National Grid USA Companies’
Incentive Thrift Plan II
Financial Statements
For The Years Ended
December 31, 2007 and 2006
&
Report Of Independent Registered
Public Accounting Firm
&
Supplemental Schedule
Table of Contents
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| Financial Statements: | | |
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| | 5 |
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| Supplemental Schedule: | | |
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1
Report of Independent Registered Public Accounting Firm
Plan Administrator
National Grid USA Companies’
Incentive Thrift Plan II
Westborough, Massachusetts
We have audited the accompanying statement of net assets available for benefits of National Grid USA Companies’ Incentive Thrift Plan II as of December 31, 2007, and the related statement of changes in net assets available for benefits for the year then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Plan is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amount s and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of National Grid USA Companies’ Incentive Thrift Plan II as of December 31, 2007 and the changes in net assets available for benefits for the year then ended in conformity with United States generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplemental schedule is presented for purposes of additional analysis and is not a required part of the basic financial statements, but is supplementary information, required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is presented fairly, in all material respects, in relation to the basic financial statements taken as a whole.
/s/ Clifton Gunderson LLP
Milwaukee, Wisconsin
June 26, 2008
2
Report of Independent Registered Public Accounting Firm
To the Participants and Administrator of National Grid USA
Companies’ Incentive Thrift Plan II:
In our opinion, the accompanying statement of net assets available for benefits presents fairly, in all material respects, the net assets available for benefits of National Grid USA Companies’ Incentive Thrift Plan II (the “Plan”) at December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. The financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit of the statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
June 21, 2007
3
NATIONAL GRID USA COMPANIES’
INCENTIVE THRIFT PLAN II
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
DECEMBER 31, 2007 AND 2006
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| | | 2007 | | | 2006 | |
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| Assets: | | | | | | | | |
| Investments, at fair value | | $ | 1,506,186,521 | | | $ | 823,990,623 | |
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| Investment in Master Trust - at fair value | | | 162,397,605 | | | | - | |
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| Receivables: | | | | | | | | |
| Dividends | | | 1,838,400 | | | | 1,813,856 | |
| Employee contributions | | | 694,214 | | | | 804,759 | |
| Employer contributions | | | 188,292 | | | | - | |
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| Cash | | | 250,535 | | | | 391,314 | |
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| Total assets | | | 1,671,555,567 | | | | 827,000,552 | |
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| Liabilities | | | - | | | | - | |
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| Net assets available for benefits at fair value | | | 1,671,555,567 | | | | 827,000,552 | |
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Adjustments from fair value to contract value
for fully benefit-responsive investment contracts | | | 2,624,386 | | | | 1,046,468 | |
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| Net assets available for benefits | | $ | 1,674,179,953 | | | $ | 828,047,020 | |
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The accompanying notes are an integral part of the financial statements
4
NATIONAL GRID USA COMPANIES’
INCENTIVE THRIFT PLAN II
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
FOR THE YEAR ENDED DECEMBER 31, 2007
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| Additions to net assets attributed to: | | | | |
| Investment income: | | | | |
| Interest and dividend income | | $ | 74,608,413 | |
| Net appreciation in fair value of investments | | | 11,357,161 | |
| Investment in Master Trust — at fair value | | | 3,447,421 | |
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| Net investment income | | | 89,412,995 | |
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| Miscellaneous income | | | 61,750 | |
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| Contributions: | | | | |
| Employer contributions | | | 10,769,271 | |
| Employee contributions | | | 48,753,472 | |
| Rollover contributions | | | 15,029,743 | |
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| Total contributions | | | 74,552,486 | |
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| Total additions | | | 164,027,231 | |
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| Deductions from net assets attributed to: | | | | |
| Benefits paid to participants | | | 90,600,653 | |
| Fees | | | 410,033 | |
| Transfers to Thrift Plan I | | | 5,887,959 | |
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| Total deductions | | | 96,898,645 | |
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| Transfer of assets from KeySpan Union Plan | | | 779,004,347 | |
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| Net increase | | | 846,132,933 | |
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| Net assets available for benefits | | | | |
| Beginning of year | | | 828,047,020 | |
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| End of year | | $ | 1,674,179,953 | |
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The accompanying notes are an integral part of the financial statements
5
National Grid USA Companies’
Incentive Thrift Plan II
Notes To Financial Statements
Effective as of August 24, 2007, which is the date of the merger of National Grid USA with KeySpan Corporation, the KeySpan Energy 401(k) Plan for Union Employees (the KeySpan Plan) merged into the National Grid USA Companies’ Incentive Thrift Plan II (the “Plan”). As of the merger date, KeySpan Corporation and all affiliated KeySpan entities that were participating employers in the KeySpan Plan immediately prior to the merger date (the KeySpan Plan Participating Employers) became employers under the Plan and each participant and beneficiary under the KeySpan Plan became a participant and beneficiary under the Plan. Also, as of the merger date, all liabilities and assets of the KeySpan Plan were assumed by, and became part of, the Plan. The total assets transferred to the Plan from the KeySpan Plan were $779,004,347. This amount differs from the amount reported in the final 5500 for the KeySpan Plan which was $777,518,352. The difference represents deemed distributions and the adjustment from contract value to fair value for the JP Morgan Stable Value Fund.
Most of the provisions of the former KeySpan Plan, which differ from the Plan provisions, were incorporated by reference in the Plan document effective August 24, 2007, and remain applicable to former KeySpan Plan participants and beneficiaries as well as newly eligible employees of a former KeySpan Plan Participating Employer. There is a different third-party service provider providing Trustee and recordkeeping services for assets and participant accounts related to the KeySpan Plan participants’ and beneficiaries.
The following Plan description reflects the provisions for the different participant groups, specially noting provisions that are different for the former KeySpan Plan participants and beneficiaries as well as newly eligible employees of a former KeySpan Plan Participating Employer.
| | | The following brief description of the Plan provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions. |
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| | | Plan Description |
| | | | The Plan was established effective September 1, 1984, pursuant to the authorization of the Board of Directors of certain subsidiaries of the New England Electric System (“NEES”), to provide a long-range program of systematic savings for eligible employees (the “Participants”). The Plan was renamed National Grid USA Companies’ Incentive Thrift Plan II upon the merger between National Grid plc and NEES on March 22, 2000, at which time NEES was renamed National Grid USA. |
6
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | Employees of participating subsidiaries of National Grid USA (collectively, the “Employers” or the “Company”) who are covered by a collective bargaining agreement are immediately eligible to participate in the Plan upon employment. Employers’ matching contribution will begin at one year of service, except for those represented employees who are members of UWUA Local 472 (Cumberland) and USWA Locals 12431-01 and 12431-02. Represented employees of UWUA Local 472 (Cumberland) are eligible for matching contribution upon hire but are subject to a six-year vesting schedule. Represented employees of USW A Locals 12431-01 and 12431-02 are eligible for matching contributions upon hire and are 100% vested. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). |
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| | | | The plan administrators are the Benefits Committee and the Investment Committee of National Grid USA Service Company, Inc. (the “Administrator”). |
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| | | | The Board of Directors of National Grid plc has the governing authority to amend the Plan, but has delegated certain amending authority to the Board of Directors of National Grid USA Service Company, Inc. (“Service Company”). |
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| | | | T. Rowe Price Retirement Plan Service, Inc. serves as record keeper of the Plan. T. Rowe Price Trust Company serves as trustee and custodian of the Plan. Additionally, Vanguard Fiduciary Trust Company serves as record keeper, trustee and custodian for the period beginning August 25, 2007 for the assets and participant accounts of the former KeySpan Plan participants and benficiaries. |
7
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | National Grid USA acquired New England Gas Company (“New England Gas”) as of August 24, 2006 pursuant to the purchase and sale agreement between Southern Union Company and National Grid USA dated February 15, 2006. Effective with the sale agreement on August 24, 2006, participants represented by UWUA AFL-CIO Local 472, USWA Locals 12431-01 and 12431-02, were hired as a result of the purchase. Employees represented by United Steelworkers Locals 12431-01 and 12431-02 shall receive matching contributions of up to 10% (resulting in a maximum potential basic matching contribution of 5% of elective contributions). Participants shall receive basic matching contributions from his or her employer equal to 100% of the first 2% of base compensation contributed and 50% of up to the next 4% of base compensation contributed. Employees represented by the UWUA AFL-CIO Local 472 hired after August 25, 2006, shall have their employer account holdings subject to a six-year year vesting schedule: 10% upon attaining one year of service, 20% upon attaining two years of service; 40% upon attaining three years of service; 60% upon attaining four years of service; 80% upon attaining five years of service; and 100% upon attaining six years of service. Employee participants represented by the UWUA AFL-CIO Local 472 hired as of August 24, 2006 as a result of the purchase of New England Gas are not subject to the vesting schedule. |
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| | | | Upon completion of the Merger of National Grid USA with KeySpan Corporation effective August 24, 2007, participants in the former KeySpan Plan who owned units of the KeySpan Common Stock Fund received cash in their Plan accounts representing the number of units held multiplied by the unitized value of the fund on the Merger date. Merger proceeds for the KeySpan Common Stock Fund, were invested initially in the Vanguard® Prime Money Market Fund, which was a component of the KeySpan Common Stock Fund. The KeySpan Common Stock Fund was also renamed the KSE Stock Transition Fund. Following the merger, former KeySpan Plan contributions that had been directed to the KeySpan Common Stock Fund were being directed to Vanguard LifeStrategy® Moderate Growth Fund. Participants were given approximately 120 days to transfer their merger proceeds in the KSE Stock Transition Fund to any other investment option in the Plan. If participants did not take action any remaining balances in the KSE Stock Transition Fund were transferred to Vanguard LifeStrategy Moderate Growth Fund on January 2, 2008. |
8
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | The Plan is a defined contribution plan. An eligible employee can make Elective Contributions through Contribution Agreements (also known as Salary Reduction Agreements) to have from 1% to 50% of their eligible compensation, contributed to the Plan on their behalf. The annual employee pre-tax Elective Contributions by each Participant were subject to IRS limits of $15,500 and $15,000 in 2007 and 2006 for employees who did not attain age 50 by the end of the respective plan year. For employees who did attain age 50 by the last day of the applicable plan year, the annual maximum pre-tax contribution was $20,500 for 2007 and $20,000 for 2006. |
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| | | | The Employers make Matching Contributions to the Plan equal to 100% of the employee Elective Contribution up to the first 2% of the Participants base compensation and then 50% of the employee Elective Contribution with respect to the next 4% of the base compensation for members of New England-based union locals who participate in the National Grid USA Companies’ Final Average Pay Pension Plan. |
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| | | | Employers equal to 1.5% of their base compensation; they also received Employer Basic Matching Contributions equal to 100% of employee Elective Contributions up to 2% then 67% of the employee Elective Contributions on the next 6% of the Participants’ base compensation. |
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| | | | Effective September 28, 2006, represented employees of Narragansett Electric Company and members of USWA Locals 12431-01 and 12431-02 are matched at a rate of 50% of the employee elective contribution up to the first 10% of the participant’s gross compensation. Represented employees participating in UWUA Local 472 (Cumberland) are matched at a rate of 100% of the employee elective contribution up to the first 2% of the Participant’s base compensation and then 50 to the next 4% of base compensation, however, subject to a six-year vesting schedule. |
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| | | | All KeySpan employees who are eligible pursuant to their collective bargaining agreement and contributing to the Plan will receive employer match contributions and a 10% discount on the purchase of National Grid ADRs on the first of the month following completion of twelve months of service. |
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| | | | All employer matching contributions are invested in the same investments elected by the participant for their employee contributions. |
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| | | | New employees with funds held under a previous employer’s qualified plan are permitted to roll over eligible amounts from such funds into the Plan. |
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| | | | Participants may allocate their account balances in any whole percentage without restriction on the frequency of subsequent reallocations subject to investment fund |
9
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | short-term trading restrictions. |
| | | | Active or former employees who are participants and who receive a lump sum distribution from a Company qualified pension plan (National Grid Pension Plan, Niagara Mohawk Pension Plan, Southern Union Company Providence Energy Pension Plan, and Southern Union Company Valley Pension Plan) may roll the lump sum proceeds into the Plan to the extent the proceeds qualify for rollover under the code. The total amount rolled over in 2007 was approximately $12,933,223. |
| | | | Effective March 15, 2006, newly hired or rehired New England union employees without an account balance are automatically enrolled in the Plan and 6% of their base pay was contributed to the Plan on a pre-tax basis. Additionally, each June, New England union employees without an account balance will be automatically enrolled in the Plan as described above. New York and USWA Locals 12431-01 and 12431-02 union employees do not participate in the automatic enrollment program. In addition, these automatic enrollment provisions are not applicable to participants of the former KeySpan Plan. |
| | | | Effective March 1, 2006, participants may elect automatic increase of pre-tax contributions each year. For participants who elect automatic increase and do not customize their elections, pre-tax contributions will increase by 1% each July until they reach 15%. New York and USWA Locals 12431-01 and 123431-02 Union employees are not included in this plan. This provision is not applicable to participants of the former KeySpan Plan. |
| | | | Each participant’s account is credited with the participant’s contribution and allocations of (a) the employer’s matching contributions (and discount on the National Grid ADR Fund, if applicable, for former KeySpan Plan participants), and (b) allocations of Plan earnings. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account. |
10
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | Participants are immediately vested in their elective contributions and employer matching contributions plus actual earnings thereon. UWUA Local 472 (Cumberland) participants are subject to a six-year vesting schedule for employee match. KeySpan participants will be 100% vested in employer match, discount, and employer non-elective contributions on the earlier to occur of: (i) the participant’s completion of three (3) years of service with the Company; (ii) the participant’s retirement from the Company at age fifty-five or older; (iii) the death of the participant; (iv) the disability of the participant if the participant is receiving disability benefits under Title II of the Social Security Act; or (v) the termination or partial termination of the Plan. Upon termination of employment or upon the determination of an employee’s disability being total and permanent, a participant or a participant’s beneficiary (in the case of death) is entitled to receive the full amount in the participant’s account. |
| | | | An employee Participant can obtain a loan from the Plan from such Participant’s account. The minimum loan allowed is $1,000. A loan cannot exceed the lesser of 50% of the Participant’s account balance or $50,000. The $50,000 limit is further limited by the Participant’s highest outstanding loan balance within the twelve months preceding the loan request. Loans are stated at the unpaid principal balance, which approximates fair value. The loans are secured by the balance in the participant’s account. Loans must be repaid over a period of one to five years (up to fifteen years for the purchase of a primary residence) by means of payroll deductions. The annual interest rate is determined by the prime rate as reported by the Wall Street Journal on the first business day of the month in which the loan is obtained, except for loans taken under the former KeySpan plan in which interest is prime + 1%. |
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| | | | A default of the loan will occur if the loan balance is not paid off by the loan end date or if a Participant fails to make a payment within 90 days of the due date. Active participants in the former KeySpan Plan who fail to make a loan repayment by its due date, will have until the end of the quarter following the quarter in which the payment was missed to make up the missed payment . In the event of default, the outstanding balance of the loan and any unpaid accrued interest is deemed to have been distributed to the Participant. Interest continues to be tracked following a default solely for determining the amount available for a subsequent loan. Deemed distributions are included in the Loan Fund’s investment balance until the employee has been terminated. Upon termination the defaulted loan balance is deducted from the Plan. There were cumulative deemed distributions of $86,807 and $163,321 as of December 31, 2007 and 2006, respectively. |
11
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | Effective March 28, 2005, the Plan was amended to allow automatic lump-sum distributions if the present value of the participant’s vested account balance is less than $1,000 and is payable on or after March 28, 2005. The participant must consent to the distribution if the present value is more than $1,000. |
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| | | | Payments of benefits upon retirement at age 55 or later, or death, are, at the election of the Participant, either made in a lump-sum payment, paid over a period not to exceed 10 years, or paid out commencing at age 70-1/2. In addition, participants in the former KeySpan Plan may elect to receive annual installments or can choose to roll over their balance to an Individual Retirement Account or another qualified plan. A retired Participant who chooses distributions commencing at age 70-1/2 may elect to receive periodic distributions at any time prior to taking a lump-sum payout. Subject to certain restrictions, distributions to Participants under other circumstances are made in the form of whole or partial lump-sum payments. |
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| | | | The Plan allows Qualified Nonelective Contributions to the extent such contributions are necessary to satisfy the nondiscrimination requirement under the Internal Revenue Code. Following separation from service prior to age 55, a Participant may elect to receive partial distribution from his or her account or a total distribution at any time; such a Participant may also defer receipt of his or her benefit until the latest date permitted under the Internal Revenue Code. |
| | | | Forfeiture accounts are maintained to hold any employer contributions and earnings thereon that were deposited as a result of a participant’s separation from service prior to becoming fully vested. In addition, forfeitures from prior plan mergers and uncashed participant checks are held in the Plan forfeiture accounts. |
12
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | As of December 31, 2007, forfeited non-vested accounts totaled $7,145. These accounts may be used to reduce future employer contributions and pay Plan administration expenses as described in the Plan document. During the year ended December 31, 2007, forfeited non-vested accounts were not utilized to reduce employer contributions. |
| 2. | | Summary Of Significant Accounting Policies |
| | | | The accompanying financial statements have been prepared on the accrual basis of accounting, in accordance with accounting principles generally accepted in the United States of America. |
| | | | As described in Financial Accounting Standards Board Staff Position, FSP AAG INV-1 and SOP 94-4-1, Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide and Defined-Contribution Health and Welfare and Pension Plans (the “FSP”), investment contracts held by a defined-contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined-contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the plan. As required by the FSP, the statement of net assets available for benefits presents the fair value of the investment contracts as well as the adjustment of the fully benefit-responsive investment contracts from fair value to contract value. The statement changes in net assets available for benefits is prepared on a contract value basis. |
| | | | The Plan provides for various investment options in various combinations of investment funds. Investment funds are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the |
13
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | statement of net assets available for benefits. |
| | | | The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits, and changes therein, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. |
| | | New Accounting Prounouncements |
| | | | In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (the Standard). The Standard defines fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. The Standard applies to fair value measurements already required or permitted by existing standards. The Standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management is currently evaluating what impact the adoption of the Standard will have on the financial statements. |
| | | Investment Valuation And Income Recognition |
| | | | The mutual funds are stated at fair value on the last business day of the plan year, which is determined by the investment advisors according to closing market prices of the securities held by the funds. If a closing price is not available, the security is priced at a fair market value as determined by the mutual funds investment committee or officers of the investment advisors. |
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| | | | Units of common/collective trusts are valued at the net asset value of shares held by the Plan at year end. Participant loans and contribution receivables are valued at cost, which approximates fair value. |
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| | | | Investments in the National Grid plc American Depositary Receipts (which trades on the New York Stock Exchange under the symbol “NGG”) are valued according to the closing price on the London Stock Exchange which is then converted from British Pounds to U.S. Dollars based on relevant currency exchange rates. The Plan provides that certain transactions relative to National Grid plc American Depository Receipts will be priced at the market value of the underlying securities at close of the London Stock Exchange on the business day prior to the particular transaction. |
14
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | | Amounts for securities that have no quoted market price represent estimated fair value. |
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| | | | The Plan is invested in T. Rowe Price, the Stable Value Common Trust Fund. Contract value represents cost plus accrued income minus redemptions. All investment contracts held by the trust are affected directly between the trust and the issuer of the contract and are nontransferable. Permitted participant-initiated withdrawals are allowed from the trust by an employer-sponsored defined-contribution plan directly as a result of participant transactions allowed by the Plan, such as participant withdrawals for benefits, or transfers to other funds or trust within the Plan. |
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| | | | A Master Trust exists for the sole purpose of holding the JPMorgan Stable Value Fund (Stable Value Fund) assets of the Plan and the National Grid USA Companies’ Incentive Thrift Plan I. The Stable Value Fund through the Master Trust is participant-directed. The Master Trust is comprised of the Stable Value Fund which includes a synthetic guaranteed investment contract (Synthetic GIC) whose underlying investments are stated at fair value. Fair value of the underlying investments is determined by taking into account values supplied by reputable pricing or quotation service or quotations furnished by one or more reputable sources, such as securities brokers, dealers or investment bankers, mutual fund administrators or other relevant information. Fair value of the insurance contracts, known as wrapper contracts, is based on quoted market prices at the time of valuation versus actual costs of the contracts. The fair value of wrapper contracts for the Stable Value Fund as of December 31, 2007 and 2006 was zero. |
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| | | | The Company classifies short-term investments with a maturity of 90 days or less at time of purchase as cash equivalents. Cash and cash equivalents are included in the total assets on the statement of net assets available for benefits. |
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| | | | Dividend income is accrued on the ex-dividend date. Interest income is recorded as earned on accrual basis. Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date. |
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| | | | Management fees and operating expenses are charged to Plan participants and are reflected as a reduction of investment return in the mutual funds. Such management fees and operating expenses are deducted from income earned on a daily basis. |
| | | | Benefit payments and withdrawals by participants are recorded when paid. |
15
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| 3. | | Investments |
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| | | The following table presents investments that represent five percent or more of the Plan’s net assets at December 31, 2007 and 2006: |
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| | | 2007 | | | 2006 | |
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| National Grid plc American Depositary Receipts | | $ | 128,440,119 | | | $ | 121,373,775 | |
| T. Rowe Price U.S. Treasury Money Market Trust | | | 39,591,577 | * | | | 44,426,300 | |
| T. Rowe Price Stable Value Common Trust Fund | | | 130,256,307* | * | | | 122,069,258 | |
| Fidelity Growth Company Fund | | | 57,149,278 | * | | | 55,838,653 | |
| Fidelity Diversified International Fund | | | 83,921,626 | | | | 63,204,557 | |
| State Street S&P500 Flagship | | | 122,656,938 | | | | 113,827,198 | |
| Vanguard PRIMECAP Fund | | | 115,956,499 | | | | | |
| Master Trust Investment -JP Morgan Stable Value | | | 165,796,432** | * | | | | |
| KSE Stock Transition Fund | | | 87,380,248 | | | | | |
| | | * Indicates investments that represent 5% or more of net assets available for benefits only as of December 31, 2006, and not for the year ending December 31, 2007. |
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| | | ** This differs from the fair value of $131,030,748 as noted in the supplemental schedule |
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| | *** This differs from the fair value of $162,397,605 as noted in the Statement of Net Assets Available for Benefits |
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| | | During the year ended December 31, 2007, the Plan’s investments (including gains and losses on investments bought, sold and held during the year) appreciated (depreciated) in value as follows: |
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| Common Stocks | | $ | 18,249,331 | | | | | |
| Mutual funds | | | (13,078,411 | ) | | | | |
| Common/Collective Trusts | | | 6,186,241 | | | | | |
| | | | | | | | |
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| Net appreciation in fair value | | $ | 11,357,161 | | | | | |
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| | | Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, any unallocated assets of the Plan will be allocated to participant accounts and distributed in such a manner as the Company may determine. |
16
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| | | The Plan obtained its latest determination letter on July 17, 2002, in which the Internal Revenue Service (“IRS”) stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code (“IRC”). The Plan has been amended since receiving the determination letter. However, the plan administrator and the Plan’s counsel believe that the Plan is designed and currently being operated in compliance with the applicable requirements of the Internal Revenue Code. Therefore, no provision for income taxes has been included in the Plan’s financial statements. To the best of its knowledge, the Company believes that the Plan is currently in compliance with the provisions of the IRC. |
| 6. | | Related-Party Transactions |
| | | Section 3(14) of ERISA defines a party-in-interest to include among others, fiduciaries or employees of the Plan, any person who provides services to the Plan or an employer whose employees are covered by the Plan. Accordingly, loans to participants and investments in American Depositary Receipts of National Grid plc and KSE Stock Transition Funds are considered party-in-interest transactions. Moreover, the Plan’s investment options include mutual funds and trust funds managed by T. Rowe Price Associates, Inc. and Vanguard affiliates of the Trustee. |
| 7. | | Administration of Plan Assets |
| | | The trustee of the Plan holds the Plan’s assets. Contributions are held and managed by the trustee, who invest cash received, interest and dividend income and makes distributions to participants. |
| |
| | | Certain administrative functions are performed by officers or employees of participating subsidiaries of National Grid USA. No such officer or employee receives compensation from the Plan. |
| | | Plan expenses are paid by the Company, the Plan, or participants as provided in the Plan document. |
17
National Grid USA Companies’Incentive Thrift Plan IINotes To Financial Statements
| 9. | | Synthetic guaranteed investment contract |
| | | The Plan provides a stable value investment option, the JP Morgan Stable Value Fund, to former KeySpan Plan participants that includes a Synthetic GIC which is made up of wrapper contracts that guarantee principal and accumulate interest and a portfolio of financial instruments that are owned by the Plan. The synthetic GIC contract includes underlying assets which are held in the Master Trust owned by the Plan and utilizes benefit-responsive wrapper contracts issued by AIG Financial Products Corp., Royal Bank of Canada, State Street Bank and Trust Company, and UBS AG, proportionately. The contracts provide that participants execute plan transactions at contract value. Contract value represents contributions made to the funds, plus earnings, less participant withdrawals. The interest rates are reset quarterly based on the current yield of the underlying investments and the spread between the market value and contract value, but the rate cannot be less than 0%. Certain events such as plan termination or a plan merger initiated by the Company which results in a material and adverse effect on the wrapper contract may limit the ability of the Plan to transact on contract value or may allow for the termination of the wrapper contracts at less than contract value. At this time, the Company believes that any events that may limit the ability of the Plan to transact at contract value are remote. |
| | | | | |
Average yields for the year ended December 31, 2007
are as follows: | | | | |
| Based on annualized earnings | | | 6.73 | % |
| Based on interest rate credited to participants | | | 5.44 | % |
| | | The Vanguard Fiduciary Trust Company is the master trustee and holds the investment assets of the Master Trust as a commingled fund in which each separate plan is deemed to have a proportionate undivided interest in the investments in which they participate. At December 31, 2007, the Plan’s interest in the net assets of the Master Trust was approximately 56%. |
| |
| | | The following presents the net assets of the Master Trust as of December 31, 2007: |
| | | | | |
| INVESTMENTS | | | | |
| JP Morgan Stable Value Fund, at fair value | | $ | 289,933,079 | |
Adjustment from fair value to contract value for fully-benefit
responsive investment contracts | | | 6,068,023 | |
| | | | |
| NET ASSETS OF THE MASTER TRUST AT CONTRACT VALUE | | $ | 296,001,102 | |
| | | | |
18
National Grid USA Companies’
Incentive Thrift Plan II
Notes To Financial Statements
| | | Investment income for the Master Trust for the year ended December 31, 2007 is as follows: |
| | | | | |
| INVESTMENT INCOME | | | | |
| Interest income | | | $6,213,662 | |
| 11. | | Reconciliation of Financial Statements to Form 5500 |
| |
| | | The following is a reconciliation of net assets available benefits per the financial statements to the Form 5500 as of December 31, 2007 and 2006: |
| | | | | | | | | |
| | | 2007 | | | 2006 | |
Net assets available for benefits per the
financial statements | | $ | 1,674,179,953 | | | $ | 828,047,020 | |
| | | | | | | | | |
Less: Loans to participants deemed distributed
for tax purposes | | | (86,807 | ) | | | — | |
| | | | | | | | | |
Adjustment from contract value to fair value for
fully benefit-responsive investment contracts
not included as an asset in the Form 5500 | | | (2,624,386 | ) | | | (1,046,468 | ) |
| | | | | | | |
| | | | | | | | | |
Net assets available for benefits per the Form
5500 | | $ | 1,671,468,760 | | | $ | 827,000,552 | |
| | | | | | | |
| | | The following is reconciliation of the changes in net assets per the financial statements to the Form 5500 for the year ended December 31, 2007: |
| | | | | |
Change in net assets available for benefits
per the financial statements | | $ | 846,132,933 | |
| | | | | |
Less: Deemed loan defaults included on Form
5500, Schedule H, Line 2g | | | (86,807 | ) |
| | | | | |
Change in adjustment from fair value to contract
value for fully benefit-responsive investment
contracts not included in the Form 5500 | | | (1,577,918 | ) |
| | | | |
| | | | | |
Change in net assets available for benefits per
the Form 5500 | | $ | 844,468,208 | |
| | | | |
19
National Grid USA Companies’
Incentive Thrift Plan II
Notes To Financial Statements
| 12. | | Plan Amendments |
| |
| | | The Service Company Board of Directors voted to amend the Plan as follows: |
| | 1. | | To amend the Plan effective as detailed below to include changes authorized by the Board and changes required by law since the document was amended and restated effective January 1, 2005, including: |
| | a. | | Effective January 1, 2006, Section 12.4(b )(iv) is amended by deleting the clause “Regulation section 1.401(k)-1(b)(5)” and replaced with clause “Regulation section 1.401(k)-2(a)(6).” |
| |
| | b. | | Effective January 1, 2006, Section 12.4(b)(vii) is amended by deleting the clause “Regulation section 1.401(m)-1(b)(5)” and replaced with clause “Regulation section 1.401(m)-2(a)(6).” |
| |
| | c. | | Effective January 1, 2006, Section 12.4(f) Is deleted and replaced as follows: “(f) Distribution of excess contributions. The excess contributions of a highly compensated employee who is a participant, as adjusted for income, will be designated by the employer as a distribution of excess contributions and distributed to the participant. The income allocable to excess contributions shall be determined in accordance with Regulation section 1.401(k)-2(b)(2)(iv). Distribution of excess contributions will be made after the close of the plan year to which contributions relate, but within 12 months after the close of such plan year. Excess contributions shall be treated as annual additions under the plan, even if distributed under this paragraph.” |
| |
| | d. | | Effective January 1, 2006, Section 12.5(b)(iv) is amended by deleting the clause “Regulation section 1.401(m)-1(b)(5)” and replaced with the clause “Regulation section 1.401(m)-2(a)(6).” |
| |
| | e. | | Effective January 1, 2006, Section 12.5(g) is deleted and replaced as follows: “(g) Distribution of excess aggregate contributions. A participant’s excess aggregate contributions, adjusted for income, will be designated by the employer as a distribution of excess aggregate contributions, and distributed to the participant. Distributions will be made first from after-tax contributions, and then, to the extent necessary, from matching contributions. The income allocable to excess aggregate contributions shall be determined in accordance with Regulation section 1.401(k)-2(b)(2)(iv). Distribution of excess aggregate contributions will be made after the close of the plan year to which the contributions relate, but within 12 months after the close of such Plan Year. Excess aggregate contributions shall be treated as employer contributions for purposes of Code sections 401(a)(4), 404, and 415 even if distributed from the plan.” |
20
National Grid USA Companies’
Incentive Thrift Plan II
Notes To Financial Statements
| | f. | | To permit the rollover of nonspouse beneficiary holdings to an inherited IRA to the extent allowed by law. |
| |
| | g. | | Effective August 24, 2006, participants represented by United Steelworkers Locals 12431-01 and 12431-02 or UWUA AFL-CIO Local 472 shall be eligible to receive matching contributions effective immediately upon participation. |
| |
| | h. | | Effective August 24, 2006, participants represented by United Steelworkers Locals 12431-01 and 12431-02 shall receive basic matching contributions from his or her employer equal to 50% of his or her elective contribution limited to elective contributions of up to 10% (resulting in a maximum potential basic matching contribution of 5% of elective contributions). Participants represented by UWUA AFL-CIO Local 472 shall receive basic matching contributions from his or her employer equal to 100% of the first 2% of base compensation contributed and 50% of up to the next 4% of base compensation contributed. The employer account for employee participants represented by the UWUA AFL-CIO Local 472 hired on or after August 25, 2006 shall have their employer account holdings subject to a 6 year vesting schedule, (employee participants represented by UWUA AFL-CIO Local 472 hired as of August 24, 2006 as a result of the purchase of New England Gas asset pursuant to the purchase and sale agreement between Southern Union Company and National Grid USA dated February 15, 2006 are not subject to the vesting schedule): 10% upon attaining one year of service, 20% upon attaining two years of service; 40% upon attaining three years of service; 60% upon attaining four years of service; 80% upon attaining five years of service; and 100% upon attaining six years of service. |
| |
| | i. | | Effective August 24, 2006, a participant will at all times be 100% vested in his or her elective contribution account, employer account, (except as specifically set forth in Section 3.3 Basic Matching Contribution), participant account, (if any), post-tax rollover account and rollover account except to the extent vesting rules are modified by procedures adopted by the National Grid Committee. |
| |
| | j. | | Effective August 24, 2006, employees hired as of August 24, 2006 as a result of the purchase of New England Gas assets pursuant to the purchase and sale agreement between Southern Union Company and National Grid USA dated February 15, 2006 shall be afforded the opportunity to roll over their outstanding loans (up to three) from the Southern Union Savings Plan into the Plan and have those loans continue under the terms of the Plan in accordance with procedures adopted by the Benefits Committee. |
| |
| | k. | | Effective August 24, 2006, the maximum amount of elective contributions made on behalf of any participant for any calendar year, when added to the amount of elective deferrals under all other plans, contracts and arrangements of an |
21
National Grid USA Companies’
Incentive Thrift Plan II
Notes To Financial Statements
| | | | employer and/or any other employer with respect to the participant for the calendar year, shall in no event exceed the maximum applicable limit in effect for the calendar year under Regulation section 1.402(g)-1(d), except to the extent permitted under Section 3.9 of the Plan and section 414(v) of the Code. |
| |
| | l. | | Effective August 24, 2006, for employee participants represented by Utility Workers Local 472 (Cumberland) deferrals are based upon “all pay”. |
To amend the Plan effective as detailed below to include changes authorized by the Board and changes required by law since the document was amended and restated effective January 1, 2007, including:
| | m. | | Effective January 1, 2007, “qualified reservist distributions” are permitted under the Pension Protection Act of 2006 (PPA). Military reservists who meet certain criteria (including being ordered to active duty for at least 179 days) are to receive distributions of their elective deferrals while on active duty. This provision is both a waiver of the general restriction on such distributions prior to termination of employment and relieves such individuals from the 10% tax penalty that would otherwise apply. The tax penalty relief will apply to a distribution of employer matching contributions during the covered period as well. |
| |
| | n. | | Effective February 1, 2007, eligible employees represented by United Steelworkers Locals 12431-01 and 12431-02 shall not be included in the automatic enrollment “opt-out” program and eligible employees of UWUA AFL-CIO Local 472 shall be included in the automatic enrollment “opt-out” program. Participants represented by United Steelworkers Locals 12431-01 and 12431-02 or UWUA AFL-CIO Local 472 may enter into a contribution agreement with his or her employer specifying that a percentage of compensation for that portion of the plan year during which he or she is a participant will be contributed to the trust as an elective contribution. |
| |
| | o. | | Effective May 1, 2007, to permit hardship distributions by participants under Sections 6.1 of the plans on account of qualifying expenses (medical, funeral and post-secondary school) attributable to participant’s primary beneficiaries to the extent allowed by law (Pension Protection Act of 2006) and to the extent set forth in procedures adopted by the Benefits Committee, which procedures shall condition application of the provision to any applicable collective bargaining requirements. |
| |
| | p. | | Effective May 1, 2007 to permit non-spousal beneficiaries the ability to transfer their account balance to an established Inherited IRA. The transfer must be a direct roll-over from the Plan to the inherited IRA. No taxes will be withheld at |
22
National Grid USA Companies’
Incentive Thrift Plan II
Notes To Financial Statements
| | | | the time of the direct roll-over distribution. The inherited IRA must be titled in a manner that reflects the decedent and the beneficiary. |
| |
| | q. | | Approved May 23, 2007, all actions including plan amendments are authorized to achieve a merger of the KeySpan union 401(k) plans into Thrift Plan II, effective upon the acquisition of KeySpan. |
| |
| | r. | | Effective September 1, 2007 participants are given the option to elect their deferral percentage based on Base Pay or All Pay (base pay plus overtime, premium pay and any bonus pay) compensation. This choice is extended to both pre-tax and after-tax elections. Compensation eligible for the Company mach is not affected by this change. At the effective time of the change participant’s current deferral percentage election was mapped to Base Pay compensation, except for those employees who are members of UWUA local B310 (Cumberland Gas) and United Steelworkers of America which were mapped to All Pay compensation. Employees who are notified that they are eligible for automatic enrollment will be automatically enrolled in the Plan and 6% of their All Pay compensation will be contributed to the Plan on a pre-tax basis with the option of changing their deferral compensation to Base Pay. |
23
NATIONAL GRID USA COMPANIES
INCENTIVE THRIFT PLAN II
EIN: 04-1663150 PLAN NUMBER: 007
SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)
DECEMBER 31, 2007
| | | | | | | | | | | |
| |
| (a) | | (b) | | (c) | | (d) | | (e) | |
| | | | | | | | | Current | |
| | | Identity of Issue | | Description of Investment | | Cost | | Value | |
| |
| | | | | | | | | | | |
| * | | National Grid plc | | National Grid American Depositary Receipts | | N/R | | $ | 128,440,119 | |
| * | | KeySpan | | KSE Stock Transition Fund | | N/R | | | 87,380,248 | |
| | | | | | | | | | | |
| | | American Funds | | American Funds Growth Fund (R5) | | N/R | | | 18,783,748 | |
| * | | Vanguard | | Vanguard 500 Index Inv | | N/R | | | 57,335,197 | |
| * | | | | Vanguard Explorer Fund | | N/R | | | 39,448,206 | |
| * | | | | Vanguard Int’l Growth Fund | | N/R | | | 40,382,028 | |
| * | | | | Vanguard LifeSt Conserv Growth | | N/R | | | 11,988,529 | |
| * | | | | Vanguard LifeSt Growth Fund | | N/R | | | 19,109,695 | |
| * | | | | Vanguard LifeSt Mod Growth | | N/R | | | 41,002,933 | |
| * | | | | Vanguard Mid-Cap Index Fund | | N/R | | | 13,984,803 | |
| * | | | | Vanguard PRIMECAP Fund | | N/R | | | 115,956,499 | |
| * | | | | Vanguard Total Bond Mkt Index | | N/R | | | 33,639,804 | |
| * | | | | Vanguard Windsor Fund | | N/R | | | 46,285,324 | |
| * | | | | Vanguard Windsor II Fund Inv | | N/R | | | 63,065,419 | |
| | | | | | | | | | | |
| * | | T. Rowe Price Trust | | T. Rowe Price Stable Value Common Trust Fund | | N/R | | | 131,030,748 | |
| * | | Company, Incorporated | | T. Rowe Price Equity Income Fund | | N/R | | | 39,313,953 | |
| * | | | | T. Rowe Price U.S. Treasury Money Market Trust | | N/R | | | 39,591,577 | |
| * | | | | T. Rowe Price Blue Chip Growth Fund | | N/R | | | 31,383,464 | |
| * | | | | T. Rowe Price Small-Cap Value Fund | | N/R | | | 29,114,422 | |
| * | | | | T. Rowe Price Capital Appreciation Fund | | N/R | | | 26,836,528 | |
| * | | | | T. Rowe Price Mid-Cap Growth Fund | | N/R | | | 38,550,462 | |
| * | | | | T. Rowe Price Personal Strategy Growth Fund | | N/R | | | 22,880,558 | |
| * | | | | T. Rowe Price Personal Strategy Balanced Fund | | N/R | | | 18,674,262 | |
| * | | | | T. Rowe Price Personal Strategy Income Fund | | N/R | | | 6,021,584 | |
| | | Fidelity Investments | | Fidelity Diversified International | | N/R | | | 83,921,626 | |
| | | Fidelity Investments | | Fidelity Growth Company Fund | | N/R | | | 57,149,278 | |
| | | Fidelity Investments | | Fidelity Low Priced Stock Fund | | N/R | | | 13,223,979 | |
| | | Fidelity Investments | | Fidelity Dividend Growth | | N/R | | | 9,987,306 | |
| | | Allianz | | Allianz RCM Global Tech Fund | | N/R | | | 17,045,980 | |
| | | Calvert | | Calvert Large Cap Growth Fund | | N/R | | | 6,372,519 | |
| | | PIMCO | | PIMCO Total Return Fund | | N/R | | | 44,584,077 | |
| | | | | | | | | | | |
| | | State Street | | State Street S & P 500 Flagship | | N/R | | | 122,656,938 | |
| | | | | | | | | | | |
| * | | Participant Loans | | Participant loans with various maturities and rates | | | | | | |
| | | | | of interest from 5.00% to 10.00% | | N/R | | | 51,044,708 | |
| | | | | | | | | | |
| | | | | | | | | | | |
| | | | | Total | | | | $ | 1,506,186,521 | |
| | | | | | | | | | |
| |
| * | | Parties-in-interest, as defined by ERISA | | | | | | |
N/R - Participant directed investment; cost not required to be reported
The accompanying notes are an integral part of the financial statements
24
