetings with Niagara Mohawk and NRG that they will
be seeking substantial fines against Niagara Mohawk and NRG as well as
the imposition of pollution controls. It is Niagara Mohawk's position
that the cost of pollution controls should be borne by NRG.
In May 2001, the New York State Attorney General advised Niagara Mohawk
and NRG of its intent to file suit on or after 16 July 2001, alleging
that the plants are in violation of the federal Clean Air Act. However,
there has been no action from the Attorney General to date. On 13 July
2001, Niagara Mohawk filed a declaratory judgement action against NRG
in New York State Supreme Court. Niagara Mohawk is seeking a
declaratory judgement that NRG is responsible for any control upgrades
and mitigation
204
resulting from the above-referenced enforcement action. This litigation
is currently in the discovery phase.
Niagara Mohawk is unable to predict whether or not the results of this
enforcement action will have an adverse material effect on its
financial position and results of operation or whether Niagara Mohawk's
action against NRG will be succesful.
19.2.3 Save as disclosed in this section 19.2, there are no legal or
arbitration proceedings, (including any such proceedings which are
pending or threatened of which New National Grid or National Grid are
aware) which may have, or have had during the 12 months preceding the
date of this document, a significant effect on the financial position
of the Niagara Mohawk Group.
20. Significant change
20.1 There has been no significant change in the financial or trading
position of New National Grid and its subsidiary since 31 March 2001,
the date to which the last audited financial statements of New National
Grid were made up.
20.2 There has been no significant change in the financial or trading
position of National Grid and its subsidiaries since 30 September 2001,
the date to which the last unaudited interim financial statements of
National Grid were made up.
20.3 Save for the sale of Niagara Mohawk's interest in the Nine Mile Point
nuclear generating facilities described in section 7.4 of Part I of
this document, there has been no significant change in the financial or
trading position of Niagara Mohawk and its subsidiaries since 30
September 2001, the date to which the last unaudited quarterly
financial statements of Niagara Mohawk were made up.
21. Additional information
21.1 N M Rothschild & Sons Limited is registered in England (number 925279)
and has its registered office at New Court, St. Swithin's Lane, London
EC4P 4DU. N M Rothschild & Sons Limited, which is regulated in the UK
by the Financial Services Authority, has given and has not withdrawn
its written consent to the issue of this document with the inclusion
herein of references to its name in the form and context in which they
appear.
21.2 Employees of N M Rothschild & Sons Limited who are advising National
Grid and New National Grid in relation to the Acquisition, the Scheme,
the proposed listing and admission to trading have an interest, in
aggregate, in 868 National Grid Shares.
21.3 The auditors of New National Grid and National Grid are
PricewaterhouseCoopers, Chartered Accountants and Registered Auditors,
1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers have been
the only auditors of New National Grid and National Grid since their
incorporation. PricewaterhouseCoopers have given and have not withdrawn
their written consent to the inclusion in this document of their
report, and of references thereto, and their name in the form and
context in which they appear and have authorised the contents of their
report for the purposes of paragraph 6(1)(e) of the Financial Services
and Markets Act 2000 (Official Listing of Securities) Regulations 2001.
21.4 The financial information relating to New National Grid and National
Grid set out in this document does not constitute statutory accounts
within the meaning of section 240 of the Act. Statutory accounts for
New National Grid for the period from incorporation to 31 March 2001
and for National Grid for each of the three financial years ended 31
March 2001 have been prepared. The auditors of New National Grid and
National Grid have audited the accounts of New National Grid and
National Grid's consolidated accounts for such periods and have made
reports under section 235 of the Act in respect of each set of
statutory accounts and each such report was unqualified and did not
contain a statement under section 237(2) or (3) of the Act. The
statutory accounts of New National Grid for the period ended 31 March
2001 and of National Grid for the three financial years ended 31 March
2001 have been delivered to the Registrar of Companies.
21.5 The auditors of Niagara Mohawk are PricewaterhouseCoopers LLP,
independent accountants, One Lincoln Center, Syracuse, NY 13202, USA.
PricewaterhouseCoopers LLP have been auditors of Niagara Mohawk and
Niagara Mohawk Power for the period covered by the accounts included in
sections 1 and 2 of Part V.
205
21.6 The costs and expenses of, and incidental to, the issue of the New
National Grid Shares payable by New National Grid and National Grid are
estimated to amount to (L)8.6 million excluding VAT, and SDRT payable.
22. Documents available for inspection
Copies of the following documents will be available for inspection during
normal business hours on any weekday (Saturday, Sundays and public holidays
excepted) at the offices of CMS Cameron McKenna, Mitre House, 160 Aldersgate
Street, London EC1A 4DD until Completion:
(i) these Listing Particulars;
(ii) the Scheme Circular;
(iii) the Merger Agreement;
(iv) the circular to National Grid Shareholders dated 2 January 2001;
(v) the offering circular issued by NGG Finance plc on 20 August 2001;
(vi) the offering circular issued by National Grid Company on 23 July 2001;
(vii) the Memorandum and Articles of Association of National Grid (as
currently in force, and as they will be following the proposed
amendments to be approved at the Scheme EGM);
(viii) the Memorandum and Articles of Association of New National Grid;
(ix) the audited consolidated accounts of National Grid for the three
financial years ended 31 March 2001 and the unaudited interim financial
statements of National Grid for the six months ended 30 September 2001;
(x) the audited consolidated accounts of Niagara Mohawk for the three
financial years ended 31 December 2000 and the unaudited interim
financial statements on the Form 10-Q for the nine month period ended
30 September 2001;
(xi) the audited accounts of New National Grid for the period from
incorporation to 31 March 2001;
(xii) the report from PricewaterhouseCoopers regarding the summary of
differences between US GAAP and UK GAAP set out in Part V;
(xiii) the Directors' and Proposed Directors' service contracts referred to in
section 7.7 above;
(xiv) the material contracts referred to in section 18 above;
(xv) the letter of consent from the Special Shareholder referred to in
section 1 of Part II of this document;
(xvi) the consent letters referred to in section 21 above;
(xvii) the rules of the National Grid Share Schemes and the New National Grid
Share Plans; and
(xviii) the rules of the Niagara Mohawk long-term incentive plans referred to
in section 12 above.
Dated 10 December 2001
206
DEFINITIONS
The following definitions apply throughout this document unless the context
requires otherwise:
"Acquisition" the acquisition of Niagara Mohawk
by National Grid Group pursuant to
the Merger Agreement
"Act" the Companies Act 1985, as amended
"Admission" the admission of the New National
Grid Shares to (i) the Official
List; and (ii) trading on the
London Stock Exchange's market for
listed securities becoming
effective in accordance with,
respectively, the Listing Rules
and the Admission and Disclosure
Standards
"Admission and Disclosure Standards" the requirements contained in the
publication "Admission and
Disclosure Standards" containing,
inter alia, the admission
requirements to be observed by
companies seeking admission to
trading on the London Stock
Exchange's market for listed
securities
"ADR" an American depositary receipt
"ADS" an American depositary share
"Authority" the Gas and Electricity Markets
Authority
"Board" or "Directors" the board of directors of National
Grid or, following the Scheme
becoming effective, New National
Grid (as the context requires)
listed in section 7.1 of Part VII
of this document
"Brazilian Real" or "R$" the lawful currency for the time
being in Brazil
"business day" any day other than a Saturday or
Sunday on which banks are
generally open for business in
England and Wales
"Capitalisation Shares" the new ordinary shares of 11 13/
17 pence each in the capital of
National Grid created pursuant to
the Scheme
"CEC" Copperbelt Energy Corporation plc
"CEGB" Central Electricity Generating
Board
"certificated" or "in certificated form" where a share or other security is
not in uncertificated form
"Citelec" Compania Inversora en Transmision
Electrica CITELEC S.A.
"Closing Price" the closing middle market
quotation of the relevant share as
derived from the Daily Official
List
"Combined Group" the National Grid Group as
enlarged by the Niagara Mohawk
Group following the Acquisition
"Company" or "National Grid" National Grid Group plc
"Companies" National Grid and National Grid
Company
"Completion" the closing of the Acquisition
following satisfaction or waiver
of the conditions attaching to the
Acquisition and the delivery of
certificates of merger for filing
with the Department of State of
the State of New York and the
Secretary of State of the State of
Delaware in accordance with the
Merger Agreement
"Court" the High Court of Justice of
England and Wales
"Court Hearing" the hearing of the Petition by the
Court
207
"Court Meeting" the meeting of National Grid
Shareholders convened by direction
of the Court pursuant to section
425 of the Act for 11.00 a.m. on
7 January 2002, to consider and,
if thought fit, approve the
Scheme, including any adjournment
thereof
"Court Order" the Order of the Court sanctioning
the Scheme under section 425 of
the Act and confirming the
reduction of the share capital of
National Grid
"CREST" a relevant system (as defined in
the CREST Regulations) in respect
of which CRESTCo Limited is the
operator (as defined in the CREST
Regulations)
"CREST Regulations" the Uncertificated Securities
Regulations 2001 (SI 2001 No.
3755) as from time to time amended
"Daily Official List" the Daily Official List of the
London Stock Exchange
"Depositary" The Bank of New York, 101 Barclay
Street, New York, NY 10286, USA
"Electronic Communications Order" the Companies Act 1985 (Electronic
Communications) Order 2000
"Energis Polska" Energis Polska Sp. zo.o
"EU" the European Union
"EUA" Eastern Utilities Associates,
which now forms part of National
Grid USA
"Exchange Rate" the (L):$ Bank of England official
closing exchange rate published
daily on Reuters at 4.00 p.m.
"Exchangeable Bonds" (L)460 million 4.25 per cent.
unsecured exchangeable bonds due
2008 issued by National Grid
Company and exchangeable into
National Grid Shares (or,
following the Scheme becoming
effective, New National Grid
Shares)
"Exchangeable Bonds Trust Deed" a supplemental trust deed dated
10 December 2001 between National
Grid Company, New National Grid,
National Grid and The Law
Debenture Trust Corporation p.l.c.
(the "Trustee") relating to the
substitution of New National Grid
for National Grid as the issuer of
shares under the exchange right in
relation to the Exchangeable Bond
"FERC" Federal Energy Regulatory
Commission
"Financing Documents" (a) a credit agreement dated
22 November 2001 between
New National Grid (as
borrower and guarantor),
National Grid (as borrower
and guarantor), NGG
Finance plc (as borrower),
various arrangers, HSBC
Investment Bank plc as
facility agent, HSBC Bank
(USA) Inc. as swingline
agent and various banks
and financial institutions
as lenders for various
facilities totalling $2.3
billion; and
(b) a letter agreement dated
20 November 2001 between
New National Grid,
National Grid Company,
National Grid and the
European Investment Bank
("EIB"), setting out the
terms under which a
guarantee to be given by
New National Grid in
respect of the obligations
of National Grid Company
under a finance contract
for (L)200 million between
EIB and National Grid
Company will become
effective
"France Telecom" France Telecom S.A.
208
"GAAP" Generally Accepted Accounting
Principles
"GridCom" GridCom Limited
"Group" or "National Grid Group" National Grid (or, following the
Scheme becoming effective, New
National Grid) and its subsidiary
undertakings (and "member of the
National Grid Group" and "member
of the Group" shall be construed
accordingly)
"Intelig" Intelig Telecomunicacoes Limitada
"JVCO" JVCO Participacoes Limitada
"Listing Particulars" these listing particulars dated 10
December 2001 relating to New
National Grid prepared in
accordance with the Listing Rules
"Listing Rules" the listing rules of the UK
Listing Authority, made under
section 74 of the Financial
Services and Markets Act 2000
"London Stock Exchange" London Stock Exchange plc
"Manquehue net" Manquehue net S.A.
"MDTE" Massachusetts Department of
Telecommunications and Energy
"Merger Agreement" the agreement and plan of merger
and scheme of arrangement, dated
as of 4 September 2000 and amended
as of 1 December 2000 entered into
between National Grid, New
National Grid, Grid Delaware,
Inc., a wholly-owned subsidiary of
New National Grid, and Niagara
Mohawk
"MW" megawatt, one million watts
"National Grid" or "Company" National Grid Group plc
"National Grid ADRs" ADRs of National Grid, evidencing
National Grid ADSs
"National Grid ADSs" ADSs of National Grid, each of
which represents five National
Grid Shares
"National Grid Articles" the Articles of Association of
National Grid as from time to time
amended
"National Grid Company" The National Grid Company plc, a
wholly-owned subsidiary of
National Grid, which, inter alia,
owns and operates the high voltage
electricity transmission system in
England and Wales
"National Grid Group" or "Group" National Grid (or, following the
Scheme becoming effective, New
National Grid) and its subsidiary
undertakings (and "member of the
National Grid Group" and "member
of the Group" shall be construed
accordingly)
"National Grid Share Schemes" the existing employee share
schemes and incentive plans
operated by National Grid
comprising the Executive Share
Option Scheme (1990), Executive
Share Option Plan 2000, Savings
Related Share Option Scheme
(1990), 1999 Savings Related Share
Option Scheme, Share Matching
Scheme (1996), Profit Sharing
Scheme (1990), 1999 US Employee
Stock Purchase Plan, Incentive
Compensation Plan, National Grid
USA Incentive Thrift Plans and
Deferred Compensation Plan
"National Grid Shareholders" holders of National Grid Shares
"National Grid Shares" or "Shares" ordinary shares of 11 13/17 pence
each in the capital of National
Grid
209
"National Grid Special Share" the special rights non-voting
redeemable preference share of
(L)1 in the capital of National
Grid held by the Special
Shareholder
"National Grid USA" National Grid USA, a wholly-owned
subsidiary of National Grid and
the US holding company which owns
National Grid's US electricity
operations
"NEES" New England Electric System, which
now forms part of National Grid
USA
"NEESCom" NEESCom, Inc.
"NEP" New England Power Corporation,
Inc.
"NEPOOL" New England Power Pool
"New B Share" the new B share of (L)1 in the
capital of National Grid created
pursuant to the Scheme
"New National Grid" New National Grid plc, which
following implementation of the
Scheme, will be the new holding
company of National Grid
"New National Grid ADRs" ADRs of New National Grid,
evidencing New National Grid ADSs
"New National Grid ADSs" ADSs of New National Grid, each of
which will represent five New
National Grid Shares
"New National Grid Articles" the Articles of Association of New
National Grid
"New National Grid Share Plans" the proposed new employee share
plans summarised in section 11 of
Part VII of this document and
comprising the National Grid
Executive Share Option Plan 2002,
National Grid Employee Share
Ownership Plan 2002 and the
associated UK Trust, National Grid
Savings Related Share Option Plan
2002, National Grid Employee Stock
Purchase Plan 2002, National Grid
Share Matching Plan 2002, National
Grid USA Incentive Thrift Plans I
and II, National Grid Employee
Trust 2002 and National Grid
Qualifying Employee Share
Ownership Trust (No. 2) 2002
"New National Grid Shareholders" holders of New National Grid
Shares
"New National Grid Shares" ordinary shares of 10 pence each
in the capital of New National
Grid
"New National Grid Special Share" the special rights non-voting
redeemable preference share of
(L)1 in the capital of New
National Grid to be issued to the
Special Shareholder pursuant to
the Scheme
"Niagara Mohawk" Niagara Mohawk Holdings, Inc.
"Niagara Mohawk Group" Niagara Mohawk and its subsidiary
undertakings (and "member of the
Niagara Mohawk Group" shall be
construed accordingly)
"Niagara Mohawk Power" Niagara Mohawk Power Corporation,
a wholly owned subsidiary of
Niagara Mohawk
"Niagara Mohawk Shareholders" holders of Niagara Mohawk Shares
"Niagara Mohawk Shares" shares of Niagara Mohawk common
stock
"NYPSC" New York Public Service Commission
"NYSE" New York Stock Exchange, Inc.
"Official List" the Official List of the UK
Listing Authority
210
"Petition" the petition to the Court to
sanction the Scheme
"PKP" Polskie Koleje Panstwowe, the
Polish national railway company
"Proposed Directors" William E. Davis and Dr Bonnie G.
Hill
"RECs" regional electricity companies
"Registrar of Companies" the Registrar of Companies in
Cardiff
"Remuneration Committee" a committee of the Board comprised
exclusively of Non-executive
Directors responsible for
reviewing the remuneration
arrangements of Executive
Directors and senior executives of
the Group
"RIPUC" Rhode Island Public Utilities
Commission
"Rothschild" N M Rothschild & Sons Limited
"RPI" the UK Retail Price Index
"RTO" a regional transmission
organisation, which is an
organisation proposed by the FERC
for the planning, operation and
co-ordination of the transmission
networks within a defined
geographical region of the US
"Scheme" or "Scheme of Arrangement" the scheme of arrangement under
section 425 of the Act set out in
Part III of the Scheme Circular,
in its original form or with or
subject to any modification
thereof or addition thereto or
condition approved or imposed by
the Court
"Scheme ADSs" all National Grid ADSs in issue at
4.00 p.m. (New York time) on the
Scheme Record Date
"Scheme Circular" the document dated 10 December
2001 sent to National Grid
Shareholders containing, inter
alia, the Scheme of Arrangement
and the notice of the Court
Meeting and the Scheme EGM
"Scheme Effective Date" the date and time at which an
office copy of the Court Order is
registered by the Registrar of
Companies and the Scheme becomes
effective, expected to be in early
2002
"Scheme EGM" the extraordinary general meeting
of National Grid Shareholders to
be held at 11.15 a.m. (or if
later, immediately following the
conclusion or adjournment of the
Court Meeting) on 7 January 2002,
including any adjournment thereof
"Scheme Record Date" the business day immediately
preceding the Scheme Effective
Date
"Scheme Shareholder" a holder of Scheme Shares
"Scheme Shares" (a) all National Grid Shares
in issue at the date of
the Scheme being 10
December 2001;
(b) all (if any) additional
National Grid Shares in
issue 48 hours prior to
the Court Meeting; and
(c) all (if any) further
National Grid Shares which
may be in issue
immediately prior to the
confirmation by the Court
of the reduction of
capital provided for under
the Scheme in respect of
which the original or any
subsequent holders shall
be bound or shall have
agreed in writing to be
bound by the Scheme
"SDRT" stamp duty reserve tax
211
"SEC" US Securities and Exchange
Commission
"Secretary of State" the UK Secretary of State for
Trade and Industry
"Silica Networks" Silica Networks Company S.A.
"Special Shareholder" the holder of the National Grid
Special Share or the New National
Grid Special Share, as the context
so requires, being currently the
Secretary of State
"Sponsor's Agreement" an agreement dated 10 December
2001 between New National Grid,
National Grid and Rothschild,
whereby New National Grid has
appointed Rothschild to act as its
sponsor in connection with
Admission.
"Sprint" Sprint Corporation
"Statutes" the provisions of every statute
for the time being in force
concerning companies and affecting
New National Grid
"Sterling" or "(L)" the lawful currency for the time
being in the UK
"Transba" Empresa de Transporte de Energia
Electrica por Distribucion Troncal
de la Provincia de Buenos Aires
Transba S.A.
"Transener" Compania de Transporte de Energia
Electrica en Alta Tension
Transener S.A.
"Treaty" US-UK Income Tax Convention
"UK" the United Kingdom of Great
Britain and Northern Ireland
"UK Listing Authority" the United Kingdom Listing
Authority
"UK Trust" the Rules and Trust Deed of the
National Grid Employee Share
Ownership Plan 2002 (UK Plan)
"uncertificated" or recorded on the relevant register
"in uncertificated form" as being held in uncertificated
form in CREST, and title to which,
by virtue of the CREST
Regulations, may be transferred by
means of CREST
"Undertaking" the consent to the Scheme and the
undertaking to be bound by its
terms executed by New National
Grid in favour of National Grid
and dated 10 December 2001
"US" the United States of America, its
territories and possessions, any
state of the United States of
America and the District of
Columbia, and all other areas
subject to its jurisdiction
"US dollars" or "$" the lawful currency for the time
being in the US
"US person" a US person, as defined in
Regulation S under the US
Securities Act of 1933, as amended
212
Exhibit 99(c)
THIS DOCUMENT IS FOR YOUR INFORMATION ONLY
YOU DO NOT NEED TO TAKE ANY ACTION
If you have sold or transferred all of your National Grid Shares or National
Grid ADSs, you should send this document, together with the accompanying
documents, at once to the purchaser or transferee, or to the stockbroker, bank
or other agent through or to whom the sale or the transfer was effected for
transmission to the purchaser or transferee. The distribution of this document
in jurisdictions other than the UK may be restricted by law and therefore
persons into whose possession this document comes should inform themselves about
and observe such restrictions. Any failure to comply with these restrictions may
constitute a violation of the securities laws of any such jurisdiction.
These Summary Listing Particulars contain a brief description of National Grid
Group and Niagara Mohawk and the New National Grid Shares to be issued pursuant
to the Scheme and the Acquisition and New National Grid ADSs arising from the
Scheme and to be issued pursuant to the Acquisition. The information contained
is in summary form and has been derived from the Listing Particulars dated 10
December 2001 relating to New National Grid which have been published and which
alone contain full details of National Grid and the New National Grid Shares to
be issued pursuant to the Scheme and the Acquisition and New National Grid ADSs
arising from the Scheme and to be issued pursuant to the Acquisition. The UK
Listing Authority has authorised the issue of these Summary Listing Particulars
under section 98 of the Financial Services and Markets Act 2000 without approval
of its contents.
A copy of the Listing Particulars, which have been prepared in accordance with
the Listing Rules of the UK Listing Authority made under section 74 of the
Financial Services and Markets Act 2000, has been delivered to the Registrar of
Companies in England and Wales for registration as required by section 83 of
that Act.
The Listing Particulars are available on the National Grid website
(www.nationalgrid.com/uk/investors/niagaramohawkLP.pdf) and copies are
available, free of charge, by application to the National Grid Shareholder
Enquiry Unit, National Grid House, Kirby Corner Road, Coventry CV4 8JY
(telephone: 024 7642 3940, fax: 024 7642 3651, e-mail:
shareholder.enquiries@uk.ngrid.com) at any time prior to Completion. A copy of
the Listing Particulars may also be obtained from the offices of N M Rothschild
& Sons Limited, New Court, St. Swithin's Lane, London EC4P 4DU and may be
inspected at the offices of CMS Cameron McKenna, Mitre House, 160 Aldersgate
Street, London EC1A 4DD and at the Document Viewing Facility, UK Listing
Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS during normal
business hours on any weekday (Saturdays, Sundays and public holidays excepted)
until Completion.
[LOGO] NATIONAL GRID
National Grid Group plc
currently named New National Grid plc
(incorporated and registered in England and Wales with registered number
4031152)
Summary Listing Particulars
relating to the admission to the Official List
of up to 2,000,000,000 ordinary shares of 10 pence each in
National Grid Group plc
Sponsored by N M Rothschild & Sons Limited
Applications have been made to the UK Listing Authority for the New National
Grid Shares to be admitted to the Official List and to the London Stock Exchange
for the New National Grid Shares to be admitted to trading on the London Stock
Exchange's market for listed securities. Admission to the Official List together
with admission to trading on the London Stock Exchange's market for listed
securities constitute admission to official listing on a stock exchange.
Pursuant to the Scheme, New National Grid Shares will be issued to National Grid
Shareholders. Pursuant to the Acquisition, New National Grid Shares will be
issued to the Depositary only, which will, in turn, issue New National Grid ADSs
to Niagara Mohawk Shareholders. Neither the New National Grid Shares nor the New
National Grid ADSs will be made generally available or marketed to the public in
the UK or the US. It is expected that Admission will become effective and
dealings will commence in the New National Grid Shares to be issued pursuant to
the Scheme at 8.00 a.m. on the Scheme Effective Date. Application has been made
to list the New National Grid ADSs arising from the Scheme and to be issued
pursuant to the Acquisition on the NYSE under the symbol "NGG", the symbol
currently used for the National Grid ADSs. It is expected that dealings will
commence on the NYSE in the New National Grid ADSs arising from the Scheme at
9.30 a.m. (New York time) on the Scheme Effective Date and in the New National
Grid ADSs to be issued pursuant to the Acquisition at 9.30 a.m. (New York time)
on the next business day after Completion.
New National Grid and National Grid have been advised that the New National Grid
Shares to be issued pursuant to the Scheme will be exempt from the registration
requirements of the US Securities Act of 1933, as amended, by virtue of section
3(a)(10) thereof and, as a consequence, the New National Grid Shares to be
issued pursuant to the Scheme have not been registered under that Act. The New
National Grid Shares to be issued pursuant to the Acquisition and represented by
the New National Grid ADSs have been registered under the US Securities Act of
1933, as amended.
N M Rothschild & Sons Limited, which is regulated in the UK by the Financial
Services Authority, is acting exclusively as financial adviser to National Grid
and as financial adviser and sponsor to New National Grid and for no one else in
connection with the Scheme, the Acquisition and the proposed listing of the New
National Grid Shares on the Official List and their admission to trading on the
London Stock Exchange's market for listed securities and will not be responsible
to anyone other than National Grid and New National Grid for providing the
protections afforded to customers of N M Rothschild & Sons Limited or for
providing advice in relation to the Scheme, the Acquisition, the proposed
listing or admission to trading.
FORWARD-LOOKING STATEMENTS
These Summary Listing Particulars contain certain statements that are neither
reported financial results nor other historic information. These statements are
forward-looking statements within the meaning of section 27A of the US
Securities Act of 1933, as amended, and section 21E of the US Securities
Exchange Act of 1934, as amended. These forward-looking statements rely on a
number of assumptions concerning future events and are subject to a number of
risks and uncertainties, many of which are outside of the control of New
National Grid and National Grid, that could cause actual results to differ
materially from those expressed in or implied by such statements. For a more
detailed description of these assumptions, risks and uncertainties, please see
National Grid's filings with the SEC (and in particular the "Risk Factors" and
"Operating and Financial Review" sections in its most recent annual report on
Form 20-F). Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this document.
New National Grid has no intention and undertakes no obligation to update or
revise any forward-looking statements in light of new information, future events
or circumstances after the date of these Summary Listing Particulars, except as
required by the Listing Rules.
REGISTERED AND HEAD OFFICE AND PRINCIPAL ADVISERS
Registered and Head Office of New National Grid
15 Marylebone Road
London NW1 5JD
Sponsor and Financial Adviser
N M Rothschild & Sons Limited
New Court, St Swithin's Lane
London EC4P 4DU
Joint Brokers
Credit Suisse First Boston Merrill Lynch International
(Europe) Limited 2 King Edward Street
One Cabot Square London EC1A 1HQ
London E14 4QJ
Legal Advisers Auditors and Reporting Accountants
CMS Cameron McKenna PricewaterhouseCoopers
Mitre House 1 Embankment Place
160 Aldersgate Street London WC2N 6RH
London EC1A 4DD
Registrars Bankers
Lloyds TSB Registrars Barclays Bank plc
The Causeway 54 Lombard Street
Worthing London EC3P 3AH
West Sussex BN99 6DA
2
CONTENTS
Page
Part I Information relating to National Grid Group 4
1. Overview of National Grid Group 4
2. National Grid Group's businesses 4
3. Business strategy 7
4. Environment and occupational health and safety 8
5. Corporate governance and internal control 8
6. Employees 8
7. Current trading and prospects 9
Part II Acquisition of Niagara Mohawk 11
1. Terms and expected timetable for the Acquisition 11
2. Niagara Mohawk's activities 11
3. Niagara Mohawk's regulation 11
4. Disposal of nuclear generating units and energy marketing business 12
5. Expected benefits of the Acquisition 12
Part III Summary financial information 13
1. New National Grid 13
2. National Grid 13
3. Niagara Mohawk 16
Part IV Scheme of Arrangement 17
1. Introduction 17
2. Reasons for the Scheme 17
3. Effect of the Scheme 17
4. Memorandum and Articles of Association of New National Grid 18
5. Authorities relating to New National Grid 18
Part V Additional information 19
1. Fair summary 19
2. Working capital 19
3. Share capital 19
4. Directors, Secretary and Proposed Directors of New National Grid 20
5. Material contracts 22
6. Litigation 25
7. Significant change 26
8. Additional information 26
Definitions 27
3
PART I
INFORMATION RELATING TO NATIONAL GRID GROUP
1. Overview of National Grid Group
National Grid Group is an international networks business. Its principal
activities are the ownership and operation of the high-voltage transmission
network in England and Wales and electricity transmission and distribution
networks serving approximately 1.7 million customers in the north-eastern US.
The Group also operates interconnectors between England and Wales and each of
France and Scotland and between the US and Canada. It is also developing an
interconnector in Australia and has interests in transmission networks in
Argentina and Zambia with joint venture partners.
The Group's telecommunications interests comprise its 32.6 per cent. economic
interest in Energis, wholly-owned infrastructure businesses in the UK and US and
joint ventures in Poland and Latin America.
The Group is currently in the process of completing the acquisition of Niagara
Mohawk, the principal activities of which are the delivery of electricity and
natural gas in New York State. The Group proposes to acquire Niagara Mohawk
through the introduction of New National Grid as the holding company for the
Group, by means of a scheme of arrangement, as described in Part IV of this
document. Further details on the Acquisition may be found in Part II of this
document. After the Scheme becomes effective the Group will continue to
undertake the operations and activities described in this Part I.
2. National Grid Group's businesses
2.1 Transmission in England and Wales
The Group's transmission activities in England and Wales are subject to the
regulatory provisions and licensing regime established under the Electricity Act
1989 (as amended) and the Utilities Act 2000, which regulate the licensing of
generation, transmission, distribution and supply and the establishment of the
Authority, responsible for the supervision and enforcement of the licensing
regime. The Group's principal UK operating subsidiary, National Grid Company, is
the sole holder of an electricity transmission licence for England and Wales and
is the owner and operator of the transmission system. It is required, under the
terms of the transmission licence, to develop and maintain an efficient,
co-ordinated and economical system of electricity transmission and to facilitate
competition in the supply and generation of electricity. The transmission
licence came into effect in March 1990 and, unless revoked, will continue in
force until terminated by the Authority at not less than 25 years' notice.
National Grid Company's customers are generators, distributors, suppliers,
interconnector users and directly-connected customers. The transmission network
in England and Wales consists of approximately 4,500 miles of overhead lines,
approximately 400 miles of underground cable and some 300 substations. Almost
all of the assets comprising the transmission system operate at 400 kV or 275
kV.
The majority of National Grid Company's transmission revenues in England and
Wales is controlled by a revenue restriction formula, which is reviewed from
time to time by the Authority, typically at intervals of four to five years. The
current revenue restriction was introduced on 1 April 2001 and is expected to
remain in force until 31 March 2006. National Grid Company earns additional
revenue from charges for connection to the transmission network and for the
provision of balancing services.
Operating profit from transmission in England and Wales in the year ended 31
March 2001 was (L)486.3 million (2000: (L)523.1 million, 1999: (L)508.1
million).
2.2 UK interconnectors
The Group has ownership interests in interconnectors with France (2,000 MW
nominal transfer capability in either direction) and Scotland (1,600 MW nominal
transfer capability). Blocks of capacity of the French interconnector are
auctioned to third parties on timescales ranging from three years to one day.
National Grid Company is currently required to set its charges for use of the
Scottish interconnector to recover no more than a
4
reasonable rate of return on the capital represented by the interconnector.
However, arrangements for access to and charging for use of the interconnector
are being examined by the Authority as part of its proposals for reform of the
Scottish electricity market.
Operating profit from UK interconnectors in the year ended 31 March 2001 was
(L)42.8 million (2000: (L)46.6 million, 1999: (L)39.5 million).
The Group is currently investigating the potential for new interconnectors
between England and Norway, between England and the Netherlands and between
Wales and the Republic of Ireland.
2.3 United States
2.3.1 Background
The Group acquired NEES, now renamed National Grid USA, in March 2000 at a cost
of approximately (L)2.1 billion. National Grid USA acquired EUA in April 2000 at
a cost of approximately (L)0.4 billion. The companies were integrated on 1 May
2000.
National Grid USA operates a network of approximately 3,000 miles of
transmission lines and 31,000 miles of distribution lines in Massachusetts,
Rhode Island and New Hampshire. Its subsidiary, NEP, is responsible for the
operation of the transmission network and delivery of electricity in bulk to
National Grid USA's four distribution companies. National Grid USA also has a
telecommunications subsidiary, NEESCom, and owns minority interests in two
operating nuclear generating units which it is in the process of divesting and
in three nuclear generating units which are permanently shutdown.
National Grid USA's total operating profit before exceptional costs and goodwill
amortisation for the year ended 31 March 2001 was (L)293.6 million. The
acquisition of NEES was completed on 22 March 2000. As a result of the short
period of ownership in the year ended 31 March 2000, the contribution of
National Grid USA, the successor to NEES, to the Group's operating profit for
that year was not material.
2.3.2 Distribution
National Grid USA has four electricity distribution companies which are:
o Massachusetts Electric, which serves approximately 1.2 million
customers in Massachusetts;
o Narragansett Electric, which serves approximately 460,000 customers in
Rhode Island;
o Granite State Electric, which serves approximately 38,000 customers in
New Hampshire; and
o Nantucket Electric, which serves approximately 11,000 customers on
Nantucket Island, off the coast of Massachusetts.
National Grid USA's electricity distribution companies have entered into
agreements approved by their respective regulators which provide for rate
reductions for electricity delivery and (with the exception of Granite State
Electric) other provisions to ensure that the service quality is maintained or
improved.
2.3.3 Transmission and interconnector
NEP operates and maintains National Grid USA's transmission network and receives
transmission revenues under local and regional transmission tariffs.
Transmission rates are regulated by the FERC and enable NEP to recover its costs
of providing transmission services, including a return on capital employed.
NEP participates in the NEPOOL, which co-ordinates the operation of its members'
generation and transmission facilities. The despatch of generation across New
England is carried out by an independent system operator, ISO New England, Inc.
National Grid USA, ISO New England, Inc. and other transmission owners in New
England filed a joint proposal for a New England RTO with the FERC in January
2001. The FERC subsequently concluded that it would be
5
desirable to promote the formation of a single RTO for the entire north-eastern
region and initiated a mediation process involving National Grid USA, Niagara
Mohawk and a large number of electricity utilities in the region. An outline
business plan for a north-eastern RTO was filed with the FERC in September 2001.
The matter is still pending before the FERC.
The Group believes that the FERC's wish to promote the development of RTOs may
offer opportunities outside the north-east. In November 2001, National Grid USA
announced that it had entered into an agreement with the proposed Alliance RTO.
Under the agreement, National Grid USA would become the managing member of an
independent transmission company that would manage the transmission networks of
the Alliance RTO's members, who operate in 11 states stretching from Missouri to
Virginia. Both the formation of the Alliance RTO and National Grid USA's
participation as managing member are subject to approval by the FERC.
National Grid USA has ownership interests in the interconnector linking the
electricity networks in New England with that of Hydro Quebec in Canada.
In the year ended 31 March 2001, the operating profit of the US transmission
business was (L)49.6 million and the operating profit of the US interconnector
business was (L)22.3 million, in each case before exceptional costs and goodwill
amortisation.
2.3.4 Generation
NEP has ownership interests in five nuclear generating units in New England, of
which three have been permanently shut down. Its interests in the two remaining
units, Vermont Yankee (in which it owns 22.5 per cent.) and Seabrook (in which
it owns 10 per cent.) are in the process of being sold. The operator of Vermont
Yankee has agreed the sale of the generating unit, including NEP's interest, to
Entergy Corporation, subject to certain regulatory approvals. The auction
process for Seabrook, including NEP's interest, commenced in December 2001 and
is expected to be completed by the end of 2002.
For each nuclear generating unit in which it retains an interest, National Grid
USA is liable for funding its pro rata share of costs, including the estimated
costs of decommissioning. A decommissioning trust fund has been established by
the operator of each unit, to which National Grid USA is contributing its pro
rata share of the estimated costs of decommissioning.
National Grid USA is able to recover the costs associated with its investment in
nuclear generation, including decommissioning contributions, through contract
termination charges. Net proceeds from sales of nuclear generating units have
been and will be credited against future contract termination charges.
In the year ended 31 March 2001, operating profit from stranded cost recovery
and generation was (L)61.7 million and operating profit from nuclear joint
ventures was (L)7.9 million, in each case before exceptional costs and goodwill
amortisation.
2.4 Other electricity businesses and projects
The Group has the following electricity businesses and projects outside the UK
and the US:
o a 42.5 per cent. interest in Citelec, a holding company which holds a
65 per cent. interest in Transener, the operator of the principal
transmission system in Argentina. In turn, Transener owns a majority
interest in Transba, the transmission company for the province of
Buenos Aires;
o a 38.5 per cent. interest in CEC, which owns and operates an
electricity transmission network of some 500 miles supplying
electricity to the mines of the Zambian Copperbelt; and
o the design, construction, operation and maintenance of a 600 MW
interconnector linking the electricity network on the island of Tasmania
to the transmission network in the state of Victoria on the Australian
mainland.
6
2.5 Telecommunications businesses
The Group's telecommunications investments comprise:
o a 32.6 per cent. economic interest in Energis. Energis is focused on
the business market place, offering advanced fixed and mobile services,
data networks and internet and e-commerce services. Its principal
countries of operation are the UK, Germany, the Netherlands,
Switzerland, Ireland and Poland. This economic interest was valued at
(L)427.4 million based on a price of 75.5 pence per Energis share
(being the Closing Price of an Energis share on 7 December 2001, the
latest practicable date prior to publication of this document). While
the Group retains two seats on the Energis board of directors, it is no
longer involved in the day-to-day management of the business. The Group
intends to dispose of its remaining interest in Energis over the medium
term, having regard to the prevailing market conditions;
o a 48.75 per cent. interest in Energis Polska Sp. zo.o., which targets
the corporate market in Poland with a range of data and voice services
using a network connecting major cities across Poland and
interconnecting with Energis' European network;
o an indirect 50 per cent. shareholding in Intelig, which provides long-
distance and international telephone and data services in Brazil;
o a 30 per cent. interest in Manquehue net, which provides local
telephone services in the Chilean capital Santiago and also offers
long-distance telephone, internet and cable TV services;
o a 50 per cent. interest in Silica Networks, a company which has been
developing a broadband communications loop linking Buenos Aires in
Argentina to Santiago in Chile and connecting major cities along the
route;
o NEESCom, a subsidiary of National Grid USA, which builds fibre optic
networks and leases capacity to telecommunications service providers,
primarily in Massachusetts and Rhode Island; and
o GridCom, which was established in February 2001 to enable the Group to
take advantage of infrastructure opportunities in the UK mobile
telecommunications market.
The Group's Latin American telecommunications investments have been affected by
the general telecommunications market downturn, by recent difficult economic
conditions in their countries of operation and, in the case of Intelig, by the
unavailability of long-term vendor financing. Accordingly, on 20 November 2001,
the Group announced that it had fully written down the carrying value of its
telecommunications investments in Latin America and was taking action to reduce
costs and seek purchasers or new strategic investors for the businesses.
3. Business strategy
The Group's core skills lie in the design, construction, system operation,
regulatory management and customer service activities associated with operating
complex networks. Its strategy is to exploit its assets and skills to create
value for shareholders and benefits for customers by achieving performance
improvements and cost savings within the framework of incentive-based
regulation or competitive markets.
After more than a decade in which the Group has improved the operating
efficiency of the UK transmission business, the Directors believe that future
opportunities for outperformance of regulatory efficiency targets are more
limited. As a consequence, the Directors expect returns for the UK business to
be lower than can be achieved elsewhere, particularly in the US, and that the
Group's choice of future investments will reflect this.
The Group is primarily focused on regulated electricity networks which are
stable, generating cash for investments and earnings to support the Group's
dividend policy. The Directors believe that they can continue to create
shareholder value from investment in electricity transmission and distribution
through progressive efficiency improvements. The Directors also believe that the
Group can create additional value in distribution by offering high-quality
customer service and in transmission by facilitating the development of
competitive energy markets while preserving system security and reducing user
costs. Gas distribution businesses generally have
7
similar characteristics to those of electricity network businesses and, in the
US particularly, are often combined under common ownership. The Group will
therefore consider investment opportunities in this area, especially when such
opportunities are associated with the electricity network businesses.
While the value of the Group's telecommunications businesses has been affected
by the general downturn in the telecommunications market, the Directors believe
that the sector continues to offer opportunities to create shareholder value.
However, going forward, the Directors intend to concentrate on opportunities
which leverage the Group's existing assets and infrastructure skills.
4. Environment and occupational health and safety
The Group is subject to environmental laws and regulations and recognises that
the minimisation of environmental impact is an essential part of its business.
Where practicable, it implements environmental management systems which are
externally verified, certified and audited in accordance with the international
ISO 14001 environmental system standard and carries out audits of its
environmental policies, procedures, operating practices and assets.
The Group recognises the importance of occupational health and safety management
and seeks to manage risk effectively in order to ensure that its activities,
services and products do not harm employees, contractors, customers or members
of the public. In 2001, the Group appointed independent external consultants who
have carried out a comprehensive assessment of its safety performance and
procedures in the UK and the US. The Group is now in the process of implementing
recommendations arising from this assessment.
5. Corporate governance and internal control
National Grid maintains its own code of corporate governance modelled on the
Combined Code of Corporate Governance appended to the Listing Rules. As
recommended by the Combined Code, the Board has established an Audit Committee,
a Remuneration Committee and a Nominations Committee. With the exception of the
Nominations Committee, of which the Group Chief Executive is a member, these
committees consist solely of Non-executive Directors.
6. Employees
The average numbers of employees of National Grid in the three years ended 31
March 2001 were as follows:
-------------------------------------------------------------------------
Year ended 31 March
2001 2000 1999
-------------------------------------------------------------------------
Europe 3,662 3,651 3,606
North America 3,836 140 6
Latin America 17 13 10
Rest of the World 8 6 6
------------- ------------- -------------
7,523 3,810 3,628
============= ============= =============
-------------------------------------------------------------------------
The vast majority of employees in Europe are either directly or indirectly
employed in the transmission of electricity in the UK. The majority of employees
in North America are either directly or indirectly employed in the transmission,
distribution and generation of electricity in the US.
8
7. Current trading and prospects
7.1 Current trading
On 20 November 2001, the Group announced its interim results for the six months
ended 30 September 2001.
The Directors believe that the results of the Group's core electricity
businesses demonstrate that it continues to perform well and to deliver on the
Group's strategy by producing good growth in operating profit and strong cash
flows. The Group recently completed a review of its Latin American
telecommunications businesses. The performance of these businesses has been
affected by the general telecommunications market downturn, the difficult
economic conditions in the region and, in the case of Intelig, by the
unavailability of long-term vendor financing. As a result, the Group announced
that it, together with its partners, had initiated a search for new strategic
investors in Intelig, was pursuing a sale of Silica Networks and taking action
to reduce costs at Manquehue net. The Group also announced that it had written
down in full the carrying value of its Latin American telecommunications
investments and provided for all expected associated liabilities. These write-
downs and provisions totalled (L)290.4 million.
In line with its stated dividend policy, National Grid announced an interim
dividend for the year ended 31 March 2002 of 6.46 pence per National Grid Share,
representing a 5 per cent. real increase over the previous year.
The Group continues to perform well and there has been no significant change in
its financial or trading position since 30 September 2001.
7.2 Prospects
7.2.1 Electricity - UK
Although the Directors expect UK transmission to continue to make a significant
contribution to total operating profit, the scope for growth is limited. The
revenue restriction introduced on 1 April 2001 gives UK transmission a stable
framework for five years but involves challenging targets for efficiency
improvements and reductions in controlled costs of the transmission operator
activity. The Directors are confident that the Group can reduce these
controllable costs by 20 per cent. over the five years to March 2006, exceeding
regulatory targets, through measures including organisational streamlining, the
rationalisation of property holdings and the use of new technology.
7.2.2 Electricity - US
The Group has been able to secure a substantial degree of regulatory certainty
in the US, where it has the opportunity to earn higher rates of return on
investment in regulated electricity businesses than in the UK. The Directors
consider that the financial contribution of the US business will be an important
factor in the Group's ability to grow earnings in order to meet its progressive
dividend policy. The Group's expansion in the US is likely to be achieved
through acquisitions and in the longer term by capitalising on transmission
opportunities arising from electricity market reform.
The Group's target is to achieve a return on investment from its enlarged US
business of 10.5 per cent. by 2005. This will be achieved through reductions in
controllable costs and modest volume growth.
7.2.3 Telecommunications
The skills in network design, construction and maintenance derived from the core
electricity business form the basis of the Group's telecommunications
investments to date. The Directors believe that the telecommunications sector
continues to offer opportunities to create shareholder value. However, going
forward, the Directors intend to concentrate on opportunities which leverage the
Group's existing assets and infrastructure skills.
7.3 Dividend policy
It is National Grid's practice to pay dividends twice a year. The interim
dividend is paid to qualifying shareholders in January of each year. Subject to
shareholder approval, the final dividend is paid to qualifying shareholders in
August each year.
9
On 21 November 2000, the Directors announced their aim to increase dividends per
share (as expressed in pounds Sterling) by 5 per cent. in real terms in each of
the next five years, based on their confidence in the Group's future strength
and because the prospects for growth and greater diversity of earnings had
increased. Following the Scheme becoming effective, New National Grid intends to
adopt the Group's stated dividend policy.
10
PART II
ACQUISITION OF NIAGARA MOHAWK
1. Terms and expected timetable for the Acquisition
On 5 September 2000, National Grid announced that it had entered into an
agreement to acquire Niagara Mohawk. The Acquisition was approved by Niagara
Mohawk Shareholders on 19 January 2001 and by National Grid Shareholders on 29
January 2001. The Acquisition is subject to a number of conditions, including
regulatory and other consents and approvals in the US, the majority of which
have been received. The only material regulatory approval outstanding is that of
the SEC. The Acquisition is expected to complete in early 2002.
Under the terms of the Merger Agreement, Niagara Mohawk Shareholders will
receive consideration of $19.00 per Niagara Mohawk Share, subject to adjustment.
This adjustment will be made by reference to the closing price of a National
Grid Share and the prevailing (L):$ exchange rate on 20 trading days selected at
random from 40 consecutive trading days ending on the tenth trading day prior to
the deadline for Niagara Mohawk Shareholders to make the election described
below. At the date of its announcement, the terms of the Acquisition valued the
equity of Niagara Mohawk at approximately $3.0 billion and the enterprise value
of Niagara Mohawk at approximately $8.9 billion.
Under the Merger Agreement, Niagara Mohawk Shareholders will be able to elect to
receive their consideration in cash, New National Grid ADSs or a combination
thereof, with the aggregate cash consideration offered to all Niagara Mohawk
Shareholders being $1.015 billion. However, if cash elections received from all
Niagara Mohawk Shareholders exceed $1.015 billion, National Grid may, at its
sole discretion, reduce the total number of New National Grid ADSs to be issued
and increase the cash component of the consideration. On 20 November 2001,
National Grid announced that it will increase the aggregate cash portion of the
price paid to 50 per cent., assuming receipt of sufficient cash elections.
2. Niagara Mohawk's activities
The principal activities of Niagara Mohawk are the delivery of electricity and
natural gas in New York State. Its electricity customer base, at more than 1.5
million customers, is similar in size to that of National Grid USA. It also has
over 0.5 million retail gas customers in the residential and business sectors
and offers transportation of gas purchased by customers directly from suppliers.
Niagara Mohawk's electricity system is interconnected with that of National Grid
USA and consists of over 9,000 miles of transmission lines and 41,000 miles of
distribution lines.
3. Niagara Mohawk's regulation
As part of the regulatory approval process for the Acquisition, a ten-year rate
plan was approved by the NYPSC on 28 November 2001. Under the terms of the plan,
the existing freeze on gas delivery rates will continue until the end of 2004.
Electricity delivery rates will be reduced by $152 million and will then be
subject to only limited adjustment for a period of ten years. However, the
Group's ability to adjust rates to reflect changes in the forecast commodity
prices of oil and gas will continue. The balance of stranded costs recoverable
in the future has been reduced by the write-off of $123 million associated with
the Nine Mile Point nuclear power plants discussed in section 4 below and will
be further reduced by approximately $850 million pursuant to this disposal. The
Group will be permitted to earn a return on its remaining stranded costs. Under
the plan, the Group will be allowed to earn a return on equity of up to 11.75
per cent. or 12 per cent. if certain customer education targets are met. Returns
above this level up to 14 per cent. will be shared equally between customers and
the Group. If returns exceed 14 per cent. but are below 16 per cent., customers
will receive 75 per cent. of the excess with the Group receiving the balance.
Should returns exceed 16 per cent., customers will receive 90 per cent. of the
excess with the balance being retained by the Group.
11
4. Disposal of nuclear generating units and energy marketing business
On 7 November 2001, Niagara Mohawk announced that it had sold Nine Mile Point
Nuclear Power Station No. 1 and its 41 per cent. interest in Nine Mile Point
Nuclear Power Station No. 2 to a subsidiary of Constellation Energy Group, Inc.
for a total of $603 million, comprising $271 million paid in cash at closing and
$332 million in principal and interest payable over five years. Under the terms
of the NYPSC's approval of the sale, Niagara Mohawk's regulatory rate base will
be reduced by the full amount of the principal but not by the interest payable.
On completion of the sale, Niagara Mohawk transferred to the buyer its existing
decommissioning funds. The buyer has assumed responsibility for all future
decommissioning costs and Niagara Mohawk has no further obligation to pay
decommissioning costs. Niagara Mohawk will purchase electricity from the buyer
of the units at fixed prices for approximately 10 years.
In November 2001, Niagara Mohawk sold Niagara Mohawk Energy Marketing, Inc.,
its unregulated energy marketing business to Select Energy, Inc. for
approximately $38.5 million.
5. Expected benefits of the Acquisition
The Acquisition will more than double the size of the Group's operations in the
US, consolidate its position in the north-east and offer the potential for
integration and efficiency savings. Following completion of the Acquisition
approximately 60 per cent. of the Group's total operating profits (before
exceptional items and goodwill amortisation) are expected to be derived from the
US, where National Grid has the opportunity to achieve higher returns on
investment in regulated electricity businesses than in the UK. The Directors
believe that the Acquisition will create value for shareholders through improved
financial performance, particularly in the core transmission and distribution
businesses.
Integration planning for the Acquisition is well advanced and the Directors
expect to meet the cost reduction target in the rate plan by the fourth year
following Completion and to achieve half the savings by 31 March 2003. The
Directors believe that, as a result, the Acquisition will enhance earnings per
share before exceptional items and after goodwill amortisation in the first full
financial year after Completion and that the Group will achieve its additional
objective of earning a nominal pre-tax return of 10.5 per cent. on its expanded
US business by 31 March 2005.
12
PART III
SUMMARY FINANCIAL INFORMATION
1. New National Grid
New National Grid will be the new holding company for Group once the Scheme of
Arrangement becomes effective, as described in Part IV of this document.
As at 31 March 2001, New National Grid had net assets of (L)12,500, which
primarily consisted of cash, plus an investment in a group undertaking, Grid
Delaware Inc., a holding company incorporated in the US. This is represented by
called up ordinary share capital of (L)12,500. New National Grid had no profits
or losses for the period from incorporation to 31 March 2001. Except for
entering into the Financing Documents, the Exchangeable Bonds Trust Deed, the
Undertaking, a service contract with William E. Davis and the Sponsor's
Agreement, New National Grid has not traded since 31 March 2001 and accordingly
no interim financial statements to 30 September 2001 have been prepared.
2. National Grid
The following summary financial information for the three years ended 31 March
2001 has been extracted without material adjustment or derived from the annual
reports of National Grid for each of those periods. The summary financial
information for the six months ended 30 September 2001 and 2000 has been
extracted without material adjustment or derived from the unaudited interim
financial statements of National Grid for the six months ended 30 September
2001.
In the unaudited interim financial statements for the six months ended 30
September 2001, the Group adopted UK Financial Reporting Standard ("FRS") 19,
"Deferred tax", to change the method of accounting for deferred taxation from a
partial to a full provision basis, and also modified the presentation of the
minority interests' share of the results of associated undertakings.
Consequently, several restatements have been made to the comparative figures for
the six months ended 30 September 2000.
Under US GAAP, National Grid adopted Statement of Financial Accounting Standard
("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities",
and SFAS 142, "Accounting for Goodwill and Other Intangible Assets", with effect
from 1 April 2001.
The financial information for the three years ended 31 March 2001 has not been
restated to reflect the changes described above.
Throughout this section 2, unless otherwise indicated, operating profit is
stated before exceptional items and goodwill amortisation.
13
Summary Group profit and loss account, balance sheet and cash flow statement
(under UK GAAP)
-----------------------------------------------------------------------------------------------------------------------------------
Six months ended
30 September Year ended 31 March
----------------------- ------------------------------------
2001 2000 2001 2000 1999
(L)m (L)m (L)m (L)m (L)m
-----------------------------------------------------------------------------------------------------------------------------------
Summary Group profit and loss account (under UK GAAP)
Group turnover 1,989.5 1,792.8 3,799.7 1,614.7 1,514.2
--------- --------- --------- --------- ---------
Operating profit
- Group undertakings 398.6 411.5 821.1 574.7 576.9
- share of joint ventures and associate (13.8) (49.1) (89.2) (28.2) 3.0
--------- --------- --------- --------- ---------
Total operating profit(1) 384.8 362.4 731.9 546.5 579.9
Goodwill amortisation(2) (47.7) (39.6) (74.5) (7.9) (2.5)
Exceptional items (287.3) 85.5 217.7 1,027.3 839.2
Net interest (152.7) (101.0) (250.6) (64.9) (118.5)
--------- --------- --------- --------- ---------
(Loss)/profit before taxation (102.9) 307.3 624.5 1,501.0 1,298.1
Taxation
- excluding exceptional items (23.5) (92.1) (85.8) (123.1) (120.3)
- exceptional items 5.5 143.3 235.4 (229.5) (162.8)
Minority interests (3.1) (3.7) (5.1) -- --
--------- --------- --------- --------- ---------
(Loss)/profit for the period (124.0) 354.8 769.0 1,148.4 1,015.0
========= ========= ========= ========= =========
Dividends per ordinary share 6.46p 6.05p 15.08p 13.94p 13.07p
Summary Group balance sheet (under UK GAAP)
Total assets 9,883.3 10,231.4 9,982.6 8,766.8 5,093.9
Creditors and provisions (7,415.6) (7,696.4) (6,465.0) (5,822.7) (3,141.4)
--------- --------- --------- --------- ---------
Net assets employed/total shareholders' funds 2,467.7 2,535.0 3,517.6 2,944.1 1,952.5
========= ========= ========= ========= =========
Equity shareholders' funds 2,432.4 2,480.3 3,475.8 2,909.0 1,952.5
--------- --------- --------- --------- ---------
Summary Group cash flow statement (under UK GAAP)
Net cash inflow from operating activities 548.0 343.4 810.6 682.0 605.9
Dividends from joint ventures 6.8 8.7 20.3 4.5 3.1
Net cash outflow for returns on investments and servicing of
finance (102.8) (125.0) (306.9) (64.7) (119.7)
Taxation 43.7 (58.4) (137.2) (274.3) (154.9)
Net cash outflow for capital expenditure (194.7) (198.6) (457.6) (279.2) (312.5)
Net cash (outflow)/inflow for acquisitions and disposals (31.0) (648.0) (582.2) (1,236.7) 934.1
Equity dividends paid (133.4) (123.2) (212.5) (197.6) (183.1)
--------- --------- --------- --------- ---------
Net cash inflow/(outflow) before the management of liquid
resources and financing 136.6 (801.1) (865.5) (1,366.0) 772.9
Net cash (outflow)/inflow from the management of liquid
resources (225.5) 372.3 775.2 618.8 (1,482.3)
Net cash inflow from financing 110.7 418.5 88.4 773.6 687.6
--------- --------- --------- --------- ---------
Movement in cash and overdrafts 21.8 (10.3) (1.9) 26.4 (21.8)
========= ========= ========= ========= =========
Amounts in accordance with US GAAP
Net income 36.5 447.4 810.3 1,009.8 1,002.8
Total assets 10,069.7 10,423.4 10,391.6 9,105.7 5,189.7
Net assets employed/total shareholders' funds 2,828.5 2,718.0 2,961.8 2,380.8 1,464.1
Equity shareholders' funds 2,793.2 2,663.3 2,920.0 2,345.7 1,464.1
-----------------------------------------------------------------------------------------------------------------------------------
Notes:
(1) Before exceptional costs and goodwill amortisation.
(2) Includes goodwill relating to joint ventures and associate.
14
2.1 Financial results for the three years ended 31 March 2001
The movement in total operating profit in the year ended 31 March 2000 reflects
higher profit contributions from UK transmission, UK interconnectors and
Energis, a lower profit contribution from other activities and operating losses
incurred by Intelig. The increase in total operating profit in the year ended 31
March 2001 principally reflected the first full-year contribution from National
Grid USA together with increased contributions from Energis and electricity
transmission joint ventures. The improvement in operating profit was partially
offset by the increased losses of Intelig and other telecommunications joint
ventures and lower profit contributions from UK transmission and UK
interconnectors.
The increase in goodwill amortisation in the year ended 31 March 2001 was mainly
as a result of the NEES and EUA acquisitions.
In each of the years ended 31 March 2001, 2000 and 1999, the Group recorded
exceptional profits of (L)242.9 million, (L)1,027.3 million and (L)891.8 million
respectively, which were associated with the partial disposals of its
shareholding in Energis. In 2001, the Group recorded exceptional costs of
(L)45.3 million associated with the integration of NEES and EUA and an
exceptional profit of (L)20.1 million on the disposal of its market services
businesses. In 1999, an exceptional charge of (L)52.6 million was incurred in
respect of closing out interest rate swaps.
The reduction in the net interest charge in the year ended 31 March 2000
reflected a lower average level of net debt as a result of the sale of shares in
Energis in that and the previous year. The increase in the net interest charge
in the year ended 31 March 2001 was largely attributable to the acquisitions of
NEES and EUA, which were funded out of cash balances and new borrowings.
The effective tax rates for each of the years ended 31 March 2001, 2000 and
1999, excluding the impact of exceptional items and adjustments relating to
prior years, were 26.0 per cent., 26.0 per cent. and 26.2 per cent.
respectively. In the year ended 31 March 2001, the tax charge excluding
exceptional items includes a credit of (L)20 million arising from an adjustment
to prior years' tax.
The exceptional tax credit in 2001 of (L)235.4 million primarily represents the
reversal of the 2000 exceptional tax charge of (L)229.5 million relating to the
exceptional profit on the partial disposal of Energis, and arises from the
realisation of capital losses for tax purposes as a result of Group
restructurings.
2.2 Financial results for the six months ended 30 September 2001
Total operating profit increased by 6 per cent. to (L)384.8 million in the six
months ended 30 September 2001, resulting from the improved performance of
National Grid USA's distribution and transmission businesses and Intelig, partly
offset by expected reductions in the recovery of US stranded costs and in
contributions from interconnectors.
An exceptional charge of (L)290.4 million was taken to write down fully the
carrying value of the Group's Latin American telecommunications investments and
provide for all expected associated liabilities. In addition, the Group recorded
an exceptional profit of (L)20.1 million from the partial disposal of its
shareholding in Energis, which was partially offset by exceptional costs of
(L)17.0 million substantially relating to the reorganisation of the business of
National Grid Company.
The increase in net interest mainly reflects Intelig's vendor financing interest
charges and exchange rate impacts on Intelig's US dollar-denominated debt. The
first half of the previous financial year included a (L)17 million benefit
relating to closing out fixed interest rate swaps.
The reduction in the tax charge excluding, exceptional items, for the six months
ended 30 September 2001 reflects an adjustment to the previous period associated
with the implementation of full provisioning for deferred tax and the release of
prior year tax provisions in this period.
15
3. Niagara Mohawk
The following summary financial information under US GAAP for the three years
ended 31 December 2000 has been extracted or derived from the 2000 and 1999
annual reports of Niagara Mohawk. The annual reports include the audited
consolidated financial statements of Niagara Mohawk for the years ended 31
December 1999 and 2000 and of Niagara Mohawk Power for the year ended 31
December 1998. Niagara Mohawk become the new holding company for Niagara Mohawk
Power in 1999. The summary financial information under US GAAP for the nine
months ended 30 September 2001 and 2000 has been extracted or derived from the
unaudited financial statements of Niagara Mohawk on Form 10-Q for the nine
months ended 30 September 2001. The amounts in accordance with UK GAAP have been
prepared solely for the purpose of these Summary Listing Particulars and are
unaudited.
-----------------------------------------------------------------------------------------------------------------------------------
Nine months ended
30 September Year ended 31 December
----------------------- ------------------------------------
2001 2000 2000 1999 1998
$m $m $m $m $m
-----------------------------------------------------------------------------------------------------------------------------------
Summary consolidated statement of income
(under US GAAP)
Operating revenues 3,591.4 3,339.7 4,539.3 4,084.2 3,992.4
--------- --------- --------- --------- ---------
Operating income 233.1 382.5 429.8 528.8 149.2
Impairment charge on investment (44.0) - - - -
Other income/(deductions) (9.9) (6.5) (13.5) 3.9 60.8
Interest charges (297.6) (329.1) (437.3) (485.2) (397.2)
Preferred dividend requirement of subsidiary (23.2) (23.7) (31.4) (36.8) (36.6)
--------- --------- --------- --------- ---------
Income/(loss) before income taxes (141.6) 23.2 (52.4) 10.7 (223.8)
Income taxes 93.9 (24.8) 6.8 (22.0) 66.4
--------- --------- --------- --------- ---------
Loss before extraordinary item (47.7) (1.6) (45.6) (11.3) (157.4)
Extraordinary item - extinguishment of debt net of tax - (0.9) (0.9) (23.8) -
Cumulative effect of a change in accounting principle,
net of income taxes 12.8 - - - -
--------- --------- --------- --------- ---------
Net loss (34.9) (2.5) (46.5) (35.1) (157.4)
========= ========= ========= ========= =========
Summary consolidated balance sheet (under US GAAP)
Total assets 12,296.5 12,642.3 12,670.4 13,861.2
Liabilities, commitments and contingencies (4,374.1) (4,794.5) (4,150.4) (3,764.8)
--------- --------- --------- ---------
Total capitalisation 7,922.4 7,847.8 8,520.0 10,096.4
========= ========= ========= =========
Common stockholders' equity 2,616.3 2,675.1 2,976.1 3,170.1
--------- --------- --------- ---------
Summary consolidated cash flows (under US GAAP)
Net cash provided by/(used in) operating activities 585.2 563.8 827.0 758.4 (3,277.0)
Net cash provided by/(used in) investing activities (168.4) (197.8) (293.0) 490.8 (447.1)
Net cash provided by/(used in) financing activities (54.4) (368.5) (541.8) (1,306.0) 3,518.9
--------- --------- --------- --------- ---------
Net increase/(decrease) in cash 362.4 (2.5) (7.8) (56.8) (205.2)
========= ========= ========= ========= =========
Amounts in accordance with UK GAAP
Net (loss)/income (31) 8 (25) (47) (155)
Common stockholders' equity 2,436 2,478 2,752 2,958
-----------------------------------------------------------------------------------------------------------------------------------
16
PART IV
SCHEME OF ARRANGEMENT
1. Introduction
On 5 September 2000, National Grid announced that it had signed a merger
agreement under which National Grid would acquire Niagara Mohawk through the
introduction of a new holding company for the Group, New National Grid, by means
of a scheme of arrangement under section 425 of the Act. The Acquisition was
approved by Niagara Mohawk Shareholders on 19 January 2001 and by National Grid
Shareholders on 29 January 2001.
Implementation of the Scheme requires the approval of National Grid Shareholders
at the Court Meeting and a special resolution to be passed at the Scheme EGM.
Once National Grid Shareholders have approved the Scheme at the Court Meeting
and the Scheme EGM, the Scheme must be sanctioned by the Court. The effect of
the Court's sanction of the Scheme is that, when the Court Order is delivered to
the Registrar of Companies and registered by him, all National Grid Shareholders
are bound by the terms of the Scheme. The Special Shareholder has already
consented to the Scheme and New National Grid has given its consent to the
Scheme and a written undertaking to be bound by the terms of the Scheme.
It is expected that the Scheme Effective Date will be in early 2002. Immediately
upon the Scheme becoming effective, New National Grid will change its name to
National Grid Group plc and National Grid Group plc will be renamed National
Grid Holdings One plc. It is expected that trading in the New National Grid
Shares and the New National Grid ADSs arising from the Scheme will commence on
the Scheme Effective Date.
2. Reasons for the Scheme
The terms of the Acquisition allow Niagara Mohawk Shareholders to elect to
receive cash, New National Grid ADSs, or a mixture of both, in exchange for
their Niagara Mohawk Shares. Under US tax legislation, Niagara Mohawk
shareholders would normally be liable to US tax in respect of the cash they
receive. In addition, depending on their circumstances, they may be liable to US
tax in respect of ADSs received because the cash portion of the purchase price
will exceed, in aggregate, 20 per cent. of the total purchase price.
At the time the Acquisition was announced, National Grid agreed to pay
approximately one-third in aggregate of the purchase price in cash and reserved
the right to increase the aggregate cash portion of the purchase price if cash
elections were received in excess of this amount. On 20 November 2001, National
Grid announced that it will increase the aggregate cash portion of the price
paid to 50 per cent., assuming receipt of sufficient cash elections. Any
increase in the aggregate cash portion of the purchase price will not affect the
total purchase price paid to Niagara Mohawk Shareholders.
The Scheme allows National Grid the flexibility to set the aggregate cash
portion of the purchase price at any level above 20 per cent. of the total
purchase price as, under US tax legislation, the introduction of New National
Grid as the new holding company of National Grid shortly before completion of
the Acquisition should ensure that Niagara Mohawk Shareholders receive New
National Grid ADSs in exchange for their Niagara Mohawk Shares on a tax-free
basis.
3. Effect of the Scheme
The effect of the Scheme will be that Scheme Shareholders and holders of Scheme
ADSs will have their respective interests in National Grid replaced by an
equivalent proportionate interest in New National Grid (of which National Grid
will be a wholly-owned subsidiary). Subject to the dilutive effect of the New
National Grid ADSs subsequently issued to Niagara Mohawk Shareholders in
connection with the Acquisition, any subsequent exercise of options granted
under the National Grid Share Schemes and the exchange of any Exchangeable
Bonds, their proportionate interests in the profits, net assets and dividends of
the National Grid Group will not be affected.
If the Scheme is sanctioned by the Court and the conditions to the Scheme are
satisfied or waived, it is expected that the Scheme will become effective, and
dealings in the New National Grid Shares to be issued pursuant to the
17
Scheme and in New National Grid ADSs arising from the Scheme will commence, in
early 2002. If the Scheme has not become effective by 31 August 2002 (or such
later date as the Court may allow), it will lapse, in which event the position
of National Grid Shareholders, holders of National Grid ADSs and the Special
Shareholder will remain unchanged.
4. Memorandum and Articles of Association of New National Grid
The Memorandum and Articles of Association of New National Grid are
substantially the same as the existing Memorandum and Articles of Association of
National Grid. Accordingly, the rights attaching to New National Grid Shares
will, after the Scheme becomes effective, be substantially the same as the
rights attaching to National Grid Shares.
The New National Grid Articles expressly permit shares to be held in
uncertificated form in accordance with the CREST Regulations and the rules of
CREST (the electronic settlement system).
It is proposed that those who hold an interest in New National Grid through New
National Grid ADSs and who are registered in the books of the Depositary should
have rights to attend, speak and vote at general meetings. Accordingly, the New
National Grid Articles will enable the Depositary to appoint holders of New
National Grid ADSs as proxies, and these proxies will have the right to attend,
speak and vote at general meetings. Such proxies will be able, in turn, to
appoint proxies to attend, speak and vote at a general meeting instead of them.
To ensure that holders of New National Grid ADSs will be able to vote on special
and extraordinary resolutions, the New National Grid Articles will require such
resolutions to be decided on a poll. All ordinary resolutions will continue to
be decided on a show of hands or, if a poll is demanded in accordance with the
New National Grid Articles, on a poll.
The New National Grid Articles also give effect to the Electronic Communications
Order which allows for communication between companies and their shareholders by
electronic means.
5. Authorities relating to New National Grid
By resolutions of New National Grid passed on 7 December 2001, the authorised
share capital of New National Grid was increased by (L)1 by the creation of the
New National Grid Special Share and, conditional on the Scheme becoming
effective, the Directors of New National Grid were authorised to issue and allot
the New National Grid Special Share and New National Grid Shares, and to make
purchases of New National Grid's own ordinary shares.
Following completion of the Scheme and the Acquisition, the Directors of New
National Grid will have authority to issue and allot up to approximately one-
third of the nominal amount of the then issued share capital. The Directors of
New National Grid have no present intention of issuing shares except pursuant to
the Scheme, the Acquisition, on the exercise of options under the National Grid
Share Schemes and the New National Grid Share Plans and in connection with the
Exchangeable Bonds.
18
PART V
ADDITIONAL INFORMATION
1. Fair summary
The Directors and the Proposed Directors are satisfied that these Summary
Listing Particulars contain a fair summary of the key information set out in the
Listing Particulars.
2. Working capital
New National Grid is of the opinion that the Group as enlarged by the
Acquisition has sufficient working capital for its present requirements, that is
for at least 12 months from the date of publication of this document.
3. Share capital
3.1 Under the Scheme, New National Grid will issue New National Grid Shares,
credited as fully paid, to the Scheme Shareholders on the basis of one
New National Grid Share for each Scheme Share held and will issue the
New National Grid Special Share to the Special Shareholder. Accordingly,
the proposed authorised, issued and fully paid share capital of New
National Grid immediately before completion of the Acquisition will be
as follows:
----------------------------------------------------------------------------------------------------------------------------
Authorised Authorised Issued Issued
Number Amount Number Amount
----------------------------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 1,486,690,953 (L)148,690,693.50
1 (L)1 New National Grid Special Share 1 (L)1
----------------------------------------------------------------------------------------------------------------------------
Note: The table set out above assumes no issues of shares by New National
Grid or National Grid after 7 December 2001 (being the latest
practicable date prior to the publication of this document), whether
pursuant to the exercise of options or otherwise, other than in
connection with the Scheme.
3.2 Under the terms of the Merger Agreement, Niagara Mohawk Shareholders
will receive consideration of $19.00 per Niagara Mohawk Share, subject
to adjustment. This adjustment will be made by reference to the closing
price of a National Grid Share and the prevailing (L):$ exchange rate on
20 trading days selected at random from 40 consecutive trading days
ending on the tenth trading day prior to the deadline for Niagara Mohawk
Shareholders to make the election described below. At the date of its
announcement, the terms of the Acquisition valued the equity of Niagara
Mohawk at approximately $3.0 billion and the enterprise value of Niagara
Mohawk at approximately $8.9 billion. Under the Merger Agreement,
Niagara Mohawk Shareholders will be able to elect to receive their
consideration in cash, New National Grid ADSs or a combination thereof,
with the aggregate cash consideration offered to all Niagara Mohawk
Shareholders being $1.015 billion. Assuming this level of cash
consideration, a price of 435.5 pence per National Grid Share and an
exchange rate of (L)1: $1.432 (being the Closing Price of a National
Grid Share and Exchange Rate on 7 December 2001, the latest practicable
date prior to the publication of this document), the maximum number of
New National Grid Shares which could be issued pursuant to the
Acquisition is 312,238,507.
However, under the terms of the Merger Agreement, if cash elections
received from all Niagara Mohawk Shareholders exceed $1.015 billion,
National Grid may, at its sole discretion, reduce the total number of
New National Grid ADSs to be issued and increase the aggregate cash
portion of the purchase price. On 20 November 2001, National Grid
announced that it will increase the aggregate cash portion of the price
paid to 50 per cent., assuming receipt of sufficient cash elections.
Assuming that the aggregate cash portion of the price paid represents 50
per cent. of the total consideration, a price per National Grid Share of
435.5 pence and an exchange rate of (L)1: $1.432 (being the Closing
Price of a National Grid Share and Exchange Rate on 7 December 2001, the
latest practicable date prior to the publication of this document),
19
share price and the authorised, issued and fully paid share capital of
New National Grid immediately following completion of the Acquisition
will be as follows:
------------------------------------------------------------------------------------------------------------------------------
Authorised Authorised Issued Issued
Number Amount Number Amount
------------------------------------------------------------------------------------------------------------------------------
2,500,000,000 (L)250,000,000 New National Grid Shares 1,724,403,787 (L)172,440,378.70
1 (L)1 New National Grid Special Share 1 (L)1
------------------------------------------------------------------------------------------------------------------------------
Note: The table set out above also assumes no issues of shares by New National
Grid, National Grid or Niagara Mohawk after 7 December 2001 (being the
latest practicable date prior to the publication of this document),
whether pursuant to the exercise of options or otherwise, other than in
the case of New National Grid connection with the Scheme and the
Acquisition.
No fractions of New National Grid ADSs will be issued in connection with
the Acquisition. Niagara Mohawk Shareholders who would otherwise have
been entitled to receive a fraction of a New National Grid ADS under the
terms of the Acquisition will receive cash in lieu of such fraction.
4. Directors, Secretary and Proposed Directors of New National Grid
4.1 Directors and Secretary
The Directors and their functions are set out below:
--------------------------------------------------------------------------------
Name Function
--------------------------------------------------------------------------------
James Hood Ross Chairman (Non-executive)
Roger John Urwin Group Chief Executive
Stephen John Box Group Finance Director
Richard Paul Sergel Group Director, North America
Steven John Holliday Group Director, UK and Europe
Edward Morrison Astle Group Director, Telecommunications
Robert Frederick William Faircloth Non-executive Director
John Albert Martin Grant Non-executive Director
Paul Lewis Joskow Non-executive Director
Richard Gurdon Reynolds Non-executive Director
--------------------------------------------------------------------------------
The business address of each of the Directors is 15 Marylebone Road, London NW1
5JD, with the exceptions of Richard Sergel and Paul Joskow each of whose
business address is 25 Research Drive, Westborough, Massachusetts, MA 01582.
Fiona Smith is Group General Counsel and Company Secretary of New National Grid.
4.2 Proposed Directors
It is proposed that, following Completion, William E. Davis, chairman and chief
executive officer of Niagara Mohawk, will be appointed Chairman of National Grid
USA for a period of two years from Completion to help ensure a smooth transition
and rapid integration and will also be appointed as an Executive Director of New
National Grid. One of Niagara Mohawk's non-executive directors, Dr Bonnie G.
Hill, will also join the Board as a Non-executive Director.
4.3 Directors' and Proposed Directors' backgrounds
James Ross, Chairman, 63
Appointed as a director of National Grid on 1 March 1999, he became Chairman in
July 1999. He is also chairman of Littlewoods plc, having been chief executive
of Cable and Wireless plc from 1992 to 1995. Before that he was a managing
director of British Petroleum Company plc and chairman and chief executive
officer of
20
BP America. He is a non-executive director of McGraw Hill and Datacard, both
based in the US, and Schneider Electric based in France.
Roger Urwin, Group Chief Executive, 55
Appointed as a director of National Grid and of National Grid Company in 1995,
Roger Urwin became Group Chief Executive in April 2001. He was previously chief
executive of London Electricity plc and, prior to this, held a number of
appointments within the Central Electricity Generating Board before joining
Midlands Electricity Board as director of engineering. He is a non-executive
director of Energis, The Special Utilities Investment Trust PLC and TotalFinaElf
Exploration UK plc and is a Fellow of the Royal Academy of Engineering.
Stephen Box, Group Finance Director, 51
Appointed as a director of National Grid and of National Grid Company in August
1997. Formerly with Coopers & Lybrand, where he was a partner specialising in
corporate finance. He is a non-executive director of Energis and of Michael Page
International PLC and a member of the Financial Reporting Review Panel.
Rick Sergel, Group Director, North America, 52
Appointed as a director of National Grid in 2000, Rick Sergel is President,
Chief Executive Officer and a director of National Grid USA. From February 1998
until the acquisition of NEES by the Group, he served as its president and chief
executive officer. His previous positions with NEES include senior vice
president in charge of retail operations and unregulated ventures, vice
president and treasurer. He serves as chairman of the board of the distribution
companies owned by National Grid USA and is also a non-executive director of
State Street Corporation.
Steven Holliday, Group Director, UK and Europe, 45
Appointed as a director of National Grid and Chief Executive of National Grid
Company in March 2001. Steven Holliday was an executive director of British
Borneo Oil and Gas. Prior to this he spent 19 years with the Exxon Group, where
he held senior positions in the operations and business development areas.
Edward Astle, Group Director, Telecommunications, 47
Appointed as a director of National Grid in September 2001. Edward Astle was
managing director of BICC Communications from 1997 to 1999. Prior to that he
held a number of positions with Cable & Wireless. He is chairman of 3G Lab Ltd
and a non-executive director of Intec Telecom Systems plc and Ilotron Limited.
Bob Faircloth, Non-executive Director, Chairman of the Remuneration Committee
and a member of the Audit and Nominations Committees, 65
Appointed as a director of National Grid in 1995, Bob Faircloth was chief
operating officer and an executive director of BTR until 1995 and a non-
executive director until May 1998. Before joining BTR in 1980, Bob Faircloth
held technical and management posts, mainly in the petrochemicals and paper
industries in Canada and Europe. He is engaged in international management
consulting with involvement with international banks, industrial companies and
government agencies.
John Grant, Non-executive Director, Chairman of the Audit Committee and a
member of the Nominations and Remuneration Committees, 56
Appointed as a director of National Grid in 1995, John Grant is executive
chairman of Hasgo Group Limited and of Peter Stubs Limited. He was chief
executive of Ascot Plc from 1997 to June 2000, finance director of Lucas
Industries plc (subsequently LucasVarity plc) from 1992 to 1996 and held a
number of senior executive positions during 25 years with Ford Motor Company,
including vice president, Ford of Europe, director of corporate strategy, Ford
USA and executive deputy chairman of Jaguar. He is also a non-executive director
of Torotrak plc, Corac Group Plc and Cordex plc.
21
Paul Joskow, Non-executive Director and a member of the Audit Committee, 54
Appointed as director of National Grid in 2000, Paul Joskow is a Professor of
Economics and Management at the Massachusetts Institute of Technology (MIT) and
is director of the MIT Center for Energy and Environmental Policy Research. He
is a research associate of the US National Bureau of Economic Research and a
Fellow of the Econometric Society and of the American Academy of Arts and
Sciences. Paul Joskow served as a director of NEES from 1987 until its
acquisition by the Group. He is a Trustee of the Putman Mutual Funds, a director
of State Farm Indemnity Company and a director of the Whitehead Institute for
Biomedical Research.
Richard Reynolds, Non-executive Director and a member of the Audit and
Remuneration Committees, 62
Appointed as a director of National Grid in 1998, Richard Reynolds was a
director of GEC 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 Wavionix Software Limited. He is also a non-executive
director of Photobition Group plc and Telme Group plc.
William E. Davis, 59
Appointed chairman and chief executive of Niagara Mohawk on 17 March 1999,
William Davis joined Niagara Mohawk in 1990 and became chairman and chief
executive of Niagara Power Corporation in 1993. He was previously an Executive
Deputy Commissioner with the New York State Energy Office. He is also a member
of a number of boards and committees including The Business Council of New York
State, Inc., Edison Electric Institute, Energy Association of New York and
Syracuse University.
Dr Bonnie G. Hill, 60
Elected as a non-executive director of Niagara Mohawk in 1991, Bonnie Hill is
chair of the Committee of Corporate Public Policy and Environmental Affairs and
a member of both the Executive and Compensation and Succession Committees. Prior
to July 2001, she was president and chief executive officer of The Times Mirror
Foundation and was senior vice president of the Los Angeles Times newspaper.
Bonnie Hill is involved in a variety of civic, educational and community bodies
and serves on the boards of AK Steel Corporation, Hershey Foods Corporation and
The Home Depot, Inc. She is president of B. Hill Enterprises, LLC, a consulting
firm, and the chief operating officer of Icon Blue, a brand marketing company.
5. Material contracts
5.1 New National Grid and the National Grid Group
Save for the contracts described in this section 5.1 and the agreements which
have been made available for inspection within the last two years being:
(i) the Merger Agreement summarised in the circular to National Grid
Shareholders dated 2 January 2001;
(ii) the trust deeds, subscription agreements and paying agency agreements
relating to the (E)1,250,000,000 5.25 per cent. guaranteed bonds due
2006 and the (E)750,000,000 6.125 per cent. guaranteed bonds due 2001
issued by NGG Finance plc and guaranteed by National Grid, which were
summarised in the offering circular issued by NGG Finance plc on 20
August 2001; and
(iii) the trust deeds subscription agreements and paying agency agreements
relating to the (L)200,000,000 3.806 per cent. Retail Price Index-
linked bonds due 2020, the (L)40,000,000 3.589 per cent. limited Retail
Price Index-linked bondsdue 2030 and the (L)360,000,000 6.50 per cent.
bonds due 2028 issued by National Grid Company, which were summarised in
the offering circular issued by National Grid Company on 23 July 2001;
no contracts (other than contracts entered into in the ordinary course of
business) have been entered into by New National Grid or any member of the
Group: (a) within the two years immediately preceding the date of this document
which are, or may be, material; or (b) which contain any provision under which
New National Grid or any member of the Group has any obligation or entitlement
which is material to New National Grid or the Group as at the date of this
document.
22
5.1.1 A credit agreement dated 22 November 2001 (the "Credit Agreement")
between (1) New National Grid (as guarantor and borrower); (2) NGG
Finance plc ("NGGF") (as borrower); (3) National Grid (as guarantor and
borrower); (4) Dresdner Kleinwort Wasserstein Limited, J.P. Morgan plc,
ABN AMRO Bank N.V., Bank of America Securities, The Bank of Tokyo-
Mitsubishi Ltd, Barclays Capital, Bayerische Landesbank Girozentrale
London Branch, Citibank N.A., HSBC Investment Bank plc and TD Bank
Europe Limited (the "Arrangers"); (5) HSBC Investment Bank plc (the
"Agent"); (6) HSBC (USA) Inc. (the "Swingline Agent"); and (7) certain
banks and financial institutions (the "Banks") which provides for:
(a) a US$1.7 billion committed 364 day dollar denominated
multicurrency revolving credit facility extending for a further
364 days (subject to the consent of each Bank in relation to
extension of that Bank's commitment) and/or converting to a term
loan maturing no later than the third anniversary of signing of
the Credit Agreement (at the option of the listed National Grid
Group holding company from time to time) to be made available to
the listed National Grid Group holding company from time to time,
National Grid, NGGF or any approved nominated subsidiary and to be
used in or towards financing the Acquisition (together with
acquisition costs and other expenses and the refinancing of
existing Niagara Mohawk borrowings) ("Facility A");
(b) a US$600 million committed dollar denominated multicurrency five
year revolving credit facility including a US$300 million swingline
facility to be made available to the listed National Grid Group
holding company from time to time, National Grid, NGGF and approved
nominated subsidiaries and to be used for general corporate
purposes ("Facility B") (Facility B together with Facility A being
the "Facilities").
The rate of interest payable on the Facilities is LIBOR together with
margins of 37.5 basis points for Facility A and 42.5 basis points for
Facility B which margins may be increased or reduced according to certain
formulae depending on percentage utilisation and partial cancellation.
Interest on the swingline facility would be the higher of the Swingline
Agent's prime rate and the Federal Funds Rate.
Certain fees and expenses will be payable in connection with the Credit
Agreement including a bookrunners' fee, underwriting and participation
fees, commitment fees and agency fees.
5.1.2 A letter agreement dated 20 November 2001 between New National Grid,
National Grid Company, National Grid and the European Investment Bank
("EIB"), setting out the terms under which a guarantee to be given by
New National Grid in respect of the obligations of National Grid
Company under a finance contract for (L)200 million between EIB and
National Grid Company will become effective.
5.1.3 The Exchangeable Bonds Trust Deed relating to the substitution of New
National Grid for National Grid as the issuer of shares under the
exchange right in relation to the Exchangeable Bonds.
5.1.4 The Undertaking.
5.1.5 The Sponsor's Agreement which provides for the payment by New National
Grid (or, if the Scheme does not become effective or New National Grid
fails to pay, National Grid) of certain expenses incurred by Rothschild
in connection with the Sponsor's Agreement and Admission, including its
legal fees. The Sponsor's Agreement contains (i) certain warranties by
New National Grid and National Grid as to the accuracy of the
information contained in the Listing Particulars, and in relation to
other matters relating to the National Grid Group and its businesses;
(ii) an indemnity from New National Grid and, to the extent lawful,
National Grid in favour of Rothschild; and (iii) certain undertakings
from New National Grid and National Grid relating, inter alia, to
consultation with, and the provision of information to, Rothschild in
its capacity as sponsor. The Sponsor's Agreement also sets out certain
circumstances in which it will or may be terminated.
23
5.2 Niagara Mohawk
Save for the contracts described in this section 5.2, no contracts (not being
contracts entered into in the ordinary course of business) have been entered
into by any member of the Niagara Mohawk Group: (a) within the two years
immediately preceding the date of this document which are, or may be, material;
or (b) which contain any provision under which any member of the Niagara Mohawk
Group has any obligation or entitlement which is material to the Niagara Mohawk
Group as at the date of this document.
(i) the Merger Agreement;
(ii) an Asset Purchase and Sale Agreement dated as of 7 August 2000, and
made by and among Niagara Mohawk Power, Central Hudson, Consolidated
Edison Company of New York, Inc. ("Con Ed"), and Dynegy Power Corp.
("Dynegy"), whereby:
(a) Dynegy agreed to purchase the Roseton generating facility and
related assets;
(b) Dynegy agreed to purchase and assume Niagara Mohawk Power's 25
per cent. undivided interest in the assets acquired under the
Asset Purchase and Sale Agreement for $78.8 million, plus $1.2
million for retained facilities; and
(c) Dynegy assumed most of Niagara Mohawk Power's obligations as
related to the assets, including responsibility for all
liabilities and obligations of Niagara Mohawk Power under
transferable permits associated with the assets, contractual
obligations relating to the assets, liabilities for stores in
transit, certain liabilities and obligations with respect to
the employees employed at the facilities, and responsibility
for environmental conditions at the facilities except for pre-
closing violations and off-site (not including migration of
waste) disposal, storage, and discharge of waste occurring
prior to the closing date;
(iii) an Asset Purchase Agreement dated as of 11 December 2000 and made
between Niagara Mohawk Power, Constellation Nuclear and Constellation
Energy Group, Inc., as Guarantor of Constellation Nuclear, whereby:
(a) Constellation Nuclear agreed to purchase the Nine Mile Point
No. 1 nuclear generating facilities from Niagara Mohawk Power;
(b) Constellation Nuclear agreed to pay $235.2 million (subject to
adjustment) to Niagara Mohawk Power for the assets acquired under
the Asset Purchase Agreement; and
(c) Constellation Nuclear assumed most of Niagara Mohawk Power's
obligations as related to the Nine Mile Point No. 1 nuclear
generating facilities, including responsibility for all
liabilities and obligations of Niagara Mohawk Power under
transferable permits associated with the assets, contractual
obligations relating to the assets, certain liabilities and
obligations with respect to the employees employed at the
facilities, and responsibility for environmental conditions at
the facilities except for pre-closing violations and off-site
(not including migration of waste) disposal, storage, and
discharge of waste occurring prior to the closing date;
(iv) an Asset Purchase Agreement dated as of 11 December 2000 and made
between Niagara Mohawk Power, RG&E, Central Hudson, NYSEG, Constellation
Nuclear and Constellation Energy Group, Inc. as Guarantor of
Constellation Nuclear, whereby:
(a) Constellation Nuclear agreed to purchase Niagara Mohawk Power's
41 per cent. interest in the Nine Mile Point No. 2 nuclear
generating facilities from Niagara Mohawk Power, together with
the interests of RG&E, Central Hudson and NYSEG in Nine Mile
Point No. 2 (a total of 82 per cent. of the interests in Nine
Mile Point No. 2);
24
(b) Constellation Nuclear agreed to pay an aggregate of $582.8
million (subject to adjustment) to Niagara Mohawk Power and the
other sellers for the assets acquired under the Asset Purchase
Agreement; and
(c) Constellation Nuclear assumed most of the sellers' obligations
as related to the Nine Mile Point No. 2 nuclear generating
facilities, including responsibility for all liabilities and
obligations of Niagara Mohawk Power under transferable permits
associated with the assets, contractual obligations relating to
the assets, certain liabilities and obligations with respect to
the employees employed at the facilities, and responsibility
for environmental conditions at the facilities except for pre-
closing violations and off-site (not including migration of
waste) disposal, storage, and discharge of waste occurring
prior to the closing date; and
(v) a Stock Purchase Agreement dated as of 28 September 2001 and made
between Niagara Mohawk and Select Energy, Inc. ("Select") whereby:
(a) Select agreed to purchase all of the outstanding shares of
Niagara Mohawk Energy Marketing, Inc., an indirect wholly-owned
subsidiary of Niagara Mohawk; and
(b) Select agreed to pay $38.5 million (subject to adjustment) to
Niagara Mohawk for the outstanding shares to be acquired under
the Stock Purchase Agreement.
6. Litigation
6.1 New National Grid and National Grid Group
There are no legal or arbitration proceedings (including any such proceedings
which are pending or threatened of which New National Grid or National Grid is
aware) which may have, or have had during the 12 months preceding the date of
this document, a significant effect on the financial position of New National
Grid, National Grid or the Group.
6.2 Niagara Mohawk
6.2.1 On 12 November 1993, Fourth Branch Associates Mechanicville ("FBAM")
filed an action against Niagara Mohawk Power and various officers,
directors and employees of Niagara Mohawk Power for fraud, negligence
and misrepresentation, breach of contract, breach of a duty of good
faith and fair dealing and intentional destruction of business. In its
complaint, FBAM sought compensatory and punitive damages. Subsequently,
FBAM discontinued its action with respect to the individual defendants
and eleven of the thirteen original causes of action were dismissed,
leaving only two causes of action which seek recovery for alleged
breach of contract and an alleged breach of a duty of good faith and
fair dealing by Niagara Mohawk Power. Discovery proceedings have been
completed. FBAM filed a Trial Term Note of Issue on 30 August 2001
placing the case on the Albany County Supreme Court trial calendar and
the case was assigned a trial date of 1 April 2002. A pre-trial
conference was held on 9 October 2001 and a motion for summary judgment
was filed on behalf of Niagara Mohawk Power on 15 November 2001.
FBAM submitted an amended unilateral offer of settlement to FERC and
Niagara Mohawk Power responded to this offer. On 23 November 1999, FERC
issued a comprehensive order rejecting FBAM's unilateral offer of
settlement, dismissing FBAM's complaint of anti-competitive conduct by
Niagara Mohawk Power, and determining that there had been an implied
surrender of the FERC licence for the Mechanicville Project. A petition
for rehearing was denied. On 21 April 2000, FBAM filed a Petition for
review of the FERC orders with the US Court of Appeals for the D.C.
Circuit, which is still pending. On 16 August 2000, FERC staff directed
Niagara Mohawk Power and FBAM to file a plan to cover decommissioning
or any other proposed alternatives and both parties have submitted such
plans.
Niagara Mohawk Power believes that it has meritorious defences to the
remaining claims of FBAM and intends to defend them vigorously. At the
present time, Niagara Mohawk is unable to estimate the exposure, if
any, which Niagara Mohawk Power might incur as a result of this
litigation.
25
6.2.2 On 25 May 2000, the New York State Department of Environmental
Conservation ("DEC") issued an air pollution notice of violation to
Niagara Mohawk regarding the operation of its two formerly owned coal-
fired generation plants (Huntley and Dunkirk). The notice of violation
was also issued to NRG Energy, Inc. ("NRG"), the current owner and
operator of both plants. While no specific relief was sought in the
notice of violation, the DEC and the New York State Attorney General
have indicated in meetings with Niagara Mohawk and NRG that they will
be seeking substantial fines against Niagara Mohawk and NRG as well as
the imposition of pollution controls. It is Niagara Mohawk's position
that the cost of pollution controls should be borne by NRG.
In May 2001, the New York State Attorney General advised Niagara Mohawk
and NRG of its intent to file suit on or after 16 July 2001, alleging
that the plants are in violation of the federal Clean Air Act. However,
there has been no action from the Attorney General to date. On 13 July
2001, Niagara Mohawk filed a declaratory judgement action against NRG
in New York State Supreme Court. Niagara Mohawk is seeking a
declaratory judgement that NRG is responsible for any control upgrades
and mitigation resulting from the above-referenced enforcement action.
This litigation is currently in the discovery phase.
Niagara Mohawk is unable to predict whether or not the results of this
enforcement action will have an adverse material effect on its
financial position and results of operation or whether Niagara Mohawk's
action against NRG will be successful.
6.2.3 Save as disclosed in this section 6.2, there are no legal or
arbitration proceedings (including any such proceedings which are
pending or threatened of which New National Grid or National Grid are
aware) which may have, or have had during the 12 months preceding the
date of this document, a significant effect on the financial position
of the Niagara Mohawk Group.
7. Significant change
7.1 There has been no significant change in the financial or trading
position of New National Grid and its subsidiary since 31 March 2001,
the date to which the last audited financial statements of New National
Grid were made up.
7.2 There has been no significant change in the financial or trading
position of National Grid and its subsidiaries since 30 September 2001,
the date to which the last unaudited interim financial statements of
National Grid were made up.
7.3 Save for the sale of Niagara Mohawk's interests in the Nine Mile Point
nuclear generating facilities described in section 4 of Part II of this
document, there has been no significant change in the financial or
trading position of Niagara Mohawk and its subsidiaries since 30
September 2001, the date to which the last unaudited quarterly
financial statements of Niagara Mohawk were made up.
8. Additional information
8.1 N M Rothschild & Sons Limited is registered in England (number 925279)
and has its registered office at New Court, St. Swithin's Lane, London
EC4P 4DU. N M Rothschild & Sons Limited, which is regulated in the UK
by the Financial Services Authority, has given and has not withdrawn
its written consent to the issue of this document with the inclusion
herein of references to its name in the form and context in which they
appear.
8.2 Employees of N M Rothschild & Sons Limited who are advising National
Grid and New National Grid in relation to the Acquisition, the Scheme,
the proposed listing and admission to trading have an interest, in
aggregate, in 868 National Grid Shares.
26
DEFINITIONS
The following definitions apply throughout this document unless the context
requires otherwise:
"Acquisition" the acquisition of Niagara Mohawk by
National Grid Group pursuant to the Merger
Agreement
"Act" the Companies Act 1985, as amended
"Admission" the admission of the New National Grid
Shares to (i) the Official List; and (ii)
trading on the London Stock Exchange's
market for listed securities becoming
effective in accordance with, respectively,
the Listing Rules and the Admission and
Disclosure Standards
"Admission and Disclosure
Standards" the requirements contained in the
publication "Admission and Disclosure
Standards" containing, inter alia, the
admission requirements to be observed by
companies seeking admission to trading on
the London Stock Exchange's market for
listed securities
"ADS" an American depositary share
"Authority" the Gas and Electricity Markets Authority
"Board" or "Directors" the board of directors of National Grid or,
following the Scheme becoming effective, New
National Grid (as the context requires)
listed in section 7.1 of Part VII of this
document
"business day" any day other than a Saturday or Sunday on
which banks are generally open for business
in England and Wales
"CEC" Copperbelt Energy Corporation plc
"Citelec" Compania Inversora en Transmision Electrica
CITELEC S.A.
"Closing Price" the closing middle market quotation of the
relevant share as derived from the Daily
Official List of the London Stock Exchange
plc
"Company" or "National Grid" National Grid Group plc
"Completion" the closing of the Acquisition following
satisfaction or waiver of the conditions
attaching to the Acquisition and the
delivery of certificates of merger for
filing with the Department of State of the
State of New York and the Secretary of State
of the State of Delaware in accordance with
the Merger Agreement
"Court" the High Court of Justice of England and
Wales
"Court Meeting" the meeting of National Grid Shareholders
convened by direction of the Court pursuant
to section 425 of the Act for 11.00 a.m. on
7 January 2002, to consider and, if thought
fit, approve the Scheme, including any
adjournment thereof
"Court Order" the Order of the Court sanctioning the
Scheme under section 425 of the Act and
confirming the reduction of the share
capital of National Grid
27
"CREST" a relevant system (as defined in the CREST
Regulations) in respect of which CRESTCo
Limited is the operator (as defined in the
CREST Regulations)
"CREST Regulations" the Uncertificated Securities Regulations
2001 (SI 2001 No. 3755) as from time to time
amended
"Depositary" The Bank of New York, 101 Barclay Street,
New York, NY 10286, USA
"Electronic Communications Order" the Companies Act 1985 (Electronic
Communications) Order 2000
"Energis Polska" Energis Polska Sp. zo.o
"EUA" Eastern Utilities Associates, which now
forms part of National Grid USA
"Exchange Rate" the (L):$ Bank of England official closing
exchange rate published daily on Reuters at
4 p.m.
"Exchangeable Bonds" (L)460 million 4.25 per cent. unsecured
exchangeable bonds due 2008 issued by
National Grid Company exchangeable into
National Grid Shares (or, following the
Scheme becoming effective, New National Grid
Shares)
"Exchangeable Bonds Trust Deed" a supplemental trust deed dated 10 December
2001 between National Grid Company, New
National Grid, National Grid and The Law
Debenture Trust Corporation p.l.c. (the
"Trustee") relating to the substitution of
New National Grid for National Grid as the
issuer of shares under the exchange right in
relation to the Exchangeable Bonds; and
"FERC" Federal Energy Regulatory Commission
"Financing Documents" (a) a credit agreement dated 22
November 2001 between New National
Grid (as borrower and guarantor),
National Grid (as borrower and
guarantor), NGG Finance plc (as
borrower), various arrangers, HSBC
Investment Bank plc as facility
agent, HSBC Bank (USA) Inc. as
swingline agent and various banks
and financial institutions as
lenders for various facilities
totalling $2.3 billion; and
(b) a letter agreement dated 20
November 2001 between New National
Grid, National Grid Company,
National Grid and the European
Investment Bank ("EIB"), setting
out the terms under which a
guarantee to be given by New
National Grid in respect of the
obligations of National Grid
Company under a finance contract
for (L)200 million between EIB and
National Grid Company will become
effective
"GAAP" Generally Accepted Accounting Principles
"GridCom" GridCom Limited
"Group" or "National Grid Group" National Grid (or, following the Scheme
becoming effective, New National Grid) and
its subsidiary undertakings (and "member of
the
28
National Grid Group" and "member of the
Group" shall be construed accordingly)
"Intelig" Intelig Telecomunicacoes Limitada
"Listing Particulars" the listing particulars dated 10 December
2001 relating to New National Grid prepared
in accordance with the Listing Rules
"Listing Rules" the listing rules of the UK Listing
Authority, made under section 74 of the
Financial Services and Markets Act 2000
"London Stock Exchange" London Stock Exchange plc
"Manquehue net" Manquehue net S.A.
"Merger Agreement" the agreement and plan of merger and scheme
of arrangement, dated as of 4 September 2000
and amended as of 1 December 2000 entered
into between National Grid, New National
Grid, Grid Delaware, Inc., a wholly-owned
subsidiary of New National Grid, and Niagara
Mohawk
"MW" megawatt, one million watts
"National Grid" or "Company" National Grid Group plc
"National Grid ADSs" ADSs of National Grid, each of which
represents five National Grid Shares
"National Grid Company" The National Grid Company plc, a
wholly-owned subsidiary of National Grid,
which, inter alia, owns and operates the
high voltage electricity transmission system
in England and Wales
"National Grid Group" or "Group" National Grid (or, following the Scheme
becoming effective, New National Grid) and
its subsidiary undertakings (and "member of
the National Grid Group" and "member of the
Group" shall be construed accordingly)
"National Grid Share Schemes" the existing employee share schemes and
incentive plans operated by National Grid
comprising the Executive Share Option Scheme
(1990), Executive Share Option Plan 2000,
Savings Related Share Option Scheme (1990),
1999 Savings Related Share Option Scheme,
Share Matching Scheme (1996), Profit Sharing
Scheme (1990), 1999 US Employee Stock
Purchase Plan, Incentive Compensation Plan,
National Grid USA Incentive Thrift Plans and
Deferred Compensation Plan
"National Grid Shareholders" holders of National Grid Shares
"National Grid Shares" or "Shares" ordinary shares of 11 13/17 pence each in
the capital of National Grid
"National Grid Special Share" the special rights non-voting redeemable
preference share of (L)1 in the capital of
National Grid held by the Special
Shareholder
"National Grid USA" National Grid USA, a wholly-owned subsidiary
of National Grid and the US holding company
which owns National Grid's US electricity
operations
29
"NEES" New England Electric System, which now forms
part of National Grid USA
"NEESCom" NEESCom, Inc.
"NEP" New England Power Corporation, Inc.
"NEPOOL" New England Power Pool
"New National Grid" New National Grid plc, which following
implementation of the Scheme, will be the
new holding company of National Grid
"New National Grid ADSs" ADSs of New National Grid, each of which
will represent five New National Grid Shares
"New National Grid Articles" the Articles of Association of New National
Grid
"New National Grid Share Plans" the proposed new employee share plans
summarised in section 11 of Part VII of this
document and comprising the National Grid
Executive Share Option Plan 2002, National
Grid Employee Share Ownership Plan 2002 and
the associated UK Trust, National Grid
Savings Related Share Option Plan 2002,
National Grid Employee Stock Purchase Plan
2002, National Grid Share Matching Plan
2002, National Grid USA Incentive Thrift
Plans I and II, National Grid Employee Trust
2002 and National Grid Qualifying Employee
Share Ownership Trust (No. 2) 2002
"New National Grid Shares" ordinary shares of 10 pence each in the
capital of New National Grid
"New National Grid Special Share" the special rights non-voting redeemable
preference share of (L)1 in the capital of
New National Grid to be issued to the
Special Shareholder pursuant to the Scheme
"Niagara Mohawk" Niagara Mohawk Holdings, Inc.
"Niagara Mohawk Group" Niagara Mohawk and its subsidiary
undertakings (and "member of the Niagara
Mohawk Group" shall be construed
accordingly)
"Niagara Mohawk Power" Niagara Mohawk Power Corporation, a wholly
owned subsidiary of Niagara Mohawk
"Niagara Mohawk Shareholders" holders of Niagara Mohawk Shares
"Niagara Mohawk Shares" shares of Niagara Mohawk common stock
"NYPSC" New York Public Service Commission
"NYSE" New York Stock Exchange, Inc.
"Official List" the Official List of the UK Listing
Authority
"Proposed Directors" William E. Davis and Dr Bonnie G. Hill
"PKP" Polskie Koleje Panstwowe, the Polish
national railway company
"Registrar of Companies" the Registrar of Companies in Cardiff
"Rothschild" N M Rothschild & Sons Limited
30
"RTO" a regional transmission organisation, which
is an organisation proposed by the FERC for
the planning, operation and co-ordination of
the transmission networks within a defined
geographical region of the US
"Scheme" or "Scheme of Arrangement" the scheme of arrangement under section 425
of the Act set out in Part III of the Scheme
Circular, in its original form or with or
subject to any modification thereof or
addition thereto or condition approved or
imposed by the Court
"Scheme ADSs" all National Grid ADSs in issue at 4.00 p.m.
(New York time) on the Scheme Record Date
"Scheme Circular" the document dated 10 December 2001 sent to
National Grid Shareholders containing, inter
alia, the Scheme of Arrangement and the
notice of the Court Meeting and the Scheme
EGM
"Scheme Effective Date" the date and time at which an office copy of
the Court Order is registered by the
Registrar of Companies and the Scheme
becomes effective, expected to be in early
2002
"Scheme EGM" the extraordinary general meeting of
National Grid Shareholders to be held at
11.15 a.m. (or if later, immediately
following the conclusion or adjournment of
the Court Meeting) on 7 January 2002,
including any adjournment thereof
"Scheme Record Date" the business day immediately preceding the
Scheme Effective Date
"Scheme Shareholder" a holder of Scheme Shares
"Scheme Shares" (a) all National Grid Shares in issue
at the date of the Scheme being 10
December 2001;
(b) all (if any) additional National
Grid Shares in issue 48 hours prior
to the Court Meeting; and
(c) all (if any) further National Grid
Shares which may be in issue
immediately prior to the
confirmation by the Court of the
reduction of capital provided for
under the Scheme in respect of
which the original or any
subsequent holders shall be bound
or shall have agreed in writing to
be bound by the Scheme
"SEC" US Securities and Exchange Commission
"Secretary of State" the UK Secretary of State for Trade and
Industry
"Silica Networks" Silica Networks Company S.A.
"Special Shareholder" the holder of the National Grid Special
Share or the New National Grid Special
Share, as the context so requires, being
currently the Secretary of State
"Sponsor's Agreement" An agreement dated 10 December 2001 between
New National Grid, National Grid and
Rothschild, whereby New National Grid has
appointed Rothschild to act as its sponsor
in connection with Admission.
"Sterling" or "(L)" the lawful currency for the time being in
the UK
31
"Summary Listing Particulars" these summary listing particulars,
containing a summary of information derived
from the Listing Particulars, prepared in
accordance with the Listing Rules
"Transba" Empresa de Transporte de Energia Electrica
por Distribucion Troncal de la Provincia de
Buenos Aires Transba S.A.
"Transener" Compania de Transporte de Energia Electrica
en Alta Tension Transener S.A.
"UK" the United Kingdom of Great Britain and
Northern Ireland
"UK Listing Authority" the United Kingdom Listing Authority
"UK Trust" the Rules and Trust Deed of the National
Grid Employee Share Ownership Plan 2002 (UK
Plan)
"uncertificated" or
"in uncertificated form" recorded on the relevant register as being
held in uncertificated form in CREST, and
title to which, by virtue of the CREST
Regulations, may be transferred by means of
CREST
"Undertaking" the consent to the Scheme and the
undertaking to be bound by its terms
executed by New National Grid in favour of
National Grid and dated 10 December 2001
"US" the United States of America, its
territories and possessions, any state of
the United States of America and the
District of Columbia, and all other areas
subject to its jurisdiction
"US dollars" or "$" the lawful currency for the time being in
the US
32