TIDMNG.
RNS Number : 3535O
National Grid PLC
17 May 2018
London | 17 May 2018: National
Grid, a leading energy transmission
and distribution company,
today announces its Full
Year results.
Report for the year ended
31 March 2018
Operational Highlights Financial Highlights
* Strong operational performance across the Group * Underlying operating profit up 4% to GBP3.5bn (6% at
constant currency); statutory operating profit up 9%
to GBP3.5bn
* US regulated Return on Equity at 95% of allowed rate,
better than target
* Underlying EPS of 60.4p, (up 3% on 2017 adjusted for
Cadent pro forma)
* Continued UK outperformance generated around GBP540m
of customer savings in the first five years of RIIO
* Headline EPS of 59.5p (statutory EPS of 103.8p)
* Good progress in NG Ventures, with increased
interconnector investment * Group RoE of 12.3% (2017: 11.7%)
* Continued execution of our strategy with option * Significant capital investment of GBP4.3bn, up 14% at
agreement on remaining 25% stake in Cadent constant currency
* Asset growth of 6%
* Recommended full year dividend of 45.93p
================================================================== ===================================================================
Financial Summary
Year ended 31 March - continuing operations only
Statutory results Headline[1]
------------------------ ========================================================== ==============================================
2018 2017 % change 2018 2017 % change
------------------- ------------------ ----------------- ============== =========== =================
Operating profit
(GBPm) 3,493 3,208 9 3,457 3,773 (8)
========================= ------------------- ------------------ ----------------- -------------- ----------- -----------------
Profit before tax
(GBPm) 2,708 2,184 24 2,650 2,807 (6)
========================= ------------------- ------------------ ----------------- -------------- ----------- -----------------
Earnings Per Share
(p) 103.8 48.1 116* 59.5 56.9 5
========================= ------------------- ------------------ ----------------- -------------- ----------- -----------------
Capital Investment
(GBPm) 4,251 3,862 10
========================= ------------------- ------------------ -----------------
* Includes 43.7p for the impact of GBP1.5bn
exceptional accounting credit relating to
US tax reform
Underlying (including
Cadent pro forma)[1](,)
[2]
==========================================================
2018 2017 % change
======================== ------------------- ------------------ -----------------
Operating profit
(GBPm) 3,495 3,375 4
========================= ------------------- ------------------ -----------------
Profit before tax
(GBPm) 2,688 2,582 4
========================= ------------------- ------------------ -----------------
Earnings Per Share
(p) 60.4 58.6 3
========================= ------------------- ------------------ -----------------
John Pettigrew
Chief Executive
"We delivered strong operational and financial performance in
2017/18. Our networks achieved high levels of reliability and
safety and we increased customer driven investment to GBP4.3
billion. The US business continued to make significant progress
enabling record levels of investment. In the UK, we continued to
deliver incentive outperformance generating significant cost
savings for customers. Consistent with our strategy, we continued
the repositioning of our portfolio towards stronger growth with the
recent agreement for the potential sale of our remaining interest
in Cadent.
Looking ahead, National Grid expects growth at the top end of
the 5-7% range for the medium term, and at least 7% in the near
term, which we will deliver with continued capital discipline and
improved efficiency across the Group. The business is well
positioned with a balanced portfolio and an efficient balance sheet
that underpins asset and dividend growth."
Contacts
Investor Relations
================================================================================
+44 (0)20 7004
Aarti Singhal 3170 +44 (0) 7989 492447
================================ =================== =========================
+44 (0)20 7004 +44 (0) 7584 206
Will Jackson 3166 578
================================ =================== =========================
+44 (0)20 7004 +44 (0) 7976 962
Tom Edwards 3460 791
================================ =================== =========================
+44 (0)20 7004 +44 (0) 7970 778
James Flanagan 3129 952
================================ =================== =========================
Media
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+44 (0)20 7004
Sean Kemp 3149 +44 (0) 7960 012356
================================ =================== =========================
+44 (0) 1926
Gemma Stokes 655272 +44 (0) 7974 198333
================================ =================== =========================
Teneo Blue Rubicon
================================================================================
+44 (0)20 7420
Charles Armistead 3199
================================ =================== =========================
Conference call details
An analyst presentation will be held at the London Stock Exchange,
10 Paternoster Square, London EC4M 7LS at 09:15 (BST) today. There
will be a live webcast of the results presentation available to view
at investors.nationalgrid.com. A replay will be available soon after
the event ends.
Live telephone coverage of the analyst presentation at 09:15
================================================================================
UK dial in numbers +44 (0) 203 037 9315
+44 (0) 800 368 2276 (UK toll free)
================================ ==============================================
US dial in numbers +1 866 966 5335 (US toll free)
+1 212 999 6659 (New York)
================================ ==============================================
Password National Grid
================================ =================== =========================
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National Grid image library available at http://media.nationalgrid.com/
The 2018 Annual Report and Accounts (ARA) is expected to be publicly
available on 4 June 2018. You can view or download the ARA from National
Grid's website at investors.nationalgrid.com or request a free printed
copy by contacting investor.relations@nationalgrid.com
Use of Alternative Performance Measures
Throughout this release we use a number of alternative (or
non-IFRS) and regulatory performance measures to provide users with
a clearer picture of the regulated performance of the business.
This is in line with how management monitor and manage the business
day-to-day. Further detail and definitions for all alternative
performance measures are provided on page 39.
2017/18 OVERVIEW
A year of significant progress and increased investment
National Grid continued to deliver strong operational
performance for customers throughout the year with high standards
of network availability and reliability, reflecting the benefit of
the Group's disciplined investment in new infrastructure.
Our safety and reliability performance remains core and last
year we made further progress evolving our safety plans. We have
consistently delivered on these plans which has enabled us to
achieve an employee lost time injury frequency rate of 0.10[3], a
level that is consistent with world-class safety performance.
In the year we also delivered an increased level of investment
in critical infrastructure, investing GBP4.3 billion, an increase
of 14% at constant currency[4]. The capital spend, when combined
with RPI inflation, drove asset growth of 6% which we achieved
whilst maintaining a strong Return on Equity at 12.3% for the
Group.
The reshaping of the business has continued, underpinning our
objective of a portfolio that can grow sustainably. In May, we
announced an agreement on the potential sale of the remaining 25%
stake we hold in Cadent with Quadgas. The terms of the agreement
are broadly similar to the 14% option agreed as part of the
original sale, with the put and call option expected to be
exercised between March and October 2019. We expect the cash
proceeds from the potential sale of the 25% to be approximately
GBP1.2 billion, to be retained in the business to help deliver our
growth strategy.
Significant operational and financial progress in the US
Our US business delivered another year of improved performance
in 2017/18 with strong financial and operational performance in a
regulatory environment that is supporting strong asset growth.
We faced a challenging winter with major storms across all our
jurisdictions. In October, we had to restore power to over 530,000
customers following one of the most severe storms in recent years.
In March, we had three back-to-back Nor'Easters, and our crews
worked round the clock restoring the vast majority of customers in
each of the storms within 72 hours. The majority of the restoration
costs of GBP142 million will be recovered via our existing
regulatory mechanisms.
A key commitment was to continue our recent trend of improved
returns with a goal to deliver 90% of the allowed Return on Equity
for fiscal year 2017/18. We achieved more than this, delivering 95%
of our allowed Return on Equity whilst also delivering strong rate
base growth of 7.4% in the US.
During the year, Massachusetts Electric, KEDNY and KEDLI all
operated under new rates, and we also completed a successful rate
case for Niagara Mohawk (NiMo) with new rates in effect from 1
April 2018. The NiMo agreement, which covers $6.1 billion of rate
base, allows a Return on Equity of 9.0%, and $2.5 billion of
capital investment over three years.
In November, we submitted rate cases for our Massachusetts Gas
and Rhode Island businesses, and expect to have updated rates in
place by October 2018. Both filings are progressing well, with the
evidentiary hearing for Massachusetts Gas due to conclude later
this month and the same hearings for Rhode Island starting in June.
With the completion of these rate filings we will have new rates
for our entire US rate base, contributing to improvements in
performance and allowing us to achieve returns as close to the
allowed level as possible.
In December 2017, US tax reform was announced. Tax is a
pass-through cost, therefore the reduction in the corporation tax
rate from 35% to 21% will be significantly beneficial for customers
and economically neutral for utilities. However, there will be some
implications on cashflows resulting from lower bill collections, as
there is little or no offset in cash tax paid due to our current
net operating loss position for the purposes of calculating taxable
profits in the US. To date, we reduced our revenue requests by $180
million across the three operating companies that were undergoing
rate filings at the time the legislation was enacted (NiMo,
Massachusetts Gas, Rhode Island) as well as for our FERC
businesses. We remain in discussion with regulators for the
remaining US businesses. In addition, we expect to return $2
billion of existing deferred tax liabilities over 20 to 30 years,
which represents amounts previously collected from customers based
on the higher rate of 35%. For further detail please refer to page
29.
With increased levels of investment in the US we have
established a capital delivery centre of excellence, similar to
that established in the UK in 2013, to ensure the efficient
delivery of our capital programme. This function is already having
an impact on helping the US to deliver on certain construction
projects, such as the Metropolitan Reliability Infrastructure
project, which is a $280 million, five-year development running
through the heart of Brooklyn, New York. We are ahead of the
initial build schedule, and when complete this project will
significantly improve the reliability of our network in this
congested part of our service territory.
Solid UK performance
Both our UK electricity and gas transmission businesses
continued to deliver high levels of performance in 2017/18.
In the five years since RIIO was introduced, we have generated
approximately GBP540 million of customer savings which will help to
reduce bills over a number of years. In 2017/18, we delivered 200
bps of outperformance through efficiency and performance
optimisation. We completed the first phase of the London Power
Tunnels generating around GBP80 million of efficiency savings. This
is a significant landmark in re-wiring the capital to provide
sufficient resilience and capacity as London continues to grow.
In March, Ofgem launched their framework consultation for
RIIO-T2, which is another important step in the process leading to
a new price control in April 2021. We have recently responded to
the Consultation document which contained a wide range of options.
Our key focus over the next three years is to ensure that the final
package is one that provides an appropriate balance between risk
and reward, drives innovation and efficiency through
incentivisation, ensures financeability of our networks and
benefits all parties through improved affordability. The next step
will be Ofgem's decision on the framework this summer, and the
publication in the autumn of the methodology for the
sector-specific price controls.
In January, Ofgem published their 'minded-to' position on the
Hinkley-Seabank connection, which represents almost GBP800 million
of capital investment. We were disappointed with the financial
parameters for the project proposed and submitted a response to
Ofgem, as did other industry participants. Whilst the annualised
capex is relatively small we did not view Ofgem's position as one
that fairly balances the risk and reward for this complex project.
Ofgem is expected to announce its decision on this consultation in
the summer, after which we will consider all options available to
us.
Finally, last August we received clarity on the role of the
Electricity System Operator (ESO). Work is underway to legally
separate the ESO and this is expected to complete by April
2019.
Progress in National Grid Ventures
National Grid Ventures delivered a solid performance in 2017/18,
with good progress on the interconnector projects.
On our Nemo project, the electricity link between the UK and
Belgium, we have laid 80% of the 140 kilometre cable and the
project is on plan to be operational in FY19. The North Sea Link
(NSL) project is due to be operational in FY22. We have started
cable laying from the UK end and recently began construction on
convertor stations. Work has also started on the second French
interconnector with the convertor station construction beginning
summer 2018/19, and the link expected to be operational in
FY21.
Property results continue to improve
The Property business delivered a higher level of operating
profit at GBP84 million with further sales in the year, most
notably our Staines and York sites. In March this year, St.
William, our joint venture with the Berkeley Group, reached the top
floor of its first building at the Prince of Wales Drive site in
Battersea. This is a significant milestone for the scheme which
will deliver almost one thousand new homes in London when
completed.
Group RoE of 12.3%
Group Return on Equity of 12.3% (2016/17: 11.7%) was 60 bps
higher than last year, primarily driven by improved US revenues. In
the UK, the regulated businesses delivered returns of 12.1%,
including an assumption of 3% long-run average Retail Price Index
(RPI) inflation. US Return on Equity, at 95% of the allowed return,
increased to 8.9% reflecting a full year of new rates in three of
our US businesses and operational efficiencies. National Grid
Ventures and Other activities delivered a solid performance and
operated in line with expectations.
GROWTH AND VALUE ADDED
A balanced portfolio to deliver asset and dividend growth
National Grid aims to provide best value to shareholders through
maintaining a portfolio of businesses that offer an attractive
combination of growth and cash returns.
Our focus has been to deliver 5-7% asset growth assuming
long-run average UK RPI inflation of 3%. Compared to our recent
rate of around 5%, the Group is now entering a period of stronger
growth. We expect asset growth to be sustained at the top end of
the 5-7% range for the medium term, and of at least 7% in the near
term. This is being driven by:
-- The sale of our UK Gas Distribution stake reshaping the portfolio towards higher growth;
-- The visibility of US growth due to the successful rate filings;
-- The investment in interconnectors in NG Ventures
Efficient capital structure to fund stronger growth
We have a strong balance sheet and an efficient capital
structure which underpins the effective financing of the Company's
growing investment programme. We expect to finance this higher rate
of growth through a combination of:
-- internally generated equity capital, delivered through strong
returns performance in the UK and US, including from operating cost
efficiencies and faster recovery of regulatory assets through rate
filings and re-openers;
-- cash received from the company's disposal of the remaining 39% shareholding in Cadent; and
-- additional capital generated through take up of the scrip
dividend option, which we put in place to support the business in
periods of higher growth.
In light of this higher growth we do not expect to buy back
scrip issuances in FY19 and FY20, unless we have higher than
anticipated balance sheet capacity.
We believe that this high quality growth will generate
attractive returns for our shareholders and underpin our long-term
investment proposition of sustainable asset and dividend
growth.
GBP4.3 billion of Capital Investment in 2017/18, 14% higher at
constant currency
We continued to make significant investments in critical energy
infrastructure during 2017/18. Total capital investment across the
Group was GBP4,251 million, an increase of GBP534 million (14%) at
constant currency, compared to the prior year.
Year ended 31 March At actual exchange
Group Capital Investment rates At constant currency
------------------------- -------------------------
(GBPm) 2018 2017 % change 2018 2017 % change
------------------------------ ------ ------ --------- ------ ------ ---------
UK Electricity Transmission 999 1,027 (3) 999 1,027 (3)
UK Gas Transmission 310 214 45 310 214 45
US Regulated 2,424 2,247 8 2,424 2,113 15
NG Ventures and other
activities(1) 518 374 39 518 363 43
Group Capital Investment 4,251 3,862 10 4,251 3,717 14
------------------------------ ------ ------ --------- ------ ------ ---------
(1) NG Ventures and other activities capital investment includes
equity and financing in joint ventures and associates but excludes
GBP19m and GBP10m equity contribution to St William property joint
venture for 2018 and 2017 respectively.
The UK regulated transmission businesses together invested a
total of GBP1,309 million in the year, GBP68 million higher than
the prior year. This reflects increased spend on the Gas
Transmission project under the Humber Estuary and greater levels of
asset health activity to maintain safe and reliable networks. Lower
investment in Electricity Transmission reflects a combination of
reduced spend on the Western HVDC Link and completion of the first
phase of the London Power Tunnels.
In the US, we achieved record levels of infrastructure
investment reaching a total of GBP2,424 million in the Regulated
businesses, an increase of GBP311 million over 2016/17 at constant
currency. This includes higher spend in KEDNY, Massachusetts
Electric and Massachusetts Gas. We expect to invest $10 billion in
our jurisdictions over the next three years, 90% of which is
already reflected in our rate plans. Rate case outcomes for our
Massachusetts Gas and Rhode Island Gas and Electric businesses,
expected by October 2018, should further support the required
investment to strengthen and modernise our networks. This progress
has contributed significantly to the strong growth rates we are
seeing now and in the medium term across our US business.
Investment in National Grid Ventures and Other activities
increased by GBP155 million to GBP518 million on a constant
currency basis. This reflected the start of construction on IFA2,
and increased investment in Nemo which is on schedule.
Achieved asset growth of 6% compared to 5% last year
During 2017/18 our combined regulated asset base and NG Ventures
and Other businesses invested capital grew by GBP2.0 billion or 6%
on a constant currency basis, compared to an increase of 5% in the
prior year.
UK RAV growth was 4.5% reflecting the continued consistent level
of investment and higher levels of inflation during the year.
Growth in our US rate base of 7.4% was driven by increased levels
of investment offset by depreciation, deferred tax, and timing over
recoveries.
Year ended 31 March At constant
Annual asset growth (continuing currency
operations)
(GBPm) 2018 2017(2) % Change
---------------------------------- ------- -------- ---------
UK RAV(1) 19,059 18,234 5
US rate base 14,762 13,751 7
------------------------------------ ------- -------- ---------
Total RAV and rate base 33,821 31,985 6
NG Ventures and Other businesses 2,167 1,984 9
------------------------------------ ------- -------- ---------
Total 35,988 33,969 6
------------------------------------ ------- -------- ---------
(1) UK RAV excludes Cadent investment.
(2) 2017 represented to include opening balance adjustments
following the completion of the regulatory pack process in
2017.
Value Added of GBP2.0 billion, driven by asset growth
The solid financial performance in the year is reflected in the
Value Added metric. This metric reflects the key components of
value delivery to shareholders, being the dividend and growth in
the value of National Grid's assets, net of growth in net debt. The
Value Added per share measure also reflects the funding of this
growth and any dilution of the equity investment through, for
example, scrip dividend take up. Value Added in the year was GBP2.0
billion or 57.9p per share.
Value Added Change
(GBPm constant currency)
--------------------------------------- ------- ------- ---------------------
2018 2017 2017/18 2016/17(1)
--------------------------------------- ------- ------- -------- -----------
UK RAV(2) 19,059 18,234 825 1,066
US rate base 14,762 13,751 1,011 827
NG Ventures and Other businesses 2,167 1,984 183 230
--------------------------------------- ------- ------- -------- -----------
Total 35,988 33,969 2,019 2,123
UK other regulated assets/liabilities (519) (479) (40) (392)
US other regulated assets/liabilities 1,921 1,487 434 18
Other (343) (260) (83) -
Total group regulated and other
assets 37,047 34,717 2,330 1,749
Dividend/share repurchase in
the year 1,494 1,652
Movement in Net Debt and Goodwill(3) (1,820) (1,460)
Value Added 2,004 1,941
Value Added per Share(4) 57.9p 51.6p
(1) 2016/17 value added calculation includes 100% share of UK
Gas Distribution.
(2) 2017 Restated for opening balance adjustments following the
completion of the regulatory reporting pack process in 2017.
(3) 2016/17 net debt and goodwill movement excludes the
GBP9,871m reduction in net debt arising on the sale of UK Gas
Distribution. 2017/18 net debt and goodwill movement excludes
GBP4.0bn relating to the return of capital resulting from the sale
of a stake in UK Gas Distribution.
(4) Based on 3,461m weighted average shares for 2017/18
(2016/17: 3,763m).
Value Added was higher than 2016/17, primarily due to higher
operational returns on US regulated assets.
Of the GBP2,004 million Value Added in 2017/18, GBP1,316 million
was paid to shareholders as cash dividends, and GBP178 million as
share repurchases (offsetting the scrip issuance during the year)
and GBP510 million was retained in the business.
FINANCIAL STRENGTH
Credit metrics remain strong, maintain A- rating
Our overall Group credit rating remains at A-/A3
(S&P/Moody's). Group gearing, measured as net debt as a
proportion of total regulatory value and other business invested
capital, was 64% at 31 March 2018, compared with 62%, at constant
currency, at 31 March 2017. Gearing remains at an appropriate level
for the current credit rating. Retained cash flow (RCF)/adjusted
net debt was 10.6% excluding one-off costs relating to the disposal
of UK Gas Distribution, above the 9% level currently indicated by
Moody's as consistent with an A3 rating.
Dividend increase of 3.75% recommended for 2017/18
Our dividend policy aims to grow the ordinary dividend per share
at least in line with the rate of RPI inflation each year for the
foreseeable future.
The Board has recommended an increase in the final dividend to
30.44p per ordinary share ($2.0606 per American Depositary Share)
which will be paid to shareholders on the register as at 1 June
2018. If approved, this will bring the full year dividend to 45.93p
per ordinary share, an increase of 3.75% over the 44.27p per
ordinary share in respect of the financial year ending 31 March
2017. This 3.75% rise is in line with the increase in UK RPI for
the twelve months to 31 March 2018 as set out in the policy
announcement of 28 March 2013.
During 2017/18 we repurchased 23 million shares issued under the
scrip programme reducing the dilution associated with the
programme. A scrip dividend alternative will again be offered in
respect of the 2017/18 final dividend.
Board changes
In May 2018, we announced that Andrew Bonfield, Finance
Director, will step down from his role with effect from the end of
the Annual General Meeting on 30 July. Andy Agg, Group Tax and
Treasury Director, will hold the position on an interim basis while
the Board looks to identify a permanent successor. In May, we also
announced that Pierre Dufour would be stepping down as
Non-executive Director of the Board with effect from the end of the
Annual General Meeting.
In April 2018, we announced the appointment of Amanda Mesler as
a Non-executive Director of the Board with effect from 17 May 2018.
On appointment, Amanda joins the Audit, Finance and Nominations
Committees of National Grid. As previously announced, Ruth Kelly
stood down as a Non-Executive Director of the Board at the end of
the 2017 Annual General Meeting on 31 July 2017.
OUTLOOK
Following the agreement of a number of regulatory filings, good
financial performance is expected to continue in the US business.
The UK business remains on track to deliver outperformance as
expected. The contribution from National Grid Ventures and Other
activities is expected to be slightly higher.
Looking ahead, National Grid expects growth at the top end of
the 5-7% range for the medium term, and at least 7% in the near
term, which we will deliver with continued capital discipline and
improved efficiency across the Group. The business is well
positioned with a balanced portfolio and an efficient balance sheet
that underpins asset and dividend growth.
2018/19 TECHNICAL GUIDANCE
The outlook and technical guidance contained in this statement
should be reviewed, together with the forward looking statements
set out in this release, in the context of the cautionary
statement.
UK Electricity Transmission
Net Revenue (excluding timing) is expected to increase by
approximately GBP80 million compared to 2017/18, reflecting
inflationary increases on base revenues and revised system operator
incentives.
Totex outperformance is expected to reduce marginally compared
with 2017/18, offset by improved incentive performance. Overall
Return on Equity outperformance is expected to remain at the top
end of the 200 - 300 bps range.
UK Gas Transmission
Net Revenue (excluding timing) is expected to decrease, with
approximately GBP160 million of lower revenue allowances compared
to 2017/18, primarily due to the return of revenues relating to the
Avonmouth project through the annual MOD adjustment[5].
Totex and incentive performance are both expected to be similar
to the prior year. As a result Return on Equity is expected to be
around the allowed level in 2018/19.
UK Timing
Revenues will be impacted by timing of recoveries including
impacts from prior years. Electricity Transmission is expected to
under-recover by around an additional GBP90 million compared to
2017/18. Gas Transmission timing is expected to under-recover at a
similar level to 2017/18.
US Regulated operations
Net Revenue (excluding timing) is expected to increase by about
GBP80 million, with the full year benefit of new rate case filings
and capex trackers, partially offset by the impact of tax reform
and the adoption of IFRS15. After inflationary impacts on operating
costs, we expect underlying operating profit to be relatively
flat.
Return on Equity for overall US Regulated operations is expected
to remain at a similar level to the performance in 2017/18.
US Timing
US in-year timing is heavily influenced by volumetric impacts
and commodity prices, particularly over the last quarter of the
financial year. However, we expect payments of previously
over-recovered NYSERDA balances to reduce revenue by approximately
$100 million during 2018/19.
National Grid Ventures and Other activities
Revenue is expected to increase year-on-year, mainly due to the
forecast sale of the Fulham site to St William in our Property
business, subject to receiving appropriate planning consents.
Profits from the Property business are expected to be almost double
last year's level as a result. This increase will be partially
offset by lower revenues at Interconnexion France-Angleterre (IFA)
and fewer domestic meters in the Metering business.
Joint Ventures and Associates
Our share of the Headline profit after tax of joint ventures and
associates, excluding Cadent, is expected to be broadly in line
with the prior year.
Interest and Taxation
Net finance costs in 2018/19 are expected to increase, driven by
higher average net debt and the non-repeat of gains on the disposal
of available for sale investments, partially offset by lower
RPI.
For the full year 2018/19, the effective tax rate, excluding the
share of joint venture and associate post-tax profits, is expected
to reduce to around 21%.
Changes to accounting standards
No material impact on EPS is expected following the adoption of
IFRS9 and IFRS15 in 2018/19.
Investment, Growth and Net Debt
Overall Group capital investment for 2018/19 is expected to be
at a similar level to the GBP4.3 billion of investment in
2017/18.
Depreciation is expected to increase, reflecting the impact of
continued high levels of capital investment.
Operating cashflow generated from continuing operations is
expected to reduce, reflecting the collection of lower tax
allowances in US revenues.
Net debt is expected to increase from GBP23.0 billion at 31
March 2018 as a result of ongoing business requirements by
approximately GBP2.5 billion.
Weighted average number of shares (WAV) is expected to reduce
reflecting the full year impact of the share consolidation and
share buyback programme following the distribution of the UK Gas
Distribution net sale proceeds during 2017/18. We expect the share
buyback and a full year's impact of the share consolidation to have
the effect of reducing WAV by approximately 70 million compared to
2017/18. This would be partially offset by the impact of any shares
issued via scrip.
FINANCIAL REVIEW
Unless otherwise stated, all financial commentary in this
release is given on a headline basis at actual exchange rates for
continuing operations. The use of these alternative and regulatory
performance (or non-IFRS) measures is to provide users with a
clearer picture of the regulated performance of the business. This
is in line with how management monitor and manage the business
day-to-day. For definitions and metrics see pages 38 to 46 of this
statement.
Profits and earnings from continuing operations
Statutory Headline
----------------------- -----------------------
At actual exchange rates 2018 2017 change 2018 2017 change
(GBPm) GBPm GBPm % GBPm GBPm %
UK Electricity Transmission 1,041 1,361 (24) 1,041 1,372 (24)
UK Gas Transmission 487 507 (4) 487 511 (5)
US Regulated 1,734 1,278 36 1,698 1,713 (1)
NG Ventures and Other 231 62 273 231 177 31
Total operating profit 3,493 3,208 9 3,457 3,773 (8)
Net finance costs (745) (1,087) 31 (974) (1,029) 5
Share of post-tax results of JVs and associates (40) 63 (163) 167 63 165
------------------------------------------------ ----- ------- ------- ----- ------- -------
Profit before tax 2,708 2,184 24 2,650 2,807 (6)
Tax[6] 884 (374) 336 (589) (666) 12
------------------------------------------------ ----- ------- ------- ----- ------- -------
Profit after tax 3,592 1,810 98 2,061 2,141 (4)
------------------------------------------------ ----- ------- ------- ----- ------- -------
EPS (pence) 103.8 48.1 116 59.5 56.9 5
------------------------------------------------ ----- ------- ------- ----- ------- -------
Underlying Underlying (including Cadent pro forma)
---------------------- -------------------------------------------
At actual exchange rates 2018 2017 change 2018 2017 change
(GBPm) GBPm GBPm % GBPm GBPm %
--------------------------------------- ----- ------- ------ ----------- --------------- -------------
UK Electricity Transmission 1,055 1,235 (15) 1,055 1,235 (15)
UK Gas Transmission 505 449 12 505 449 12
US Regulated 1,704 1,514 13 1,704 1,514 13
NG Ventures and Other 231 177 31 231 177 31
Total operating profit 3,495 3,375 4 3,495 3,375 4
Net finance costs (974) (1,029) 5 (974) (1,000) 3
Share of post-tax results of JVs and
associates 167 63 165 167 207 (19)
--------------------------------------- ----- ------- ------ ----------- --------------- -------------
Profit before tax 2,688 2,409 12 2,688 2,582 4
Tax (598) (547) (9) (598) (553) (8)
--------------------------------------- ----- ------- ------ ----------- --------------- -------------
Profit after tax 2,090 1,862 12 2,090 2,029 3
--------------------------------------- ----- ------- ------ ----------- --------------- -------------
EPS (pence) 60.4 49.5 22 60.4 58.6 3
--------------------------------------- ----- ------- ------ ----------- --------------- -------------
Profits and earnings from continuing operations
Headline Underlying Underlying (including Cadent pro forma)
--------------------- -------------------- -------------------------------------------
At constant currency 2018 2017 change 2018 2017 change 2018 2017 change
(GBPm) GBPm GBPm % GBPm GBPm % GBPm GBPm %
UK Electricity Transmission 1,041 1,372 (24) 1,055 1,235 (15) 1,055 1,235 (15)
UK Gas Transmission 487 511 (5) 505 449 12 505 449 12
US Regulated 1,698 1,611 5 1,704 1,424 20 1,704 1,424 20
NG Ventures and Other 231 181 28 231 181 28 231 181 28
Total operating profit 3,457 3,675 (6) 3,495 3,289 6 3,495 3,289 6
Net finance costs (974) (984) 1 (974) (984) 1 (974) (955) (2)
Share of post-tax results of
JVs and associates 167 62 169 167 62 169 167 206 (19)
---------------------------- ----- ----- ------- ----- ----- ------ ------------ ----------- ----------------
Profit before tax 2,650 2,753 (4) 2,688 2,367 14 2,688 2,540 6
---------------------------- ----- ----- ------- ----- ----- ------ ------------ ----------- ----------------
Definitions
In considering the financial performance of our business and
segments, we use various adjusted profit measures in order to aid
comparability of results year-on-year. The various measures are
explained below and reconciled on pages 38 to 46.
Headline (also referred to as 'Adjusted') - In considering the
financial performance of our businesses and segments, we analyse
each of our primary financial measures of operating profit, profit
before tax, and profit for the year attributable to equity
shareholders and EPS into two components. The first of these
components is referred to as 'Headline' or alternatively as a
'business performance' measure. This is the measure used by
management that forms part of the incentive target set annually for
remunerating certain Executive Directors. Headline results exclude
exceptional items and remeasurements. These items are reported
collectively as the second component of the financial measures.
Note 3 on page 57 explains in detail the items which are excluded
from our adjusted profit measures.
Underlying - This is one of the measures used by management to
assess the performance of the underlying business. This measure is
based on the Headline figure, but excludes the impact of timing in
each year and major storms experienced during 2017/18. The impact
of major storms is adjusted for when the total impact in any one
year is sufficiently large. Prior to this year, the last storms
that were excluded from Headline performance were Superstorm Sandy
and the Nemo snow storm, both of which occurred in the year ended
31 March 2013.
Underlying (including Cadent pro forma) - This measure is used
in the Annual Report to aid comparability year-on-year by
estimating what our Underlying results would have looked like had
the disposal of a 61% interest in our UK Gas Distribution business
occurred at the start of the comparative period rather than at 31
March 2017. The basis used for the Cadent pro forma is explained in
more detail on page 66-67.
Constant currency - The Headline, Underlying, and Underlying
(including Cadent pro forma) profits for prior periods are also
shown on a constant currency basis to show the year-on-year
comparisons excluding any impact of foreign currency movements.
This basis is explained in more detail on page 39.
Operating profit and controllable costs
Statutory operating profit was GBP3,493 million, up GBP285
million (9%) compared with last year at actual exchange rates.
Headline operating profit was GBP3,457 million, down GBP316 million
(8%) compared with last year at actual exchange rates. The
year-on-year movement in exchange rates had a GBP98 million
negative impact on Headline operating profit. On a constant
currency basis, Headline operating profit was down GBP218 million
(6%). This included an adverse year-on-year timing movement of
GBP282 million, at constant currency. In addition, the US Regulated
business incurred GBP142 million of major storm costs in
2017/18.
Over/(under)-recovery Year ended 31 March
(GBPm - 2017 at constant currency)
-------------------------------------
2018 2017
------------------------------------- ---------- ----------
Balance at start of year 394 14
Restatements(1) (219) (6)
------------------------------------- ---------- ----------
Balance at start of year (restated) 175 8
In-year over/(under)-recovery 104 386
------------------------------------- ---------- ----------
Balance at end of period 279 394
------------------------------------- ---------- ----------
Headline operating profit -
continuing 3,457 3,675
Adjust for timing differences (104) (386)
Adjust for major storms 142 -
------------------------------------- ---------- ----------
Underlying operating profit 3,495 3,289
------------------------------------- ---------- ----------
(1) Restated to reflect finalisation of UK and US timing
balances and revised estimate of US timing balances
Underlying operating profit (excluding timing and major storms)
increased by GBP206 million (up 6%) on a constant currency
basis.
Underlying operating profit from regulated activities increased
by GBP156 million on a constant currency basis. Net regulated
revenues excluding timing increased by GBP302 million at constant
currency. Regulated controllable costs increased by GBP43 million
at constant currency, in part driven by increased output
requirements associated with new rate cases in the US and increased
employee costs in the UK, partly offset by the non-recurrence of
the 2016/17 write off of prior-year US capital costs.
Post-retirement costs were GBP4 million higher and bad debts
decreased by GBP13 million. Depreciation and amortisation in our
regulated businesses increased by GBP93 million, reflecting our
continuing investment programme and growing asset base. Other
regulated costs increased by GBP19 million including higher US
property taxes.
Other activities and National Grid Ventures contributed GBP50
million more to Underlying operating profit than last year, on a
constant currency basis. The profitability of our Property business
improved as a result of increased site sales, and we benefited from
a lower level of business change costs compared to the one-off
costs incurred last year. This was partly offset by reductions in
IFA revenues due to lower price arbitrage between the UK and
mainland Europe and lower metering revenues as our existing meters
are replaced by smart meters.
Finance costs
Statutory net finance costs were GBP745 million, GBP342 million
lower than 2016/17.
Headline net finance costs were GBP974 million, GBP55 million
lower than 2016/17 at actual exchange rates and GBP10 million lower
than 2016/17 at constant currency, reflecting increased income from
captive insurance company financial asset sales, a gain on the sale
of our investment in Dominion and income from our loan to Cadent.
This was mostly offset by higher interest on our inflation-linked
debt, reflecting higher UK RPI inflation.
The continuing effective interest rate on Treasury managed debt
for the year was 4.6% compared with 3.9% in 2016/17.
Profit before tax and taxation
On a statutory basis, Group profit before tax was GBP2,708
million with a tax credit of GBP884 million. This reflects a
GBP1,510 million tax credit relating to the reduction in the US
federal corporation tax rate (deferred tax impact).
The Group's Headline share of post-tax results from joint
ventures and associates was GBP167 million, up GBP105 million from
2016/17 at constant currency reflecting our share of the post-tax
results of Cadent.
Headline profit before tax was down 6% at actual exchange rates
to GBP2,650 million. Excluding the impact of timing and major
storms, profit before tax of GBP2,688 million was up 12% on the
prior year.
The headline tax charge on continuing profits was GBP589
million, GBP77 million lower than 2016/17 at actual exchange rates.
This principally reflects decreased operating profits from lower
timing over recoveries and reductions in UK and US corporation tax
rates. These tax rate reductions, partially offset by a higher
proportion of US profits compared to prior year, have driven a
lower effective tax rate[7] of 23.7% (2016/17: 24.3%).
Total corporation tax paid in the UK in 2017/18 decreased by
GBP92 million to GBP37 million primarily reflecting refunds
received in relation to prior years.
Other earnings metrics, EPS, exceptional and statutory
earnings
Statutory basic earnings per share for continuing operations
were 103.8p compared with 48.1p last year. The increase reflects
the benefit of a GBP1.5 billion credit relating to the reduction of
the US federal tax rate and remeasurement gains on financial
instruments, partially offset by a net GBP103 million charge
arising in relation to our retained investment in Quadgas Holdco
Limited.
Earnings attributable to non-controlling interests (minority
interests) were GBP1 million (2016/17: nil).
Continuing earnings before exceptional items and remeasurements
(Headline earnings) attributable to equity shareholders were
GBP2,060 million, down GBP81 million compared with 2016/17.
Headline earnings per share increased by 5% to 59.5p from 56.9p
last year.
Underlying earnings attributable to equity shareholders were
GBP2,089 million, up GBP227 million compared with 2016/17, and
underlying earnings per share increased by 22% year-on-year to
60.4p.
Exceptional items and remeasurements increased statutory
earnings from continuing operations by GBP1,531 million after tax.
A detailed breakdown of these items can be found on page 57. After
these items and non-controlling interests, statutory earnings
attributable to equity shareholders were GBP3,591 million.
Cash flow
Cash generated from continuing operations was GBP4,702 million,
GBP250 million higher than 2016/17, principally reflecting a lower
pension deficit payments, partly offset by lower Headline operating
profit (before exceptional items).
Funding and Net Debt
Net debt as at 31 March 2018 increased by GBP3.7 billion to
GBP23.0 billion (2017: GBP19.3 billion).
The increase in net debt was driven by increased levels of
capital investment and the return of over GBP4 billion to
shareholders relating to the proceeds from last year's sale of UK
Gas Distribution, partly offset by the impact of a weaker US dollar
on the translation of our US dollar-denominated debt.
As at 31 March 2017 the Group maintained approximately $24.6
billion of its total financial liabilities denominated in US
dollars as a substantial hedge of foreign exchange movements in the
value of its US businesses. As a result, the movements resulting
from the weakening of the US dollar against the pound decreased net
debt by around GBP2.1 billion compared with a year ago.
Excluding the impact of exchange movements, the return of
capital relating to the UK Gas Distribution sale and other residual
sale-related cash flows, net debt increased by GBP1.6 billion
comprising a net GBP4.0 billion inflow from operating, interest and
tax cash flows and dividends from associates and joint ventures,
offset by ordinary dividends and scrip share buybacks of GBP1.5
billion and capital investment of GBP4.1 billion.
During the year, National Grid raised over GBP1.8 billion of new
long-term debt through eight capital markets transactions. This
funding was primarily for the US business, at both holding company
and operating company levels. Operating company funding included
bond issues for our Massachusetts and New York gas businesses, as
well as New England Power, our US electricity transmission
business, which issued a debut $400 million bond and achieved a
3.80% coupon, the group's lowest ever coupon for a 30-year
maturity.
The Group has also begun to draw down on $370 million of senior
unsecured credit loans with the Swedish and Italian Export Credit
Agencies which were signed in September. These facilities were
procured in relation to the Group's share of investment in the IFA2
interconnector and provide an attractively priced and diversified
source of funding for the Group.
As a result, the Group considers that it is well funded as it
enters 2018/19.
The Group's balance sheet remained strong, supporting further
investment in new assets during the year. Overall net debt as a
proportion of total regulatory value and invested capital in our
other businesses at 31 March 2018 was 64%, slightly up on the prior
year adjusted for constant currency and the return of capital
associated with the UK Gas Distribution sale.
Credit rating metrics as indicators of balance sheet strength
remained above the levels indicated by credit rating agencies as
appropriate for the current group rating levels. Funds from
operations (FFO) to adjusted net debt was 16.4% and RCF to adjusted
net debt was 10.6%, excluding one-off costs relating to the
disposal of UK Gas Distribution (9.7% including these costs). FFO
interest cover was 4.4x compared with 5.0x in 2016/17, above
National Grid's target of exceeding 3.0x. Our metrics benefited
from the impact of foreign exchange on the closing debt of the
Group at 31 March 2018 and a reduction in balance sheet pension
deficits.
During the year, Moody's, S&P and Fitch maintained their
ratings of National Grid plc on stable outlook. Moody's moved the
outlook for the ratings of NiMo, KEDNY and KEDLI to "negative" from
"stable", reflecting the potential for lower net cash flows in the
short-medium term following US tax reform implementation. Fitch
moved their rating of KEDNY from "negative" to "stable".
Pensions
In May 2018, National Grid's Group Pension Trustee entered into
a longevity swap with Zurich Assurance Limited, covering more than
GBP2 billion of pension liabilities for around 6,000 pensioners and
dependants of the National Grid Electricity Group of the
Electricity Supply Pension Scheme.
This action has been taken to provide additional security over
members' benefits, while making sure National Grid and electricity
consumers are protected against the risk of liabilities increasing
as a result of scheme members living longer than currently
expected.
The removal of longevity risk through this approach is a key
part of the ongoing strategy by National Grid and the Group Trustee
to manage the pension risk.
BUSINESS REVIEW
In addition to IFRS based profit measures, National Grid
calculates a number of additional regulatory performance metrics to
aid understanding of the performance of the regulated businesses.
These metrics aim to reflect the impact of performance in the
current year that is expected to impact future regulatory revenue
allowances. This includes the creation of future regulatory revenue
adjustment balances and the impact of current year performance on
the regulated asset base. These metrics also seek to remove the
impacts on current year revenues relating to "catch up" or
"sharing" of elements of prior year performance for example the
sharing of prior year efficiencies with customers.
These metrics include Return on Equity, Regulated Financial
Performance and Regulated Asset Value or Regulated Rate Base.
Further detail on these is provided on pages 45 to 46.
Year ended 31 March Regulatory Achieved Base or Allowed
Debt:Equity Return on Equity Return on Equity
assumption
-------------
% 2018 2017 2018 2017
----------------------------- ------------- --------- --------- --------- ---------
UK Electricity Transmission 60:40 13.1 13.6 10.2 10.2
UK Gas Transmission 62.5:37.5 10.0 10.8 10.0 10.0
US Regulated avg. 50:50 8.9 8.2 9.4 9.5
Group 12.3 11.7
----------------------------- ------------- --------- --------- --------- ---------
Overall Group Return on Equity was 12.3% (prior year 11.7%).
As at 31 March Regulated Asset Value Total Regulated Assets
or Rate Base or Invested Capital
and Business Invested
Capital
(GBPm, at constant currency) 2018 2017* 2018 2017*
---------------------------------- ------------ ----------- ------------ -----------
UK Electricity Transmission 13,045 12,479 12,651 12,034
UK Gas Transmission 6,014 5,755 5,889 5,721
US Regulated 14,762 13,751 16,683 15,238
NG Ventures and Other activities 2,167 1,984 1,824 1,724
---------------------------------- ------------ ----------- ------------ -----------
Group 35,988 33,969 37,047 34,717
---------------------------------- ------------ ----------- ------------ -----------
* Restated to include opening balance adjustments following the
completion of the regulatory reporting process in 2017.
Total Group regulated and other assets grew 7% at constant
currency, including favourable movements in assets outside of rate
base, in part driven by current year timing over recoveries.
Excluding assets outside regulated assets, which principally
comprise UK timing differences and US capital work in progress,
group regulated and other assets grew by 6%.
UK ELECTRICITY TRANSMISSION
2017/18 Overview
UK Electricity Transmission performed well in 2017/18,
maintaining a focus on safe, reliable, innovative and efficient
operations.
We achieved an excellent network reliability of 99.999984%
during the year, while maintaining a good safety performance. We
also met our customer satisfaction targets, where we achieved a
score of 7.7 against a baseline target of 6.9, set by Ofgem for
reward or penalty under RIIO.
The business continued to deliver complex engineering projects
of all sizes across the UK. Delivering these safely, on time and to
budget is something that is fundamental to the success of our
business, and we remain committed to delivering improvements and
increased productivity year-on-year.
In February 2018, HRH The Prince of Wales and HRH The Duchess of
Cornwall opened the London Power Tunnels. This project, costing
close to GBP1 billion, includes new substations in Highbury and
Kensal Green, and is part of the most significant investment into
London's electricity transmission system since the 1960s. We used a
number of new approaches in this project, including recycling 98%
of spoil removed from the tunnels, designing a state-of-the-art
substation at Highbury, and a development to accommodate new
business units and affordable homes. As a result, we delivered
efficiencies of 7% on the project.
In December 2017 we started to energise the Western Link
project, our billion pound joint venture with ScottishPower
Transmission that will bring renewable energy from Scotland to
homes and businesses in England and Wales. During testing a fault
was detected which is currently being repaired. Before
commissioning, the link had been operating at a capacity of up to
1125MW and is expected to increase to its full capacity of 2250MW
following the completion of full commissioning over the next few
months.
We also made good progress on the work to create a legally
separate ESO, in line with regulatory guidance. We remain on track
to separate the ESO by 1 April 2019.
In late February, adverse weather affected the UK leading to
high demand for energy on the system. Our networks performed
strongly and maintained secure supplies of electricity. In
addition, the ESO continued to balance the network to maintain
security of supply throughout the year.
Regulated Returns and Financial Performance reflect efficiency
and incentive delivery
Return on Equity 290 bps above base levels
Return on Equity for the year, normalised for a long-run
inflation rate of 3%, was 13.1% compared with a regulatory
assumption, used in calculating the original revenue allowance, of
10.2%. The principal components of the difference are shown in the
table below:
Year ended 31 March 2018 2017
-----
Base return (including avg. 3% long-run
inflation) 10.2 10.2
Totex incentive mechanism 1.8 1.9
Other revenue incentives 0.4 0.7
--------------------------------------------------- ----- -----
Return including in year incentive performance 12.4 12.8
Pre-determined additional allowances 0.7 0.8
Return on Equity 13.1 13.6
--------------------------------------------------- ----- -----
Return on Equity decreased 50 bps year-on-year, mainly due to
the adverse incentive performance for the Balancing Services
Incentive Scheme, where the 2017/18 scheme had a lower cap and
collar opportunity (+/- GBP10m) than the prior year (+/- GBP30m).
The scheme delivered performance of GBP8m for the year, offset by a
reduced performance incentive for FY2016 given changes in
methodology agreed with Ofgem.
Totex was GBP1.2bn compared with an estimated allowance,
adjusted for outputs and phasing of spend, of GBP1.4bn. Our share
of this efficiency saving is expected to be GBP87m. Much of this
saving is reflected in an estimate of increased performance
RAV.
The consistent totex performance in the year principally
reflects efficiencies and innovative engineering within the capital
investment programme in relation to both load and non-load related
projects. We aim to deliver the outputs and essential maintenance
required by the RIIO framework in a sustainable and efficient way
to deliver best value for consumers and shareholders. Innovative
solutions such as those described for London Power Tunnels are
essential to achieving this.
The business delivered a broadly consistent level of totex
performance and additional allowances to prior year. Stakeholder
engagement and customer satisfaction continued to deliver strong
performance and we continue to work to identify opportunities for
future outperformance across these areas.
Investment activities in 2017/18
Capital investment in UK Electricity Transmission was GBP999m,
GBP28m lower than the prior year. The reduction was in part driven
by delivered efficiencies, lower spend on significant projects
including London Power Tunnels, Wimbledon Substation and Western
HVDC Link as these projects neared completion or were completed in
the year. This was partially offset by increased spend on overhead
lines, including refurbishing the lines between Langage to Landulph
and Abham to Exeter, as well as the Richborough to Canterbury
upgrade to accommodate the additional capacity that the Nemo
interconnector will add to the network when operational in early
2019.
The business continued to seek improved totex efficiency in its
investment through a combination of innovation and process
simplification. This focus on engineering for best value while
maintaining safety standards ensures consumer bills are kept as low
as possible and support attractive levels of asset growth through
the creation of performance RAV. Overall, investment in the year
reflected GBP669m of non-load related investment whilst load
related spend was GBP330m.
Regulated Financial Performance up 7% year-on-year
The regulated financial performance calculation adjusts reported
operating profit to reflect the impact of the business' regulatory
arrangements when presenting financial performance.
Regulated financial performance for UK Electricity Transmission
increased to GBP1,262m from GBP1,184m. The year-on-year increase
primarily reflects underlying asset growth.
Reconciliation of regulated financial 2018
performance to operating profit (GBPm) 2017 % change
Operating profit 1,041 1,372 (24)
Movement in other regulated assets and
liabilities 51 (288) 118
Deferred taxation adjustment 70 62 13
RAV indexation (avg. 3% long-run inflation) 356
374 5
Regulatory v IFRS depreciation difference (377) (379) 1
Fast/Slow money adjustment 34
Pensions (47)
69 103
(49) (4)
Performance RAV created 83 74 12
------------------------------------------------- ------ ------ ---------
Regulated Financial Performance 1,262 1,184 7
------------------------------------------------- ------ ------ ---------
Regulated Financial Position up 5.0%
In the year, RAV grew by 4.7%, a slight decrease on last year's
growth rate, reflecting the lower levels of totex than prior
periods as large portfolio spend such as London Power Tunnels and
Western Link came to completion, partially offset by higher RPI
accretion, which at 3.3% was slightly above our long run
assumption.
2018 2017
---------------------------------------------- ------- -------
Opening Regulated Asset Value (RAV)(1) 12,479 11,871
---------------------------------------------- ------- -------
Asset additions (aka slow money) (actual) 918 944
Performance RAV or assets created 83 74
Inflation adjustment (actual RPI) 417 375
Depreciation and amortisation (852) (800)
-------
Closing RAV 13,045 12,464
---------------------------------------------- ------- -------
Opening balance of other regulated assets
and (liabilities)(1) (445) (129)
---------------------------------------------- ------- -------
Movement 51 (288)
---------------------------------------------- ------- -------
Closing balance (394) (417)
---------------------------------------------- ------- -------
Closing Regulated Financial Position 12,651 12,047
---------------------------------------------- ------- -------
(1) March 2017 opening balances adjusted to correspond with
2016/17 regulatory filings and calculations
Regulatory and other business developments
In August 2017, we received regulatory clarity on the role of
the UK Electricity System Operator (ESO), and work is underway to
create a legally separate ESO within National Grid by April
2019.
As highlighted in the 2017/18 Overview, Ofgem issued the
framework for the RIIO-T2 consultation process in March 2018. We
are supportive of many of the proposals in the consultation
document, which maintain key principles which have delivered value
for consumers in RIIO-T1. We also welcome Ofgem's proposals on
giving consumers a stronger voice, and their thinking is closely
aligned with ours, namely to put stakeholder engagement at the
heart of the approach to RIIO-T2. We agree with the idea of
independently chaired user groups and the engagement these will
facilitate with our stakeholders.
We have advocated that positive strong incentives drive
innovation, efficiency and performance improvement which benefit
consumers through cost reductions and service improvements, and
provide opportunities for investors to earn above base returns. On
fair returns and financeability, we have supported variable sharing
factors but have challenged Ofgem's proposed cost of equity range
of 3-5% as too low for the risk of a transmission company and will
not offer adequate return for investors. The parameters driving the
proposed cost of equity range, in the current consultation
document, do not take into account the full range of evidence for
Total Market Return (TMR) or beta. We believe that Ofgem should
take account of the full range of evidence available, which would
increase the range currently contained in the framework document.
We would then support narrowing the range, on a sector specific
basis, closer to the start of the RIIO-T2 period.
We will continue to work with Ofgem and other stakeholders to
explore the options presented, and agree a framework that balances
the needs of consumers, investors and other stakeholders. The next
step will be Ofgem's decision on the framework this summer and the
publication in the autumn of the methodology for the
sector-specific price controls.
In January, Ofgem published their 'minded-to' position on the
Hinkley-Seabank connection, to which we expressed our
disappointment with the financial parameters for the project. We do
not support the Competition Proxy Model for the delivery of
Hinkley-Seabank because we believe the proposal put forward is
flawed and there is no credible basis for concluding that it is in
consumers' interest. In our view, the proposed terms have not
presented a robust or coherent 'proxy' for competition for a number
of reasons, including errors and inconsistencies in the analysis
and an unachievable proposed cost of capital based on the implied
project cashflows. Hinkley-Seabank is a large individual project
which is still subject to risk associated with construction
activities.
We believe that in order to ensure timely delivery of this vital
connection, continuing under the existing Strategic Wider Works
model is in the best interests of consumers, and have engaged with
Ofgem to that effect. Depending on Ofgem's final decision we will
consider all legal options available to us.
Future activities and outlook
UK Electricity Transmission expects to continue to deliver good
returns and asset growth in 2018/19 with opportunities for the
business to deliver continued healthy outperformance led by totex
and other incentives. The business will continue to focus on using
process improvements, efficiency and innovation to deliver the RIIO
outputs at the lowest sustainable cash cost, generating savings for
consumers and shareholders. The business expects to generate
savings from finding new and innovative ways to maintain, repair
and replace its assets.
National Grid expects UK Electricity Transmission capital
investment in 2018/19 to decrease compared to the 2017/18 levels,
reflecting the completion of a number of significant projects in
2017/18. The business expects to deliver growth in RAV, including
the benefit of efficiencies, above the rate of inflation in
2018/19.
The majority of our capital expenditure will be non-load
related, including the replacement of existing assets, system
upgrades and improvements to site safety and visual amenity. The
load related spend mainly includes the connection of new generation
sources.
APPIX to UK ELECTRICITY TRANSMISSION
Revenue and Costs in 2017/18 on an IFRS basis
On a Headline basis, UK Electricity Transmission operating
profit was GBP1,041m, down GBP331m or 24% on the prior year. The
principal components of the movement in operating profit are shown
below.
Revenue and Costs
(GBPm) 2018 2017 % change
---------------------------------------------- ------ ------ ---------
Net revenue 1,911 2,146 (11)
Regulated controllable operating costs (321) (286) (12)
Post-retirement costs (50) (43) (16)
Other operating costs and provisions (24) (24) -
Depreciation and amortisation (475) (421) (13)
---------------------------------------------- ------ ------ ---------
Headline operating profit 1,041 1,372 (24)
---------------------------------------------- ------ ------ ---------
Less: Timing impact (14) 137 n/a
Underlying operating profit excluding timing 1,055 1,235 (15)
Net revenues in the year were lower, reflecting adverse timing
impacts and MOD adjustments, lower BSIS incentive performance and
lower base allowed revenues, partly offset by the annual RPI
revenue uplift.
Regulated controllable operating costs increased by GBP35m,
reflecting the additional costs incurred as part of the separation
of the ESO, higher headcount, IS costs and inflation.
Post-retirement costs increased by GBP7m and other operating costs
and provisions were in line with the prior year.
Depreciation and amortisation increased by GBP54m, reflecting
investment driven growth in the asset base.
UK GAS TRANSMISSION
2017/18 Overview
In 2017/18, UK Gas Transmission performed in line with
expectations with a strong safety performance.
We achieved an excellent network reliability of 99.996151%
during the year, although below our target of 100% due to cessation
of flow at two National Transmission System (NTS) supply points on
a small number of occasions. We also met our customer satisfaction
targets, where we achieved a score of 7.6 against a baseline target
of 6.9, which is set by Ofgem for reward or penalty under RIIO.
In late February, adverse weather affected the UK, leading to
high demand for energy on the system. Our networks performed
strongly maintaining secure supplies of gas. As part of our
response we issued a Gas Deficit Warning, the first since 2010.
This signalled to the market that we required more gas to be made
available to keep the system running safely and reliably and is
part of our standard approach to balancing supply and demand. This
worked effectively, with the market responding promptly to ensure
there was sufficient gas during the day to meet demand.
We are gaining more insight into the needs of our customers (and
theirs) including the need for greater transparency from us. To
address this, our gas transmission business has a new online
connections platform. We are also working with customers to
identify a suitable pilot opportunity which is due to complete in
October 2018.
Work moved into the delivery phase for Feeder 9, the project
under the Humber Estuary, with the tunnel boring machine on site
and round the clock tunnelling starting in May 2018 to dig the 5
kilometre tunnel over the next year. This link provides a critical
bulk transportation route for gas into the wider NTS. We will
continue to work closely with our stakeholders to minimise the
impact on local communities and the environment.
The business has also made good progress on Project GRAID, which
is developing an innovative robotic inspection device for
underground pipework. This year we have developed the robot for
offline trials ahead of live site trials later in 2018.
Return on Equity in line with base levels
Return on Equity for the year, using a long-run inflation rate
of 3%, was 10.0% in line with the regulatory assumption used in
calculating the original revenue allowance. The principal
components of the performance are shown in the table below.
Year ended 31 March 2018 2017
------
Base return (including avg. 3% long-run
inflation) 10.0 10.0
Totex incentive mechanism (0.8) (0.8)
Other revenue incentives 1.2 1.1
--------------------------------------------------- ------ ------
Return including in year incentive performance 10.4 10.3
Pre-determined additional allowances (0.4) 0.5
Return on Equity 10.0 10.8
--------------------------------------------------- ------ ------
The business performed below the targets set by the totex
incentive mechanism; however it was in line with prior year for
overall totex performance. Totex spend was nearly GBP480m, compared
to an estimated allowance, adjusted for outputs and phasing, of
just under GBP440m.
The main drivers for the decrease in Return on Equity were
increases in asset health spend required to deliver our RIIO-T1
outputs, and the cessation of legacy allowances.
Other revenue incentive performance for the business was in line
with expectations. Overall, the UK Gas Transmission business
delivered around 120 bps of additional returns through other
revenue incentives. The majority of this was from strong
performance on constraint management, transmission support services
and shrinkage incentives. On a pre-tax basis, this equates to an
estimated GBP30m of additional revenue allowance, most of which is
due to be recovered in future years under the RIIO funding
mechanisms.
Regulated Financial Performance in line with 2017
An explanation of the regulatory financial performance measure
can be found in the section on UK Electricity Transmission and in
the glossary before the notes to this statement.
Regulated financial performance for UK Gas Transmission was in
line with prior year at GBP499m reflecting an increased asset base,
offset by a lower operational Return on Equity.
Reconciliation of regulated financial
performance to operating profit (GBPm) 2018 2017 % change
Operating profit 487 511 (5)
Movement in other regulated assets and
liabilities (91) (120) 24
Deferred taxation adjustment 18 39 (54)
RAV indexation (3% long-run avg.) 173 168 3
Regulatory v IFRS depreciation difference (29) (21) (38)
Fast/Slow money adjustment (11) (14) 21
Pensions (32) (53) 40
Performance RAV created (16) (11) (45)
---------------------------------------------- ------- ------- -----------
Regulated Financial Performance 499 499 -
---------------------------------------------- ------- ------- -----------
Regulated Financial Position increased 3.5%
RAV increased 4.5% in the year (2017: 2.8%) reflecting a higher
inflation uplift, a planned increase in asset health spend to
enable an increase in Network Output Measures (NOMs) delivery, and
the increased spend on the Feeder 9 project under the Humber
Estuary. The increase in asset health spend also adversely affected
performance RAV and totex performance as we spent further above our
allowances.
GBPm 2018 2017
---------------------------------------------- ------ ------
Opening Regulated Asset Value (RAV) 5,755 5,597
---------------------------------------------- ------ ------
Asset additions (aka slow money) (actual) 304 201
Performance RAV or assets created (16) (11)
Inflation adjustment (actual RPI) 194 175
Depreciation and amortisation (223) (207)
Closing RAV 6,014 5,755
---------------------------------------------- ------ ------
Opening balance of other regulated assets
and (liabilities)(1) (34) 56
---------------------------------------------- ------ ------
Movement (91) (120)
---------------------------------------------- ------ ------
Closing balance (125) (64)
---------------------------------------------- ------ ------
Closing Regulated Financial Position 5,889 5,691
---------------------------------------------- ------ ------
(1) (March 2017 opening balances adjusted to correspond with
2016/17 regulatory filings and calculations.)
Investment activities in 2017/18 focussed on asset health
UK Gas Transmission invested GBP310m during the year, a GBP96m
increase on the prior year, which was due to higher asset health
spend and the Feeder 9 project under the Humber Estuary moving into
the delivery from design phase.
Asset health expenditure forms part of an essential and
co-ordinated programme of work throughout the RIIO period. In the
year we conducted a significant valves and civils campaign which
contributed to the increase in asset health work versus the prior
year. The asset health programme is designed to enable UK Gas
Transmission to maintain a safe network and continue to meet
regulatory output requirements.
Regulatory and other business developments
In May, we made a number of submissions to Ofgem as part of the
May 2018 Re-opener window, which forms part of the RIIO-T1
framework. The submissions cover projects where outputs were
uncertain at the beginning of RIIO or have changed during the RIIO
period. The submissions therefore cover requests for additional
allowances where new outputs are being delivered and reducing
allowances where outputs are no longer required or have changed.
Under the terms of the licence, Ofgem will make decisions on the
submissions by the end of September.
As highlighted in the 2017/18 Overview and UK Electricity
Transmission sections, Ofgem issued the framework for the RIIO-T2
consultation process in March 2018. We were pleased that Ofgem
recommended that the gas system operator and gas transmission owner
be considered as one for RIIO-T2, as they have been historically.
For further background and information, please refer to the UK
Electricity Transmission section on page 21.
Future activities and outlook
UK Gas Transmission expects returns to remain in line with the
allowed level, with continued incentive performance offset by
higher totex spend compared to our allowances.
Over the last two years we have received revenues for the
Avonmouth project which was ultimately not required. As a result,
approximately GBP85m of revenues will be returned in 2018/19
compared to GBP47m received in 2017/18.
Capital investment in UK Gas Transmission in 2018/19 is expected
to remain consistent with 2017/18 reflecting the continued
investment in asset health activity, compressor reengineering
projects as well as the continued delivery of the Feeder 9 project.
As a result, regulated asset value is expected to grow above the
rate of inflation in 2018/19.
APPIX to UK GAS TRANSMISSION
Revenue and Costs in 2017/18 on an IFRS basis
On a Headline basis, UK Gas Transmission operating profit was
GBP487m, down GBP24m or 5%. Excluding the impact of timing,
operating profit was GBP56m higher reflecting increased base
revenues, and the benefit of the annual RPI uplift on revenue,
partly offset by the cessation of legacy gas revenue drivers
income.
The principal components of the movement in operating profit are
shown below.
Revenue and costs
(GBPm) 2018 2017 % change
---------------------------------------------- ------ ------ ---------
Net revenue 834 857 (3)
Regulated controllable operating costs (146) (137) (7)
Post-retirement costs (18) (19) 5
Other operating costs and provisions 11 (4) n/a
Depreciation and amortisation (194) (186) (4)
---------------------------------------------- ------ ------ ---------
Headline operating profit 487 511 (5)
---------------------------------------------- ------ ------ ---------
Less: Timing impact (18) 62 n/a
Underlying operating profit excluding timing 505 449 12
Net revenue (net of pass through costs) decreased by GBP23m.
Excluding timing impacts of GBP80m, net revenue increased by
GBP57m. This primarily relates to an increase in allowed base
revenue and inflation, partly offset by the loss of legacy gas
revenues.
Regulated controllable costs increased by GBP9m reflecting
higher labour costs and higher Xoserve costs.
Depreciation and amortisation increased by GBP8m, while other
operating costs decreased by GBP15m due to one-off provision
releases in the year.
US REGULATED OPERATIONS
2017/18 Overview
National Grid's US Regulated business made significant progress
during 2017/18, achieving an improved Return on Equity, increased
levels of investment, and delivering a major rate agreement. We
responded to a number of major storms both within and outside of
our service territories, and continued to focus on driving improved
safety performance.
We continued to focus on safety, seeing a 6% reduction in the
number of injuries requiring medical attention beyond first aid,
and a 19% reduction in the number of preventable road traffic
collisions during the year. We implemented Safety, Health and
Environment (SHE) plans at local levels to address current risks
and injury trends, and we also established our guiding principles
of safety which sets out how our people can play a role in
promoting a safer environment for everyone. We will continue to
focus on improving our safety culture to address key risk and
hazard mitigation strategies in 2018/19.
Major storms
We faced a challenging winter, with major storms across all our
jurisdictions, as well as record cold weather. There were no gas
outages, demonstrating improvements to our networks through gas
infrastructure investment.
In September, more than 130 National Grid US employees responded
to the 7.8 million outages caused by Hurricane Irma in Florida and
Georgia. We have also assisted with restoration efforts in Puerto
Rico over the past six months following the damage caused by
Hurricane Maria.
In October, we had to restore power to 532,000 customers
following one of the most severe storms in recent years. In March,
we were challenged again with an unprecedented three back-to-back
Nor'Easters. Our crews worked round the clock, moving between
regions, restoring the vast majority of customers in each of the
storms within 72 hours. The majority of the restoration costs of
around GBP140 million will be recovered via our existing regulatory
mechanisms.
Increased Return on Equity
Return on Equity for 2017/18 was 8.9%, an increase of 70 bps
compared to 2016/17. This represents 95% of the average allowed
return and reflects a first full-year benefit from new rate plans
for our Massachusetts Electric, KEDNY and KEDLI businesses.
Another year of significant capital investment
Capital investment in the Company's US regulated businesses
increased by $421m to a new high of $3.3bn on a statutory basis, or
$3.2bn on a US GAAP basis.
Approximately $1.8bn was associated with the gas distribution
networks, primarily on mandated programmes to replace ageing
infrastructure and on adding new customers to the networks. In
total, National Grid replaced approximately 220 miles of leak prone
pipe, exceeding our regulatory targets for each operating company,
and added approximately 16,000 new gas customers.
Approximately $1.0bn was invested in the electricity
distribution networks primarily to improve asset health, system
capacity and performance. Significant investment was also made in
response to customer requests including almost 11,000 new
distributed generation connections across the territory. A further
$0.3bn was invested in the Federal Energy Regulatory Commission
(FERC) regulated businesses.
Impact of US Tax Reform
Tax is a pass-through cost for utilities. The reduction in the
corporation tax rate from 35% to 21% will be significantly
beneficial to customers and economically neutral for utilities.
There will be some implications on the balance sheet resulting
from lower bill collections. This is because there is little or no
offset in cash tax paid as we are currently in a net operating loss
position for the purposes of calculating taxable profits in our US
Group.
We reduced our revenue requests by $180m across the three
operating companies that were undergoing rate filings at the time
the legislation was enacted, as well as for our FERC businesses
which operate under formula rates. In our remaining distribution
businesses we may be able to partially offset the bill reduction,
for example, through faster recovery of existing regulatory asset
balances. We filed our Massachusetts Electric proposals in early
May and plan to file KEDNY and KEDLI over the summer.
We will also return $2bn of existing deferred tax liabilities,
which represents amounts previously collected from customers based
on the higher rate of 35%, over 20 to 30 years.
Due to regulatory accounting applicable under US GAAP there is
no impact at the operating company level on earnings or US Return
on Equity (RoEs). Under IFRS, for the Group overall there will be a
small impact associated with the return of the deferred tax balance
in future years, with the release of the $2bn liability being
reflected as an exceptional item this year.
Rate base growth will increase due to the lower tax rate, the
abolition of bonus depreciation for utilities, and the return of
the $2bn of existing deferred tax liabilities. Over time this will
be beneficial to cash flow, marginally offsetting the lower tax
collections.
Regulated Financial Position
Overall, the US rate base increased by $1,419m (7.4%) to
$20,716m driven by increased capital expenditure partially offset
by depreciation, timing over recoveries and deferred tax
movements.
US Regulated Assets ($bn as at 31 March)
2018 2017 % change
--------------------------------------- ----- ------ ---------
Rate Base excl. working capital
(w/c) 20.0 18.6 7
Working capital in Rate Base 0.7 0.7 -
----- ------ ---------
Total Rate Base 20.7 19.3 7
Reg. assets outside Rate Base excl.
w/c 2.7 2.2 25
Working capital outside Rate Base - (0.1) -
--------------------------------------- ----- ------ ---------
Total regulated assets outside Rate
Base 2.7 2.1 29
---------------------------------------- ----- ------ ---------
Total US Regulated Assets 23.4 21.4 9
---------------------------------------- ----- ------ ---------
GBPbn as at 31 March
---------------------------------------- ----- ------ ---------
2018 2017 % change
---------------------------------------- ----- ------ ---------
Total US Regulated Assets at actual
currency 16.7 17.1 (2)
---------------------------------------- ----- ------ ---------
Total US Regulated Assets at constant
currency 16.7 15.2 9
---------------------------------------- ----- ------ ---------
Financial performance
Headline operating profit was GBP1,698m, a decrease of GBP15m at
actual exchange rates including adverse exchange rate movements of
GBP102m.
On a constant currency basis, net revenue (including timing)
increased by GBP278m to GBP5,468m, driven by increased revenue
allowances from the Massachusetts Electric, KEDNY and KEDLI rate
cases and our capex trackers. Regulated controllable costs
excluding pensions decreased by GBP1m largely due to non-recurrence
of capital cost write-offs in the prior year, partially offset by
higher spending in the current year due to a greater workload and
certain mandated items from the rate plans.
Post-retirement costs decreased by GBP2m and bad debts decreased
by GBP13m. Depreciation and amortisation increased by GBP31m and
other costs increased by GBP176m due to increased property taxes,
environmental spend, and major storm costs of GBP142m.
Underlying operating profit at constant currency for the year
excluding timing and major storm impacts was GBP280m (20%) higher
than 2016/17 at GBP1,704m.
Regulatory and other business developments
National Grid works collaboratively with regulators and other
stakeholders to ensure the necessary investments are made to
construct and maintain safe and reliable networks, while managing
costs to customers. Where appropriate, National Grid continues to
propose further projects and initiatives to provide benefits to
customers through the use of new technology or by facilitating the
transition to a low carbon economy.
During 2017/18 we reached agreement with the New York Public
Service Commission (PSC) for a three-year rate plan for NiMo with
new rates effective from 1 April 2018. We also filed rate cases for
new gas distribution rates in Massachusetts, and new electricity
and gas distribution rates in Rhode Island, where rates had
remained the same for eight and five years respectively.
Future activities and outlook
The 2018/19 outlook for National Grid's US Regulated activities
remains positive.
We will see the full benefit from the rate case agreed for NiMo,
and anticipate outcomes on the rate cases filed for Massachusetts
Gas and Narragansett (Rhode Island) Electric and Gas with new rates
effective in October and September respectively.
We expect to invest around $10bn over the next three years in
our US business. We also expect that the vast majority of this
investment will be fully remunerated, benefitting earnings from the
point the investment is made. The higher levels of investment are
already impacting our rate base growth with increased growth this
year of 7.4%. This higher investment alongside the beneficial
impact of US tax reform means that we expect the growth rate to
continue to be at least 7% through to 2021 and higher in the near
term.
New York
The New York Jurisdiction consists of KEDNY and KEDLI, gas
distribution companies in downstate New York, and NiMo, an
electricity and gas distribution company in upstate New York. A
summary of the rate plans in effect as of 31 March 2018 is shown
below.
Summary of rate plans - New York
Regulated Filing Start date Allowed Return Fully funded Revenue
Entity of current on Equity investment increase
rate plan
----------- ----------------------- -------------- --------------- ------------- ----------
KEDNY 3 year joint proposal January 2017 9.0% $1.9bn $362m
KEDLI 3 year joint proposal January 2017 9.0% $1.1bn $159m
NiMo 3 year joint proposal April 2018 9.0% $2.5bn $132m
----------- ----------------------- -------------- --------------- ------------- ----------
In March, we achieved a favourable rate case outcome for our
largest utility, NiMo. The agreement provides an allowed Return on
Equity of 9%, funding for $2.5bn in capital investment over the
next three years, and 250 new jobs. Performance based mechanisms
will allow for up to 61 bps of return outperformance for gas, and
up to 65 bps for electric. This level of capital investment is 35%
more than we have invested over the last three years. It allows us
to invest in significant infrastructure renewal projects in our
service territory, including the replacement of 150 miles of leak
prone gas pipe, the Albany Loop Closure project, and the $100m
upgrade of the Gardenville substation which serves downtown Buffalo
and Western New York.
Return on Equity for 2017/18 increased 80 bps to 9.0% for KEDNY
and by 60 bps to 10.1% for KEDLI. The NiMo Return on Equity for
2017/18 increased by 30 bps to 8.8% for the electricity business
and increased by 130 bps to 7.9% for the gas business.
Return on Equity Most recent granted
Achieved (%) (%)
---------------------------- ------------------------- --------------------
Regulated Entity FY18 FY17 CY15
New York
KEDNY 9.0 8.2 7.1 9.0
KEDLI 10.1 9.5 7.3 9.0
NMPC Gas 7.9 6.6 8.4 9.0
NMPC Electric 8.8 8.5 8.1 9.0
--------------------------- ------- ------- ------- --------------------
Total New York(1) 9.0 8.4 7.7 9.0
------- --------------------
(1) Total return weighted by average rate base
On a US GAAP basis, capital investment in 2017/18 increased to
$1,651m from $1,281m in 2016/17. The increased investment was
driven by higher levels of capital expenditure funded by the
KEDNY/KEDLI joint proposal and NiMo capital petition, including a
total of nearly 440 miles of leak prone pipe replacement, compared
to 430 miles in the prior year.
Rate Base ($m) as at 31 March
New York Regulated Entity 2018 2017 % change
--------------------------- ------- ------- ---------
KEDNY 3,004 2,722 10
KEDLI 2,346 2,256 4
NMPC Gas 1,163 1,052 11
NMPC Electric 4,980 4,737 5
--------------------------- ------- ------- ---------
Total New York 11,493 10,767 7
--------------------------- ------- ------- ---------
National Grid continues to develop and implement projects to
progress New York state's Reforming the Energy Vision (REV)
programme. This seeks to help consumers make more informed energy
choices, develop new energy products and services, and protect the
environment while creating new jobs and economic opportunity
throughout the state. The eight REV demonstration projects are
progressing and achieved major milestones in 2017/18, including
reaching a 500kW solar capacity target in the Fruitbelt, over
13,000 electric Advanced Metering Infrastructure (AMI) meters,
nearly 12,000 gas Encoder Receiver Transmitters (ERT) installed in
Clifton Park, and an award winning Gas Demand Response Programme.
The Public Service Commission also recently approved the Smart City
REV demonstration in Schenectady to install LED streetlights.
Massachusetts
The Massachusetts Jurisdiction consists of the Massachusetts
Electric business (including Nantucket Electric) and the
Massachusetts Gas business (including Boston Gas and Colonial
Gas).
In November 2017, we filed a rate case for our Massachusetts Gas
business, and we expect to have new rates in place by October 2018.
Our filing requested a Return on Equity of 10.5%, an increase in
revenue of $46m (after adjusting for the lower US tax rate), and
capital investment of over $550m.
A summary of the current rate plans is shown below.
Summary of current rate plans - Massachusetts
Regulated Entity Filing Start date Allowed Return Fully funded Revenue
of current on Equity investment increase
rate plan
------------------------ ---------- --------------- --------------- ------------- ----------
Massachusetts Gas(1) One year November 2010 9.8% $241m
Massachusetts Electric One year October 2016 9.9% $249m $101m
------------------------ ---------- --------------- --------------- ------------- ----------
(1) Boston Gas and Colonial Gas
Return on Equity for Massachusetts Electric increased by 470 bps
to 9.0% reflecting increased revenues associated with new rates
that became effective in October 2016. Return on Equity for
Massachusetts Gas decreased by 110 bps to 6.6% ahead of new rates
becoming effective in October, reflecting high levels of gas leak
repair costs during the year.
Return on Equity Most recent granted
Achieved (%) (%)
------------------------- ------------------- --------------------
Regulated Entity FY18 FY17 CY15
Massachusetts
Massachusetts Gas 6.6 7.7 8.4 9.8
Massachusetts Electric 9.0 4.3 3.4 9.9
------------------------ ----- ----- ----- --------------------
Total Massachusetts(1) 7.8 6.0 5.8 9.8
------------------------- ----- ----- ----- --------------------
(1) Total return weighted by average rate base
On a US GAAP basis, capital investment in 2017/18 increased to
$957m from $791m in 2016/17. The increased investment was driven by
the new rate plan for the Electric business and higher levels of
leak prone pipe replacement in the Gas business.
Rate Base ($m) as at 31 March
Massachusetts Regulated Entity 2018 2017 % change
-------------------------------- ------ ------ ---------
Massachusetts Gas 2,479 2,251 10
Massachusetts Electric 2,448 2,281 7
-------------------------------- ------ ------ ---------
Total Massachusetts 4,927 4,532 9
-------------------------------- ------ ------ ---------
In December, the Massachusetts Clean Energy Center awarded
energy storage grants totalling $4.5m to projects supported by
National Grid. The funding supports 4.8MW of energy storage
capacity. One grant will assist in the planned construction and
operation of an energy storage system to be deployed alongside one
of our large scale solar installations located in Shirley,
Massachusetts.
Rhode Island
The Rhode Island Jurisdiction consists of the Narragansett
Electric and Narragansett Gas businesses that cover the majority of
the state. A summary of the current rate plans is shown below.
Summary of current rate plans - Rhode Island
Regulated Entity Filing Start date Allowed Return Fully funded Revenue
of current on Equity investment(1) increase
rate plan
----------------------- ---------- --------------- --------------- --------------- ----------
Narragansett Gas One year February 2013 9.5% $101m $11.3m
Narragansett Electric One year February 2013 9.5% $101m $21.5m
----------------------- ---------- --------------- --------------- --------------- ----------
(1) Including capex recovered through our annual ISR filing
Both the gas and electric businesses are recovering base
operating costs under one-year rate plans that became effective in
February 2013, using a 2011 test year. Other costs, including
capital, pension and property taxes, are recovered through annual
trackers. These include gas and electric Infrastructure Safety and
Reliability (ISR) capital trackers that allow us to agree a level
of investment for the coming year and concurrently recover the full
costs associated with investment in the current year.
In November 2017, we filed a rate case for both Narragansett
Electric and Narragansett Gas. The filing requested a Return on
Equity of 10.1% for both businesses, and a total combined revenue
increase of $35m (after adjusting for the lower US tax rate). We
expect to have new rates in place in September 2018.
Return on Equity decreased by 80 bps to 6.9% for the combined
Rhode Island business. This was largely driven by the impact of
inflation on the cost base ahead of new rate filings.
Return on Equity Most recent granted
Achieved (%) (%)
-------------------------- ------------------- --------------------
Regulated Entity FY18 FY17 CY15
Rhode Island
Narragansett Gas 8.4 9.4 9.8 9.5
Narragansett Electric 5.6 6.2 10.5 9.5
-------------------------- ----- ----- ----- --------------------
Total Rhode Island(1) 6.9 7.7 10.2 9.5
-------------------------- ----- ----- ----- --------------------
(1) Total return weighted by average rate base
On a US GAAP basis, capital investment in 2017/18 increased to
$232m from $196m in 2016/17.
Rate Base ($m) as at 31 March
Rhode Island Regulated Entity 2018 2017 % change
------------------------------- ------ ------ ---------
Narragansett Gas 742 640 16
Narragansett Electric 737 665 11
------------------------------- ------ ------ ---------
Total Rhode Island 1,479 1,305 13
------------------------------- ------ ------ ---------
The Rhode Island business achieved strong delivery of its gas
and electric capital investment plans in 2017/18. In relation to
the electric business, the $80m South Street substation rebuild
project in Providence, which is a key part of the city's
redevelopment and economic growth, met all major milestones in
2017/18 with the completion of the station construction and the
start of cutovers from the old station. For the gas business, the
proactive main replacement programme continues to drive our gas
capital investment with over 60 miles of leak prone pipe replaced
in Rhode Island in 2017/18.
FERC
The FERC Jurisdiction consists of the Long Island Generation
business, the Canadian Interconnector, New England Power,
Narragansett Electric (Transmission), and LNG investments.
Long Island Generation and the Canadian Interconnector are
contracted investments, meaning that they earn revenues from
long-term contracts with customers. The contracts are regulated by
FERC and allow for an agreed Return on Equity. New England Power
and Narragansett Electric (Transmission) use formula rates that
allow for the businesses to earn returns on incremental investments
almost immediately.
Return on Equity for the FERC Jurisdiction increased by 20 bps
to 11.5%, primarily driven by an increased Return on Equity for
Long Island Generation to 13.5% (2016/17: 12.0%).
FERC previously agreed to lower the base Return on Equity for
the New England transmission owners from 11.14% to 10.57% for the
period of October 2011 to December 2012. In April 2017, the US
Court of Appeals found the FERC failed to articulate a satisfactory
explanation for its actions. In March 2018, an Initial Decision was
issued on Complaint 4, raised by New England Transmission Owners,
NETO, ruling that the current base Return on Equity of 10.57% and
maximum Return on Equity of 11.74% is not unjust and unreasonable.
This Initial Decision is not the final agency action and must be
acted upon by the Commission. We expect a final order no earlier
than Q1 2019.
Return on Equity Most recent granted
Achieved (%) (%)
------------------------------------- ------------------- --------------------
Regulated Entity FY18 FY17 CY15
FERC
Long Island Generation 13.5 12.0 12.5 9.9
New England Power 11.0 11.1 11.0 10.6
Canadian Interconnector 13.0 13.0 13.0 13.0
Narragansett Electric Transmission 11.5 11.4 11.2 10.6
------------------------------------ ----- ----- ----- --------------------
Total FERC(1) 11.5 11.3 11.4 10.5
------------------------------------- ----- ----- ----- --------------------
(1) Total return weighted by average rate base
On a US GAAP basis, capital investment in 2017/18 decreased to
$312m from $382m in 2016/17.
Rate Base ($m) as at 31 March
FERC Regulated Entity 2018 2017 % change
--------------------------------------- ------ ------ ---------
Long Island Generation 408 422 (3)
New England Power 1,661 1,543 8
Canadian Interconnector 30 31 (3)
Narragansett Electric Transmission 718 697 3
--------------------------------------- ------ ------ ---------
Total FERC 2,817 2,693 5
--------------------------------------- ------ ------ ---------
In November 2017, we announced plans to install a 48MWh Battery
Energy Storage System (BESS) on the island of Nantucket. Given
growth forecasts, the island's emergency electricity back-up system
needs to be expanded particularly as it is served by two submarine
cables. The BESS, together with new backup diesel generation, will
have a 6MW capacity to supply the island for up to eight hours in
the event of a cable failure. It is one of several innovative
battery systems that National Grid has planned across the three
States that it serves.
NATIONAL GRID VENTURES AND OTHER ACTIVITIES
Good performance in the year
12 months ended 31 March at Operating change Capital investment change
actual exchange rates profit % %
-------
(GBPm) 2018 2017 2018 2017
--------------------------------- ----- ------ ------- ---------- --------- -------
Metering (incl. smart) 155 161 (4) 53 35 51
Grain LNG 76 74 3 7 6 17
IFA 65 72 (10) 21 15 40
IFA2 - - - 58 2 n/a
North Sea Link - - - 47 40 18
Other (62) (68) 9 - - -
--------------------------------- ----- ------ ------- ---------- --------- -------
Total National Grid Ventures 234 239 (2) 186 98 90
Property 84 65 29 14 15 (7)
Corporate and other activities (87) (127) 31 141 134 5
--------------------------------- ----- ------ ------- ---------- --------- -------
Total Other (3) (62) 95 155 149 4
--------------------------------- ----- ------ ------- ---------- --------- -------
Total National Grid Ventures
and Other 231 177 31 341 247 38
--------------------------------- ----- ------ ------- ---------- --------- -------
Joint ventures and associates Share of change Capital change
post-tax % investment(1) %
results
(GBPm) 2018 2017 2018 2017
------------------------------------- ----- ----- ------- -------- -------- -------
BritNed 36 53 (32) - - n/a
Nemo Link (1) 1 (200) 113 53 113
Millennium 13 13 - 13 4 225
Other 5 2 150 51 70 (27)
-------------------------------------- ----- ----- ------- -------- -------- -------
Total National Grid Ventures 53 69 (23) 177 127 39
St. William (9) (6) (50)
Cadent(2) 123 - n/a
------------------------------------- ----- ----- -------
Total Other 114 (6) n/a
-------------------------------------- ----- ----- -------
Total Joint Ventures and Associates 167 63 165
-------------------------------------- ----- ----- -------
(1) Excludes GBP19m and GBP10m equity contribution to St William
property joint venture for 2018 and 2017, respectively.
(2) Continuing results for 2016/17 exclude any contribution from
Cadent. The estimated equivalent contribution for 2016/17 would
have been GBP144m.
NATIONAL GRID VENTURES
National Grid Ventures performed well this year, making a
GBP287m positive contribution to Group profit before tax, which
consisted of Headline operating profit and post-tax share of JVs
and associates earnings. Capital investment was GBP363m for the
period to 31 March 2018, up GBP138m versus the prior year.
Metering profits continue expected decline; cash flows remain
strong
The metering business continues to see a decline in meter rental
income driven by the Government mandated smart meter rollout
programme, albeit slower than expected. We now own 11.1 million gas
meters, down 1.3m on the prior year. Investment is up GBP18m on
prior year primarily due to increased smart metering installations.
As at 31 March 2018, a total of 107,000 smart meters have now been
installed (2016/17: 7,000 meters).
Grain LNG profit steady
National Grid's LNG import terminal on the Isle of Grain
continues to deliver a consistent level of operating profit which
is backed by long-term 'take or pay' capacity contracts with
suppliers.
Existing interconnectors in line with expectations
As expected, operating profit for IFA declined 10% to GBP65m,
driven by reduced price arbitrage between the UK and continental
Europe. IFA had good availability in the year of 93% (2016/17: 78%,
due to Storm Angus). Increased investment in 2017/18 was primarily
driven by the ongoing refurbishment programme to extend the life of
the interconnector for another 30 years.
Our share of BritNed profit after tax was GBP17m lower
year-on-year, primarily due to lower auction revenue.
Construction continues on Nemo and NSL, and now underway on IFA2
interconnector
Construction continues on both the Nemo Link and NSL, which
remain on track to be operational in FY2019 and FY2022
respectively. The increased investment in Nemo reflects 112km of
cable laid and the start of construction of the converter stations
during the year.
In November 2017, we also commenced construction on IFA2, a 1GW,
GBP350m HVDC interconnector between Chilling in England and Tourbe
in France. It will become the second link to France that National
Grid has developed with RTE and it is expected to be operational in
late 2020.
Business Development opportunities
In June, we were selected as preferred bidder for a new link
between Shetland and mainland Great Britain. Having won the
competitive tender for the Shetland link, we were disappointed that
Ofgem rejected our proposal. This was due to two reasons. First,
changes in the EU Industrial Emissions Directive, with tougher
emissions targets only applying to Lerwick power station from 2030,
10 years later than initially expected. Second, the government
announcement in October 2017 that, subject to receiving state aid
approval, wind farms on remote islands will be eligible to compete
for a Contract for Difference in the next auction in 2019. This
meant Ofgem received assurances that the security of supply from
Lerwick could be guaranteed until 2025 at a cost below our proposed
connection.
In the US, we have worked on the Granite State and Northeast
Renewable projects to bring new-build renewables into
Massachusetts. Although our projects were unsuccessful in the last
Clean Energy RFP, we will utilise the foundational work to explore
how these projects can be evolved to meet longer-term clean energy
needs.
US renewable and storage opportunities
The evolving energy landscape is creating new opportunities in
our US territories.
During 2017, National Grid Ventures signed power purchase
agreements with the Long Island Power Authority to build and
operate battery storage energy systems. This project includes two
5MW, 8 hour lithium-ion battery systems located on Long Island's
South Fork and will help customers avoid the cost of new
transmission or traditional generation. We are also constructing a
6.4MW/15MWh BESS at the Philadelphia Navy Yard (PNY). The battery
will be for peak shaving and resiliency as part of the PNY
microgrid. We were awarded the project in April 2018 and expect the
system to be in service by mid-2019.
The business also connected over 204MW of rooftop solar for
almost 27,000 customers through our joint venture with Sunrun and
won a competitive 23MW solar project in Suffolk County, Long
Island.
OTHER ACTIVITIES
Headline operating loss for the twelve months ended 31 March
2018 was GBP(3)m, GBP59m favourable compared to last year, largely
driven by additional property site sales and a reduction in other
costs.
The Property business delivered an operating profit of GBP84m
(2016/17: GBP65m), as a result of further sales, most notably our
Staines and York sites.
Other costs decreased year-on-year reflecting the expected
reduction in business change programme expenditure.
In March this year, St. William 'topped out' the first apartment
building at the Prince of Wales Drive site in Battersea. This is a
significant milestone for the scheme, which will deliver almost one
thousand new homes when completed.
The remaining 39% stake in Cadent made a GBP123m post tax
contribution, down GBP21m compared to an estimate of the equivalent
contribution last year. This was largely driven by timing.
Future activities and outlook
The focus for National Grid Ventures remains the efficient
construction of the major interconnector projects in its portfolio,
with an expected step up in capital investment in FY19 as
construction continues on Nemo, NSL and IFA2. These three projects
represent a total GBP1.3bn capital investment. A final investment
decision on Viking Link, the 1.4GW 760km interconnector from
England to Denmark, is expected later this summer.
National Grid is at the heart of decarbonisation in both the UK
and US. The strong ongoing growth in large scale renewables is
likely to generate further opportunities for incremental
investment. The long-term contracted nature or regulatory
underpinning makes them well suited to the risk/reward profile of
our portfolio. They leverage many of our core capabilities in
engineering, project development, asset management and
financing.
We are therefore actively engaged in the renewables space, which
is creating new opportunities for the business. The economics for
Solar and Wind generation are becoming increasingly attractive, and
the ongoing significant growth in large scale renewables is set to
continue into the long-term.
In the UK, we currently have around 100 connections in the
pipeline from a range of new solar and storage customers.
Similarly, in the US, at the distribution level, we continue to
connect renewables for customers.
APPIX: BASIS OF PRESENTATION, DEFINITIONS AND METRIC
CALCULATIONS
BASIS OF PRESENTATION
Headline (or Adjusted)
Unless otherwise stated, all financial commentaries in this
release are given on a Headline (also referred to as Adjusted)
basis at actual exchange rates.
'Headline' (also referred to as 'Adjusted') results are a key
financial performance measure used by National Grid, which
represent the results for continuing operations before exceptional
items and remeasurements. Remeasurements comprise gains or losses
recorded in the income statement arising from changes in the fair
value of commodity contracts and derivative financial instruments
to the extent that hedge accounting is not achieved or is not fully
effective. Commentary provided in respect of results after
exceptional items and remeasurements is described as 'statutory'.
Further details are provided in note 3 on page 57. A reconciliation
to statutory results is provided in the consolidated income
statement on page 49.
Within this release a number of financial measures are
presented. These measures have been categorised as Alternative
Performance Measures (APMs), as per the European Securities and
Markets Authority (ESMA) guidelines and the Securities and Exchange
Commission (SEC) conditions for use of non-GAAP Financial
Measures.
An APM is a financial measure of historical or future financial
performance, financial position or cash flows, other than a
financial measure defined under IFRS. The Group uses a range of
these measures to provide a better understanding of the underlying
performance of the Group. APMs are reconciled to the most directly
comparable IFRS financial measure where practicable.
The Group has defined the following financial measures as APMs
derived from IFRS: net revenue, Headline operating profit including
timing and major storms, Underlying operating profit excluding
timing and major storms, adjusted earnings per share including and
excluding timing and major storms, net debt, capital investment,
funds from operations (FFO), FFO/interest cover and retained cash
flow (RCF)/adjusted net debt. For each of these measures we present
a reconciliation to the most directly comparable IFRS measure.
In addition to these APMs, we also have APMs derived from
regulatory measures which have no basis under IFRS; we call these
Regulatory Performance Measures. They comprise: Group Return on
Equity (RoE), UK and US regulatory RoE, Regulated Asset Base,
Regulated Asset Base growth, Regulatory gearing, annual Asset
Growth, Value Growth and Value Added including value added per
share. These measures reflect, in particular, the inputs used by
utility regulators to set the allowed revenues for many of our
businesses. As such, we believe that they provide close correlation
to the economic value we generate for our shareholders and are
therefore important supplemental measures for our shareholders to
understand the performance of the business.
We use these measures to monitor progress against our regulatory
agreements and certain aspects of our strategic objectives.
Further, targets for some of these performance measures are
included in the Company's Annual Performance Plan (APP) and Long
Term Performance Plan (LTPP) and contribute to how we reward our
employees. We consider that such regulatory measures are important
supplemental measures to our IFRS reporting to ensure a complete
understanding of Group performance.
The starting point for our Regulatory Performance Measures is
not IFRS, and the assumptions used in deriving these measures are
not governed by IFRS. We are unable to provide meaningful
reconciliations to any directly comparable IFRS measures, as
differences between IFRS and the regulatory recognition rules
applied have built up over many years. Instead, for each of these
we present an explanation of how the measure has been determined
and why it is important, and an overview as to why it would not be
meaningful to provide a reconciliation to IFRS.
DEFINITIONS
Alternative Performance Measures derived from IFRS
The following are metrics that are reconciled to IFRS measures,
as set out on pages 42 to 44.
Annual Asset Growth
'Annual Asset Growth' measures the increase in 'total regulatory
value and other investments', defined below.
Capital Investment
'Capital Investment' or 'Investment' refer to additions to
plant, property and equipment and intangible assets, and
contributions to joint ventures, other than the St William joint
venture during the period. St William is excluded based on the
nature of this joint venture arrangement.
Constant Currency
'Constant Currency Basis' refers to the reporting of the actual
results against the results for the same period last year which, in
respect of any US dollar currency denominated activity, have been
translated using the weighted average US dollar exchange rate for
the year ended 31 March 2018, which was $1.36 to GBP1.00. The
weighted average rate for the year ended 31 March 2017, was $1.28
to GBP1.00. Assets and liabilities as at 31 March 2017 have been
retranslated at the closing rate at 31 March 2018 of $1.40 to
GBP1.00. The closing rate for the balance sheet date 31 March 2017
was $1.25 to GBP1.00.
Net Revenue
'Net Revenue' is revenue less pass-through costs, such as
payments to other UK network owners, system balancing costs, and
gas and electricity commodity costs in the US. Pass-through costs
are fully recoverable from our customers and are recovered through
separate charges that are designed to recover those costs with no
profit. Any over or under-recovery of these costs is returned to,
or recovered from, our customers.
Regulatory Performance Measures
The following are metrics unable to be reconciled to IFRS
measures as their starting point is not IFRS and the assumptions
used to drive changes in these measures are not governed by
IFRS.
Group Return on Equity
'Group Return on Equity' or 'Group RoE' provides investors with
a view of the performance of the Group as a whole compared with the
amounts invested by the Group in assets attributable to equity
shareholders. It is the ratio of our regulatory financial
performance to our measure of equity investment in assets. It
therefore reflects the regulated activities as well as the
contribution from our non-regulated businesses together with joint
ventures and minority interests.
We use Group RoE to measure our performance in generating value
for our shareholders and a target for Group RoE is included in the
incentive mechanisms for executive remuneration within both the APP
and LTPP schemes.
Group RoE is underpinned by our regulated asset base. For the
reasons noted further below, no reconciliation to IFRS has been
presented as we do not believe it would be meaningful.
Other Regulatory Assets and Liabilities
The revenues that National Grid's UK regulated businesses
targets to collect in any year are based on the regulator's
forecasts for that year. Under the UK price control arrangements,
revenues will be adjusted in future years to take account of actual
levels of collected revenue, costs and outputs delivered when they
differ from those regulatory forecasts. This includes adjustments
designed to share performance efficiencies with customers. National
Grid's estimate of these future revenue adjustments are represented
in the calculation of regulated financial performance and regulated
financial position as 'Other Regulatory Assets and Liabilities'.
These include:
-- Revenues associated with sharing under the totex incentive mechanism
-- Adjustments for changes to customer output requirements on totex allowances
-- True ups for pass through costs, actual RPI and pensions deficit repair costs
-- Differences between allowed/targeted and recovered revenues
-- Differences between revenues collected and earned under other incentive mechanisms
In addition, Other Regulatory Assets and Liabilities include
balances relating to 'phasing adjustments'. Where expenditure
allowances have been awarded in one year but are associated with
expenditure that is now expected to be incurred in a different year
National Grid applies 'phasing adjustments' to better match the
allowances to the year of expenditure. In such cases, the revenues
associated with these re-phased allowances are included in Other
Regulated Assets and Liabilities and reversed when the associated
expenditure is incurred.
In the US, other regulatory assets and liabilities include
regulatory assets and liabilities which are not included in the
definition of rate base within that jurisdiction, including working
capital where appropriate.
Performance RAV
UK performance efficiencies are in part remunerated by the
creation of additional RAV which is expected to result in future
earnings under regulatory arrangements. This is an addition to RAV
above and beyond that associated with the remuneration of actual
expenditure and is termed 'Performance RAV'.
Regulated Asset Base
The 'Regulated Asset Base' is a regulatory construct, based on
pre-determined principles not based on IFRS. It effectively
represents the invested capital on which we are authorised to earn
a cash return. By investing in our networks, we add to our
Regulated Asset Base over the long term and this in turn
contributes to delivering shareholder value. Our regulated asset
base is comprised of our regulatory asset value in the UK, plus our
rate base in the US.
Maintaining efficient investment in our regulated asset base
ensures we are well positioned to provide consistently high levels
of service to our customers and increases our revenue allowances in
future years. While we have no specific target, our overall aim is
to achieve between 5% and 7% growth in regulated asset base each
year through continued investment in our networks in both the UK
and US.
In the UK, the way in which our transactions affect 'Regulated
Asset Value' (RAV) is driven by principles set out by Ofgem. In a
number of key areas these principles differ from the requirements
of IFRS, including areas such as additions and the basis for
depreciation. Further, our UK RAV is adjusted annually for
inflation. RAV in each of our retained UK businesses has evolved
over the period since privatisation in 1990 and as a result,
historical differences between the initial determination of RAV and
balances reported under UK GAAP at that time still persist. Due to
the above, substantial differences exist in the measurement bases
between RAV and an IFRS balance metric and, therefore, it is not
possible to provide a meaningful reconciliation between the
two.
In the US, 'Rate Base' is a regulatory measure determined for
each of our main US operating companies. It represents the value of
property and other assets or liabilities on which we are permitted
to earn a rate of return, as set out by the regulatory authorities
for each jurisdiction. The calculations are based on the applicable
regulatory agreements for each jurisdiction and include the
allowable elements of assets and liabilities from our US companies.
For this reason, it is not possible to provide a meaningful
reconciliation from the US Rate Base to an equivalent IFRS
measure.
Timing
Under the Group's regulatory frameworks, the majority of the
revenues that National Grid is allowed to collect each year are
governed by a regulatory price control or rate plan. If National
Grid collects more than this allowed level of revenue, the balance
must be returned to customers in subsequent years, and if it
collects less than this level of revenue it may recover the balance
from customers in subsequent years. These variances between allowed
and collected revenues give rise to 'over and under-recoveries'. In
addition, a number of costs in both the UK and the US are
pass-through costs (including substantial commodity and energy
efficiency costs in the US), and are fully recoverable from
customers. Any timing differences between costs of this type being
incurred and their recovery through revenues are also included in
over and under-recoveries. In the UK, timing differences also
include an estimation of the difference between revenues earned
under revenue incentive mechanisms and any associated revenues
collected. UK timing balances and movements exclude any adjustments
associated with changes to controllable cost (totex) allowances or
adjustments under the totex incentive mechanism.
Identification of these timing differences enables a better
comparison of performance from one period to another. Opening
balances of under and over-recoveries have been restated where
appropriate to correspond with regulatory filings and
calculations.
Total Regulatory Value and Other Investments
The sum of: the Regulatory Asset Value of the UK regulated
businesses determined under the methodology set out in Ofgem's
Price Control Financial Model; the Rate Bases applicable to each US
regulated entity calculated according to the methodology used by
each respective utility regulator; the value of assets held by the
Group's National Grid Ventures and Other activities; together with
investments in joint ventures and associates excluding Cadent.
National Grid Ventures and Other activities primarily relate to
non-network businesses and other commercial operations including:
UK gas metering activities; the Great Britain-France
Interconnector; UK property management; a UK LNG import terminal;
and Nemo, North Sea Link and IFA2 interconnector projects, which
are all under construction.
Totex
Under the UK RIIO regulatory arrangements the Company is
incentivised to deliver efficiencies against cost targets set by
the regulator. In total, these targets are set in terms of a
regulatory definition of combined total operating and capital
expenditure, also termed 'Totex'. The definition of Totex differs
from the total combined regulated controllable operating costs and
regulated capital expenditure as reported in this statement
according to IFRS accounting principles. Key differences are
capitalised interest, capital contributions, exceptional costs,
costs covered by other regulatory arrangements and unregulated
costs.
UK Regulated Return on Equity (nominal)
'UK Regulated Return on Equity' or 'UK Regulated RoE' is a
measure of how the businesses are performing against the
assumptions used by our regulator. These returns are calculated
using the assumption that the businesses are financed in line with
the regulatory adjudicated capital structure, at the cost of debt
assumed by the regulator and that RPI inflation is equal to a
long-run assumption of 3.0%. They are calculated by dividing
elements of out or under-performance versus the regulatory contract
by the average equity RAV in line with the regulatory assumed
capital structure and adding to the base allowed RoE.
This is an important measure of UK regulated business
performance and our operational strategy continues to focus on this
metric. This measure can be used to determine how we are performing
under the RIIO framework and also help investors to compare our
performance with similarly regulated UK entities. Reflecting the
importance of this metric, it is also a key component of both the
APP and LTPP schemes.
The UK RoE is underpinned by the UK RAV. For the reasons noted
further above, no reconciliation to IFRS has been presented as we
do not believe it would be meaningful.
US Regulated Return on Equity (nominal)
'US Regulated Return on Equity' or 'US Regulated RoE' is a
measure of how the businesses are performing against the
assumptions used by the regulator. This US operational return
measure is calculated using the assumption that the businesses are
financed in line with the regulatory adjudicated capital structure.
The returns are divided by the average Rate Base (or where a
reported Rate Base is not available, an estimate based on Rate Base
calculations used in previous rate filings) multiplied by the
adjudicated equity portion in the regulatory adjudicated capital
structure.
This is an important measure of our US regulated business
performance and our operational strategy continues to focus on this
metric. This measure can be used to determine how we are performing
and also helps investors compare our performance with similarly
regulated US entities. Reflecting the importance of this metric, it
is also a key component of both the APP and LTPP schemes.
The US return is based on a calculation which gives
proportionately more weighting to those jurisdictions which have a
greater rate base as measured under US GAAP; there is no equivalent
concept of Rate Base under IFRS.
The US RoE is underpinned by the US Rate Base. For the reasons
noted further above, no reconciliation to IFRS has been presented
as we do not believe it would be meaningful.
Value Added
'Value Added' is a measure that reflects the value to
shareholders of our dividend and the growth in National Grid's
regulated and non-regulated assets (as measured in our Rate Base,
for regulated entities), net of the growth in overall debt. It is a
key metric used to measure our performance and underpins our
approach to sustainable decision-making and long-term management
incentive arrangements.
Value Added is derived using our Regulated Asset Base and, as
such, it is not possible to provide a meaningful reconciliation
from this measure to an equivalent IFRS measure due to the reasons
set out for our Regulated Asset Base.
Financial position, cash flow and net debt
Capital investment
At actual exchange rates At constant currency
Year ended 31 March 2018 2017 change 2018 2017 change
GBPm GBPm % GBPm GBPm %
---------------------------------------------------------- -------- ------- --------- ------- ------ -------
UK Electricity Transmission 999 1,027 (3) 999 1,027 (3)
UK Gas Transmission 310 214 45 310 214 45
US Regulated 2,424 2,247 8 2,424 2,113 15
NG Ventures and Other 341 247 38 341 239 43
---------------------------------------------------------- -------- ------- --------- ------- ------ -------
Group capex 4,074 3,735 9 4,074 3,593 13
Equity investment, funding contributions and loans to
joint ventures and associates(1) 177 127 39 177 124 43
---------------------------------------------------------- -------- ------- --------- ------- ------ -------
Group capital investment 4,251 3,862 10 4,251 3,717 14
---------------------------------------------------------- -------- ------- --------- ------- ------ -------
1. Excludes GBP19m (2017: GBP10m) equity contribution to the St
William property joint venture.
Net debt, retained cashflow and RCF to net debt metrics
Year ended 31 March 2018 2017 change
GBPm GBPm %
---------------------------- ------ ------ ------
Net debt 23,002 19,274 19
Adjusted net debt 22,777 20,290 12
Retained cashflow (RCF) 2,199 3,020 (27)
---------------------------- ------ ------ ------
RCF / Adjusted net debt (%) 9.7 14.9
---------------------------- ------ ------ ------
Regulatory performance measures
Regulated financial performance (pre-tax)
Year ended 31 March 2018 2017 change
GBPm GBPm %
---------------------------- ----- ----- ------
UK Electricity Transmission 1,262 1,184 7
UK Gas Transmission 499 499 -
US Regulated 1,631 1,359 20
---------------------------- ----- ----- ------
Rate base, RAV and invested capital
At actual exchange rates At constant currency
Year ended 31 March 2018 2017(1) change 2018 2017(1) change
GBPm GBPm % GBPm GBPm %
--------------------------------------- -------- --------- ------- ------- ------- ------
UK Electricity Transmission RAV 13,045 12,479 5 13,045 12,479 5
UK Gas Transmission RAV 6,014 5,755 5 6,014 5,755 5
Other regulated assets/liabilities (519) (479) (8) (519) (479) (8)
--------------------------------------- -------- --------- ------- ------- ------- ------
Total UK regulated and other assets 18,540 17,755 4 18,540 17,755 4
US rate base 14,762 15,398 (4) 14,762 13,751 7
Other regulated assets 1,921 1,665 15 1,921 1,487 29
--------------------------------------- -------- --------- ------- ------- ------- ------
Total US regulatory and other assets 16,683 17,063 (2) 16,683 15,238 9
Other invested capital 1,824 2,231 (18) 1,824 1,724 6
--------------------------------------- -------- --------- ------- ------- ------- ------
Group regulated and other assets 37,047 37,049 - 37,047 34,717 7
--------------------------------------- -------- --------- ------- ------- ------- ------
(1) Restated for opening balance adjustment following the
completion of the regulatory reporting pack process in 2017.
Value added (GBPm, constant currency) For the year ended 31 March 2018 For the year ended 31 March 2017
------------------------------------ ------------------------------------
2018 2017 change 2017 2016 change
GBPm GBPm GBPm GBPm GBPm GBPm
------------ ----------- --------- ------------ ----------- ---------
Total Group regulated and other
assets(1) 37,047 34,717 2,330 45,895 44,146 1,749
Net Debt(2) (23,002) (21,182) (1,820) (29,145) (27,685) (1,460)
510 289
Dividend paid 1,316 1,463
Share buy-backs 178 189
---------------------------------------- ------------ ----------- --------- ------------ ----------- ---------
Value added 2,004 1,941
Value added per share (pence) 57.9 51.6
---------------------------------------- ------------ ----------- --------- ------------ ----------- ---------
(1) For the year ended 31 March 2017 total group regulated and
other assets included 100% share of RAV of the UK Gas Distribution
business.
(2) For the year ended 31 March 2018, net debt of GBP21,182m
includes an adjustment for the GBP4bn return of capital. For the
year ended 31 March 2017, net debt of GBP29,145m includes an
adjustment to exclude the GBP10bn reduction in net debt on the sale
of UK Gas Distribution.
(3) Excludes special dividend and share buybacks associated with
return of capital post UK Gas Distribution sale.
Return on Equity
Year ended 31 March 2018 2017 change
% %
---------------------------- ---- ---- ------
UK Electricity Transmission 13.1 13.6 (0.5)
UK Gas Transmission 10.0 10.8 (0.8)
US Regulated 8.9 8.2 0.7
Group 12.3 11.7 0.6
---------------------------- ---- ---- ------
Regulatory gearing
At actual exchange rates At constant currency
Year ended 31 March 2018 2017 change 2018 2017 change
% % % %
-------------------- ------- ------- ---------- ------ ------ --------
Group 64 65 (1) 64 62 2
-------------------- ------- ------- ---------- ------ ------ --------
METRIC CALCULATIONS
Regulated Financial Performance 2018 2017
(GBPm)
(year ended 31 March)
----------------------------------- ----------------------- -------------------------------
UKET UKGT US REG UKET UKGT UKGD US REG
---------------------------------- ------ ------ ------- ------ ------ ------ -------
Statutory operating profit 1,041 487 1,734 1,361 507 898 1,278
Exceptional items/remeasurements - - (36) 11 4 - 435
Headline operating profit 1,041 487 1,698 1,372 511 898 1,713
Depreciation and amortisation 475 194 635 421 186 214 642
---------------------------------- ------ ------ ------- ------ ------ ------ -------
1,516 681 2,333 1,793 697 1,112 2,355
Major storms - - 142 - - -
---------------------------------- ------ ------ ------- ------ ------ ------ -------
1,516 681 2,475 1,793 697 1,112 2,355
Regulatory treatment
adjustments
Movement in UK regulatory
"IOUs" 51 (91) - (288) (120) 16 -
US timing - - (136) - - - (199)
Performance RAV created 83 (16) - 74 (11) 47 -
Pension adjustment (49) (32) (73) (47) (53) (13) (155)
3% RAV Indexation 374 173 - 356 168 260 -
UK deferred taxation
adjustment 70 18 - 62 39 (24) -
Regulatory depreciation (852) (223) (635) (800) (207) (413) (642)
Fast/slow money adjustment 69 (11) - 34 (14) (121) -
Regulated Financial Performance 1,262 499 1,631 1,184 499 864 1,359
Group RoE calculation 2018 2017 2016
(year ended 31 March)
----------------------------------------------- --------- --------- ---------
Regulated Financial Performance 3,392 3,906 3,663
Operating profit of other activities 255 204 374
Group financial performance 3,647 4,110 4,037
----------------------------------------------- --------- --------- ---------
Share of post-tax results of
joint ventures 238 63 59
Non-controlling interests (1) 1 (3)
Adjusted group interest charge (980) (1,075) (922)
Group tax charge (639) (808) (753)
Tax on adjustments 27 166 4
---- ----------------------------------------- --------- --------- ---------
Group financial performance after
interest and tax 2,292 2,457 2,422
----------------------------------------------- --------- --------- ---------
Opening Rate Base/RAV 32,446 40,435 36,998
Share of Cadent RAV 512 - -
Opening NBV of non-regulated businesses 1,328 1,579 1,213
Joint Ventures 459 408 319
Opening Goodwill 5,626 5,984 5,182
----------------------------------------------- --------- --------- ---------
Opening capital employed 40,371 48,406 43,712
Opening Net Debt(1) (21,770) (27,346) (24,024)
----------------------------------------------- --------- --------- ---------
Opening Equity 18,601 21,060 19,688
----------------------------------------------- --------- --------- ---------
Return on Equity 12.3% 11.7% 12.3%
----------------------------------------------- --------- --------- ---------
(1) Opening net debt has been adjusted to reflect the impact of
the UK Gas Distribution sale.
Regulated Financial Position 2017/18
(GBPm - constant currency)
-----------------------------------------------------
UKET UKGT US REG Group
---------------------------------------------------- ------- ------ ------- -------
Opening RAV/Rate Base(1) 12,479 5,755 13,751 31,985
In year movement 566 259 1,011 1,836
Closing RAV/Rate Base 13,045 6,014 14,762 33,821
Opening Other Regulatory Assets and Liabilities(1) (445) (34) 1,487 1,008
In year movement 51 (91) 434 394
Closing Other Regulatory Assets and Liabilities (394) (125) 1,921 1,402
Closing Regulated Financial Position 12,651 5,889 16,683 35,223
(1) Adjusted to correspond with 2016/17 regulatory filings and
calculations
DESCRIPTION OF METRIC CALCULATIONS
Regulated Financial Performance
The Regulated Financial Performance calculation provides a
measure of the performance of the regulated operations before the
impacts of interest and taxation. It makes adjustments to reported
operating profit to reflect the impact of the businesses'
regulatory arrangements when presenting financial performance. It
reflects both the value realised on behalf of providers of capital
in the year and also an estimation of net value created, but not
yet realised that is reasonably expected to be realised or returned
to customers in future periods under the Group's regulatory
arrangements.
The principal adjustments from reported operating profit to
regulated financial performance are:
Adjustment Calculation
US timing, major storms & movement
in UK regulatory "IOUs"
Revenue related to performance US: As per US Timing and major
in one year may be recovered in storms
later years. Revenue may be recovered UK: Movement in other regulated
in one year but be required to assets and liabilities.
be returned to customers in future
years.
Performance RAV
UK performance efficiencies are In year totex outperformance
in part remunerated by the creation multiplied by the appropriate
of additional RAV which is expected regulatory capitalisation
to result in future earnings under ratio and multiplied by the
regulatory arrangements. retained company incentive
sharing ratio.
Pension adjustment
Cash payments against pension deficits UK: cash payments against
in the UK are recoverable under the regulatory proportion
regulatory contracts. In US Regulated of pension deficits in the
operations, US GAAP pension charges UK regulated business.
are generally recoverable through US: the difference between
rates. Revenue recoveries are recognised IFRS and US GAAP pension charges.
under IFRS but payments are not
charged against IFRS operating
profits in the year.
3% RAV Indexation
Future UK revenues expected to UK RAV multiplied by 3% (long-run
be set using an asset base adjusted RPI inflation assumption).
for inflation.
UK deferred taxation adjustment
Future UK revenues are expected The difference between 1.
to recover cash taxation cost including IFRS underlying EBITDA less
the unwinding of deferred taxation other regulatory adjustments
balances created in the current and 2. IFRS underlying EBITDA
year. less other regulatory adjustments
less current taxation (adjusted
for interest tax shield) then
grossed up at full UK statutory
tax rate.
Regulatory depreciation
US and UK regulated revenues include Regulatory depreciation.
allowance for a return of regulatory
capital in accordance with regulatory
assumed asset lives. This return
does not form part of regulatory
profit.
Fast/slow money adjustment
The regulatory remuneration of Difference between IFRS classification
costs incurred is split between of costs as operating costs
in year revenue allowances and or fixed asset additions and
the creation of additional RAV. the regulatory classification.
This does not align with the classification
of costs as operating costs and
fixed asset additions under IFRS
accounting principles.
Group Return on Equity
The Group Return on Equity (RoE) calculation provides a measure
of the performance of the whole Group compared with the amounts
invested by the Group in assets attributable to equity
shareholders.
Calculation: Regulatory financial performance, including a
long-run assumption of 3.0% RPI inflation, less adjusted interest
and adjusted taxation divided by equity investment in assets
-- Adjusted interest removes interest on pensions, capitalised
interest and discount unwind on provisions
-- Adjusted taxation adjusts the Group taxation charge for
differences between IFRS profit before tax and regulated financial
performance less adjusted interest
-- Equity investment in assets is calculated as the total
opening UK regulatory asset value, the total opening US rate base
plus goodwill plus opening net book value of joint ventures and
other activities excluding Cadent plus a 39% share of Cadent RAV,
adjusted to reflect debt structure; minus opening net debt as
reported under IFRS (adjusted for the impact of the disposal of UK
Gas Distribution).
US Regulated Return on Equity (nominal)
US Regulated Return on Equity is a measure of how a business is
performing operationally against the assumptions used by the
regulator.
This US operational return measure is calculated using the
assumption that the businesses are financed in line with the
regulatory adjudicated capital structure.
This is a post-tax US GAAP metric as calculated annually. For
the current, prior and future year results, this has been
calculated on a fiscal basis (e.g. year ended 31 March 2018). Prior
to March 2016 this was calculated on a calendar year basis.
Calculation: Regulated net income divided by equity rate
base:
-- Regulated net income calculated as US GAAP operating profit
less interest on the adjudicated debt portion of the rate base
(calculated at the actual rate on long term debt, adjusted where
the proportion of long term debt in the capital structure is
materially different from the assumed regulatory proportion) less
tax at the adjudicated rate
-- Regulated net income is adjusted for earned savings in New
York and Narragansett Electric and for certain material specified
items
-- Equity rate base for the current year is an estimate based on
rate base calculations used in previous rate filings multiplied by
the adjudicated equity portion in the regulatory capital structure.
For the prior year, equity rate base was an average rate base for
the calendar year as reported to the Group's regulators or, where a
reported rate base is not available, an estimate based on rate base
calculations used in previous rate filings multiplied by the
adjudicated equity portion in the regulatory capital structure
UK Regulated Return on Equity (nominal)
UK Regulated Return on Equity is a measure of how a business is
performing operationally against the assumptions used by the
regulator.
These returns are calculated using the assumption that the
businesses are financed in line with the regulatory adjudicated
capital structure, at the cost of debt assumed by the regulator and
that RPI is equal to a long-run assumption of 3.0%.
Calculation: Base allowed Return on Equity plus or minus the
following items
-- Additional allowed revenues/profits earned in the year from
incentive schemes, less associated corporation tax charge;
-- Totex outperformance multiplied by the company sharing factor set by the regulator; and
-- Revenues (net of associated depreciation and base allowed
asset return) allowed in the year associated with incentive
performance earned under previous price controls but not yet fully
recovered, less associated corporation tax charge (excluding
logging up or pensions recovery)
Divided by average equity RAV in line with regulatory assumed
capital structure.
PROVISIONAL FINANCIAL TIMETABLE
Date Event
17 May 2018 2017/18 full year results
31 May 2018 Ordinary shares and ADRs go ex-dividend for
2017/18 final dividend
1 June 2018 Record date for 2017/18 final dividend
7 June 2018 Scrip reference price announced
28 June 2018 (5pm London Scrip election date for 2017/18 final dividend
time)
30 July 2018 Annual General Meeting, ICC, Birmingham
15 August 2018 2017/18 final dividend paid to qualifying shareholders
8 November 2018 2018/19 half year results
21 November 2018 ADRs go ex-dividend for the 2018/19 interim
dividend
22 November 2018 Ordinary shares go ex-dividend for the 2018/19
interim dividend
23 November 2018 Record date for 2018/19 interim dividend
29 November 2018 Scrip reference price announced
7 December 2018 Scrip election date for 2018/19 interim dividend
9 January 2019 2018/19 interim dividend paid to qualifying
shareholders
American Depositary Receipt (ADR) Deposit Agreement
National Grid amended the deposit agreement under which the ADRs
representing its ordinary shares are issued to allow a fee of up to
$0.05 per ADR to be charged for any cash distribution made to ADR
holders, including cash dividends. ADR holders who receive cash in
relation to the 2017/18 final dividend will be charged a fee of
$0.02 per ADR, by the Depositary prior to distribution of the cash
dividend.
CAUTIONARY STATEMENT
This announcement contains certain statements that are neither
reported financial results nor other historical information. These
statements are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These
statements include information with respect to National Grid's
financial condition, its results of operations and businesses,
strategy, plans and objectives. Words such as 'aims',
'anticipates', 'expects', 'should', 'intends', 'plans', 'believes',
'outlook', 'seeks', 'estimates', 'targets', 'may', 'will',
'continue', 'project' and similar expressions, as well as
statements in the future tense, identify forward-looking
statements. These forward-looking statements are not guarantees of
National Grid's future performance and are subject to assumptions,
risks and uncertainties that could cause actual future results to
differ materially from those expressed in or implied by such
forward-looking statements. Many of these assumptions, risks and
uncertainties relate to factors that are beyond National Grid's
ability to control or estimate precisely, such as changes in laws
or regulations, including any arising as a result of the United
Kingdom's exit from the European Union, announcements from and
decisions by governmental bodies or regulators, including those
relating to the role of the UK electricity system operator as well
as increased political and economic uncertainty; failure to
adequately forecast and respond to disruptions in energy supplies;
the timing of construction and delivery by third parties of new
generation projects requiring connection; breaches of, or changes
in, environmental, climate change and health and safety laws or
regulations, including breaches or other incidents arising from the
potentially harmful nature of its activities; network failure or
interruption, the inability to carry out critical non network
operations and damage to infrastructure, due to adverse weather
conditions including the impact of major storms as well as the
results of climate change, due to counterparties being unable to
deliver physical commodities, or due to the failure of or
unauthorised access to or deliberate breaches of National Grid's IT
systems and supporting technology; performance against regulatory
targets and standards and against National Grid's peers with the
aim of delivering stakeholder expectations regarding costs and
efficiency savings, including those related to investment
programmes and remediation plans; and customers and counterparties
(including financial institutions) failing to perform their
obligations to the Company. Other factors that could cause actual
results to differ materially from those described in this
announcement include fluctuations in exchange rates, interest rates
and commodity price indices; restrictions and conditions (including
filing requirements) in National Grid's borrowing and debt
arrangements, funding costs and access to financing; regulatory
requirements for the Company to maintain financial resources in
certain parts of its business and restrictions on some
subsidiaries' transactions such as paying dividends, lending or
levying charges; inflation or deflation; the delayed timing of
recoveries and payments in National Grid's regulated businesses and
whether aspects of its activities are contestable; the funding
requirements and performance of National Grid's pension schemes and
other post-retirement benefit schemes; the failure to attract,
train or retain employees with the necessary competencies,
including leadership skills, and any significant disputes arising
with the National Grid's employees or the breach of laws or
regulations by its employees; and the failure to respond to market
developments, including competition for onshore transmission, the
threats and opportunities presented by emerging technology,
development activities relating to changes in the energy mix and
the integration of distributed energy resources, and the need to
grow the Company's business to deliver its strategy, as well as
incorrect or unforeseen assumptions or conclusions (including
unanticipated costs and liabilities) relating to business
development activity (including acquisitions and disposals) and
joint ventures. For further details regarding these and other
assumptions, risks and uncertainties that may impact National Grid,
please read the Strategic Report section and the 'Risk factors' on
pages 180 to 183 of National Grid's most recent Annual Report and
Accounts, as updated by National Grid's unaudited half-year
financial information for the six months ended 30 September 2017
published on 9 November 2017. In addition, new factors emerge from
time to time and National Grid cannot assess the potential impact
of any such factor on its activities or the extent to which any
factor, or combination of factors, may cause actual future results
to differ materially from those contained in any forward-looking
statement. Except as may be required by law or regulation, the
Company undertakes no obligation to update any of its
forward-looking statements, which speak only as of the date of this
announcement.
Consolidated income statement
for the years ended 31 March
Exceptional
Before exceptional items and remeasurements
2018 items and (see note 3)
GBPm Notes remeasurements Total
Continuing operations
Revenue 2(a) 15,250 - 15,250
Operating costs 3 (11,793) 36 (11,757)
Operating profit 2(b) 3,457 36 3,493
Finance income 4 154 - 154
Finance costs 3,4 (1,128) 229 (899)
Share of post-tax results of
joint ventures and associates 167 (207) (40)
Profit before tax 2(b),3 2,650 58 2,708
Tax 5 (589) 1,473 884
Profit after tax from
continuing
operations 3 2,061 1,531 3,592
Loss after tax from
discontinued
operations 8 - (41) (41)
Total profit for the year
(continuing
and discontinued) 2,061 1,490 3,551
Attributable to:
Equity shareholders of the
parent 2,060 1,490 3,550
Non-controlling interests(1) 1 - 1
Earnings per share (pence)
Basic earnings per share
(continuing) 6 103.8
Diluted earnings per share
(continuing) 6 103.3
Basic earnings per share
(continuing
and discontinued) 6 102.6
Diluted earnings per share
(continuing
and discontinued) 6 102.1
1. The non-controlling interests for the year ended 31 March 2018 relate
to continuing operations.
Exceptional
Before exceptional items and remeasurements
2017(2) items and (see note 3)
GBPm Notes remeasurements Total
Continuing operations
Revenue 2(a) 15,035 - 15,035
Operating costs 3 (11,262) (565) (11,827)
Operating profit 2(b) 3,773 (565) 3,208
Finance income 4 53 - 53
Finance costs 3,4 (1,082) (58) (1,140)
Share of post-tax results of
joint ventures and associates 63 - 63
Profit before tax 2(b),3 2,807 (623) 2,184
Tax 5 (666) 292 (374)
Profit after tax from
continuing
operations 3 2,141 (331) 1,810
Profit after tax from
discontinued
operations 8 606 5,378 5,984
Total profit for the year
(continuing
and discontinued) 2,747 5,047 7,794
Attributable to:
Equity shareholders of the
parent 2,747 5,048 7,795
Non-controlling interests(3) - (1) (1)
Earnings per share (pence)
Basic earnings per share
(continuing) 6 48.1
Diluted earnings per share
(continuing) 6 47.9
Basic earnings per share
(continuing
and discontinued) 6 207.1
Diluted earnings per share
(continuing
and discontinued) 6 206.2
2. Comparatives have been re-presented to reflect the change to
a columnar format (see note 1).
3. The non-controlling interests for the year ended 31 March
2017 relate to discontinued operations.
Consolidated statement of comprehensive income
for the years ended 31 March
Note 2018 2017
GBPm GBPm
Profit after tax from continuing operations 3,592 1,810
Other comprehensive income from continuing operations
Items from continuing operations that will never
be reclassified to profit or loss:
Remeasurement gains of pension assets and post-retirement
benefit obligations 1,313 423
Share of other comprehensive income of associates,
net of tax(1) 142 -
Tax on items that will never be reclassified to
profit or loss (530) (277)
Total items from continuing operations that will
never be reclassified to profit or loss 925 146
Items from continuing operations that may be reclassified
subsequently to profit or loss:
Exchange adjustments (505) 346
Net gains in respect of cash flow hedges 19 70
Transferred to profit or loss in respect of cash
flow hedges (3) (6)
Net (losses)/gains on available-for-sale investments (30) 81
Transferred to profit or loss on sale of available-for-sale
investments (73) (25)
Share of other comprehensive income of associates,
net of tax(1) 5 -
Tax on items that may be reclassified subsequently
to profit or loss 33 (34)
Total items from continuing operations that may be
reclassified subsequently to profit or loss (554) 432
Other comprehensive income for the year, net of tax
from continuing operations 371 578
Other comprehensive income for the year, net of tax
from discontinued operations 8 - 42
Other comprehensive income for the year, net of tax 371 620
Total comprehensive income for the year from continuing
operations 3,963 2,388
Total comprehensive income for the year from discontinued
operations 8 (41) 6,026
Total comprehensive income for the year 3,922 8,414
Attributable to:
Equity shareholders of the parent
From continuing operations 3,963 2,389
From discontinued operations (41) 6,026
3,922 8,415
Non-controlling interests
From continuing operations - (1)
1. The share of other comprehensive income of associates relates
to items of other comprehensive income of Cadent (investment through
Quadgas HoldCo Limited), comprising GBP142 million (2017: GBPnil)
remeasurement gains on pension assets and post-retirement benefit
obligations and a GBP5 million (2017: GBPnil) net gain in respect
of cash flow hedges. Both items are shown net of tax.
Consolidated statement of changes in equity
for the years ended 31 March
Share Other Total
Share premium Retained equity share-holders' Non-controlling Total
capital account earnings reserves equity interests equity
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2016 447 1,326 16,305 (4,523) 13,555 10 13,565
Profit/(loss) for the year - - 7,795 - 7,795 (1) 7,794
Total other comprehensive
income
for the year - - 84 536 620 - 620
Total comprehensive
income/(loss)
for the year - - 7,879 536 8,415 (1) 8,414
Equity dividends 7 - - (1,463) - (1,463) - (1,463)
Scrip dividend related share
issue(1) 2 (2) - - - - -
Purchase of treasury shares - - (189) - (189) - (189)
Issue of treasury shares - - 18 - 18 - 18
Purchase of own shares - - (6) - (6) - (6)
Other movements in
non-controlling
interests - - - - - 7 7
Share-based payments - - 35 - 35 - 35
Tax on share-based payments - - 3 - 3 - 3
At 31 March 2017 449 1,324 22,582 (3,987) 20,368 16 20,384
Profit for the year - - 3,550 - 3,550 1 3,551
Total other comprehensive
income/(loss)
for the year - - 925 (553) 372 (1) 371
Total comprehensive
income/(loss)
for the year - - 4,475 (553) 3,922 - 3,922
Equity dividends 7 - - (4,487) - (4,487) - (4,487)
Scrip dividend related share
issue(1) 3 (3) - - - - -
Purchase of treasury shares - - (1,017) - (1,017) - (1,017)
Issue of treasury shares - - 33 - 33 - 33
Purchase of own shares - - (5) - (5) - (5)
Share-based payments - - 16 - 16 - 16
Tax on share-based payments - - 2 - 2 - 2
At 31 March 2018(2) 452 1,321 21,599 (4,540) 18,832 16 18,848
1. Included within the share premium account are costs associated
with scrip dividends.
2. Refer to note 7 for the effect of the share consolidation and
special dividend.
Consolidated statement of financial position
as at 31 March
2018 2017
GBPm GBPm
Non-current assets
Goodwill 5,444 6,096
Other intangible assets 899 923
Property, plant and equipment 39,853 39,825
Other non-current assets 115 69
Pension assets 1,409 603
Financial and other investments 899 1,100
Investments in joint ventures and associates 2,168 2,083
Derivative financial assets 1,319 1,567
Total non-current assets 52,106 52,266
Current assets
Inventories and current intangible assets 341 403
Trade and other receivables 2,798 2,728
Current tax assets 114 317
Financial and other investments 2,694 8,741
Derivative financial assets 405 246
Cash and cash equivalents 329 1,139
Total current assets 6,681 13,574
Total assets 58,787 65,840
Current liabilities
Borrowings (4,447) (5,496)
Derivative financial liabilities (401) (1,147)
Trade and other payables (3,453) (3,345)
Current tax liabilities (123) (107)
Provisions (273) (416)
Total current liabilities (8,697) (10,511)
Non-current liabilities
Borrowings (22,178) (23,142)
Derivative financial liabilities (660) (1,246)
Other non-current liabilities (1,317) (1,370)
Deferred tax liabilities (3,636) (4,479)
Pensions and other post-retirement benefit
obligations (1,672) (2,536)
Provisions (1,779) (2,172)
Total non-current liabilities (31,242) (34,945)
Total liabilities (39,939) (45,456)
Net assets 18,848 20,384
Equity
Share capital 452 449
Share premium account 1,321 1,324
Retained earnings 21,599 22,582
Other equity reserves (4,540) (3,987)
Total shareholders' equity 18,832 20,368
Non-controlling interests 16 16
Total equity 18,848 20,384
1. Comparative amounts have been represented to reflect the
reclassification of commodity derivative contracts from trade and
other receivables and payables, and from other non-current assets
and liabilities, to derivative financial assets and derivative
financial liabilities.
Consolidated cash flow statement
for the years ended 31 March
2018 2017
Notes GBPm GBPm
Cash flows from operating activities
Total operating profit from continuing
operations 2(b) 3,493 3,208
Adjustments for:
Exceptional items and remeasurements 3 (36) 565
Depreciation, amortisation and impairment 1,530 1,481
Share-based payments charge 16 32
Changes in working capital 118 151
Changes in provisions (206) (181)
Changes in pensions and other post-retirement
benefit obligations (239) (768)
Cash flows relating to exceptional items 26 (36)
Cash generated from operations - continuing
operations 4,702 4,452
Tax recovered/(paid) 8 (132)
Net cash inflows from operating activities
- continuing operations 4,710 4,320
Net cash (used in)/inflows from operating
activities - discontinued operations 8 (207) 909
Cash flows from investing activities
Acquisition of investments (2) -
Investments in joint ventures and associates (129) (76)
Loans to joint ventures and associates (68) (61)
Disposal of investments 134 -
Disposal of UK Gas Distribution (20) 5,454
Purchases of intangible assets (173) (223)
Purchases of property, plant and equipment (3,738) (3,296)
Disposals of property, plant and equipment 10 18
Dividends received from joint ventures
and associates 213 99
Interest received 57 51
Net movements in short-term financial
investments 5,953 (5,600)
Net cash flow from/(used in) investing
activities - continuing operations 2,237 (3,634)
Net cash flow used in investing activities
- discontinued operations 8 - (680)
Cash flows from financing activities
Purchase of treasury shares (1,017) (189)
Proceeds from issue of treasury shares 33 18
Purchase of own shares (5) (6)
Proceeds received from loans 1,941 2,463
Repayments of loans (2,156) (1,616)
Net movements in short-term borrowings
and derivatives (772) 90
Interest paid (853) (839)
Dividends paid to shareholders (4,487) (1,463)
Net cash flow used in financing activities
- continuing operations (7,316) (1,542)
Net cash flow (used in)/from financing
activities - discontinued operations 8 (231) 1,611
Net (decrease)/increase in cash and cash
equivalents 9 (807) 984
Disposal of bank overdraft in UK Gas Distribution - 15
Exchange movements (3) 16
Net cash and cash equivalents at start
of year 1,139 124
Net cash and cash equivalents at end of
year 329 1,139
Notes
1. Basis of preparation and new accounting standards,
interpretations and amendments
The full year financial information contained in this
announcement, which does not constitute statutory accounts as
defined in Section 434 of the Companies Act 2006, has been derived
from the statutory accounts for the year ended 31 March 2018, which
will be filed with the Registrar of Companies in due course.
Statutory accounts for the year ended 31 March 2017 have been filed
with the Registrar of Companies. The auditors' report on each of
these statutory accounts was unqualified and did not contain a
statement under Section 498 of the Companies Act 2006.
The full year financial information has been prepared in
accordance with the accounting policies applicable for the year
ended 31 March 2018 which are consistent with those applied in the
preparation of our accounts for the year ended 31 March 2017.
This year we have adopted a columnar presentation for our income
statement as we consider it improves the clarity of the
presentation, and is consistent with the way that financial
performance is measured by management and reported to the Board and
Executive Committee, and better enables users of the financial
statements to understand the results. The inclusion of total profit
for the period from continuing operations before exceptional items
and remeasurements forms part of the incentive target set annually
for remunerating certain Executive Directors and accordingly we
believe it is important for users of the financial statements to
understand how this compares to our results on a statutory basis
and year on year.
The following standards, interpretations and amendments, issued
by the IASB as adopted and by the IFRS Interpretations Committee
(IFRIC), and as adopted by the EU, are effective for the year ended
31 March 2018. None of the pronouncements had a material impact on
the Company's consolidated results or assets and liabilities for
the year ended 31 March 2018.
-- Annual improvements to IFRSs 2014-2016 Cycle;
-- Amendments to IAS 7 'Statement of Cash Flows'; and
-- Amendments to IAS 12 'Income Taxes'.
New accounting standards not yet adopted
i) IFRS 9 'Financial Instruments'
IFRS 9 'Financial Instruments' is effective for National Grid
for the year ending 31 March 2019. The change to IFRS 9 principally
impacts the accounting for the classification and measurement of
financial instruments, impairment of financial assets and hedge
accounting. The Group has elected not to restate comparatives on
initial application of IFRS 9. The full impact of adopting IFRS 9
will depend on the financial instruments that the Group has during
the year ending 31 March 2019 as well as on economic conditions and
judgements made as at the year end. The Group has performed an
assessment of the potential impact of adopting IFRS 9 based on the
financial instruments and hedging relationships as at the date of
adoption of IFRS 9 (1 April 2018). It is not expected that the
adoption of IFRS 9 will materially impact our profits or net assets
on transition or prospectively.
ii) IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' is effective for
National Grid for the year ending 31 March 2019. The new standard
provides enhanced detail and a five-step revenue recognition
approach to reflect the transfer of goods and services to
customers. The core principle of IFRS 15 is that an entity
recognises revenue related to the transfer of promised goods or
services when control of the goods or services passes to customers.
We will adopt the modified retrospective approach whereby the
historical cumulative transition adjustment is reflected through
retained earnings. There are two types of revenue arrangements that
will be impacted on transition to IFRS 15:
-- There are certain pass through costs where the
agency/principal assessment changes under IFRS 15. In moving from a
risk and reward model to a control model under IFRS 15, there are
certain pass through revenues principally relating to revenues
collected on behalf of the Scottish and Offshore transmission
operators where we will no longer act as principal. If we had
adopted IFRS 15 in 2017/18, both revenues and operating costs would
have been GBP1,056m lower.
-- Across our subsidiaries in the UK and US our customers
provide contributions in advance for certain capital works
(principally for connections across the UK and the US and for
diversions in the UK). IFRS 15 has changed how revenue is
recognised. Under IFRS 15, we will defer revenues over the life of
the connection because our customers cannot benefit from a
connection without the use of our utility network; access to our
network through the connection is satisfied over time. For
diversions, revenues will be recorded on completion of the work as
there are no ongoing performance obligations to satisfy. Had we
adopted IFRS 15 in 2017/18, revenues would have been approximately
GBP83 million lower, as revenues from connections in the US and UK
Gas Transmission that were previously recognised up-front are
deferred over the life of the network. The decrease in profit after
tax in our subsidiaries would have been GBP56 million.
The transition adjustment through retained earnings of GBP167
million will result in an increase to deferred revenues of
approximately GBP240 million and a corresponding deferred tax
impact of GBP73 million.
Date of approval
This announcement was approved by the Board of Directors on 16
May 2018.
2. Segmental analysis
Revenue and the results of the business analysed by operating
segment are presented based on the information the Board of
Directors uses internally for the purposes of evaluating the
performance of operating segments and determining resource
allocation between operating segments. The Board is National Grid's
chief operating decision-making body (as defined by IFRS 8
'Operating Segments') and assesses the profitability of operations
principally on the basis of operating profit before exceptional
items and remeasurements (see note 3). As a matter of course, the
Board also considers profitability by segment, excluding the effect
of timing. However, the measure of profit disclosed in this note is
operating profit before exceptional items and remeasurements as
this is the measure that is most consistent with the IFRS results
reported within our financial statements.
The following table describes the main activities for each
reportable operating segment:
UK Electricity High voltage electricity transmission networks in England
Transmission and Wales.
UK Gas Transmission High-pressure gas transmission network in England and
Wales and UK liquefied natural gas (LNG) storage activities.
US Regulated Gas distribution networks, electricity distribution
networks and high voltage electricity transmission networks
in New York and New England and electricity generation
facilities in New York.
NG Ventures was formed on 1 April 2017 and brought together our
businesses that are adjacent to our core regulated operations to
create a new division with its own leadership. NG Ventures is led
by a member of the Group Executive and its results are reported
separately to the Board of Directors. This operating segment
represents our key strategic growth area outside of our regulated
core in competitive markets across the US and the UK. The business
comprises all commercial operations in metering, LNG at the Isle of
Grain and electricity interconnectors, with a focus on investment
and future activities in emerging growth areas. NG Ventures does
not meet the thresholds set out in IFRS 8 to be identified as a
separate reportable segment and therefore its results have not been
disaggregated. The results of the businesses that now form NG
Ventures were previously reported in the Other activities segment
and therefore, although the segment has been renamed NG Ventures
and Other, the results of previous periods have not been
affected.
Other activities that do not form part of any of the segments in
the above table primarily relate to UK property development
together with insurance and corporate activities in the UK and US
geographical areas.
Discontinued operations in 2017 comprises the profits and losses
associated with the UK Gas Distribution business, up to and
including the point at which it was sold to Quadgas HoldCo Limited
(see note 8). In the current year, transactions within discontinued
operations relate solely to the business prior to the sale and the
sale transaction itself.
Revenue primarily represents the sales value derived from the
generation, transmission and distribution of energy, together with
the sales value derived from the provision of other services to
customers. It excludes value added (sales) tax and intra-group
sales. Revenue includes an assessment of unbilled energy and
transportation services supplied to customers between the date of
the last meter reading and the year-end. This is estimated based on
historical consumption and weather patterns.
Where revenue exceeds the maximum amount permitted by a
regulatory agreement, adjustments will be made to future prices to
reflect this over-recovery. No liability is recognised, as such an
adjustment relates to the provision of future services. Similarly,
no asset is recognised where a regulatory agreement permits
adjustments to be made to future prices in respect of an
under-recovery. As part of our regulatory agreements we are
entitled to recover certain costs directly from customers
(pass-through costs). These amounts are included in the overall
calculation of revenue as stipulated by regulatory agreements.
Sales between operating segments are priced considering the
regulatory and legal requirements to which the businesses are
subject. The analysis of revenue by geographical area is on the
basis of destination, with no material sales between the UK and US
geographical areas.
(a) Revenue
2018 2017
GBPm GBPm
Operating segments:
UK Electricity Transmission 4,154 4,439
UK Gas Transmission 1,091 1,080
US Regulated 9,272 8,931
NG Ventures and Other(1) 776 713
Sales between segments (43) (128)
Total from continuing operations 15,250 15,035
Split by geographical areas - continuing operations
UK 5,938 6,064
US 9,312 8,971
15,250 15,035
1. Included within NG Ventures and Other is GBP593 million
(2017: GBP604 million) of revenue relating to NG Ventures.
2. Segmental analysis continued
(b) Operating profit from continuing operations
A reconciliation of the operating segments' measure of profit to
profit before tax from continuing operations is provided below.
Further details of the exceptional items and remeasurements are
provided in note 3.
Before exceptional After exceptional
items and remeasurements items and remeasurements
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Operating segments - continuing operations:
UK Electricity Transmission 1,041 1,372 1,041 1,361
UK Gas Transmission 487 511 487 507
US Regulated 1,698 1,713 1,734 1,278
NG Ventures and Other(1) 231 177 231 62
Total operating profit from continuing
operations 3,457 3,773 3,493 3,208
Split by geographical areas - continuing
operations
UK 1,840 2,118 1,840 1,988
US 1,617 1,655 1,653 1,220
3,457 3,773 3,493 3,208
Below we reconcile total operating profit from continuing operations
to profit before tax from continuing operations. We have shown the share
of post-tax results of joint ventures and associates disaggregated between
those held within NG Ventures and Other and our retained 39% interest
in the UK Gas Distribution business ('Cadent'(2) ). Operating exceptional
items and remeasurements of GBPnil (2017: GBP11 million) detailed in
note 3 are attributable to UK Electricity Transmission; GBPnil (2017:
GBP4 million) to UK Gas Transmission; GBP36 million (2017: GBP435 million)
to US Regulated; and GBPnil (2017: GBP115 million) to NG Ventures and
Other.
Reconciliation to profit before tax:
Operating profit from continuing operations 3,457 3,773 3,493 3,208
Finance income 154 53 154 53
Finance costs (1,128) (1,082) (899) (1,140)
Share of post-tax results of joint
ventures and associates
Cadent(2) 123 - (89) -
NG Ventures and Other 44 63 49 63
Profit before tax from continuing operations 2,650 2,807 2,708 2,184
1. Included within NG Ventures and Other is GBP234 million
(2017: GBP239 million) of operating profit (both before and after
exceptional items and remeasurements) relating to NG Ventures.
2. Investment held through Quadgas HoldCo Limited.
(c) Capital expenditure
Net book value of Capital expenditure(1) Depreciation and
property plant and amortisation
equipment and other
intangible assets
2018 2017 2018 2017 2018 2017
GBPm GBPm GBPm GBPm GBPm GBPm
Operating segments
UK Electricity Transmission 13,028 12,515 999 1,027 (475) (421)
UK Gas Transmission 4,280 4,165 310 214 (194) (186)
US Regulated 20,953 21,638 2,424 2,247 (635) (642)
NG Ventures and Other(2) 2,491 2,430 341 247 (226) (232)
Total from continuing
operations 40,752 40,748 4,074 3,735 (1,530) (1,481)
Split by geographical areas -
continuing operations:
UK 18,772 18,102 1,527 1,357 (804) (753)
US 21,980 22,646 2,547 2,378 (726) (728)
40,752 40,748 4,074 3,735 (1,530) (1,481)
By asset type
Property, plant and
equipment 39,853 39,825 3,901 3,507 (1,392) (1,348)
Non-current intangible
assets 899 923 173 228 (138) (133)
Total from continuing
operations 40,752 40,748 4,074 3,735 (1,530) (1,481)
1. Represents additions to property, plant and equipment and
non-current intangibles but excludes additional investments in and
loans to joint ventures and associates.
2. Included within NG Ventures and Other are assets with a net
book value of GBP1,454 million (2017: GBP1,432 million), capital
expenditure of GBP186 million (2017: GBP98 million) and
depreciation and amortisation of GBP143 million (2017: GBP143
million) relating to NG Ventures.
3. Exceptional items and remeasurements
Exceptional items and remeasurements are items of income and
expenditure that, in the judgement of management, should be
disclosed separately on the basis that they are important to an
understanding of our financial performance and significantly
distort the comparability of financial performance between
periods. Remeasurements comprise gains or losses recorded in
the
income statement (which can vary significantly from one period
to the next) arising from changes in the fair value of
commodity contracts and of derivative financial instruments to
the extent that hedge accounting is not achieved or is not
effective. These fair values increase or decrease because of
changes in commodity and financial indices and prices over
which we have no control.
2018 2017
Continuing operations GBPm GBPm
Included within operating profit:
Exceptional items:
Environmental charges - (526)
Gas holder demolition costs - (107)
Final settlement of LIPA MSA Transition 26 -
26 (633)
Remeasurements:
Commodity contract derivatives 10 68
36 (565)
Included within finance costs:
Remeasurements:
Net gains on derivative financial instruments 229 (58)
Included within share of post-tax results of associates
and joint ventures:
Remeasurements:
Net losses on derivative financial instruments 1 -
Exceptional items:
Impairment of investment in Quadgas HoldCo Limited (213) -
Deferred tax arising on the reduction of the US corporation
tax rate 5 -
(207) -
Total included within profit before tax 58 (623)
Included within tax:
Exceptional items: credits arising on items not included
in profit before tax:
Deferred tax credit arising on the reduction in the
UK corporation tax rate - 94
Deferred tax credit arising on the reduction in the
US corporation tax rate 1,510 -
Tax on exceptional items (9) 227
Tax on remeasurements (28) (29)
1,473 292
Total exceptional items and remeasurements after tax 1,531 (331)
Analysis of total exceptional items and remeasurements after
tax:
Exceptional items after tax 1,319 (312)
Remeasurements after tax 212 (19)
Total exceptional items and remeasurements after tax 1,531 (331)
Operating exceptional items
2017/18
During the year, the Group reached an agreement with LIPA on an
amount in final settlement of receivables and payables that arose
following the cessation of the Management Services Agreement (MSA)
with LIPA in December 2013. The settlement has resulted in a gain
of GBP26 million, which has been recorded as exceptional,
consistent with the treatment of gains and losses on the original
transaction.
In assessing the value of the Group's interests in Quadgas
HoldCo Limited (the holding Company for Cadent Gas) at 31 March
2018, the Company has considered the fair market value of its
interests as implied by the agreement relating to a potential sale
of a 25% interest in Quadgas (for equity and shareholder loans),
announced on 1 May 2018 and described in note 14.
3. Exceptional items and remeasurements continued
The associated accounting implications are the recognition of a
GBP110 million fair value gain on the Further Acquisition Agreement
(FAA) which is detailed in the remeasurements section below and a
GBP213 million impairment against the equity carrying value of
investment in Quadgas HoldCo Limited.
We have assessed the carrying value of all our interests in
Quadgas (including the FAA derivative asset noted above) against
the cash flows we expect to receive under the agreement for the 25%
(comprising future dividends, shareholder loan interest income and
the proceeds on exercise of the option arrangement plus a cost of
carry), discounted to present value derived using an estimate of
Quadgas Investments BidCo Limited's marginal cost of borrowing.
Following the recognition of this charge, the total carrying value
of our interests in Quadgas HoldCo Limited is GBP2.1 billion.
Neither of these two accounting entries are taxable.
2016/17
In the US, the Group's most significant environmental
liabilities relate to former manufacturing gas plant (MGP)
facilities formerly owned or operated by the Group. The sites are
subject to both state and federal law in the US. The expenditure is
expected to be largely recoverable from rate payers but under IFRS,
no asset can be recorded for this. During the second half of
2016/17, the Group updated its assessment of the gross remediation
costs at three key sites in New York, resulting in an increase of
GBP481m on an undiscounted basis.
The charge booked reflects the Group's best estimate of future
cash outflow, based on notices received from state and federal
authorities, and plans developed in response, supported by external
consultants where appropriate. In some cases, judgement is also
required regarding the Group's share of the estimated cost,
principally at sites where other parties are also potentially
liable but where no cost sharing agreement exists.
Also included within the above are charges relating to the
impact of a change in the real discount rate from 2% to 1% on our
provisions.
A provision of GBP107m has been made for the demolition of
certain non-operational gas holders in the UK. Following the
disposal of UK Gas Distribution, the land on which the gas holders
are sited was transferred to the Group's UK property division. The
Group's property division maximises our return from our land
portfolio and therefore a constructive obligation exists to
demolish the gas holders.
Remeasurements
Commodity contract derivatives represent mark-to-market
movements on certain physical and financial commodity contract
obligations in the US. These contracts primarily relate to the
forward purchase of energy for supply to customers, or to the
economic hedging thereof, that are required to be measured at fair
value and that do not qualify for hedge accounting. Under the
existing rate plans in the US, commodity costs are recoverable from
customers although the timing of recovery may differ from the
pattern of costs incurred.
Net (losses)/gains on derivative financial instruments of GBP119
million (2017: GBP58 million) comprise (losses)/gains arising on
derivative financial instruments reported in the income statement.
These exclude gains and losses for which hedge accounting has been
effective, which have been recognised directly in other
comprehensive income or which are offset by adjustments to the
carrying value of debt.
The Further Acquisition Agreement (FAA) signed on 31 March 2017
relating to a 14% interest in the equity and shareholder loans of
Quadgas HoldCo Limited is treated as a derivative at fair value
through profit and loss. In assessing the fair value of this
derivative at 31 March 2018, we have compared the pricing mechanism
within the FAA against that of the agreement concerning our
remaining 25% interest. The GBP110 million gain reflects the
pricing differential between the two contracts. At 31 March 2017,
being the date on which the FAA was signed, the fair value was
taken to be zero.
Net gains on financial instruments comprise the gains on
financial instruments of Quadgas HoldCo Limited reported through
their income statement.
Items included within tax
The 'Tax Cuts and Jobs Act' which was enacted on 22 December
2017 reduced the US corporate rate from 35% to 21% with effect from
1 January 2018. Deferred taxes at the reporting date have been
measured using these enacted tax rates and reflected in these
financial statements, resulting in a deferred tax credit.
The Finance Act 2016 which was enacted on 15 September 2016
reduced the main rate of UK corporation tax to 17% with effect from
1 April 2020. Deferred tax balances have been calculated at this
rate for the years ended 31 March 2017 and 31 March 2018.
4. Finance income and costs
2018 2017
GBPm GBPm
Finance income
Bank deposits and other financial assets 81 28
Gains on disposal of available-for-sale investments 73 25
154 53
Finance costs
Net interest on pension and other post-retirement
benefit obligations (65) (107)
Interest expense on financial instruments (1,105) (994)
Unwinding of discount on provisions (75) (73)
Other interest (11) (17)
Less: interest capitalised(1) 128 109
Finance costs before exceptional items and
remeasurements (1,128) (1,082)
Remeasurements:
Net gains / (losses) on derivative financial
instruments(2,) (3, 4) 229 (58)
Exceptional items and remeasurements included
within finance costs 229 (58)
Finance costs (899) (1,140)
Net finance costs from continuing operations (745) (1,087)
1. Interest on funding attributable to assets in the course of
construction in the current year was capitalised at a rate of 4.1%
(2017: 3.4%). In the UK, capitalised interest qualifies for a
current year tax deduction with tax relief claimed of GBP20 million
(2017: GBP18 million). In the US, capitalised interest is added to
the cost of plant and qualifies for tax depreciation
allowances.
2. Includes a net foreign exchange loss on financing activities
of GBP314 million (2017: GBP264 million loss) offset by foreign
exchange gains and losses on derivative financial instruments
measured at fair value.
3. Includes a net loss on instruments designated as fair value
hedges of GBP90 million (2017: GBP27 million loss) and a net gain
of GBP124 million (2017: GBP60 million gain) arising from fair
value adjustments to the carrying value of debt.
4. Includes GBP110 million gain on the Further Acquisition
Agreement (FAA) derivative financial instrument relating to the
put/call option over a 14% interest in Quadgas HoldCo Limited.
Further details can be found in note 3.
5. Tax
Tax (credited)/charged to the income statement - continuing
operations
2018 2017
GBPm GBPm
Tax before exceptional items and remeasurements 589 666
Exceptional tax on items not included in profit before
tax (note 3) (1,510) (94)
Tax on other exceptional items and remeasurements 37 (198)
Tax on total exceptional items and remeasurements
(note 3) (1,473) (292)
Total tax (credit)/charge from continuing operations (884) 374
Tax as a percentage of profit before tax %%
Before exceptional items and remeasurements - continuing
operations 22.2 23.7
After exceptional items and remeasurements - continuing
operations (32.6) 17.1
The tax (credit)/charge for the year can be analysed
as follows:
GBPm GBPm
Current tax
UK corporation tax at 19% (2017: 20%) 205 225
UK corporation tax adjustment in respect of prior
years (18) (47)
Overseas corporation tax 15-
Overseas corporation tax adjustment in respect of
prior years (4)1
Total current tax from continuing operations 198 179
Deferred tax
UK deferred tax 65 (9)
UK deferred tax adjustment in respect of prior years (2) (18)
Overseas deferred tax (1,155) 224
Overseas deferred tax adjustment in respect of prior
years 10 (2)
Total deferred tax from continuing operations (1,082) 195
Total tax (credit)/charge from continuing operations (884) 374
Factors that may affect future tax charges
On 22 December 2017, the Tax Cuts and Jobs Act (Tax Reform) was
signed into law in the US. The Tax Reform includes significant
changes to various federal tax provisions applicable to National
Grid. The most significant changes include the reduction in the
corporate federal income tax rate from 35% to 21% effective 1
January 2018 and the elimination of bonus depreciation deduction on
utility property acquired after 27 September 2017 but allowance for
100% expensing of non-utility property. The reduction in the US
corporate tax rate is the only item we would expect to materially
impact our future effective tax rate. However, we expect the
overall impact of Tax Reform to be economically neutral for the
Group.
The Finance Act 2016 which was enacted on 15 September 2016
reduced the main rate of UK corporation tax to 17% with effect from
1 April 2020. Deferred tax balances have been calculated at this
rate.
We will continue to monitor the developments driven by Brexit,
the OECD's Base Erosion and Profit Shifting (BEPS) project and
European Commission initiatives including fiscal state aid
investigations. At this time we do not expect this to cause any
material impact on our future tax charges.
6. Earnings per share
Adjusted earnings and earnings per share, excluding exceptional
items and remeasurements, are provided to reflect the business
performance subtotals used by the Company. For further details of
exceptional items and remeasurements, see note 3. We have included
reconciliations from this additional EPS measure to earnings for
both basic and diluted EPS to provide additional detail for these
items. The earnings per share calculations are based on profit
after tax attributable to equity shareholders of the parent company
which excludes non-controlling interests.
Following the sale of the UK Gas Distribution business on 31
March 2017, National Grid plc returned GBP3,171 million of proceeds
to shareholders through a special dividend, paid on 2 June 2017. In
order to maintain the comparability of the Company's share price
before and after the special dividend, this was preceded by a share
consolidation undertaken on 22 May 2017, replacing every 12
existing ordinary shares with 11 new ordinary shares. The weighted
average number of ordinary shares outstanding for the period
includes the effect of both the share consolidation and the special
dividend from the date the special dividend was paid. The share
buy-back programme which commenced on 2 June 2017 is now complete.
Purchased shares are held as treasury shares.
(a) Basic earnings per share
Earnings Earnings
Earnings per share Earnings per share
2018 2018 2017 2017
GBPm pence GBPm pence
Adjusted earnings from continuing operations 2,060 59.5 2,141 56.9
Exceptional items after tax from continuing
operations 1,319 38.1 (312) (8.3)
Remeasurements after tax from continuing
operations 212 6.2 (19) (0.5)
Earnings from continuing operations 3,591 103.8 1,810 48.1
Adjusted earnings from discontinued operations - - 607 16.1
Exceptional items and remeasurements after
tax from discontinued operations (41) (1.2) 5,378 142.9
Earnings from discontinued operations (41) (1.2) 5,985 159.0
Total adjusted earnings 2,060 59.5 2,748 73.0
Total exceptional items and remeasurements
after tax 1,490 43.1 5,047 134.1
Total earnings 3,550 102.6 7,795 207.1
2018 2017
Millions millions
Weighted average number of shares - basic 3,461 3,763
(b) Diluted earnings per share
Earnings Earnings
Earnings per share Earnings per share
2018 2018 2017 2017
GBPm pence GBPm pence
Adjusted earnings from continuing operations 2,060 59.3 2,141 56.7
Exceptional items after tax from continuing
operations 1,319 37.9 (312) (8.3)
Remeasurements after tax from continuing
operations 212 6.1 (19) (0.5)
Earnings from continuing operations 3,591 103.3 1,810 47.9
Adjusted earnings from discontinued operations - - 607 16.0
Exceptional items and remeasurements after
tax from discontinued operations (41) (1.2) 5,378 142.3
Earnings from discontinued operations (41) (1.2) 5,985 158.3
Total adjusted earnings 2,060 59.3 2,748 72.7
Total exceptional items and remeasurements
after tax 1,490 42.8 5,047 133.5
Total earnings 3,550 102.1 7,795 206.2
2018 2017
millions Millions
Weighted average number of shares - diluted 3,476 3,780
7. Dividends
2018 2017
Cash
Cash dividend dividend Scrip
Pence paid Scrip dividend Pence paid dividend
per share GBPm GBPm per share GBPm GBPm
Interim dividend in respect
of the current year 15.49 346 176 15.17 540 32
Special dividend 84.375 3,171 - - - -
Final dividend in respect
of the prior year 29.10 970 33 28.34 923 151
128.965 4,487 209 43.51 1,463 183
The Directors are proposing a final dividend for the year ended
31 March 2018 of 30.44p per share that will absorb approximately
GBP1.0 billion of shareholders' equity (assuming all amounts are
settled in cash). It will be paid on 16 August 2018 to shareholders
who are on the register of members at 1 June 2018 (subject to
Shareholders' approval at the AGM). A scrip dividend will be
offered as an alternative.
Following completion of the sale of the majority interest in UK
Gas Distribution, the Company paid a special dividend on 2 June
2017 of 84.375p per existing ordinary share ($5.4224 per existing
American Depositary Share). This returned GBP3,171 million to
shareholders. No scrip dividend was offered as an alternative.
8. Discontinued operations and disposal of UK Gas
Distribution
On 31 March 2017 the Group completed the disposal of a 61%
equity interest in the UK Gas Distribution business, principally
comprising the Group's equity and debt interests in National Grid
Gas Distribution Limited together with certain other assets
(principally property and a 45% interest in Xoserve Limited).
Further details are included in the Annual Report and Accounts
2016/17.
The Group sold its 100% equity interest in UK Gas Distribution
to Quadgas HoldCo Limited, a newly incorporated UK limited company
61% owned by Quadgas Investments Bidco Limited and 39% by the
Group's subsidiary National Grid Holdings One plc. In exchange, the
Group received cash consideration of GBP3,679 million, loan
proceeds of GBP1,775 million and recognised a shareholder loan
receivable of GBP429 million and a 39% equity interest in Quadgas
HoldCo Limited.
The UK Gas Distribution business met the criteria to be
classified as held for sale at 8 December 2016, the date that the
Group initially entered into the sale agreement, and depreciation
and amortisation (circa GBP25 million per month) on tangible and
intangible fixed assets ceased from this date. The disposal of UK
Gas Distribution resulted in a GBP5.3 billion gain on disposal. The
provisional purchase price allocation reported in the Annual Report
and Accounts 2016/17 has been finalised and there were no
significant completion adjustments on finalising this exercise in
the current year.
The business represented a reportable segment and a separate
major line of business and accordingly was presented as a
discontinued operation in the consolidated income statement,
consolidated statement of comprehensive income and the consolidated
cash flow statement in 2016/17.
In 2017/18 a loss of GBP41 million is reported in discontinued
operations, with GBP33 million relating to the completion accounts
settlement in November 2017. In addition, this reflects a net
charge of GBP8 million representing further transaction costs and
gains principally relating to the reversal of provisions.
In addition, there was a cash outflow from operating activities
of GBP207 million related to the utilisation of provisions,
principally relating to payments of professional fees in respect of
the disposal of the UK Gas Distribution business. Net cash flows
used in financing activities were GBP231 million for the settlement
of RPI swaps relating to the final stages of the Group-wide
liability management programme executed as part of the sale process
(2017: cashflows comprising GBP4.8 billion of debt issued and term
debt raised, offset by GBP3.2 billion in respect of bond
buybacks).
On 1 May 2018, the Group announced that it had entered into an
agreement with Quadgas Investments BidCo Limited ('the Consortium')
regarding the potential sale of its remaining 25% interest in
Quadgas HoldCo Limited. Further details are given in notes 3 and
14.
9. Reconciliation of net cash flow to movement in net debt
2018 2017
GBPm GBPm
(Decrease)/increase in cash and cash equivalents (807) 984
(Decrease)/increase in financial investments (5,953) 5,675
Net decrease/(increase) in borrowings and related
derivatives 1,209 (3,715)
Net interest paid on the components of net debt 808 1,955
Change in net debt resulting from cash flows (4,743) 4,899
Changes in fair value of financial assets and
liabilities and exchange movements 2,098 (2,273)
Net interest charge on the components of net
debt (1,017) (2,401)
Disposal of UK Gas Distribution - 5,890
Other non-cash movements (66) (64)
Movement in net debt (net of related derivative
financial instruments) in the year (3,728) 6,051
Net debt (net of related derivative financial
instruments) at start of year (19,274) (25,325)
Net debt (net of related derivative financial
instruments) at end of year (23,002) (19,274)
10. Net debt
2018 2017
GBPm GBPm
Cash, cash equivalents and financial investments 3,023 9,880
Borrowings and bank overdrafts (26,625) (28,638)
Derivatives(1) 600 (516)
Net debt (net of related derivative financial
instruments) (23,002) (19,274)
1. The derivatives balance included in net debt excludes the
commodity derivative liabilities of GBP47 million (2017:GBP64
million) and Further Acquisition Agreement (FAA) derivative asset
of GBP110 million (2017: GBPnil).
11. Commitments and contingencies
2018 2017
GBPm GBPm
Future capital expenditure contracted for but
not provided(1) 1,843 1,913
Operating lease commitments 443 619
Energy purchase commitments(2) 5,328 5,699
Guarantees (a) 2,669 2,780
(a) Guarantees
2018 2017
GBPm GBPm
Guarantee of sublease for US property (expires 2040) 178 225
Guarantees of certain obligations of Grain LNG Import
Terminal (expire up to 2028) 46 100
Guarantees of certain obligations for construction of
HVDC West Coast Link (expires 2018) 213 281
Guarantees of certain obligations of Nemo Link Limited
(various expiry dates) 63 140
Guarantees of certain obligations of National Grid North
Sea Link Limited (various expiry dates)(3) 1,009 1,059
Guarantees of certain obligations of construction of
IFA2 SAS (expected expiry 2021)(3) 729 354
Guarantees of certain obligations of St William Homes
LLP (various expiry dates)(4) 98 147
Other guarantees and letters of credit (various expiry
dates) 333 474
2,669 2,780
1. Following a review in the year, the basis on which we
disclose capital commitments has been refined.
2.
Energy purchase commitments relate to contractual commitments to
purchase electricity or gas that are used to satisfy physical
delivery requirements to our customers or for energy that we use
ourselves (i.e. normal purchase, sale or usage) and hence are
accounted for as ordinary purchase contracts.
3. Included within total guarantees are guarantees to both joint
ventures and EPC contractors regarding the construction of
interconnectors of GBP739 million (2017: GBP555 million).
4. Includes guarantees to related parties.
11. Commitments and contingencies continued
(b) Litigation and claims
Through the ordinary course of our operations, we are party to
various litigations, claims and investigations. We do not expect
the ultimate resolution of any of these proceedings to have a
material adverse effect on our results of operations, cash flows or
financial position.
12. Exchange rates
The consolidated results are affected by the exchange rates used
to translate the results of our US operations and US dollar
transactions. The US dollar to pound sterling exchange rates used
were:
2018 2017
Closing rate applied at year end 1.40 1.25
Average rate applied for the year 1.36 1.28
13. Related party transactions
The following significant transactions with related parties were
in the normal course of business. Amounts receivable from and
payable to related parties are due on normal commercial terms:
2018 2017
GBPm GBPm
Sales: Goods and services supplied to a pension
plan 3 3
Sales: Goods and services supplied to joint
ventures(1) 14 78
Sales: Goods and services supplied to associates(2) 220 -
Purchases: Goods and services received from
joint ventures(3) 135 168
Purchases: Goods and services received from
associates(3) 160 169
Receivable from joint ventures(4) 160 64
Receivable from associates(4) 376 457
Payable to joint ventures(5) - 84
Payable to associates 17 27
Interest income from joint ventures 4 -
Interest income from associates 27 -
Dividends received from joint ventures(6) 43 75
Dividends received from associates(7) 170 24
1. In 2018 GBP5 million (2017: GBP68 million) of property sites
were sold to joint venture St William Homes LLP.
2. Sales in the year relate to transactions with Quadgas HoldCo
Limited. Within this is other income of GBP54 million relating to a
Transitional Service Agreement following the sale of the UK Gas
Distribution business to Quadgas HoldCo Limited.
3. During the year the Company received goods and services from
a number of US associates, both for the transportation of gas and
for pipeline services in the US. Additionally, goods and services
were received from UK joint ventures for the construction of a
transmission link in the UK.
4. Amounts receivable from associates includes a loan receivable
balance from Quadgas HoldCo Limited of GBP352 million (2017: GBP434
million) and a loan receivable balance of GBP130 million (2017:
GBP61 million) from Nemo Link Limited (a joint venture).
5. In previous years the amounts payable to joint ventures
include deposits received for National Grid property sites from St
William Homes LLP which have been settled during the year.
6. Dividends in respect of joint ventures were received from BritNed Development Limited.
7. Within dividends received from associates in 2018, GBP144
million (2017: GBPnil) was from Quadgas HoldCo Limited.
14. Post balance sheet events
On 1 May 2018, the Group announced that it had entered into an
agreement with Quadgas Investments BidCo Limited regarding the
potential sale of its remaining 25% equity interest in Quadgas
HoldCo Limited, the holding company for Cadent Gas Limited. Refer
to note 3 for details on the accounting implications on the results
for the year ended 31 March 2018 in relation to this agreement.
Alternative performance measures / non-IFRS reconciliations
Within the Annual Report, a number of financial measures are
presented. These measures have been categorised as alternative
performance measures (APMs), as per the European Securities and
Markets Authority (ESMA) guidelines and the Securities and Exchange
Commission (SEC) conditions for use of non-IFRS Financial
Measures.
An APM is a financial measure of historical or future financial
performance, financial position, or cash flows, other than a
financial measure defined under IFRS. The Group uses a range of
these measures to provide a better understanding of its underlying
performance. APMs are reconciled to the most directly comparable
IFRS financial measure where practicable.
The Group has defined the following financial measures as APMs
derived from IFRS: net revenue, the various adjusted operating
profit, earnings and earnings per share metrics detailed in the
'adjusted profit measures' section below, net debt, capital
investment, funds from operations (FFO), FFO/interest cover and
retained cash flow (RCF)/adjusted net debt. For each of these we
present a reconciliation to the most directly comparable IFRS
measure.
In addition to these APMs, we also have APMs derived from
regulatory measures which have no basis under IFRS; we call these
Regulatory Performance Measures. They comprise: Group return on
equity (RoE), UK and US regulatory RoE, Regulated Asset Base,
regulated asset base growth, invested capital, regulatory financial
performance, regulatory gearing, annual asset growth, value growth
and value added including value added per share. These measures
reflect the inputs used by utility regulators to set the allowed
revenues for many of our businesses. As such, we believe that they
provide close correlation to the economic value we generate for our
shareholders and are therefore important supplemental measures for
our shareholders to understand the performance of the business.
We use regulatory performance measures to monitor progress
against our regulatory agreements and certain aspects of our
strategic objectives. Further, targets for certain of these
performance measures are included in the Company's Annual
Performance Plan (APP) and Long Term Performance Plan (LTPP) and
contribute to how we reward our employees. We consider that such
regulatory measures are important supplemental measures to our IFRS
reporting to ensure a complete understanding of Group
performance.
As the starting point for our Regulatory Performance Measures is
not IFRS, and these measures are not governed by IFRS, we are
unable to provide meaningful reconciliations to any directly
comparable IFRS measures, as differences between IFRS and the
regulatory recognition rules applied have built up over many years.
Instead, for each of these we present an explanation of how the
measure has been determined and why it is important, and an
overview as to why it would not be meaningful to provide a
reconciliation to IFRS.
Alternative Performance Measures
Net revenue
'Net revenue' is revenue less pass-through costs, such as
payments to other UK network owners, system balancing costs, and
gas and electricity commodity costs in the US. Pass-through costs
are fully recoverable from our customers and are recovered through
separate charges that are designed to recover those costs with no
profit. Any over- or under-recovery of these costs is returned to,
or recovered from, our customers.
2018 2017
Gross revenue Pass- through Net revenue Gross revenue Pass- through costs Net revenue
Year ended 31 March costs
GBPm GBPm GBPm GBPm GBPm GBPm
UK Electricity
Transmission 4,154 (2,243) 1,911 4,439 (2,293) 2,146
UK Gas Transmission 1,091 (257) 834 1,080 (223) 857
US Regulated 9,272 (3,804) 5,468 8,931 (3,411) 5,520
NG Ventures and
Other 776 - 776 713 - 713
Sales between
segments (43) - (43) (128) - (128)
Total 15,250 (6,304) 8,946 15,035 (5,927) 9,108
Adjusted profit measures:
In considering the financial performance of our business and
segments, we use various adjusted profit measures in order to aid
comparability of results year on year. The various measures are
presented on page 14 and reconciled below.
Adjusted results, also referred to as Headline results: These
exclude the impact of exceptional items and remeasurements that are
treated as discrete transactions under IFRS and can accordingly be
classified as such. This is a measure used by management that forms
part of the incentive target set annually for remunerating certain
Executive Directors and further details of these items are included
in note 3.
Underlying results: Further adapts our adjusted results to take
account of volumetric and other revenue timing differences arising
due to the in year difference between allowed and collected
revenues, including revenue incentives, as governed by our rate
plans in the US or regulatory price controls in the UK (but
excluding totex-related allowances and adjustments). For 2017/18,
as highlighted on page 15, our underlying results exclude GBP104
million of timing differences, as well as GBP142 million of storm
costs (which are significant in aggregate this year) where we
expect to recover the bulk of the costs incurred through regulatory
mechanisms in the US.
Prior period pro forma including Cadent overlay: To aid
comparability with prior years, we show an estimate of adjusted and
underlying results and earnings for the continuing business in 2017
and 2016, including an estimated contribution from our 39% interest
in UK Gas Distribution (now Cadent).
Constant currency - The adjusted profit measures are also shown
on a constant currency basis to show the year on year comparisons
excluding any impact of foreign currency movements. This basis is
explained in more detail on page 39.
Alternative performance measures / non-IFRS reconciliations
continued
Reconciliation of Statutory, Adjusted, Underlying and Underlying
(pro forma) Profits and Earnings - At actual exchange rates -
Continuing operations
Statutory Exceptionals Adjusted Timing Major Storms Underlying Cadent Underlying
Year ended 31 and overlay (1, 2) (pro forma)
March 2018 remeasurements
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK Electricity
Transmission 1,041 - 1,041 14 - 1,055 - 1,055
UK Gas
Transmission 487 - 487 18 - 505 - 505
US Regulated 1,734 (36) 1,698 (136) 142 1,704 - 1,704
NG Ventures and
Other 231 - 231 - - 231 - 231
Total operating
profit 3,493 (36) 3,457 (104) 142 3,495 - 3,495
Net finance
costs (745) (229) (974) - - (974) - (974)
Share of post
-tax results
of JVs and
associates (40) 207 167 - - 167 - 167
Profit before
tax 2,708 (58) 2,650 (104) 142 2,688 - 2,688
Tax 884 (1,473) (589) 42 (51) (598) - (598)
Profit after
tax 3,592 (1,531) 2,061 (62) 91 2,090 - 2,090
Statutory Exceptionals Adjusted Timing Major Storms Underlying Cadent overlay Underlying
Year ended 31 and (1, 2) (pro forma)
March 2017 remeasurements
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------
UK Electricity
Transmission 1,361 11 1,372 (137) - 1,235 - 1,235
UK Gas
Transmission 507 4 511 (62) - 449 - 449
US Regulated 1,278 435 1,713 (199) - 1,514 - 1,514
NG Ventures and
Other 62 115 177 - - 177 - 177
Total operating
profit 3,208 565 3,773 (398) - 3,375 - 3,375
Net finance
costs (1,087) 58 (1,029) - - (1,029) 29 (1,000)
Share of post
-tax results
of JVs and
associates 63 - 63 - - 63 144 207
--------
Profit before
tax 2,184 623 2,807 (398) - 2,409 173 2,582
Tax (374) (292) (666) 119 - (547) (6) (553)
--------
Profit after
tax 1,810 331 2,141 (279) - 1,862 167 2,029
--------
Reconciliation of Adjusted, Underlying and Underlying (pro
forma) Profits - At constant currency
At constant currency
Adjusted Constant Adjusted Timing Major Storms Underlying Cadent Underlying
Year ended 31 at actual currency overlay (1, (pro forma)
March 2017 exchange rate adjustment 2)
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
UK Electricity
Transmission 1,372 - 1,372 (137) - 1,235 - 1,235
UK Gas
Transmission 511 - 511 (62) - 449 - 449
US Regulated 1,713 (102) 1,611 (187) - 1,424 - 1,424
NG Ventures
and Other 177 4 181 - - 181 - 181
Total
operating
profit 3,773 (98) 3,675 (386) - 3,289 - 3,289
Net finance
costs (1,029) 45 (984) - - (984) 29 (955)
Share of post
-tax results
of JVs and
associates 63 (1) 62 - - 62 144 206
Profit before
tax 2,807 (54) 2,753 (386) - 2,367 173 2,540
Note 1: 2017 estimate including 39% interest in UK Gas
Distribution for the year ended 31 March 2017
The 2017 estimate includes Cadent overlay approximating a 39%
stake in UK Gas Distribution (see note 8 for further detail), we
have imputed additional net income as follows:
- Reduction to net finance cost of GBP29 million in each year
reflecting additional interest receivable on the shareholder
loan;
- Increase in share of post-tax results of joint ventures and
associates based on actual operating profit reported by UK Gas
Distribution in 2017, less the effect of provisional purchase price
adjustments, finance costs reflecting the cost charged to
discontinued operations in the comparative period, estimated
additional financing costs at holding company level and the tax
effects thereon.
Alternative performance measures / non-IFRS reconciliations
continued
Note 2: Weighted average number of shares
2018 2017
Millions Millions
Weighted average number of shares used for basic EPS 3,461 3,763
Reduction to reflect implied return of capital - (300)
Weighted average number of shares used for pro forma 3,461 3,463
The reduction in the weighted average number of shares is an
approximation of the impact of the share consolidation and share
buyback had these events taken place during the comparative
period.
Earnings per share calculations from continuing operations - at
actual exchange rates
The table below reconciles the profit before tax from continuing
operations per the previous tables back to the earnings per share
from continuing operations for each of the adjusted profit
measures. Earnings per share is only presented for those adjusted
profit measures that are at actual exchange rates, and not for
those at constant currency.
Year ended 31 March Profit after tax Non-controlling Profit after tax Weighted average Earnings per share
2018 GBPm interest attributable to number of shares pence
GBPm the parent Number
GBPm
Statutory 3,592 (1) 3,591 3,461 103.8
Adjusted (also
referred to as
Headline) 2,061 (1) 2,060 3,461 59.5
Underlying 2,090 (1) 2,089 3,461 60.4
Year ended 31 March Profit after tax Non-controlling Profit after tax Weighted average Earnings per share
2017 GBPm interest attributable to number of shares pence
GBPm the parent Number
GBPm
Statutory 1,810 - 1,810 3,763 48.1
Adjusted (also
referred to as
Headline) 2,141 - 2,141 3,763 56.9
Underlying 1,862 - 1,862 3,763 49.5
Underlying (pro
forma) 2,029 - 2,029 3,463 58.6
Timing impacts
Under the Group's regulatory frameworks, the majority of the
revenues that National Grid is allowed to collect each year are
governed by a regulatory price control or rate plan. If a company
collects more than this allowed level of revenue, the balance must
be returned to customers in subsequent years, and if it collects
less than this level of revenue, it may recover the balance from
customers in subsequent years. These variances between allowed and
collected revenues give rise to "over and under recoveries".
Opening balances of over and under recoveries have been restated
where appropriate to correspond with regulatory filings and
calculations.
UK Electricity Transmission UK Gas Transmission US Regulated Total
GBPm GBPm GBPm GBPm
31 March 2017 closing balance(1) (30) 112 312 394
Opening balance adjustments - (1) (218) (219)
Restated 1 April 2017 opening balance (30) 111 94 175
Over/(under) recovery (14) (18) 136 104
31 March 2018 closing balance to
(recover)/return (44) 93 230 279
Year on year timing variance (151) (80) (51) (282)
UK Electricity Transmission UK Gas Transmission US Regulated Total
GBPm GBPm GBPm GBPm
31 March 2016 closing balance(1) (171) 38 147 14
Opening balance adjustments 4 12 (22) (6)
Restated 1 April 2016 opening balance (167) 50 125 8
Over/(under)recovery(2) 137 62 187 386
31 March 2017 closing balance to
(recover)/return (30) 112 312 394
Year on year timing variance 132 (5) 283 410
1. Opening US Regulated balances restated using the average rate
for the year to 31 March 2018.
2. Over/under recovery restated using the average rate for the year to 31 March 2018.
Alternative performance measures / non-IFRS reconciliations
continued
Capital investment
'Capital investment' or 'investment' refer to additions to
plant, property and equipment and intangible assets, and
contributions to joint ventures and associates, other than the St
William Homes LLP joint venture during the period. St William Homes
LLP is excluded based on the nature of this joint venture
arrangement.
At actual exchange rates At constant currency
Year ended 31 March 2018 2017 % change 2018 2017 % change
GBPm GBPm GBPm GBPm
------ ------ --------
UK Electricity Transmission 999 1,027 (3) 999 1,027 (3)
UK Gas Transmission 310 214 45 310 214 45
US Regulated 2,424 2,247 8 2,424 2,113 15
NG Ventures and Other 341 247 38 341 239 43
------ ------ --------
Group capex 4,074 3,735 9 4,074 3,593 13
Equity investment, funding contributions and loans to joint
ventures and associates(1) 177 127 39 177 124 43
------ ------ --------
Group capital investment 4,251 3,862 10 4,251 3,717 14
------ ------ --------
1. Excludes GBP19m (2017: GBP10m) equity contribution to the St William property joint venture.
Net Debt
See notes 9 and 10 on page 63 for reconciliation of net
debt.
Funds from Operations and Interest Cover
Funds from operations (FFO) is the cash flows generated by the
operations of the Group. Credit rating metrics, including FFO, are
used as indicators of balance sheet strength.
Year ended 31 March 2018 2017(1)
GBPm GBPm
Interest expense (P&L) 1,128 1,082
Hybrid interest reclassified as dividend (51) (51)
Capitalised interest 128 109
Pensions interest adjustment (49) (60)
Interest on lease rentals adjustment 16 18
Unwinding of discount on provisions (75) (73)
Other interest adjustments 12 1
Interest paid (discontinued operations) - 146
Adjusted interest expense 1,109 1,172
Net cash inflow from operating activities 4,710 4,320
Interest received on financial instruments 57 51
Interest paid on financial instruments (853) (839)
Dividends received 213 99
Working capital adjustment (118) (151)
Excess employer pension contributions 211 606
Hybrid interest reclassified as dividend 51 51
Lease rentals 86 86
Difference in net interest expense in income statement to cash flow (178) (170)
Difference in current tax in income statement to cash flow (206) (47)
Current tax related to prior periods (22) (46)
Cash flow from discontinued operations (207) 909
Interest paid (discontinued operations) - (146)
Funds from operations (FFO) 3,744 4,723
Interest cover (FFO + adjusted interest expense/adjusted interest expense) 4.4x 5.0x
1. Numbers for 2017 reflect the calculations for the total Group
as based on the published accounts for the respective years and
have not been restated.
Alternative performance measures / non-IFRS reconciliations
continued
Retained cash flow (RCF)/adjusted net debt
Years ended 31 March 2018 2017
GBPm GBPm
Funds from operations (FFO) 3,744 4,723
Hybrid interest reclassified as dividend (51) (51)
Ordinary dividends paid to shareholders (1,316) (1,463)
RCF (excl. share buybacks) 2,377 3,209
Repurchase of scrip treasury shares (178) (189)
RCF (net of share buybacks) 2,199 3,020
Bank overdrafts - -
Borrowings 26,625 28,638
Less:
50% hybrid debt (1,050) (1,033)
Cash and cash equivalents (329) (1,139)
Restricted cash - 2
Available-for-sale investments (2,304) (7,432)
Underfunded pension obligations 857 1,487
Operating leases adjustment(1) 408 526
Derivative asset removed from debt (479) 52
Currency swaps 117 72
Nuclear decommissioning liabilities reclassified as debt 5 36
Collateral - cash received under collateral agreements (878) (709)
Accrued interest removed from short term debt (195) (210)
Adjusted net debt (includes pension deficit) 22,777 20,290
FFO/adjusted net debt 16.4% 23.3%
RCF (excl. share buybacks)/adjusted net debt 10.4% 15.8%
RCF (net of share buybacks)/adjusted net debt 9.7% 14.9%
(1) An adjustment to reclassify operating lease commitments as
debt. For March 2018 this was calculated as four times the
operating lease rental charge for 2018.
RCF/adjusted net debt for 2018 includes GBP207m of cash flows
relating to the sale of UK Gas Distribution in 2016/17. Excluding
these cash flows, RCF/adjusted net debt for 2017/18 was 10.6%.
Regulatory Performance Measures
Regulated financial performance
Regulatory financial performance is a pre interest and tax
measure, starting at segmental operating profit and making
adjustments (such as the elimination of all pass-through items
included in revenue allowances and eliminates timing) to
approximate regulatory profit for the UK regulated activities. This
measure provides a bridge for investors between a well understood
and comparable IFRS starting point through the key adjustments
required to approximate regulatory profit. This measure also
provides the foundation to calculate profit driven regulatory
returns i.e. Return on Capital Employed (RoCE) and Group Return on
Equity (RoE).
For the reasons noted above, the table below shows the principal
differences between the IFRS operating profit and the regulated
financial performance, but is not a formal reconciliation to an
equivalent IFRS measure.
UK Electricity Transmission
Years ended 31 March 2018 2017
GBPm GBPm
Reported operating profit 1,041 1,372
Movement in regulatory 'IOUs' 51 (288)
Deferred taxation adjustment 70 62
RAV indexation (average 3% long-run inflation) 374 356
Regulatory vs IFRS depreciation difference (377) (379)
Fast/slow money adjustment 69 34
Pensions (49) (47)
Performance RAV created 83 74
Regulated financial performance 1,262 1,184
UK Gas Transmission
Years ended 31 March 2018 2017
GBPm GBPm
Reported operating profit 487 511
Movement in regulatory 'IOUs' (91) (120)
Deferred taxation adjustment 18 39
RAV indexation (average 3% long-run inflation) 173 168
Regulatory vs IFRS depreciation difference (29) (21)
Fast/slow money adjustment (11) (14)
Pensions (32) (53)
Performance RAV created (16) (11)
Regulated financial performance 499 499
Regulated asset base
The regulated asset base is a regulatory construct, based on
pre-determined principles not based on IFRS. It effectively
represents the invested capital on which we are authorised to earn
a cash return. By investing efficiently in our networks, we add to
our regulated asset base over the long term and this in turn
contributes to delivering shareholder value. Our regulated asset
base is comprised of our regulatory asset value in the UK, plus our
rate base in the US.
Maintaining efficient investment in our regulated asset base
ensures we are well positioned to provide consistently high levels
of service to our customers and increases our revenue allowances in
future years. While we have no specific target, our overall aim is
to achieve between 5% and 7% growth in regulated asset base each
year through continued investment in our networks in both the UK
and US.
In the UK, the way in which our transactions impact RAV is
driven by principles set out by Ofgem. In a number of key areas
these principles differ from the requirements of IFRS, including
areas such as additions and the basis for depreciation. Further,
our UK RAV is adjusted annually for inflation. RAV in each of our
retained UK businesses has evolved over the period since
privatisation in 1990 and as a result, historical differences
between the initial determination of RAV and balances reported
under UK GAAP at that time still persist. Due to the above,
substantial differences exist in the measurement bases between RAV
and an IFRS balance metric and, therefore, it is not possible to
provide a meaningful reconciliation between the two.
In the US, rate base is a regulatory measure determined for each
of our main US operating companies. It represents the value of
property and other assets or liabilities on which we are permitted
to earn a rate of return, as set out by the regulatory authorities
for each jurisdiction. The calculations are based on the applicable
regulatory agreements for each jurisdiction and include the
allowable elements of assets and liabilities from our US companies.
For this reason, it is not practical to provide a meaningful
reconciliation from the US rate base to an equivalent IFRS
measure.
Regulatory Performance Measures continued
Years ended 31 March Total
(GBPm at constant currency) RAV, rate base or other business assets Regulated and other assets
2018 2017(1) 2018 2017(1)
UK Electricity Transmission 13,045 12,479 12,651 12,034
UK Gas Transmission 6,014 5,755 5,889 5,721
US Regulated 14,762 13,751 16,683 15,238
Total Regulated 33,821 31,985 35,223 32,993
Other assets/invested capital 2,167 1,984 1,824 1,724
Total Group Regulated and other assets 35,988 33,969 37,047 34,717
1. Represented for opening balance adjustments following the
completion of the regulatory reporting pack process in 2017.
US rate base and total regulated assets for 31 March 2017 have
been restated in the table above at constant currency. At actual
currency the values were GBP15,398 million and GBP17,063 million
respectively.
Other business assets and other assets/invested capital for 31
March 2017 have been restated in the table above at constant
currency. At actual currency the values were GBP2,055 million and
GBP1,814 million respectively.
Group return on equity (RoE)
Group RoE provides investors with a view of the performance of
the Group as a whole compared with the amounts invested by the
Group in assets attributable to equity shareholders. It is the
ratio of our regulatory financial performance to our measure of
equity investment in assets. It therefore reflects the regulated
activities as well as the contribution from our non-regulated
businesses together with joint ventures and minority interests.
We use Group RoE to measure our performance in generating value
for our shareholders and a target for Group RoE is included in the
incentive mechanisms for executive remuneration within both the APP
and LTPP schemes.
Group RoE is underpinned by our regulated asset base. For the
reasons noted above, no reconciliation to IFRS has been presented
as we do not believe it would be practical. However we do include
the calculations below.
Calculation: Regulatory financial performance including a
long-run assumption of 3.0% RPI inflation, less adjusted interest
and adjusted taxation divided by equity investment in assets:
-- Adjusted interest removes interest on pensions, capitalised
interest and release of provisions;
-- Adjusted taxation adjusts the Group taxation charge for
differences between IFRS profit before tax and regulated financial
performance less adjusted interest;
-- Equity investment in assets is calculated as the total
opening UK regulatory asset value, the total opening US rate base
plus goodwill plus opening net book value of Other activities and
our share of joint ventures and associates, minus opening net debt
as reported under IFRS restated to the weighted average GBP/$
exchange rate for the year.
Years ended 31 March 2018 2017
GBPm GBPm
Regulated financial performance 3,392 3,906
Operating profit of other activities 255 204
Group financial performance 3,647 4,110
Share of post-tax results of joint ventures and associates 238 63
Non-controlling interests (1) 1
Adjusted Group interest charge (980) (1,075)
Group tax charge (639) (808)
Tax on adjustments 27 166
Group financial performance after interest and tax 2,292 2,457
Opening rate base/RAV 32,446 40,435
Share of Cadent RAV 512 -
Opening NBV of non-regulated businesses 1,328 1,579
Joint ventures and associates 459 408
Opening goodwill 5,626 5,984
Opening capital employed 40,371 48,406
Opening net debt (21,770) (27,346)
Opening equity 18,601 21,060
Return on equity 12.3% 11.7%
Regulatory Performance Measures continued
UK regulated return on equity (RoE)
UK regulated RoEs are a measure of how the businesses are
performing against the assumptions used by our regulator. These
returns are calculated using the assumption that the businesses are
financed in line with the regulatory adjudicated capital structure,
at the cost of debt assumed by the regulator and that RPI inflation
is equal to a long-run assumption of 3.0%. They are calculated by
dividing elements of out- or under-performance versus the
regulatory contract by the average equity RAV in line with the
regulatory assumed capital structure and adding to the base allowed
RoE.
This is an important measure of UK regulated business
performance and our operational strategy continues to focus on this
metric. This measure can be used to determine how we are performing
under the RIIO framework and also helps investors to compare our
performance with similarly regulated UK entities. Reflecting the
importance of this metric, it is also a key component of both the
APP and LTPP schemes.
The UK RoE is underpinned by the UK RAV. For the reasons noted
above, no reconciliation to IFRS has been presented as we do not
believe it would be practical. However we do include the
calculations below.
US regulated return on equity
US regulated RoE is a measure of how a business is performing
against the assumptions used by the regulator. This US operational
return measure is calculated using the assumption that the
businesses are financed in line with the regulatory adjudicated
capital structure. The returns are divided by the average rate base
(or where a reported rate base is not available, an estimate based
on rate base calculations used in previous rate filings) multiplied
by the adjudicated equity portion in the regulatory adjudicated
capital structure.
This is an important measure of our US regulated business
performance and our operational strategy continues to focus on this
metric. This measure can be used to determine how we are performing
and also helps investors compare our performance with similarly
regulated US entities. Reflecting the importance of this metric, it
is also a key component of both the APP and LTPP schemes.
The US return is based on a calculation which gives
proportionately more weighting to those jurisdictions which have a
greater rate base. For the reasons noted above, no reconciliation
to IFRS has been presented as we do not believe it would be
practical.
Years ended 31 March Achieved Return
% on Equity Base or Allowed Return on Equity
Regulatory Debt:Equity assumption 2018 2017 2018 2017
UK Electricity Transmission 60/40 13.1 13.6 10.2 10.2
UK Gas Transmission 62.5/37.5 10.0 10.8 10.0 10.0
US Regulated Avg. 50/50 8.9 8.2 9.4 9.5
Value Added and Value Added per Share
Value Added is a measure that reflects the value to shareholders
of our dividend and the growth in National Grid's regulated and
non-regulated assets (as measured in our rate base, for regulated
entities), net of the growth in overall debt. It is a key metric
used to measure our performance and underpins our approach to
sustainable decision-making and long-term management incentive
arrangements.
Value Added is derived using our regulated asset base and, as
such, it is not practical to provide a meaningful reconciliation
from this measure to an equivalent IFRS measure due to the reasons
set out for our regulated asset base. However, the calculation is
set out in the Growth and Value Added section on page 8.
Value added per share is calculated by dividing value added by
the weighted average number of shares set out in note 6 on page
61.
Regulatory Gearing
Regulatory gearing is a measure of how much of our investment in
RAV and rate base and other elements of our invested capital
(including our investments in NG Ventures, UK property and other
assets and US other assets) is funded through debt.
Year ended 31 March 2018 2017* % change
GBPm GBPm
UK RAV 19,059 18,219 5
US Rate base 14,762 15,398 (4)
Other invested capital included in gearing calculation 2,167 2,055 5
Total assets included in gearing calculation 35,988 35,672 1
Net debt (including 100% of hybrid debt) 23,002 23,284 (1)
Group gearing (based on 100% of net debt) 64% 65% 2
Group gearing (excluding 50% of hybrid debt from net debt) 61% 62% 2
* Net debt for 2017 adjusted to include impact of future
GBP4.01bn return of capital relating to the sale of a stake in UK
Gas Distribution.
[1] 'Headline' - (also referred to as 'Adjusted') - represents
statutory results excluding exceptional items and remeasurements.
'Underlying' represents Headline results additionally excluding
timing and major storms. These and a number of other terms and
performance measures used in this document are not defined within
accounting standards and may be applied differently by other
organisations. We have provided definitions of these terms on page
14 and reconciliations of these measures on pages 42 to 44.
[2] Underlying (including Cadent pro forma) - This measure is
used to aid comparability year on year by showing what our
Underlying results would have looked like had the disposal of the
61% interest in our UK Gas Distribution business occurred at the
start of the earliest comparative period rather than at 31 March
2017. The basis used for the Cadent pro forma is explained in more
detail on page 14.
[3] Employee lost time injury frequency rate per 100,000 hours
worked.
[4] Our results are also shown on a constant currency basis to
show the year-on-year comparisons excluding any impact of foreign
currency movements. This basis is explained in more detail on page
39.
[5] In November 2017, Ofgem ran the financial models that
calculate substantial elements of the revenue allowances for
National Grid's UK regulated businesses. The outcome of these model
runs (known as the 'MOD adjustments') were in line with National
Grid's expectations.
[6] See explanation to 2018 statutory tax under 'Profit before
tax and taxation' on page 15.
[7] Effective tax rates are calculated before the share of
post-tax profits from joint ventures and associates.
On a statutory basis, Group profit before tax was GBP2,708m with
a tax credit of GBP884m. This reflects a GBP1,510m tax credit
relating to the reduction in the US federal corporation tax rate
(deferred tax impact).
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR ARMMTMBTBMAP
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