TIDMNG.
RNS Number : 3027Q
National Grid PLC
18 June 2020
London | 18 June 2020 : National
Grid, a leading
energy transmission and distribution
company,
today announces its Full Year results.
Report for the year ended
31 March 2020
Business Highlights
-- Business continuity plans successfully implemented in response to COVID-19
-- Continued progress on 2050 net zero emissions target;
achieved 70% reduction on 1990 baseline; new interim target to
achieve 80% by 2030
-- Record capital investment of GBP5.4bn leading to strong asset growth of 9%
-- Published long-term gas options for New York
-- Business plans submitted for RIIO-2
-- Cost efficiency programmes delivered around GBP100m savings
-- First renewable project commissioned through Geronimo since acquisition in July
Financial Performance
-- Underlying operating profit up 1% to GBP3.5bn
-- COVID-19 impact on earnings, primarily driven by a GBP117m
increased provision for US bad debts
-- Statutory operating profit down 3% to GBP2.8bn
-- Underlying EPS down 1% to 58.2p reflecting improved regulated
performance, offset by non-recurrence of prior year one-off
benefits
-- Statutory EPS of 36.8p, impacted by environmental provision,
commodity remeasurements, and timing
-- Group RoE of 11.7% (2019: 11.8%)
-- Achieved 99% of allowed RoE in the US (9.3%)
-- Recommended final dividend to bring full year dividend to
48.57p, up 2.6%, in line with policy
-- FY21 outlook: assumed COVID-19 underlying operating profit impact of approximately GBP400m
Financial Summary
Year ended 31 March - continuing operations
Statutory results Underlying ([1])
---------------------------
2020 2019 % change 2020 2019 % change
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Operating profit (GBPm) 2,780 2,870 (3)% 3,454 3,427 1%
============================ ------
Profit before tax (GBPm) 1,754 1,841 (5)% 2,493 2,474 1%
============================ ------
Earnings per share (p) 36.8 44.3 (17)% 58.2 58.9 (1)%
============================ ------
Capital investment (GBPm) 5,405 4,506 20% 5,405 4,506 20%
============================ ------- ------ ----- ------- ------ ---- ---
3,461 million weighted average shares for 2019/20 (2018/19:
3,386 million).
John Pettigrew
Chief Executive
"We have successfully implemented our business continuity plans
in response to the COVID-19 pandemic, ensuring the well-being of
our staff and customers, whilst maintaining continuity of service.
I am proud of our response and contribution to help our customers
and communities through these challenging times.
National Grid made good progress in 2019/20. We maintained high
levels of reliability across our networks and delivered good
financial performance. Asset growth of 9% was underpinned by record
investment of GBP5.4 billion. We achieved continued regulatory
progress in the UK, responded proactively to the challenges in
downstate New York, whilst further developing our interconnector
and renewable portfolios.
Looking ahead, whilst COVID-19 will impact our financial
performance in FY21, we expect this to be largely recoverable over
future years and therefore anticipate no material economic impact
on the Group in the long-term. We continue to target asset growth
of 5-7% in the near term and with an efficient balance sheet that
underpins asset and dividend growth, the Group is well positioned
to create value for shareholders."
Contacts
Investor Relations
Nick Ashworth +44 (0) 7814 355 590
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Jon Clay +44 (0) 7899 928 247
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James Flanagan +44 (0) 7970 778 952
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Media
Molly Neal +44 (0) 7583 102 727
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+44 (0) 7974 198
Gemma Stokes 333
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Teneo
Charles Armitstead +44 (0) 7703 330 269
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Conference call details
An audio call will be held at 09:15 (BST) today. A webcast link is
available here . Please use this link to join via a laptop, smartphone
or tablet. Should you wish to ask a question, please dial in using
the details below. A replay of the webcast will be available soon
after the event at investors.nationalgrid.com/ .
Live telephone coverage of the analyst presentation at 09:15
UK dial in numbers +44 (0) 20 3936 2999 (Local)
+44 (0) 800 640 6441 (UK toll free)
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US dial in numbers +1 646 664 1960 (Local)
+1 855 9796 654 (US toll free)
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All other locations +44 20 3936 2999
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Access Code 750 435
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The National Grid image library is available here . The 2020 Annual
Report and Accounts (ARA) is expected to be publicly available on
25 June 2020. 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 pages 72 to 83.
2019/20 OVERVIEW
Strong reliability maintained and record year for investment
In 2019/20, National Grid continued to deliver good operational
progress across the Group with high levels of network reliability.
In the UK, we experienced a rare and exceptional event with the 9
August power cut that caused significant disruption to many people.
We welcomed Ofgem's technical report into the incident that found
no link between National Grid's actions and the power cut. The
report confirmed the initiation of a review into the structure and
governance of the Electricity System Operator (ESO), which we were
expecting. We are working and cooperating closely with Ofgem on
this review.
This year, we achieved a Group Lost Time Injury Frequency Rate
(LTIFR) ([2]) of 0.12, slightly higher than the Group target of
0.1. The UK delivered its best ever year of safety with a LTIFR of
0.07, whilst National Grid Ventures (NGV) also achieved a record
low LTIFR of 0.05. In the US, we saw an increase in the number of
safety incidents with a LTIFR of 0.16. In response, we are
reviewing safety controls across the business to ensure they are
current and appropriate, and to ensure they are reflected in
working methods and operating procedures.
Across the Group, capital investment increased by GBP858 million
at constant currency to GBP5,405 million, an increase of 19% (or
20% at actual exchanges rates). This capital expenditure, when
combined with RPI inflation, drove Group asset growth of 9%. In
addition, we maintained a Return on Equity (RoE) of 11.7% for the
Group which was driven by good performance across all our
businesses.
National Grid has a critical role to play in enabling the energy
transition to a low carbon future. We have strengthened our
commitment to our net zero emissions aim with a tougher interim
target. This is to reach an 80% reduction in our emissions, from a
1990 baseline, by 2030, and a 90% reduction by 2040. This follows
the commitment we made in November to reach net zero for our own
emissions by 2050.
Responding to an unprecedented challenge: COVID-19
Impact on our workforce
Throughout the COVID-19 crisis, National Grid's priority has
been to keep employees safe whilst doing their job, and to ensure
the safety and wellbeing of our customers and communities.
COVID-19 has had a significant impact on the way in which we
work. At the end of March, as the crisis unfolded, we successfully
implemented our business continuity plans in the UK and US. This
included taking action to change working habits quickly and safely,
including a risk assessment of all our operational projects. In
addition, we issued new working guidance to our field force that
included measures such as limits on team sizes, changes to rotas,
revised cleaning arrangements, and single occupancy in vehicles. We
have continued to work successfully with these 'lockdown'
constraints and social distancing requirements since the end of
March. For example, in April, our teams in Massachusetts rapidly
restored power to 142,000 customers following a significant storm,
with 95% of our affected customers reconnected within 24 hours.
Away from the field, our dedicated control room staff have
worked tirelessly, some sequestered away from their families. In
the UK, we set up sleeping pods and recreation centres on site for
those staff in isolation, and this was replicated across our
businesses in the US. Our digital infrastructure is also playing a
key role in enabling new ways of working, as around half of our
employees across the organisation have been successfully working
from home.
Keeping electricity and gas flowing
Against this backdrop, we have been focused on maintaining
reliable flows of electricity and gas. Demand has reduced across
all our jurisdictions, with the increase in residential demand more
than offset by lower levels of industrial, commercial, and business
demand. In the UK, we saw record low levels of transmission system
demand on the electricity network at 14.5GW over the recent Spring
Bank Holiday weekend and again at the end of May. To ensure the ESO
can continue to safely and reliably manage the system at these
unprecedented low demand levels, it has put in place a suite of
additional balancing services. It is continuing to work closely
with Ofgem and industry on ways to ease pressures on customers from
potential increases in balancing costs.
In the US, across our service territories, we have seen an 8%
decrease in gas consumption between mid-March and the end of April.
For electricity, we have seen a 6% decrease in consumption between
mid-March and the end of May, although this is comprised of a 5%
increase in residential usage, and a 9% decrease in Industrial and
Commercial usage.
Supporting our communities
We are acutely aware of the impact COVID-19 has had on the
communities where we operate. Our teams have stepped forward with
multiple initiatives, including financial donations to help the
most vulnerable. In the UK, we have made donations to support key
charities delivering aid; in the US, we have provided funding for
customers experiencing financial hardship and for community-based
organisations. In April, we made a donation to the University
Hospitals Birmingham Charity appeal in the UK that provides vital
support to both patients and staff. The donation will be used to
purchase almost 400 tablet computers that will be used by patients
to help them speak to relatives while in isolation. In the US, our
teams upgraded gas supply in record time to help turn a college gym
into a 1,000-bed hospital on Long Island.
Supporting our customers
We are also providing support and assistance to our customers.
In the US, where we collect directly from end consumers, we took
several actions following discussions with regulators. We suspended
debt collection and disconnections across all our US service
territories. We deferred rate increases in our upstate New York
business, Niagara Mohawk (NIMO), that were due to take effect on 1
April; and we delayed the NIMO rate filing, originally planned at
the end of April, as we look to minimise the impact on bills when
many customers are experiencing economic hardship. We have also
offered flexible bill plans and arrangements for overdue bills, as
well as eligibility discounts dependent on household income and
size.
In the UK, we are working with other network companies and Ofgem
to help suppliers address financial challenges caused by COVID-19,
without imposing additional burdens on consumers. We have extended
credit terms for eligible suppliers to help our most vulnerable
customers, and we are also working with Ofgem to identify how we
can help our customers bear increased balancing costs associated
with securely managing the system.
Financial impact on our business
As lockdown measures began to take hold towards the end of
2019/20, incremental costs due to COVID-19 were limited on the
Group. However, the help we are giving our customers, and the
additional costs that COVID-19 has brought, will lead to a
financial impact for 2020/21. We currently estimate the impact of
COVID-19 on underlying operating profit to be around GBP400
million, with a potential impact of up to GBP1 billion on cash flow
by the end of this financial year. We have seen only a small impact
on our investment programme, and whilst we have slowed down some
works given restrictions and working within new guidelines, we
still expect to invest around GBP5 billion this financial year.
As we highlight in our Forward Guidance section below, these
estimates assume a scenario of continued gradual easing of
lockdowns across our territories, together with cost recovery
mechanisms that continue to be based on regulatory precedent. If
other scenarios play out through the course of the year, then this
could have a range of impacts on cashflows and earnings, which
could be different from our current assessment. However, whilst we
expect to see a financial impact in the near term, ultimately we
see limited economic impact from COVID-19 for the Group.
Of the GBP400 million underlying operating profit impact we
expect to see in 2020/21, whilst we do expect to see some
additional costs in the UK, and a limited impact in our NGV
business, most of the impact will come from our US business. The
impact in the US is driven by three, broadly similar, impacts: (1)
the deferral of rate increases, (2) COVID-19 related costs, and (3)
higher bad debt charges.
Higher levels of operating costs due to COVID-19 relate to areas
such as higher IT costs, higher cleaning costs, costs to sequester
critical teams to maintain system integrity, and PPE and health
screening costs to enable return to work. The lower capitalisation
of workforce costs related to an amendment in capital programmes
also has an impact. In the US, we are working to recover
incremental COVID-19 costs going forward.
With a weaker economic backdrop, we also anticipate bad debt
costs to rise in 2020/21. This follows the GBP117 million
additional provision for bad debts we have accounted for in
2019/20, and we currently estimate a slightly bigger impact in
2020/21. Whilst we receive allowances for bad debts across all our
operating businesses, we expect forecast levels of bad debt to be
above this allowance in 2020/21. We would anticipate recovering bad
debts, above our regulatory allowances, through future rate
plans.
The weaker economic backdrop is also likely to lead to lower
customer revenue collections in the US by year end, impacting
cashflow. This should be recoverable in time either as we fully
resume our collection activity across our jurisdictions, or through
recovery in future rate cases if receivables turn in to bad debts,
as described above.
As well as potential lower US customer revenue collection
affecting cashflow in 2020/21, we currently assume additional
revenue shortfall in the UK and US due to COVID-19 that will impact
both headline earnings and cash flow. These impacts come from areas
where we have (or will have) regulatory mechanisms in place,
thereby classified as timing impacts, such as, (1) lower demand in
the UK and US, and (2) customer assistance programmes in the
UK.
Lower levels of energy usage due to COVID-19 may impact our
revenue collection within year, and therefore headline earnings,
although we expect limited economic impact as almost all our
revenues are decoupled from demand across the UK and US. This means
that any under-collection is primarily a timing one and we expect
to recover revenues through existing regulatory mechanisms in the
medium term.
Similarly, in the UK, we are participating in a scheme that has
been set up to help some of the smaller energy supply customers.
This involves the relaxation of network charge payment terms for
suppliers and shippers who are facing cash flow challenges as a
result of COVID-19. We view these measures to strengthen and
support the market positively. The open letter from Ofgem proposes
all network charges are repayable in the current financial year and
allows us to recover any unsettled amounts in the 2021/22 financial
year.
In the UK, the ESO is also working with Ofgem and industry on
ways in which it could help ease pressures on its customers from
the potential increase in balancing costs. We would expect any
programme to be put in place to be consistent with current
regulatory practice, with any deferrals of costs to be recovered
over time.
Operational and regulatory progress in FY2020
Throughout 2019/20 we continued to make progress in our US
regulatory strategy as we align our rate filings and agreements
with the environmental goals of the states where we operate. We
have delivered comprehensive business plans as part of the RIIO-2
process in the UK, and we have continued to make significant
progress on our interconnector portfolio. We also completed the
acquisition of Geronimo, our first meaningful step into US
renewable generation.
US business delivering continued growth and value
We achieved good performance across most of our US operating
companies which resulted in an RoE of 9.3%. This represents 99% of
our allowed returns, above our 95% expectation that we guided to at
the beginning of the year.
Our US Regulated business invested $4.2 billion in the year
which, coupled with a $380 million net transfer from Construction
Work in Progress (CWIP), resulted in strong rate base growth of
12.2%. This was primarily driven by increases in Massachusetts Gas
capex compared to prior year, and higher mandated and reliability
capital investment in New York, such as City-State construction and
Metropolitan Reliability Infrastructure projects. Across all our
jurisdictions, we have continued to focus on modernising ageing
networks and providing better safety, reliability and resilience
throughout the year. An example of this is the additional 458 miles
of leak prone pipe we replaced this year, bringing the total
replaced to date to more than 10,500 miles, just over half of the
20,000 miles of pipe we have identified in need of replacing.
We have continued to make good regulatory progress during the
year, with new rates agreed for Massachusetts Electric. The rate
case order, effective October 2019, is for 5 years and included an
allowed Return on Equity of 9.6%. It also included a new
Performance Based Rate Mechanism (PBRM) that funds both capital and
operational expenditure across the rate plan, ensuring inflation is
factored into the cost base. In April 2019, we filed for new rates
for KEDNY/KEDLI. We are resuming settlement negotiations in the
KEDNY/KEDLI rate case in the interest of agreeing on a multi-year
rate plan that mitigates bill impacts for our customers while
allowing us to maintain safe and reliable service, advance our
clean energy goals, and earn a reasonable return. If we are unable
to reach a negotiated settlement, the rate cases will continue to a
litigated outcome at which time we would then plan to file a new
multi-year rate case proposal.
In downstate New York, we continue to work with all parties to
find solutions to the gas supply constraints faced by the region.
We took the difficult decision in May 2019 to stop processing
applications for new or expanded gas service in our service
territories. This followed further delays to permits for the
Williams' Northeast Supply Enhancement Project (otherwise known as
the NESE pipeline) which was the final piece of a series of
long-term gas supply projects. Following an order issued by the New
York Public Service Commission (PSC) requiring us to connect
approximately 1,100 customer accounts, we implemented a plan to
expand demand response and energy efficiency programmes, alongside
sourcing incremental compressed natural gas.
In November, we agreed to lift the moratorium on all new
connections until September 2021. Under the terms of the agreement,
we committed to offering $7 million in customer assistance to
address hardships arising from the moratorium; $8 million in demand
response and energy efficiency programs; and an additional $20
million investment in clean energy projects and clean tech business
investments. In addition, we committed to filing a report providing
a comprehensive analysis of the gas capacity constraints affecting
our downstate New York service territory, outlining all reasonably
available options for meeting long-term customer demand. This
report was filed and made available to the public on 24 February
and was followed by a series of public and virtual meetings in
March and April to solicit report feedback. The meetings were
constructive and attended by over 800 people with more than 7,000
comments filed with the PSC. In May, we filed a supplementary
report that focused on feedback from the meetings and two potential
solutions to long-term constraints. The proposed solutions were (a)
a portfolio including LNG vaporisation, gas compression
enhancements, combined with incremental energy efficiency and
demand response, or (b) the Williams' NESE pipeline. In mid-May,
certain permits were denied in New York and New Jersey for the
pipeline and therefore we are advancing the portfolio of solutions
that were identified in the supplementary report.
Our US cost efficiency initiative continues to ensure we deliver
our significant capital investment programme as efficiently as
possible. We are streamlining operations, simplifying our supply
chain, and rationalising our property portfolio. As a result, the
programme delivered cost savings of over $30 million in 2019/2020,
in line with the target set in 2018.
Consistent delivery across the UK
The UK has delivered another year of strong operational
performance reflected in an RoE of 12.4%. The weighted average
outperformance for the UK is within our forecast range of 200 to
300 basis points under RIIO-T1.
Our transmission networks in the UK have continued to deliver
with GBP1.3 billion of investment in 2019/20, slightly higher than
prior year. This was driven by increased investment for the
Hinkley-Seabank connection, and for our London Power Tunnels 2
project, a 33km, GBP1 billion link from Wimbledon to Crayford which
will provide significant resilience across south London when
completed in 2028. We also completed the tunnelling of the Feeder 9
gas pipeline under the Humber estuary, a critical reinforcement of
the gas network. This takes our total investment in RIIO-1 to over
GBP11 billion, which has generated GBP767 million savings for
customers ([3]) . The benefits of this investment were evident
during the early months of 2020 when the flood protection we had
installed at our sites prevented flooding and enabled ongoing
supply of electricity to our customers.
The UK cost efficiency programme that we announced in 2018
continues to deliver a more efficient and agile business ahead of
RIIO-2. Through this initiative we have simplified ways of working
with a leaner organisation and more efficient IT and back office
activities. In 2019/20, the programme enabled us to deliver
efficiency savings of GBP54 million in Electricity Transmission,
and GBP19 million in Gas Transmission, above the target we set for
the UK in 2018.
In September, we published a technical report on the loss of
power event on 9 August. The power cut was a rare and exceptional
event and, whilst we do not underestimate the significant
disruption and inconvenience that it caused, we were able to
restore power within 7 minutes. Both the ESO and transmission
network operated as designed and in accordance with our license
obligations. We published an interim and final report from the ESO
setting out its findings. In December, we welcomed Ofgem's
technical report that found no link between National Grid's actions
and the power cut (its investigation was closed in June). The
report also announced that it intended to undertake a review of
system operation. This review had always been foreseen as likely
for the ESO at the end of its first year of legal separation. It
will enable broader thinking about the appropriate industry
arrangements to assist the UK in its commitment to achieve Net Zero
emissions by 2050.
In October, we welcomed Ofgem's minded-to position on the
Hinkley-Seabank connection to use existing Strategic Wider Works
(SWW) for the project. We had argued for the SWW mechanism as we
believed the Competition Proxy Model did not include the financial
parameters necessary to deliver a project of this complexity. We
have continued to work with Ofgem to support our view of the
efficient costs to complete the project, and last month we reached
agreement on the final cost. The allowance for the project is
GBP656 million and will use the SWW mechanism as the delivery model
in the RIIO-2 price control. We are pleased with this outcome and
the project remains on track to be ready for connection in
2025.
In November, we were pleased to reach the final commissioning
stage of the Western Link, a high capacity cable over 400
kilometres long, and a joint venture between National Grid and
Scottish Power. In January, testing was carried out following the
detection of a cable fault with the link returning to service in
February. Following this trip, Ofgem announced an investigation
into the delivery and operation of the cable. We are currently
working closely with Scottish Power and the cable manufacturer, the
Prysmian-Siemens consortium, to provide Ofgem with the information
it requires to conclude the investigation. The cable plays an
important role in bringing renewable energy from Scotland to homes
and businesses in England and Wales, helping the UK to meet its
renewable energy targets and providing Scotland with additional
resilience.
This has been the first year that the ESO has operated as a
separate legal entity. The transition itself has been smooth and,
operationally, the ESO has performed well.
RIIO-2 process continues
Ofgem has continued to progress its framework for the RIIO-2
price control, which will run for five years from April 2021.
Achieving the right regulatory framework is vital to enable the
necessary investments to maintain excellent safety and reliability
levels we expect from our networks. It is also critical to ensure
that the rapid decarbonisation of the UK energy system can
continue, and ongoing investment in innovation to benefit consumers
in the long term is encouraged.
In December, we published the outcome of the stakeholder group
reports and submitted final business plans for our Electricity
Transmission (ET) and Gas Transmission (GT) businesses, and for the
ESO. Our plans cover a crucial period when rapid change is expected
in the energy system to reduce carbon emissions and help achieve
the UK's environmental goals. In delivering the plans, we engaged
with over 25,000 households, businesses and energy consumers and
were the first networks to set up independent stakeholder user
groups.
The business plans propose GBP10 billion ([4]) of totex over the
five-year price control period for RIIO-2. This is split
approximately GBP7.5 billion for ET and GBP2.5 billion for GT. For
ET, the business plan seeks to connect over 15GW of capacity over
the duration of the price control, providing the UK with clean
power and flexible storage. In addition, it seeks to maintain
network reliability, network availability, and increase resilience
to cyber and physical attacks. For GT, the plan aims to increase
asset health spend to maintain levels of network reliability,
replace two compressor units at our Wormington site, and increase
system resilience to environmental and cyber challenges. These
business plans represent a step change in investment from the RIIO
T1 baseline and would see our part of the consumer bill reducing in
real terms as we identified efficiency savings of 11%.
Looking forward, the next key date on the RIIO-2 timeline is
initial determinations which are expected in July. Planned open
hearings in March and April were cancelled as a consequence of the
COVID-19 crisis and lockdown restrictions. However, we have
continued our dialogue with Ofgem and stakeholders on the proposed
parameters for RIIO-2, and we have continued to make
representations on those areas we believe need to be addressed.
Further progress in National Grid Ventures
National Grid Ventures (NGV) delivered a good performance in
2019/20, broadly in line with the prior year. Capital investment
increased significantly to GBP815 million pounds, mainly driven by
the acquisition of Geronimo and higher investment in our North Sea
Link, Viking and IFA2 interconnector projects.
Nemo Link, the electricity interconnector between the UK and
Belgium, achieved over 96% availability in its first full year of
operation. Availability on IFA reached 91% for the year, and 99% on
BritNed. On IFA2, the AC connection from Daedalus to Chilling has
been completed and successfully tested, and the 25km French land
cable has also been constructed. Commissioning of IFA2 is on course
for the end of the calendar year, whilst progress on both the North
Sea Link (NSL) and Viking interconnectors remains on track. These
links are due to commission in FY2022 and FY2024 respectively.
In July, we completed the acquisition of Geronimo ([5]) , our
first meaningful step into US renewable generation, including a
joint venture with Washington State Investment Board (WSIB). In
December, we announced the start of commercial operations for the
200MW Crocker Wind Farm in South Dakota, with 100% of generation
contracted under PPAs for 12 years. This was followed in February
by signing a PPA agreement with Basin Electric Power Cooperative
for the 128MW Wild Springs Solar Project, also in South Dakota,
which is expected to commission in FY2023.
Our Grain LNG business contributed another good year to the
business, with over 30% utilisation throughout FY2020, welcoming
the 500th ship to the terminal in March. Legacy metering profits
fell broadly in line with our falling meter population as the
mandated smart meter rollout continues.
Property - first year of St William profits
Our Property business delivered another strong year. Our joint
venture with St William Homes delivered a net profit to the Group
selling approximately 370 homes of which over 20% were affordable.
The business also sold another two sites into the joint venture,
Hornsey and Poplar, and we exchanged contracts on a further four
sites at Brighton, Worthing, Bromley by Bow and Kensal Green.
Across the wider Property business, we sold another 34 sites in
cities including St Albans, Manchester, Bristol and Chelmsford.
Group RoE of 11.7%
Group RoE of 11.7% was broadly in line with prior year (2018/19:
11.8%).
The UK regulated businesses delivered a combined return of
12.4%, including an assumption of 3% long-run average Retail Price
Index (RPI) inflation. US RoE, at 99% of the allowed return,
increased to 9.3% reflecting improved performance as a result of
increased revenues from new rate allowances and efficiency measures
to reduce operating costs.
GROWTH AND VALUE ADDED
A balanced portfolio to deliver asset and dividend growth
National Grid seeks to create value for shareholders through
developing a balanced portfolio of businesses that offer an
attractive combination of asset growth and cash returns.
Strong organic growth driven by critical investment
We aim to deliver asset growth of 5-7%, assuming an average
long-run UK RPI inflation of 3%.
In 2019/20, the Group achieved asset growth of 9% driven by a
GBP5.4 billion capital investment programme. This investment
continued our focus on building and maintaining world-class
networks that are safe, reliable, resilient and ready for the
future. It is specifically focused on:
-- our regulated businesses: with the objective of upgrading and
modernising ageing infrastructure, especially in the US, to meet
the changing needs of customers and to drive the decarbonisation of
energy supply; and
-- interconnector projects: with the objective of bringing a
range of lower cost and renewable energy sources into the UK.
Looking forward, we expect capital investment to be around GBP5
billion for the Group in FY2021, and to remain at that level in
FY2022. We expect this to continue to drive asset growth in our
target range of 5-7% assuming an average long-run UK RPI inflation
of 3%.
National Grid is confident that this high-quality growth will
continue to generate attractive returns for shareholders and add to
our long-term investment proposition of sustainable asset and
income growth.
Funding of organic growth
National Grid has a strong balance sheet and an efficient
capital structure which supports the effective financing of our
investment programme. This programme will be financed through a
combination of:
-- additional debt financing;
-- internally generated equity capital, delivered through strong
financial performance in both the UK and US, including from
operating efficiencies and from faster recovery of regulatory
assets through rate filings and re-openers; and
-- additional equity capital generated through the take up of
the shareholder scrip dividend option, originally established to
support the business in periods of higher asset growth.
Reflecting the continuing high level of investment, the Group
currently expects to continue to utilise the scrip dividend
mechanism to fund asset growth.
Over GBP5 billion of Capital Investment in 2019/20, 19% higher
at constant currency
We continued to make significant investments in critical energy
infrastructure during 2019/20. Total capital investment across the
Group was GBP5,405 million, an increase of around GBP858 million
(19% at constant currency) compared to the prior year.
Year ended 31 March
======= ======= ========== ======== ======= ==========
At actual exchange
Capital investment (GBP million) rates At constant currency
==================================
2020 2019 % change 2020 2019 % change
================================== ======= ======= ========== ======== ======= ==========
UK Electricity Transmission 1,043 925 13% 1,043 925 13%
UK Gas Transmission 249 308 (19)% 249 308 (19)%
US Regulated 3,228 2,650 22% 3,228 2,688 20%
NGV and other activities(1) 885 623 42% 885 626 41%
Group capital investment 5,405 4,506 20% 5,405 4,547 19%
=================================== ======= ======= ===== ======== ======= ======
1. Excludes GBP15 million (2019: GBP47 million) equity
contribution to the St William Homes LLP joint venture. Includes
GBP61 million National Grid Partners investment (2019: GBP58
million).
Investment in UK Electricity Transmission increased, primarily
driven by higher investment for the Hinkley-Seabank connection, and
for our London Power Tunnels 2 project. Completion of the Feeder 9
gas pipeline replacement project under the Humber Estuary was the
primary reason for the decrease in investment in UK Gas
Transmission. In the US, investment increased by 20% on a constant
currency basis, primarily driven by increases in Massachusetts Gas
capex compared to prior year, and higher mandated and reliability
capital investment in New York. Investment in NGV stepped up driven
by the acquisition of Geronimo and higher investment in our North
Sea Link, Viking and IFA2 interconnector projects.
Achieved asset growth of 9.0% compared to 7.2% last year
During 2019/20, our combined regulated asset base and NGV and
Other business assets grew by GBP3,730 million, or 9.0% on a
constant currency basis. This was helped by the acquisition of
Geronimo, as well as the transfer of Construction Work in Progress
(CWIP) in to rate base, which combined added around 100bp to the
annual growth. This compared to an increase of 7.2% in the prior
year. UK RAV growth was 3.8% including RPI indexation of 2.6% while
the US rate base grew strongly by 12.2%.
Year ended 31 March
Assets (GBP million at constant currency)
=========================================== ====== ======= ==========
2020 2019(2) % change
=========================================== ====== ======= ==========
UK RAV(1) 20,431 19,692 4%
US rate base 20,644 18,407 12%
============================================ ====== ======= ==== ===
Total RAV and rate base 41,075 38,099 8%
NGV and Other businesses 4,105 3,351 23%
Total 45,180 41,450 9%
============================================ ====== ======= ==== ===
1. UK RAV excludes Cadent investment.
2. 2019 restated to reflect the impact of IFRS16.
Value Added of GBP2.0 billion, driven by asset growth
Value Added As at 31 March change
(GBPm constant currency) 2020 2019(1) 2020 2019
======================================= ======== ======= ======= =========
UK RAV 20,431 19,692 739 687
US rate base 20,644 18,407 2,237 1,478
NGV and Other businesses 4,105 3,351 754 515
Total 45,180 41,450 3,730 2,680
======================================= ======= ====== ====== ======
UK other regulated balances (357) (302) (55) 196
US other regulated balances 1,791 1,987 (196) (22)
Other balances (514) (679) 165 185
Total group assets and other balances 46,100 42,456 3,644 3,039
======================================= ======= ====== ====== ======
Increase in goodwill 81 -
Cash dividend 892 1,160
Adjusted net debt movement (2,577) (2,128)
Value Added 2,040 2,071
Value Added per Share(2) 58.9p 61.2p
======================================= ======== ======= ======= =========
1. Figures relating to prior periods have, where appropriate,
been re-presented at constant currency and for opening balance
adjustments following the completion of the UK regulatory reporting
pack process in 2019, reclassifications between US rate base and US
other balances, the finalisation of US balances, and the impact of
IFRS16.
2. Based on 3,461 million weighted average shares for 2019/20
(2018/19: 3,386 million).
Value Added, which reflects the key components of value delivery
to shareholders (i.e. dividend and growth in the economic value of
the Group's assets, net of growth in net debt) was GBP2.0 billion
in 2019/20. This was slightly lower than last year's GBP2.1
billion, with consistent UK returns, the impact of asset growth and
good performance from NGV and Other activities, offset by lower
Cadent dividends received. Of the GBP2.0 billion value added,
GBP0.9 billion was paid to shareholders as cash dividends, and
GBP1.1 billion was retained in the business. Value added per share
was 58.9p compared with 61.2p in 2018/19. This excludes the benefit
of the Cadent sale where a further GBP2 billion proceeds were
retained in the business to fund asset growth.
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 63% at 31 March 2020, slightly lower than the level,
at constant currency, at 31 March 2019. Gearing remains at an
appropriate level for the credit rating. Retained cash flow
(RCF)/adjusted net debt, using Moody's methodology, was 9.2%. The
Funds From Operations (FFO) to debt metric, using S&P's
methodology, was 12.3%.
At 31 March 2020, the Group had GBP1 billion of cash and
short-term financial investments available and GBP5.5 billion of
committed bank facilities providing general liquidity across the
Group. In addition, the ESO has GBP550 million of committed bank
facilities. These facilities are provided by our relationship
banking group and all remain undrawn.
During the year, we raised GBP2.9 billion of long-term senior
debt and refinanced GBP1.1 billion of our hybrid debt. In January,
we used our Green Financing Framework to issue our inaugural green
bond, a EUR500 million bond issued by National Grid Electricity
Transmission with a coupon of 0.19 percent. We have also used this
framework to agree GBP598 million of ECA financing for our Viking
interconnector. In April, we raised $600 million for Narragansett
Electric and GBP400 million for National Grid Electricity
Transmission. Both were priced attractively highlighting global
debt investor confidence in National Grid despite COVID-19
volatility.
Dividend increase of 2.6% recommended for 2019/20
Our dividend policy, set out in 2013, aims to grow the ordinary
dividend per share at least in line with RPI inflation each year
for the foreseeable future. As is its usual practice, the Board
reviews this policy regularly, taking into account a range of
factors including expected business performance and regulatory
developments.
The Board has recommended an increase in the final dividend to
32.0 pence per ordinary share ($2.0126 per American Depositary
Share) which will be paid to shareholders on the register as at 3
July 2020. If approved, this will bring the full year dividend to
48.57 pence per ordinary share, an increase of 2.6% over the 47.34
pence per ordinary share in respect of the financial year ending 31
March 2019. This rise is in line with the increase in UK RPI for
the twelve months to 31 March 2020 as set out in the policy
announcement of 28 March 2013.
A scrip dividend alternative will again be offered in respect of
the 2019/20 final dividend.
Board changes
In May 2019, we announced the appointment of Jonathan Silver as
a Non-Executive Director of the Board. Jonathan joined the Finance,
Remuneration and Nominations Committees. Amanda Mesler joined the
Safety, Environment and Health Committee and stepped down from the
Finance Committee.
In November 2019, we announced that, for personal reasons, Dean
Seavers, US Executive Director, would step down with immediate
effect from his position as a member of the Board and as President
of the US Business. Dean remained with the business until 31
December 2019 to ensure a smooth leadership transition and
handover.
In January 2020, Liz Hewitt was appointed as a Non-Executive
Director, joining the Audit, Nominations and Safety, Environment
and Health Committees.
OUTLOOK
For 2020/21, we have assumed an impact on Group underlying
operating profit, based on the scenario set out in the Forward
Guidance section, of around GBP400 million from COVID-19. This is
driven largely by our US operations where we are expecting (1)
higher levels of bad debt, (2) additional direct COVID-19 costs,
and (3) deferral of rate increases. However, given regulatory
mechanisms and precedents, we expect to recover a large part of
this. In the UK, we do expect to see some limited cost impact from
COVID-19. We are also currently working with regulators on support
mechanisms for our customers, which may lead to cash flow impacts
this year, but we would ultimately expect to be recoverable.
Therefore, whilst COVID-19 will impact earnings and cash flow in
the short term, we currently anticipate limited economic impact
longer term.
For the year ahead, our focus in the US will be to work with
regulators on developing the appropriate rate plans for a post
COVID-19 world. In the UK, we will focus on agreeing a fair
settlement for RIIO-2 with Ofgem. We will continue to place a sharp
emphasis on efficiency across the business. With our enhanced
medium-term net zero emissions targets, we remain committed to
working with all our stakeholders towards enabling the energy
transition.
National Grid continues to expect asset growth towards the top
end of its target range of 5-7% in the near term, assuming RPI at
3%, with annual capital investment of around GBP5 billion. As we
emerge from the COVID-19 crisis, our focus will continue to be on
customer affordability, safety and reliability across our networks
as we work with regulators on agreeing new frameworks in the US and
UK. With an efficient balance sheet that underpins asset and
dividend growth, the Group is well positioned to create value for
shareholders.
2020/21 FORWARD GUIDANCE
The forward guidance below assumes a scenario of continued
gradual easing of lockdowns across our territories, together with
cost recovery mechanisms that continue to be based on regulatory
precedent. If other scenarios play out through the course of the
year, then this could have a range of impacts on cashflows and
earnings, which could be different from our current assessment.
The outlook and forward 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 decrease compared
to 2019/20, including lower connections income, however this should
be mostly offset by lower controllable costs reflecting continuing
benefit from the UK cost efficiency programme, and taking into
account COVID-19 related costs.
Depreciation is expected to increase by over GBP40 million
reflecting the ongoing investment programme.
Totex and other outperformance is expected to decrease slightly
compared to 2019/20, but Incentive performance is expected to
increase. Overall, Return on Equity is expected to be similar to
the level in 2019/20.
UK Gas Transmission
Net Revenue (excluding timing) is expected to increase by
approximately GBP30 million compared to 2019/20, including base
revenue increases and the benefit of RPI inflation. Overall costs,
including depreciation, are expected to be broadly flat on 2019/20,
as COVID-19 related costs offset the benefit of the ongoing cost
efficiency programme.
Return on Equity is expected to be lower than 2019/20, with
lower totex performance.
UK Timing
Revenues are likely to be impacted by timing of recoveries
including impacts from prior years and lower volume expectations
for 2020/21 given lower system demand due to COVID-19. This will
drive under-recovery of revenues in Electricity Transmission in
2020/21. Gas Transmission timing is expecting a small
over-recovery.
US Regulated operations
Net Revenue (excluding timing) is expected to be over GBP100
million higher, reflecting the first full year of new rates in our
Massachusetts Electric business, and rate increases under existing
rate plans. We do not expect significant revenue increases in our
New York businesses due to deferral of rate increases in upstate
New York, as well as a delay to updating rates in KEDNY/KEDLI.
However, under our current assumptions, we expect costs to
increase by over GBP150 million y-o-y driven by:
-- continuing higher levels of bad debts, above our current regulatory allowances
-- additional COVID-19 related costs
We expect to recover most of these additional costs through
regulatory mechanisms. The timing of recovery through revenues will
depend on the outcome of negotiations with our regulators.
We expect depreciation to be higher in 2020/21 by around GBP100
million reflecting the higher level of asset growth.
Return on Equity for overall US Regulated operations is expected
to decrease compared to 2019/20. The size of the decrease will be
dependent on the arrangements for recoveries of additional costs
related to the pandemic.
US Timing
Revenues will be impacted by timing of recoveries. We expect
timing to be significantly favourable relative to the timing
outflow seen in FY20.
NGV and Other activities
NG Ventures operating profits are expected to decrease by around
5% year-on-year due to lower meter volumes and lower interconnector
arbitrage. New interconnectors are not expected to start to
contribute materially to operating profit until 2021/22.
We also expect other activities' underlying operating profit to
be lower year on year driven by lower property operating profit,
and lower NG Partners fair value gains resulting from the current
economic climate.
Joint Ventures and Associates
Our share of the profit after tax of joint ventures and
associates is expected to reduce as property sales from the St
William property joint venture slow.
Interest and Tax
Net finance costs in 2020/21 are expected to be a little lower
than 2019/20, with lower RPI inflation and lower interest rates
more than offsetting the impact of increased net debt.
For the full year 2020/21, the underlying effective tax rate
relating to profit generated in the year, excluding the share of
joint venture and associate post-tax profits, is expected to be
around 22%.
Investment, Growth and Net Debt
Overall Group capital investment for 2020/21 is expected to
reduce to around GBP5 billion, on the back of implementing new
working practices to follow government guidelines based on the
impacts of the COVID-19 pandemic. Investment in 2019/20 included
the acquisition of Geronimo.
Asset Growth is expected to be lower than in 2019/20, reflecting
our expectations for lower capex and lower RPI inflation. We expect
asset growth to be towards the top end of our 5-7% target range at
3% RPI.
Depreciation is expected to increase, reflecting the impact of
continued high levels of capital investment.
Operating cashflow generated from continuing operations is
expected to decrease with lower EBITDA driven primarily by costs
related to COVID-19.
Net debt is expected to increase by around GBP3 billion
(excluding the impact of foreign exchange) from GBP28.6 billion. We
currently forecast an impact of up to GBP1 billion on cash flow by
the end of this financial year due to COVID-19.
Weighted average number of shares (WAV) is expected to increase
from 3,461 million last year to approximately 3,540 million in
2020/21 reflecting the impact of scrip shares, assuming a 25% scrip
uptake.
FINANCIAL REVIEW
In managing the business, we focus on various non-IFRS measures
which provide meaningful comparisons of performance between years,
monitor the strength of the Group's balance sheet as well as
profitability and reflect the Group's regulatory economic
arrangements. Such alternative and regulatory performance measures
are supplementary to, and should not be regarded as a substitute
for, IFRS measures, which we refer to as statutory results. We
explain the basis of these measures and, where practicable,
reconcile these to statutory results in 'Alternative performance
measures/non-IFRS reconciliations' on pages 72 to 83.
Also, we distinguish between adjusted results, which exclude
exceptional items and remeasurements, and underlying results, which
further take account of: (i) volumetric and other revenue timing
differences arising from our regulatory contracts, and (ii) major
storm costs which are recoverable in future periods, neither of
which give rise to economic gains or losses.
Performance for the year ended 31 March
Financial summary for continuing operations
change
(GBP million) 2020 2019 %
================================================ ===== ===== ==========
Statutory results
Operating profit 2,780 2,870 (3)
Profit after tax 1,274 1,502 (15)
Earnings per share (pence) 36.8 44.3 (17)
Dividend per share (pence), including proposed
final dividend 48.57 47.34 2.6
Alternative performance measures:
Underlying operating profit 3,454 3,427 1
Underlying profit after tax 2,015 1,998 1
Adjusted earnings per share (pence) 55.2 59.0 (6)
Underlying earnings per share (pence) 58.2 58.9 (1)
Underlying dividend cover 1.2 1.2 -
Capital investment 5,405 4,506 20
Retained cash flow/adjusted net debt 9.2% 9.4% (20)bps
Regulatory performance measures:
Asset growth 9.0% 7.2% 180bps
Group return on equity 11.7% 11.8% (10)bps
Value added 2,040 2,071 (1)
Regulatory gearing 63% 66% (300)bps
================================================ ===== ===== ==========
The Group's statutory results for the year were adversely
impacted by exceptional charges. The impact on statutory EPS as a
result of these charges is presented after each item. These
included additional environmental provisions and a reduction in the
discount rate applied to certain provisions across the Group (8.6p)
and a deferred tax charge due to the reversal of the expected
reduction in the UK corporation tax rate originally enacted by the
Finance Act 2016 (5.6p). Last year's statutory results were
adversely impacted by exceptional charges incurred in respect of
the Massachusetts Gas labour dispute (6.2p), our UK and US cost
efficiency and restructuring programme (4.7p) and the impairment of
development costs in respect of the termination of the NuGen and
Horizon nuclear connection projects (3.3p).
Statutory operating profit was also adversely impacted by
commodity remeasurement losses of GBP125 million in 2019/20
(2018/19: GBP52 million gains) from mark-to-market movements on
derivatives which are used to hedge the cost of buying wholesale
gas and electricity on behalf of our US customers.
Underlying operating profit was up 1% as higher rate case
revenues in our US Regulated businesses and lower operating costs
more than offset higher deferable storm costs, higher bad debts
costs, increased depreciation, the non-recurrence of favourable US
legal settlements and sale of our Fulham property site in 2018/19.
The combination of these factors was partly offset by higher net
financing costs, driven by the implementation of IFRS 16 and higher
average net debt. Underlying profit after tax increased by 1% and,
combined with a higher share count, resulted in a 1% decrease in
underlying EPS to 58.2p.
Capital investment of GBP5.4 billion increased our asset growth
to 9%. We delivered Value Added (our measure of economic profit) of
GBP2.0 billion in 2019/20, slightly lower than in 2018/19. Group
RoE of 11.7% was comparable to 11.8% in 2018/19, reflecting the
higher new rate allowances in our US businesses, while 2018/19
benefited from the Fulham sale and legal settlements. RCF/net debt
at 9.2% remained consistent with the Company's strong investment
grade credit rating. The recommended full-year dividend per
ordinary share of 48.57 pence is in line with policy and is covered
1.2 times by underlying EPS.
The adoption of IFRS 16 'Leases' during the year increased our
net debt by GBP474 million, with a corresponding increase in
right-of-use assets recorded on the balance sheet. This standard
has resulted in lower operating costs within our businesses, offset
by a higher depreciation charge and a higher interest cost.
Reconciliation of different measures of profitability and
earnings
The table below reconciles our statutory profit measures for
continuing operations, at actual exchange rates, to adjusted and
underlying versions.
Reconciliation of profit and earnings from continuing operations
Earnings per share
Operating profit Profit after tax (pence)
(GBP million) 2020 2019 2020 2019 2020 2019
========================== ======== =========== ======== ========= ========= ============
Statutory results 2,780 2,870 1,274 1,502 36.8 44.3
Exceptional items 402 624 491 480 14.2 14.2
Remeasurements 125 (52) 148 19 4.2 0.5
========================== ======== ======= ======== ======== ========= =========
Adjusted results 3,307 3,442 1,913 2,001 55.2 59.0
Timing 147 (108) 102 (72) 3.0 (2.1)
Major storm costs - 93 - 69 - 2.0
========================== ======== ======= ======== ======== ========= =========
Underlying results 3,454 3,427 2,015 1,998 58.2 58.9
========================== ======== ======= ======== ======== ========= =========
In calculating adjusted profit measures, where we consider it is
in the interests of users of the financial statements to do so we
exclude certain discrete items of income or expense that we
consider to be exceptional in nature. The table below summarises
such items; full details are contained in note 4 to the financial
statements together with an explanation of the process used to make
this determination.
Exceptional income/(expense) for continuing operations
Impact on Impact on Impact on
operating profit profit after tax EPS (pence)
(GBP million) 2020 2019 2020 2019 2020 2019
============================== ============ ======== ============ ======== ======= ========
Changes in environmental
provision (402) - (299) - (8.6) -
Massachusetts Gas labour
dispute - (283) - (209) - (6.2)
UK and US cost efficiency
and restructuring programme - (204) - (160) - (4.7)
Impairment of nuclear
connections development
costs - (137) - (111) - (3.3)
Deferred tax arising
on the reversal of
the reduction in UK
corporation tax rate - - (192) - (5.6) -
============================== ======== ======= ======== ======= ======= =====
Total (402) (624) (491) (480) (14.2) (14.2)
============================== ======== ======= ======== ======= ======= =====
This year we have classified the following items as
exceptional:
-- Changes in environmental provisions: a GBP326 million net
increase in the provision for estimated costs and cost sharing
allocations borne by the Company associated with environmental
clean-up related to former manufacturing gas plant facilities,
formerly owned or operated by the Group or its predecessor
companies and additionally, GBP76 million for the impact of a
reduction of 0.5% in the real discount rate applied to the
environmental provisions across the Group; and
-- Deferred tax arising on the reversal of the reduction in UK
corporation tax rate: The Finance Act 2016 reduced the UK
corporation tax rate to 17% with effect from April 2020. A GBP192
million deferred tax charge has been made, following the reversal
of this legislation, which retains the UK corporation tax rate at
19%, resulting in an increase in deferred tax liabilities.
In the prior year we classified the GBP283 million cost arising
as a result of the Massachusetts Gas labour dispute as exceptional,
along with the GBP204 million charge relating to the UK and US cost
efficiency and restructuring programme and the GBP137m impairment
charge relating to nuclear connection development costs.
We also exclude certain unrealised gains and losses on
mark-to-market financial instruments from adjusted profit; see
notes 5 and 6 to the financial statements for further information.
Net remeasurement losses of GBP125 million on commodity contract
derivatives were incurred in addition to net remeasurement losses
of GBP64 million on financing-related instruments and a further
GBP1 million of remeasurement losses related to our share of
post-tax results of joint ventures.
Timing over/(under)-recoveries
In calculating underlying profit, we exclude regulatory revenue
timing over- and under-recoveries and major storm costs. Under the
Group's regulatory frameworks, most of the revenues we are allowed
to collect each year are governed by regulatory price controls in
the UK and rate plans in the US. If more than this allowed level of
revenue is collected, the balance must be returned to customers in
subsequent years; likewise, if less than this level of revenue is
collected, the balance will be recovered from customers in
subsequent years. We also collect revenues from customers and pass
these on to third parties (e.g. NYSERDA). These variances between
allowed and collected revenues and timing of revenue collections
for pass-through costs give rise to over- and under-recoveries.
The following table summarises management's estimates of such
amounts for the two years ended 31 March 2020. All amounts are
shown on a pre-tax basis and, where appropriate, opening balances
are restated for exchange adjustments and to correspond with
subsequent regulatory filings and calculations. All amounts are
translated at the current year average exchange rate of
$1.29:GBP1.
Timing over/(under)-recoveries
(GBP million) 2020 2019
======================================== ===== ======
Balance at start of year (restated)(1) 403 301
In-year over/(under)-recovery (147) 111
Balance at end of year 256 412
======================================== ==== ====
1. March 2019 opening balances adjusted to correspond with
2018/19 regulatory filings and calculations.
Timing over-recoveries of GBP146 million in UK Electricity
Transmission were more than offset by timing under-recoveries of
GBP54 million in UK Gas Transmission and timing under-recoveries of
GBP239 million in US Regulated in 2019/20. In calculating the
post-tax effect of these timing recoveries, we impute a tax rate,
based on the regional marginal tax rates, consistent with the
relative mix of UK and US balances. For the year ended 31 March
2020 this tax rate was 31%.
Major storm costs
We also take account of the impact of major storm costs in the
US where the aggregate amount is sufficiently material in any given
year. Such costs (net of certain deductibles) are recoverable under
our rate plans but are expensed as incurred under IFRS.
Accordingly, where the total incurred cost (after deductibles)
exceeds $100 million in any given year, we exclude the net costs
from underlying earnings. In 2019/20, although we experienced a
number of storms, the $98 million of deferrable storm costs we
incurred (in aggregate) fell just below this threshold. During
2018/19 we experienced bad weather events across the year, with
storms unusually occurring during April and May as well as in the
winter months. In that year the total net costs exceeded the $100
million threshold and were excluded from our underlying
results.
Segmental income statement
The tables below set out operating profit on adjusted and
underlying bases.
Underlying operating
Adjusted operating profit profit
change change
GBP million 2020 2019 % 2020 2019 %
============================= ============== ========= ====== ============ ======= ========
UK Electricity Transmission 1,320 1,015 30 1,174 1,092 8
UK Gas Transmission 348 303 15 402 341 18
US Regulated 1,397 1,724 (19) 1,636 1,594 3
NGV and Other activities 242 400 (40) 242 400 (40)
============================= ========== ======== ===== ======== ====== =====
Total operating profit 3,307 3,442 (4) 3,454 3,427 1
Net finance costs (1,049) (993) 6 (1,049) (993) 6
Share of post-tax results
of joint ventures and
associates 88 40 120 88 40 120
============================= ========== ======== ===== ======== ====== =====
Profit before tax 2,346 2,489 (6) 2,493 2,474 1
Tax (433) (488) (11) (478) (476) -
============================= ========== ======== ===== ======== ====== =====
Profit after tax 1,913 2,001 (4) 2,015 1,998 1
============================= ========== ======== ===== ======== ====== =====
Earnings per share (pence) 55.2 59.0 (6) 58.2 58.9 (1)
============================= ========== ======== ===== ======== ====== =====
The statutory operating profit for all three reportable segments
fell in the year primarily as a result of the GBP402 million
exceptional charges referred to earlier. The reasons for the
movements in underlying operating profit are described in the
Business Review.
Financing costs and tax
Net finance costs
Net finance costs (excluding remeasurements) for the year were
6% higher than last year at GBP1,049 million, with the GBP56
million increase mostly driven by the impact of IFRS 16, lower
capitalised interest and adverse foreign exchange movements, partly
offset by interest on tax settlements. The effective interest rate
of 4.1% on net debt was 20bps lower than the prior year rate of
4.3%.
Joint ventures and associates
The Group's share of net profits from joint ventures and
associates increased as a result of St William's first year of
profits. Our Minnesota-based joint venture, Emerald Energy Ventures
LLC, which we acquired in July also contributed GBP1 million of
post-tax earnings in 2019/20.
Tax
The underlying effective tax rate of 19.9% was 30bps higher than
last year. The tax charge for the year benefited from the release
of reserves following settlement of tax audits relating to earlier
years and gains on chargeable disposals which are offset by
previously unrecognised capital losses. In the prior year,
significantly higher gains on property disposals that were offset
by previously unrecognised capital losses resulted in a lower
underlying effective tax rate.
Discontinued operations
We completed the sale of our remaining 39% interest in Quadgas
HoldCo Limited, the holding company for the Cadent gas networks, in
June 2019 for approximately GBP2 billion. As described further in
note 10 to the financial statements, we have treated all items of
income and expense relating to the disposal of Quadgas HoldCo
Limited within discontinued operations.
Cash flow, net debt and funding
Net debt is the aggregate of cash and cash equivalents,
borrowings, current financial and other investments and derivatives
(excluding commodity contract derivatives) as disclosed in note 13.
'Adjusted net debt' used for the RCF/adjusted net debt calculation
is principally adjusted for pension deficits and hybrid debt
instruments. For a full reconciliation see page 77.
The following table summarises the Group's cash flow for the
year, reconciling this to the change in net debt.
Summary cash flow statement
change
GBP million 2020 2019 %
=================================================== ======== ======== ========
Cash generated from continuing operations 4,914 4,464 10
Cash capital expenditure and acquisition of
investments (5,098) (4,148) 23
Dividends from joint ventures and associates 75 68 10
=================================================== ======= ======= =====
Business net cash flow from continuing operations (109) 384 (128)
Net interest paid (884) (846) 4
Net tax (paid)/received (199) (75) 165
Ordinary dividends (892) (1,160) (23)
Other cash movements 10 15 (33)
=================================================== ======= ======= =====
Net cash flow from continuing operations (2,074) (1,682) 23
Quadgas sale proceeds 1,965 - n/a
Discontinued operations (91) 85 (207)
Non-cash movements (1,387) (1,930) (28)
=================================================== ======= ======= =====
Increase in net debt (1,587) (3,527) (55)
Net debt at start of year (26,529) (23,002) 15
Impact of adoption of IFRS 16 (474) - n/a
Net debt at end of year (28,590) (26,529) 8
=================================================== ======= ======= =====
Cash flow generated from continuing operations was GBP4.9
billion, GBP0.5 billion higher than last year, principally due to
exceptional items in 2018/19 and favourable working capital (mainly
higher inflows from collection of prior year winter receivables),
partly offset by adverse timing on revenues and provisions. Cash
expended on investment activities increased for the reasons
described above. Net interest paid increased due to the growth in
net debt and also higher interest income received in 2018/19. The
Group made net tax payments of GBP199 million during 2019/20. A 46%
scrip take-up in the year reduced the cash dividend to GBP892
million, GBP268 million lower than in 2018/19, when the scrip
take-up was 26%. Proceeds of GBP1,965 million (plus GBP6 million of
interest) from the Quadgas HoldCo Limited disposal, were partly
offset by outflows for residual provisions and accruals classified
within discontinued operations. In 2018/19, discontinued operations
included dividend and interest income of GBP156 million from our
investment in Quadgas. Non-cash movements primarily reflect changes
in the sterling-dollar exchange rate, the impact of adopting IFRS
16 'Leases', accretions on index-linked debt, finance lease
additions and other derivative fair value movements.
Overall, the increase in net debt was driven by continuing high
levels of capital investment and the impact of a stronger US dollar
on the translation of US dollar-denominated debt. As at 31 March
2020 the Group reduced its total financial liabilities denominated
in US dollars from $21 billion at the start of the year to $20
billion at 31 March 2020, as a hedge of foreign exchange movements
in the value of its US businesses.
During the year we raised over GBP2.9 billion of new long-term
senior debt including 13 bond issues, and GBP1.1 billion of hybrid
debt refinancing. The Board has considered the Group's ability to
finance normal operations at the same time as funding a significant
capital programme, in light of the potential impacts of COVID-19.
This includes stress-testing of the Group's finances under a
'reasonable worst case' scenario and consideration of levers
available to ensure our businesses are adequately financed. As a
result, the Board has concluded that the Group will have adequate
resources to do so. In April, we issued GBP0.9 billion of debt
through 2 bonds, evidencing our ability to raise new finance. In
addition, as at 17 June 2020, we have GBP5.8 billion of undrawn
committed facilities, all of which have expiry dates beyond June
2021. The three major credit rating agencies - Moody's, Standard
& Poor's (S&P) and Fitch - have all maintained their strong
investment grade ratings of National Grid plc on stable
outlook.
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 on 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 77 to 83.
Achieved Base or Allowed
Year ended 31 March Return on Equity Return on Equity
============
Regulatory
Debt:Equity
% assumption 2020 2019 2020 2019
============================= ============ ========= ========= ========= ===========
UK Electricity Transmission 60/40 13.5 13.7 10.2 10.2
UK Gas Transmission 62.5/37.5 9.8 9.5 10.0 10.0
UK Weighted Average 12.4 12.4 10.1 10.1
US Regulated Avg. 50/50 9.3 8.8 9.4 9.4
Group 11.7 11.8
============================= ============ ========= ========= ========= ===========
RAV, Rate Base
or other business Total Regulated
As at 31 March assets and other balances
(GBP million, at constant currency) 2020 2019 2020 2019
===================================== ========== ========= ========== ============
UK Electricity Transmission 14,133 13,537 13,769 13,291
UK Gas Transmission 6,298 6,155 6,305 6,099
US Regulated 20,644 18,407 22,435 20,394
===================================== ========== ========= ========== ==========
Total regulated 41,075 38,099 42,509 39,784
NGV and Other activities 4,105 3,351 3,591 2,672
Group regulated and other balances 45,180 41,450 46,100 42,456
===================================== ========== ========= ========== ==========
UK ELECTRICITY TRANSMISSION
2019/20 Overview
UK Electricity Transmission delivered another strong year of
operational performance, maintaining a focus on safe, reliable,
innovative and efficient operations.
We achieved an excellent network reliability of 99.99997% during
the year, while maintaining a strong safety performance. Our
customers were also more satisfied with our performance - we
achieved a score of 8.2 against a baseline target of 6.9 set by
Ofgem.
During the year we have continued to deliver complex projects to
ensure continued reliability of the network. As part of this
investment, in December we awarded the GBP400 million tunnelling
contract associated with our London Power Tunnels 2 project, a
33.5km, GBP1 billion link from Wimbledon to Crayford which will
provide significant resilience across south London when completed
in 2028. Four other major contracts associated with the cable and
substation works will be let this year.
We have made good progress on the GBP116 million Dorset Visual
Impact Provision (VIP) during the year, with site establishment and
preliminary civil works well underway. We are on track to
underground 8.8km of overhead line and remove 22 pylons in the
Dorset Area of Outstanding Natural Beauty (AONB) by 2022. Funding
and planning applications have been submitted for the Peak East VIP
project. This GBP43 million project will remove 6 pylons and 2km of
overhead line in the Peak District National Park. A preferred
bidder has been selected to install a 3.4km tunnel through the
Snowdonia National Park for the Snowdonia VIP project, and
engineering and consenting activities have commenced on the first
of our RIIO-2 portfolio of VIP projects, the undergrounding of
4.4km of overhead line through the North Wessex Downs AONB.
The UK electricity transmission network is continuing with
innovation investments. We are focused on reducing our carbon
footprint from our construction activities and seeking ways to
reduce the greenhouse gas impact from gas-insulated assets. We have
engaged extensively with regional stakeholders in our Zero 2050
South Wales project to better understand the changes in
decarbonising society. We have made progress in the construction of
our transmission accelerator at Deeside, recognising the need to
test and adopt new technologies faster, and we continue to research
technologies to enhance our cyber security and further digitise our
grid infrastructure.
Regulated Returns and Financial Performance reflect efficiency
and incentive delivery
Return on Equity above base levels
RoE for the year, normalised for a long-run inflation rate of
3%, was 13.5% 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 2020 2019
==================================================== ==== ======
Base return (including avg. 3% long-run inflation) 10.2 10.2
Totex incentive mechanism 2.5 2.3
Other revenue incentives 0.1 0.5
==================================================== ==== ====
Return including in year incentive performance 12.8 13.0
Pre-determined additional allowances 0.7 0.7
Return on Equity 13.5 13.7
==================================================== ==== ====
Totex incentives contributed over 250 basis points from
efficiency savings across our asset health programmes and high
performing load related schemes. For the first time in RIIO-T1 we
outperformed against the opex element of our totex allowance, as
well as the capex element (excluding cash spend relating to the
restructuring provision we made in 2018/19). This outperformance
was driven by process improvement and contract management savings,
partially offset by lower ESO incentive revenues and the true up of
prior year incentives. Additional allowances contributed 70 basis
points, slightly above prior year.
We continued to deliver good performance under the stakeholder
engagement and customer satisfaction incentives and we continue to
work to identify opportunities for future outperformance across
these areas.
Investment activities in 2019/20
Capital investment in UK Electricity Transmission was GBP1,043
million, GBP118 million higher than the prior year. This was
primarily due to increased investment for the Hinkley-Seabank
connection, and for our second phase of the London Power Tunnels 2
project.
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 supports attractive levels of asset growth through
the creation of performance RAV. Overall, investment in the year
included GBP780 million of non-load related investment whilst load
related spend was GBP263 million.
Regulated Financial Performance down 3% 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
decreased to GBP1,324 million from GBP1,361 million. The
year-on-year decrease primarily reflects lower achieved RoE and
lower cost of debt allowance.
Reconciliation of regulated financial performance
to operating profit
(GBP million) 2020 2019 % change
======================================================= ====== ====== ==========
Operating profit 1,320 1,015 30
Movement in other regulated assets and liabilities (99) 174 (157)
Deferred tax adjustment 63 64 (2)
RAV indexation (avg. 3% long-run inflation) 406 391 4
Regulatory v IFRS depreciation difference (459) (394) 16
Fast money/other 26 72 (64)
Pensions (52) (51) 2
Performance RAV created 119 90 32
Regulated Financial Performance 1,324 1,361 (3)
======================================================= ===== ===== =======
Regulated Financial Position up 3.5%
In the year, RAV grew by 4.4%, an increase on last year's growth
rate driven primarily by increased investment, and inflation linked
growth in the RAV (2.6% 2019/20 versus 2.4% 2018/19).
2020 2019
Opening Regulated Asset Value (RAV)(1) 13,537 13,045
============================================================= ====== ======
Asset additions (slow money) - actual 1,048 967
Performance RAV or assets created 119 90
Inflation adjustment (actual RPI) 357 321
Depreciation and amortisation (928) (886)
Closing RAV 14,133 13,537
============================================================= ====== ======
Opening balance of other regulated assets and (liabilities) (265) (410)
============================================================= ====== ======
Movement (99) 175
Closing balance (364) (235)
============================================================= ====== ======
Closing Regulated Financial Position 13,769 13,302
============================================================= ====== ======
1. March 2019 opening balances adjusted to correspond with
2018/19 regulatory filings and calculations
Regulatory and other business developments
As highlighted in the 2019/20 Overview sections, Ofgem has
continued to progress its framework for the RIIO-2 price control,
which will run for five years from April 2021.
In December, we published the outcome of the stakeholder group
reports and submitted the final business plan for Electricity
Transmission (ET). Our plans cover a crucial period when rapid
change is expected in the energy system to reduce carbon emissions
and help achieve the UK's net zero target by 2050. They highlight
specific opportunities within the regulatory framework to enable
and accelerate the UK's progress to net zero. In delivering the
plans, we engaged with over 25,000 households, businesses and
energy consumers and were the first network to set up independent
stakeholder user groups.
The ET business plan proposes GBP7.5 billion ([6]) of totex over
the five-year price control period for RIIO-2. It seeks to connect
over 15GW of capacity over the duration of the price control,
providing the UK with clean power and flexible storage. In
addition, it seeks to maintain network reliability, network
availability, and increase resilience to cyber and physical
attacks. The plan represents a step change in investment from the
RIIO-T1 baseline and would see our part of the consumer bill
reducing in real terms as we identified efficiency savings of
11%.
Looking forward, the next key date on the RIIO-2 timeline is
initial determinations which are expected in July. Planned open
hearings in March and April were cancelled as a consequence of the
COVID-19 crisis and lockdown restrictions. However, we have
continued our dialogue with Ofgem and stakeholders on the proposed
parameters for RIIO-2, and we have continued to make
representations on those areas we believe need to be addressed.
Future activities and outlook
UK Electricity Transmission expects to continue to deliver good
returns and asset growth in 2020/21 with opportunities for the
business to deliver continued strong outperformance led by totex
and other incentives in the final year of RIIO-T1. 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 returns
for shareholders.
National Grid expects UK Electricity Transmission capital
investment in 2020/21 to be slightly higher than 2019/20. 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. The
business expects to continue to deliver growth in RAV, including
the benefit of efficiencies, above the rate of inflation in
2020/21.
APPIX to UK ELECTRICITY TRANSMISSION
Revenue and Costs in 2019/20 on an IFRS basis
UK Electricity Transmission statutory operating profit increased
by GBP538 million in the year. In 2018/19, there were GBP137
million of exceptional costs related to the cancellation of nuclear
connections (net of termination income) and GBP100 million in
relation to our cost-efficiency and restructuring programme. Timing
over-recoveries of GBP146 million in 2019/20 compared to
under-recoveries of GBP77 million in the prior year primarily due
to the collection of prior year balances.
Adjusted operating profit increased by GBP305 million (30%),
driven by GBP223 million favourable year-on-year timing
over-recoveries. Underlying operating profit increased by 8%. Net
revenues (excluding timing) were relatively flat, with higher
re-opener allowances for cyber and data centres, funding for ESO
legal separation and the RPI uplift, being fully offset by output
and allowances true-up in the annual iteration, along with lower
ESO incentive income. Regulated controllable costs were lower, with
efficiency savings and lower ESO separation costs, partly offset by
higher IT costs and inflation. Post-retirement benefit costs were
little changed year-on-year. Other costs were lower, mainly
relating to 2018/19's provisions against income recognised on early
termination of connections.
The decrease in depreciation and amortisation charges reflects a
benefit from the release of provisions related to prior years.
UK Electricity Transmission
(GBP million) 2020 2019 % change
=============================== ======= ======= ==========
Revenue 3,702 3,351 10
Operating costs (2,386) (2,573) (7)
=============================== ====== ====== ======
Statutory operating profit 1,316 778 69
Exceptional items 4 237 (98)
=============================== ====== ====== ======
Adjusted operating profit 1,320 1,015 30
Timing (146) 77 n/a
Underlying operating profit 1,174 1,092 8
=============================== ====== ====== ======
Net revenue (excl. timing) 2,028 2,031 -
Regulated controllable costs (306) (332) (8)
Post-retirement benefits (48) (49) (2)
Other operating costs (31) (65) (52)
Depreciation and amortisation (469) (493) (5)
=============================== ====== ====== ======
Underlying operating profit 1,174 1,092 8
Timing 146 (77) n/a
Adjusted operating profit 1,320 1,015 30
=============================== ====== ====== ======
UK GAS TRANSMISSION
2019/20 Overview
In 2019/20, UK Gas Transmission performed in line with
expectations with a strong safety performance. We achieved an
excellent network reliability of 99.99959% during the year, and we
also met our customer satisfaction targets, where we achieved a
score of 8.0 against a baseline target of 6.9 which is set by
Ofgem.
In January, we completed the tunnelling of the Feeder 9 gas
pipeline under the Humber estuary, a critical reinforcement of the
gas network. On our gas compressor refurbishment, we are in talks
with Costain, our contractor, about cost and timing overruns on the
project. As on all our sites, activities were paused briefly while
risk assessments were put in place following the COVID-19 impact.
We aim to complete these refurbishments as soon as possible.
The UK cost efficiency programme that we announced last year
continues to deliver a more agile business ahead of RIIO-2. We
remain on track to become a leaner organisation with simplified
ways of working and more efficient IT and back office activities.
In 2019/20, the Gas Transmission business delivered cost savings of
GBP19 million.
Our UK gas transmission business has been leading our research
to better understand the role of transitioning to a hydrogen
future. Our 'HyNTS' Hydrogen Portfolio of projects aims to identify
the opportunities and potential challenges to hydrogen injection
into the National Transmission System (NTS). Working in
collaboration with industry, the programme includes the building of
a test facility using decommissioned NTS assets. When built, it
will allow us to run tests with 0%, 20% and 100% hydrogen in
natural gas. The plan envisages this facility being built by April
2023, after which the transportation of hydrogen will be tested,
and access granted to third parties to trial new technologies. We
aim to fund this facility through a Network Innovation Allowance
(NIA) and Network Innovation Competition funding from Ofgem. The
use of hydrogen across the transmission network is likely to have a
key role to play in achieving net zero emissions by 2050, and this
facility will help us develop a pathway and learning to future
deployment.
Return on Equity lower than base levels
RoE for the year, using a long-run inflation rate of 3%, was
9.8%. The principal components of the performance are shown in the
table below.
Year ended 31 March 2020 2019
==================================================== ===== =======
Base return (including avg. 3% long-run inflation) 10.0 10.0
Totex incentive mechanism (0.7) (1.1)
Other revenue incentives 1.1 1.2
==================================================== ==== ====
Return including in year incentive performance 10.4 10.1
Pre-determined additional allowances (0.6) (0.6)
Return on Equity 9.8 9.5
==================================================== ==== ====
The RoE was 30 bps higher than 2018/19 but marginally lower than
the allowed level. This slight underperformance reflects the higher
costs of delivering key compressor projects and our new data
centres.
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 Gas Transmission was higher than prior
year at GBP473 million reflecting an increased asset base and
improved RoE.
Reconciliation of regulated financial performance
to operating profit
(GBP million) 2020 2019 % change
==================================================== ==== ==== ==========
Operating profit 348 303 15
Movement in other regulated assets and liabilities 67 68 (1)
Deferred tax adjustment 25 8 213
RAV indexation (3% long-run avg.) 185 179 3
Regulatory v IFRS depreciation difference (77) (42) 83
Fast money/other (17) (10) 70
Pensions (34) (33) 3
Performance RAV created (24) (30) (20)
Regulated Financial Performance 473 443 7
==================================================== === === ======
Regulated Financial Position increased 3.2%
RAV increased 2.3% in the year, compared to 3.3% in 2018/19. The
reduction in growth reflects lower capital expenditure.
GBP million 2020 2019
Opening Regulated Asset Value (RAV)(1) 6,155 5,960
================================================================ ===== =====
Asset additions (slow money) actual 253 302
Performance RAV or assets created (24) (30)
Inflation adjustment (actual RPI) 162 146
Depreciation and amortisation (248) (223)
Closing RAV 6,298 6,155
================================================================ ===== =====
Opening balance of other regulated assets and (liabilities)(1) (60) (111)
================================================================ ===== =====
Movement 67 68
Closing balance 7 (43)
================================================================ ===== =====
Closing Regulated Financial Position 6,305 6,112
================================================================ ===== =====
1. March 2019 opening balances adjusted to correspond with
2018/19 regulatory filings and calculations.
Investment activities in 2019/20 focused on asset health
UK Gas Transmission invested GBP249 million during the year, 19%
lower than the investment made in 2018/19. This decrease was driven
primarily by completion of the Feeder 9 gas pipeline replacement
project under the Humber Estuary.
Regulatory and other business developments
As highlighted in the 2019/20 Overview sections, Ofgem has
continued to progress its framework for the RIIO-2 price control,
which will run for five years from April 2021.
In December, we published the outcome of the stakeholder group
reports and submitted our final business plan for Gas Transmission
(GT). Our plans cover a crucial period when rapid change is
expected in the energy system to reduce carbon emissions and help
achieve the UK's net zero target by 2050. They highlight specific
opportunities within the regulatory framework to enable and
accelerate the UK's progress to net zero. In delivering the plans,
we engaged with over 25,000 households, businesses and energy
consumers and were the first network to set up independent
stakeholder user groups.
The GT business plan proposes GBP2.5 billion ([7]) of totex over
the five-year price control period for RIIO-2. It aims to increase
asset health spend to maintain levels of network reliability,
replace two compressor units at our Wormington site, and increase
system resilience to environmental and cyber challenges. These
business plans represent a step change in investment from the
RIIO-T1 baseline and would see our part of the consumer bill
reducing in real terms as we identified efficiency savings of
11%.
Looking forward, the next key date on the RIIO-2 timeline is
initial determinations which are expected in July. Planned open
hearings in March and April were cancelled as a consequence of the
COVID-19 crisis and lockdown restrictions. However, we have
continued our dialogue with Ofgem and stakeholders on the proposed
parameters for RIIO-2, and we have continued to make
representations on those areas we believe need to be addressed.
Future activities and outlook
UK Gas Transmission expects returns to remain in line with the
allowed level in the final year of RIIO-T1, with continued
incentive performance offset by higher totex spend compared to our
allowances.
Capital investment in UK Gas Transmission in 2020/21 is expected
to be slightly lower than 2019/20 on the back of implementing new
working practices to follow government guidelines based on the
impacts of the COVID-19 pandemic. Regulated asset value is expected
to grow albeit below the rate of inflation in 2020/21.
APPIX to UK GAS TRANSMISSION
Revenue and costs in 2019/20 on an IFRS basis
UK Gas Transmission statutory operating profit increased GBP80
million in the year. In 2018/19, GBP36 million of costs in relation
to our efficiency and restructuring programme were treated as
exceptional. Timing under-recoveries of GBP54 million in 2019/20
compared to GBP38 million in the prior year reflecting lower than
expected volumes and higher shrinkage costs.
Adjusted operating profit increased by GBP45 million (15%),
including GBP16 million year-on-year adverse timing
under-recoveries. Underlying operating profit increased by 18%. Net
revenue (excluding timing) was higher, reflecting the re-opener
allowances for cyber and data centres, the RPI uplift and the
impact of 2018/19's Avonmouth pipeline project revenue allowance
clawback. Regulated controllable costs were GBP17 million lower,
driven by efficiency savings. Post-retirement costs were lower,
mainly related to the 2018/19 Guaranteed Minimum Pension (GMP)
ruling. Other costs were higher principally due to the
non-recurrence of provision releases in 2018/19.
The depreciation charge was lower than in 2018/19 as a result of
an additional charge in the prior period following a detailed
review of asset lives.
UK Gas Transmission
(GBP million) 2020 2019 % change
=============================== ===== ===== ==========
Revenue 927 896 3
Operating costs (580) (629) (8)
=============================== ==== ==== ======
Statutory operating profit 347 267 30
Exceptional items 1 36 (97)
=============================== ==== ==== ======
Adjusted operating profit 348 303 15
Timing 54 38 n/a
Underlying operating profit 402 341 18
=============================== ==== ==== ======
Net revenue (excl. timing) 739 707 5
Regulated controllable costs (127) (144) (12)
Post-retirement benefits (19) (27) (30)
Other operating costs (20) (14) 43
Depreciation and amortisation (171) (181) (6)
=============================== ==== ==== ======
Underlying operating profit 402 341 18
Timing (54) (38) n/a
Adjusted operating profit 348 303 15
=============================== ==== ==== ======
US REGULATED OPERATIONS
2019/20 Overview
National Grid's US Regulated business continued to make good
progress during 2019/20, achieving increased levels of investment
and delivering another new rate case agreement. We responded to an
increased number of storms across our service territories and
continued to focus on driving improved safety performance.
We achieved excellent network reliability of 99.994% across our
electric distribution business during the year, and 99.955% across
our electric transmission business.
Safety continues to be a critical pillar of our daily operations
and the Company is fully committed to the well-being and safety of
employees and customers alike. This year, a tragic event took the
life of one of our employees in a car accident and reminded us to
continue striving to improve our safety culture. As at 31 March
2020, our Lost Time Injury Frequency Rate was 0.16. In response, we
are reviewing safety controls across the business to ensure they
are current and appropriate, and to ensure they are reflected in
working methods and operating procedures.
During the year we exceeded our electric vehicle charging
station deployment goals in New York. We enabled more than 900
stations across more than 100 customer sites. We are currently in
the process of proposing a significantly larger program to New York
regulators to enable even more customers to convert to clean
vehicle options.
Increased minor storms
We have continued to maintain excellent reliability across our
networks this year, despite increased minor storms across our US
jurisdictions. The efforts that we have made over time to
significantly change and improve our speed of restoration means
that we are now able to reconnect the majority of our customers in
less than 24 hours.
Return on Equity
We achieved an RoE of 9.3% in our US business, representing 99%
of our average allowed returns. We achieved good performance in
most of our operating companies, primarily driven by higher net
revenues through new rates, lower controllable costs due to the
non-recurrence of last year's Rhode Island gas interruption, and
delivered efficiency savings of over $30 million in 2019/2020, in
line with the target we set in 2018.
Another year of significant capital investment
Our US Regulated business invested $4.2 billion in the year
resulting in rate base growth of 12.2%. This was partly driven by
increases in Massachusetts Gas capex compared to prior year, and
higher mandated and reliability capital investment in New York,
such as City-State Construction and Metropolitan Reliability
Infrastructure projects. Across all our jurisdictions, we have
continued to focus on modernising ageing networks and providing
better safety, reliability and resilience throughout the year.
Regulated Financial Position
Overall, the US rate base increased by $2.7 billion (12%) to
$25.6 billion ([8]) driven by increased capital expenditure
partially offset by depreciation and deferred tax movements.
US Regulated Assets
($ billion as at 31 March) 2020 2019(1) % change
================================================ ===== ======= ==========
Rate Base excl. working capital (w/c) 24.5 21.9 12
Working capital in Rate Base 1.1 1.0 10
================================================ ==== ====== ======
Total Rate Base 25.6 22.9 12
Reg. assets outside Rate Base excl. w/c 2.7 2.5 8
Working capital outside Rate Base (0.4) (0.1) 300
================================================ ==== ====== ======
Total regulated assets outside Rate Base 2.3 2.4 (4)
Total US Regulated Assets 27.9 25.3 10
================================================ ==== ====== ======
GBP billion as at 31 March 2020 2019 % change
================================================ ===== ======= ==========
Total US Regulated Assets at actual currency 22.4 19.5 15
Total US Regulated Assets at constant currency 22.4 20.4 10
================================================ ==== ====== ======
1. 2019 restated for movements between categories.
Financial performance
2019 at
US Regulated constant
(GBP million) 2020 2019 currency % change
=============================== ======= ======= ========= ==========
Revenue 9,205 9,846 9,988 (7)
Operating costs (8,325) (8,421) (8,542) (1)
=============================== ====== ====== ======== =======
Statutory operating profit 880 1,425 1,446 (38)
Exceptional items 392 351 356 12
Remeasurements 125 (52) (53) (340)
=============================== ====== ====== ======== =======
Adjusted operating profit 1,397 1,724 1,749 (19)
Timing 239 (223) (226) (207)
Major storm costs - 93 94 (100)
Underlying operating profit 1,636 1,594 1,617 3
=============================== ====== ====== ======== =======
Net revenue (excl. timing) 5,984 5,645 5,727 6
Regulated controllable costs (1,871) (1,895) (1,922) (1)
Post-retirement benefits (95) (94) (95) 1
Bad debt expense (231) (146) (148) 58
Other operating costs (1,296) (1,216) (1,235) 7
Depreciation and amortisation (855) (700) (710) 22
Underlying operating profit 1,636 1,594 1,617 3
Timing (239) 223 226 (207)
Major storm costs - (93) (94) (100)
Adjusted operating profit 1,397 1,724 1,749 (19)
=============================== ====== ====== ======== =======
US Regulated statutory operating profit fell partly as a result
of the GBP177 million year-on-year adverse swing in commodity
contract remeasurements. Exceptional charges also increased
reflecting GBP392 million environmental costs detailed above. In
2018/19, GBP283 million of exceptional costs were incurred for the
Massachusetts Gas labour dispute in addition to GBP68 million of
restructuring costs. Timing under-recoveries of GBP239 million in
2019/20 compared to timing over-recoveries of GBP223 million in
2018/19, driven by revenue decoupling, commodity recoveries and
lower net energy efficiency collections contributed to a reduction
in statutory and adjusted operating profit.
Adjusted operating profit decreased by GBP327 million (19%),
including GBP462 million year-on-year adverse timing
under-recoveries, partly offset by GBP93 million of deferrable
storm costs qualifying as major (in aggregate) in 2018/19.
Underlying operating profit increased by 3%. Net revenues
(excluding timing) increased by GBP257 million as the benefits of
rate case increments (including KEDNY, KEDLI and Niagara Mohawk)
and GBP82 million from foreign exchange movements. A stronger US
dollar increased underlying operating profit by GBP23 million in
the year. US Regulated controllable costs decreased as a result of
cost efficiencies (principally from benefit of restructurings and
contract management), partly offset by workload increases and
inflation. Bad debt related costs increased by GBP85 million,
driven by GBP117 million additional provision for receivables
related to the impact of COVID-19. Depreciation and amortisation
increased due to the growth in assets. Other costs were higher due
to increased property taxes and higher storm costs partly offset by
lower cost of removal. Deferrable storm costs were removed from
underlying results last year.
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.
We have continued to make good regulatory progress during the
year, with new rates agreed for Massachusetts Electric. The rate
case order, effective October 2019, is for 5 years and included an
allowed Return on Equity of 9.6%. It also included a new
Performance Based Rate Mechanism (PBRM) that funds both capital and
operational expenditure across the rate plan, ensuring inflation is
factored into the cost base. In April 2019, we filed for new rates
for KEDNY/KEDLI. We are resuming settlement negotiations in the
KEDNY/KEDLI rate cases in the interest of agreeing on a multi-year
rate plan that mitigates bill impacts for our customers while
allowing us to maintain safe and reliable service, advance our
clean energy goals, and earn a reasonable return. If we are unable
to reach a negotiated settlement, the rate cases will continue to a
litigated outcome at which time we would then plan to file a new
multi-year rate case proposal.
In downstate New York, we continue to work with all parties to
find solutions to the gas supply constraints faced by the region.
We took the difficult decision in May 2019 to stop processing
applications for new or expanded gas service in our service
territories. This followed further delays to permits for the
Williams' Northeast Supply Enhancement Project (otherwise known as
the NESE pipeline) which was the final piece of a series of
long-term gas supply projects. Following an order issued by the New
York Public Service Commission (PSC) requiring us to connect
approximately 1,100 customer accounts, we implemented a plan to
expand demand response and energy efficiency programmes, alongside
sourcing incremental compressed natural gas.
In November, we agreed to lift the moratorium on all new
connections until September 2021. Under the terms of the agreement,
we committed to offering $7 million in customer assistance to
address hardships arising from the moratorium; $8 million in demand
response and energy efficiency programs; and an additional $20
million investment in clean energy projects and clean tech business
investments. In addition, we committed to filing a report providing
a comprehensive analysis of the gas capacity constraints affecting
our downstate New York service territory, outlining all reasonably
available options for meeting long-term customer demand. This
report was filed and made available to the public on 24 February
and was followed by a series of public and virtual meetings in
March and April to solicit report feedback. The meetings were
constructive and attended by over 800 people with more than 7,000
comments filed with the PSC. In May, we filed a supplementary
report that focused on feedback from the meetings and two potential
solutions to long-term constraints. The proposed solutions were (a)
a portfolio including LNG vaporisation, gas compression
enhancements, combined with incremental energy efficiency and
demand response, or (b) the Williams' NESE pipeline. In mid-May,
certain permits were denied in New York and New Jersey for the
pipeline and therefore we are advancing the portfolio of solutions
that were identified in the supplementary report.
Rate Base ($m) as
Return on Equity at 31 March
Allowed
most recent
Regulated Entity FY20 FY19 FY18 (%) 2020 2019 % change
========================= ===== ==== ==== ============ ======= ======= ==========
KEDNY 7.7 6.2 9.0 9.0 4,555 3,711 23
KEDLI 9.7 9.9 10.1 9.0 2,932 2,630 11
NMPC Gas 8.7 9.8 7.9 9.0 1,328 1,266 5
NMPC Electric 8.9 9.4 8.8 9.0 5,881 5,358 10
Total New York 8.7 8.6 9.0 9.0 14,696 12,965 13
========================== ===== ==== ==== ============ ======= ======= ======
Massachusetts Gas 7.8 7.4 6.6 9.5 3,108 2,761 13
Massachusetts Electric 10.3 7.8 9.0 9.6 2,858 2,564 11
Total Massachusetts 9.0 7.6 7.8 9.5 5,966 5,325 12
========================== ===== ==== ==== ============ ======= ======= ======
Narragansett Gas 8.8 4.7 8.4 9.3 944 887 6
Narragansett Electric 11.9 10.7 5.6 9.3 895 779 15
Total Rhode Island 10.3 7.7 6.9 9.3 1,839 1,666 10
========================== ===== ==== ==== ============ ======= ======= ======
Long Island Generation 14.1 14.2 13.5 9.9 456 454 -
New England Power 11.0 11.0 11.0 10.6 1,844 1,630 13
Narragansett Electric
Transmission 11.1 11.3 11.5 10.6 788 744 6
Canadian Interconnector
& Other 13.0 13.0 13.0 13.0 52 79 (34)
Total FERC 11.4 11.5 11.5 10.6 3,140 2,907 8
========================== ===== ==== ==== ============ ======= ======= ======
Total US Regulated 9.3 8.8 8.9 9.4 25,641 22,863 12
========================== ===== ==== ==== ============ ======= ======= ======
Future activities and outlook
On rate filings and agreements, we will see the full benefit
from the new rate case agreed for Massachusetts Electric, we are
resuming settlement negotiations for KEDNY/KEDLI, and we plan to
file for new rates for Massachusetts Gas towards the end of this
calendar year. For our Niagara Mohawk (NIMO) business, we are
exploring options including an extension of the current rate plan
or a rate case filing later this summer.
Overall, we expect capital investment to be slightly lower in
2020/21 compared to 2019/20. This is on the back of implementing
new working practices following the impact of COVID-19.
NGV AND OTHER ACTIVITIES
Operating profit Capital investment(1)
2019 at change 2019 at change
constant % at constant constant % at constant
(GBP million) 2020 2019 currency currency 2020 2019 currency currency
=================== ==== ==== =========== ================ ====== ===== ========= ================
Metering 158 153 153 3 41 57 57 (28)
Interconnectors 61 64 64 (5) 498 252 252 98
Grain LNG 78 74 74 5 7 8 8 (13)
Geronimo (9) - - n/a 123 - - n/a
Other (19) (28) (28) (32) - 6 6 (100)
Total NGV 269 263 263 2 669 323 323 107
=================== === === ======= ============ ====== ===== ========= ============
Property 63 181 181 (65) 4 10 10 (60)
NG Partners (11) (8) (8) 38 50 52 53 (6)
Corporate and
other activities (79) (36) (35) 126 5 111 112 (96)
Total Other (27) 137 138 (120) 59 173 175 (66)
=================== === === ======= ============ ====== ===== ========= ============
Total NGV and
Other 242 400 401 (40) 728 496 498 46
=================== === === ======= ============ ====== ===== ========= ============
1. Excluding investment in joint ventures and associates.
Joint ventures and associates
Share of post-tax results Capital investment
2019 at change 2019 at change
constant % at constant constant % at constant
(GBP million) 2020 2019 currency currency 2020 2019 currency currency
================= ======= ========= ========= ============== ====== ==== ========= ===============
Interconnectors 29 29 29 - - 52 52 (100)
Millennium 22 18 18 22 - 52 53 (100)
Sunrun 13 8 8 63 - - - n/a
Emerald 1 - - n/a 127 - - n/a
Other 2 (2) (2) (200) 19 17 17 12
Total NGV 67 53 53 26 146 121 122 20
================= ======= ===== ======== ========== ====== ==== ========= ===========
NG Partners 3 4 4 (25) 11 6 6 83
Other (including
St William) 18 (17) (17) (206) - - - n/a
================= ======= ===== ======== ========== ====== ==== ========= ===============
Total Other 21 (13) (13) (262) 11 6 6 83
Joint Ventures
and Associates 88 40 40 120 157 127 128 23
================= ======= ===== ======== ========== ====== ==== ========= ===========
NATIONAL GRID VENTURES
National Grid Ventures' statutory operating profits were broadly
in line with 2018/19, with higher use of our LNG import terminal at
Grain and lower business development costs, offset by lower
revenues from our declining meter population and costs related to
the Geronimo business.
Metering profits broadly flat; cash flows remain strong
Metering profits were broadly flat in FY20 reflecting
non-recurrence of the smart meter impairment last year and a more
gradual decline than expected in our legacy meter population as the
mandated smart meter rollout continues. We now own 8.9 million gas
meters, down 1 million on the prior year.
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. During FY2020, Grain's utilisation reached 30%, and we
welcomed the 500th ship to the terminal in March.
BritNed, IFA and Nemo links in line with expectations
Nemo Link achieved over 96% availability in its first full year
of operation. Availability on IFA reached 91.4% for the year, and
98.6% on BritNed, both of which were above target for the year.
NEMO delivered its first year contribution to the Group, and our
share of BritNed profit after tax was broadly in line with prior
year.
Continued good progress on IFA2, NSL and Viking links
On IFA2, the AC connection from Daedalus to Chilling has been
completed and successfully tested, and the 25km French land cable
has also been constructed. Commissioning of IFA2 is on course for
the end of the calendar year, whilst progress on both the North Sea
Link (NSL) and Viking interconnectors remains on track. Both links
are due to commission in FY2022 and FY2024 respectively.
Geronimo
In July, we completed the acquisition of Geronimo, our first
meaningful step into US renewable generation, including a joint
venture with Washington State Investment Board (WSIB). In December,
we announced the start of commercial operations for the 200MW
Crocker Wind Farm in South Dakota, with 100% of generation
contracted under PPAs. This was followed in February by signing a
PPA agreement with Basin Electric Power Cooperative for the 128MW
Wild Springs Solar Project, also in South Dakota, which is expected
to commission in 2023.
Geronimo has been our first meaningful step into developing
renewable generation in the US, providing us with a potential
pipeline of over 6GW of solar and onshore wind projects at
different stages of development. The joint venture with WSIB gives
optionality and flexibility to hold projects jointly with WSIB, or,
if warranted, sell projects to third parties. This investment is
consistent with our long-term strategy of evolving the Group for
the future.
OTHER ACTIVITIES
In 'other' activities, we incurred net costs of GBP27 million,
compared to a net profit of GBP137 million in 2019/20. The
performance of the Property business was lower than prior year
reflecting the sale of the Fulham site to the St William joint
venture in 2018/19.
Corporate and other activities did not include last year's
benefit of GBP95 million of legal settlements to recover costs
associated with a US systems implementation. The National Grid
Partners operating loss of GBP11 million was GBP3 million higher
than in 2018/19.
National Grid Partners (NGP)
NGP had a strong second year of operation delivering value to
the Group. In 2019, we continued to make strategic investments in
our incubation and corporate venture capital portfolios.
As of 31 March 2020, our investment portfolio included direct
investments in 17 start-up companies and 4 venture funds, with a
fair value of GBP134 million. These investments provide valuable
insights, collaborations and deployment opportunities that
strengthen and future-proof our core business activities. For
example, we have deployed cyber detection and response solutions
from Dragos, asset management decision software from Copperleaf,
and demand response management services from Autogrid.
In April 2019, we created a central innovation team, targeting
disruptive innovations, and lean start-up methods to the
organisation. The team has explored innovation opportunities in
collaboration with our core businesses with several projects
progressing into prototype stages during 2020.
Future activities and outlook
Looking ahead, our interconnector investment will continue next
year as spend on NSL, IFA2 and Viking Link continues. Around a
further GBP1 billion will be invested through to 2023 when the
final interconnector project, Viking, will begin commissioning. As
these projects become operational their EBITDA contribution will
increase, with approximately GBP75 million in 2021/22 increasing to
approximately GBP250 million from 2024/25 onwards (including NEMO
link, which successfully commissioned in January 2019).
For Geronimo, the project pipeline remains strong. Following
peak investment in our Interconnector program, we will consider
increasing investment in Geronimo and delivering more capacity of
clean renewable energy.
During FY2020, we entered into a new joint venture agreement
with Places for People, one of the largest regeneration,
development and property management companies in the UK, and a
registered provider of affordable housing. As part of the venture,
we aim to build up to 500 new homes on the first three sites and
delivering 10 sites into the joint venture over the next three
years.
PROVISIONAL 2020/21 FINANCIAL TIMETABLE
Date Event
=============================== ===============================================
18 June 2020 2019/20 Preliminary Results
1 July 2020 ADRs go ex-dividend for 2019/20 final dividend
Ordinary shares go ex-dividend for 2019/20
2 July 2020 final dividend
3 July 2020 Record date for 2019/20 final dividend
9 July 2020 Scrip reference price announced
22 July 2020 (5pm London time) Scrip election date
27 July 2020 Annual General Meeting
2019/20 final dividend paid to qualifying
19 August 2020 shareholders
12 November 2020 2020/21 half year results
25 November 2020 ADRs go ex-dividend
26 November 2020 Ordinary shares go ex-dividend
27 November 2020 Record date for 2020/21 interim dividend
3 December 2020 Scrip reference price announced
14 December 2020 (5pm London Scrip election date for 2020/21 interim
time) dividend
=============================== ===============================================
2020/21 interim dividend paid to qualifying
13 January 2021 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 2019/20 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 (the
Company) 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, predict or estimate precisely, such as the
impact of COVID-19 on our operations, our employees, our
counterparties, our funding and our regulatory and legal
obligations, but also, more widely, 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 proposals relating to
the RIIO-2 price controls as well as increased economic uncertainty
resulting from COVID-19; 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; failure to
adequately forecast and respond to disruptions in energy supply;
performance against regulatory targets and standards and against
National Grid's peers with the aim of delivering stakeholder
expectations regarding costs and efficiency savings; 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; 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, develop
and retain employees with the necessary competencies, including
leadership skills, and any significant disputes arising with
National Grid's employees or the breach of laws or regulations by
its employees; the failure to respond to market developments,
including competition for onshore transmission; the threats and
opportunities presented by emerging technology; the failure by the
Company to respond to, or meet its own commitments as a leader in
relation to, climate change development activities relating to
energy transition, including 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. 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 212 to 215 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 2019 published on 14 November 2019. 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 items and
exceptional remeasurements
items and (see note
remeasurements 4) Total
2020 Notes GBPm GBPm GBPm
=========================================== ====== =============== ================= ========
Continuing operations
Revenue 2(a),3 14,540 - 14,540
Provision for bad and doubtful
debts (234) - (234)
Other operating costs 4 (10,999) (527) (11,526)
=========================================== ====== ============== ============ =======
Operating profit/(loss) 2(b) 3,307 (527) 2,780
Finance income 4,5 70 (16) 54
Finance costs 4,5 (1,119) (48) (1,167)
Share of post-tax results of joint
ventures and associates 88 (1) 87
=========================================== ====== ============== ============ =======
Profit/(loss) before tax 2(b) 2,346 (592) 1,754
Tax 4,6 (433) (47) (480)
=========================================== ====== ============== ============ =======
Profit/(loss) after tax from continuing
operations 1,913 (639) 1,274
Profit/(loss) after tax from discontinued
operations 9 5 (14) (9)
Total profit/(loss) for the year
(continuing and discontinued) 1,918 (653) 1,265
=========================================== ====== ============== ============ =======
Attributable to:
Equity shareholders of the parent 1,917 (653) 1,264
Non-controlling interests from
continuing operations 1 - 1
Earnings per share (pence)
Basic earnings per share (continuing) 7 36.8
Diluted earnings per share (continuing) 7 36.6
Basic earnings per share (continuing
and discontinued) 7 36.5
Diluted earnings per share (continuing
and discontinued) 7 36.3
=========================================== ====== =============== ================= =======
Exceptional
Before items and
exceptional remeasurements
items and (see note
remeasurements 4) Total
2019 Notes GBPm GBPm GBPm
=========================================== ====== =============== ================= ========
Continuing operations
Revenue 2(a),3 14,933 - 14,933
Provision for bad and doubtful
debts (181) - (181)
Other operating costs 4 (11,310) (572) (11,882)
=========================================== ====== ============== ============ =======
Operating profit/(loss) 2(b) 3,442 (572) 2,870
Finance income 4,5 73 15 88
Finance costs 4,5 (1,066) (91) (1,157)
Share of post-tax results of joint
ventures and associates 40 - 40
=========================================== ====== ============== ============ === =======
Profit/(loss) before tax 2(b) 2,489 (648) 1,841
Tax 4,6 (488) 149 (339)
=========================================== ====== ============== ============ === =======
Profit/(loss) after tax from continuing
operations 2,001 (499) 1,502
Profit/(loss) after tax from discontinued
operations 9 57 (45) 12
=========================================== ====== ============== ============ =======
Total profit/(loss) for the year
(continuing and discontinued) 2,058 (544) 1,514
=========================================== ====== ============== ============ =======
Attributable to:
Equity shareholders of the parent 2,055 (544) 1,511
Non-controlling interests from
continuing operations 3 - 3
=========================================== ====== ============== ============ === =======
Earnings per share (pence)
Basic earnings per share (continuing) 7 44.3
Diluted earnings per share (continuing) 7 44.1
Basic earnings per share (continuing
and discontinued) 7 44.6
Diluted earnings per share (continuing
and discontinued) 7 44.4
=========================================== ====== =============== ================= =======
Consolidated statement of comprehensive income
for the years ended 31 March
2020 2019
Notes GBPm GBPm
============================================================== ===== ====== ========
Profit after tax from continuing operations 1,274 1,502
Other comprehensive income from continuing operations
Items from continuing operations that will never
be reclassified to profit or loss:
Remeasurement (losses)/gains on pension assets and
post-retirement benefit obligations (724) 68
Net losses on equity instruments designated at fair
value through other comprehensive income (9) -
Net (losses)/gains on financial liability designated
at fair value through profit and loss attributable
to changes in own credit risk (3) 7
Net losses in respect of cash flow hedging of capital
expenditure (17) (13)
Tax on items that will never be reclassified to profit
or loss 212 (15)
============================================================== ===== ===== =====
Total items from continuing operations that will
never be reclassified to profit or loss (541) 47
============================================================== ===== ===== =====
Items from continuing operations that may be reclassified
subsequently to profit or loss:
Exchange adjustments 551 347
Net losses in respect of cash flow hedges (128) (40)
Net losses in respect of cost of hedging (78) (66)
Net (losses)/gains on investment in debt instruments
measured at fair value
through other comprehensive income (15) 2
Share of other comprehensive (losses)/income of associates,
net of tax (5) 1
Tax on items that may be reclassified subsequently
to profit or loss 35 12
Total items from continuing operations that may be
reclassified subsequently to profit or loss 360 256
============================================================== ===== ===== =====
Other comprehensive (loss)/income for the year, net
of tax from continuing operations (181) 303
Other comprehensive income for the year, net of tax
from discontinued operations(1) 9 6 36
Other comprehensive (loss)/income for the year, net
of tax (175) 339
============================================================== ===== ===== =====
Total comprehensive income for the year from continuing
operations 1,093 1,805
Total comprehensive (loss)/income for the year from
discontinued operations 9 (3) 48
Total comprehensive income for the year 1,090 1,853
============================================================== ===== ===== =====
Attributable to:
Equity shareholders of the parent
From continuing operations 1,091 1,801
From discontinued operations (3) 48
1,088 1,849
============================================================== ===== ===== =====
Non-controlling interests
From continuing operations 2 4
============================================================== ===== ===== =====
1. The other comprehensive income from discontinued operations
relates to the items of other comprehensive income of Cadent
(investment through Quadgas HoldCo Limited). Refer to note 9 for
further details.
Consolidated statement of changes in equity
for the years ended 31 March
Share Other Total Non-
Share premium Retained equity share-holders' controlling Total
capital account earnings reserves equity interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================== ======== ======== ========= ========= ================= ============ =========
At 31 March 2018
(as
previously
reported) 452 1,321 21,599 (4,540) 18,832 16 18,848
Impact of
transition
to IFRS 9 and
IFRS 15 - - (268) 72 (196) - (196)
================== ======== ======= ======== ======== ============= ============ ======
At 1 April 2018
(as restated) 452 1,321 21,331 (4,468) 18,636 16 18,652
Profit for the
year - - 1,511 - 1,511 3 1,514
Other
comprehensive
income
for the year - - 89 249 338 1 339
================== ======== ======= ======== ======== ============= ============ ======
Total
comprehensive
income
for the year - - 1,600 249 1,849 4 1,853
Equity dividends - - (1,160) - (1,160) - (1,160)
Scrip
dividend-related
share issue(1) 6 (7) - - (1) - (1)
Issue of treasury
shares - - 18 - 18 - 18
Purchase of own
shares - - (2) - (2) - (2)
Share-based
payments - - 27 - 27 - 27
Cash flow hedges
transferred
to the statement
of financial
position, net of
tax - - - (18) (18) - (18)
================== ======== ======= ======== ======== ============= ============ ======
At 1 April 2019 458 1,314 21,814 (4,237) 19,349 20 19,369
Profit for the
year - - 1,264 - 1,264 1 1,265
Other
comprehensive
(loss)/income
for the year - - (509) 333 (176) 1 (175)
================== ======== ======= ======== ======== ============= ============ ======
Total
comprehensive
income
for the year - - 755 333 1,088 2 1,090
Equity dividends - - (892) - (892) - (892)
Scrip
dividend-related
share issue(1) 12 (13) - - (1) - (1)
Issue of treasury
shares - - 17 - 17 - 17
Purchase of own
shares - - (6) - (6) - (6)
Share-based
payments - - 19 - 19 - 19
Tax on
share-based
payments - - 3 - 3 - 3
Cash flow hedges
transferred
to the statement
of financial
position, net of
tax - - - (15) (15) - (15)
================== ======== ======= ======== ======== ============= ============ ======
At 31 March 2020 470 1,301 21,710 (3,919) 19,562 22 19,584
================== ======== ======= ======== ======== ============= ============ ======
1. Included within the share premium account are costs
associated with scrip dividends.
Consolidated statement of financial position
as at 31 March
2020 2019
Notes GBPm GBPm
======================================================== ===== ======== ==========
Non-current assets
Goodwill 6,233 5,869
Other intangible assets 1,295 1,084
Property, plant and equipment 10 48,770 43,913
Other non-current assets 354 264
Pension assets 11 1,849 1,567
Financial and other investments 543 667
Investments in joint ventures and associates 995 608
Derivative financial assets 1,249 1,045
Total non-current assets 61,288 55,017
======================================================== ===== ======= =======
Current assets
Inventories and current intangible assets 549 370
Trade and other receivables 2,986 3,153
Current tax assets 102 126
Financial and other investments 1,998 1,981
Derivative financial assets 93 108
Cash and cash equivalents 73 252
Assets held for sale 9 - 1,956
========================================================
Total current assets 5,801 7,946
Total assets 67,089 62,963
======================================================== ===== ======= =======
Current liabilities
Borrowings (4,072) (4,472)
Derivative financial liabilities (380) (350)
Trade and other payables (3,602) (3,769)
Contract liabilities (76) (61)
Current tax liabilities (86) (161)
Provisions (348) (316)
Total current liabilities (8,564) (9,129)
======================================================== ===== ======= =======
Non-current liabilities
Borrowings (26,722) (24,258)
Derivative financial liabilities (954) (833)
Other non-current liabilities (891) (808)
Contract liabilities (1,082) (933)
Deferred tax liabilities (4,184) (3,965)
Pensions and other post-retirement benefit obligations 11 (2,802) (1,785)
Provisions (2,306) (1,883)
Total non-current liabilities (38,941) (34,465)
Total liabilities (47,505) (43,594)
======================================================== ===== ======= =======
Net assets 19,584 19,369
======================================================== ===== ======= =======
Equity
Share capital 470 458
Share premium account 1,301 1,314
Retained earnings 21,710 21,814
Other equity reserves (3,919) (4,237)
======================================================== ===== ======= =======
Total shareholders' equity 19,562 19,349
Non-controlling interests 22 20
Total equity 19,584 19,369
======================================================== ===== ======= =======
Consolidated cash flow statement
for the years ended 31 March
2020 2019
Notes GBPm GBPm
=========================================================== ===== ======= =========
Cash flows from operating activities
Total operating profit from continuing operations 2(b) 2,780 2,870
Adjustments for:
Exceptional items and remeasurements 4 527 572
Depreciation, amortisation and impairment 1,640 1,588
Share-based payments 19 27
Changes in working capital 269 40
Changes in provisions (169) (110)
Changes in pensions and other post-retirement benefit
obligations (92) (123)
Cash flows relating to exceptional items (60) (400)
=========================================================== ===== ====== ======
Cash generated from operations - continuing operations 4,914 4,464
Tax paid (199) (75)
Net cash inflow from operating activities - continuing
operations 4,715 4,389
Net cash used in operating activities - discontinued
operations 9 (97) (71)
=========================================================== ===== ====== ======
Cash flows from investing activities
Acquisition of financial investments (108) (89)
Acquisition of Geronimo and Emerald 15 (139) -
Investments in joint ventures and associates (82) (143)
Loans to joint ventures and associates - (31)
Disposal of financial investments 63 18
Disposal of interests in Quadgas HoldCo Limited 9 1,965 -
Purchases of intangible assets (317) (306)
Purchases of property, plant and equipment (4,583) (3,635)
Disposals of property, plant and equipment 68 38
Dividends received from joint ventures and associates 75 68
Interest received 73 68
Net movements in short-term financial investments 7 822
Net movements in derivatives(1) (223) (412)
===========================================================
Net cash flow used in investing activities - continuing
operations (3,201) (3,602)
Net cash flow used in investing activities - discontinued
operations 9 6 156
=========================================================== ===== ====== ======
Cash flows from financing activities
Proceeds from issue of treasury shares 16 17
Purchase of own shares (6) (2)
Proceeds received from loans 4,218 2,932
Repayment of loans (3,253) (1,969)
Payments of lease liabilities (121) (70)
Net movements in short-term borrowings (424) 179
Net movements in derivatives(1) (187) 35
Interest paid (957) (914)
Dividends paid to shareholders (892) (1,160)
Net cash flow used in financing activities - continuing
operations (1,606) (952)
Net cash flow (used in)/from financing activities
- discontinued operations 9 - -
=========================================================== ===== ====== ======
Net decrease in cash and cash equivalents (183) (80)
Exchange movements 4 3
Cash and cash equivalents at start of year 252 329
Cash and cash equivalents at end of year 73 252
=========================================================== ===== ====== ======
1. Certain derivative balances have been represented for all
periods presented to reflect a reclassification from financing
activities to investing activities to reflect a change in
accounting policy.
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 2020, which
will be filed with the Registrar of Companies in due course.
Statutory accounts for the year ended 31 March 2019 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 2020 which are consistent with those applied in the
preparation of our accounts for the year ended 31 March 2019, with
the exception of the new standards adopted during the year.
Our income statement and segmental analysis separately identify
financial results before and after exceptional items and
remeasurements. We continue to use a columnar presentation as we
consider it improves the clarity of the presentation, and assists
users of the financial statements to understand the results. The
Directors believe that presentation of the results in this way is
relevant to an understanding of the Group's financial performance.
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 period on period.
Areas of judgement and key sources of estimation uncertainty
Areas of judgement that have the most significant effect on the
amounts recognised in the financial statements are as follows:
-- categorisation of certain items as exceptional items or
remeasurements and the definition of adjusted earnings (see notes 4
and 7). In applying the Group's exceptional items framework, we
have considered a number of key matters, as detailed in note 4;
-- the judgement that notwithstanding legislation enacted and
targets established during the year ended 31 March 2020 committing
the UK, New York State and Massachusetts to achieving net zero
greenhouse gas emissions by 2050, these do not trigger a
reassessment of the remaining useful economic lives of our gas
network assets (see estimate below); and
-- following the legal separation of the Electricity System
Operator on 1 April 2019, we concluded that the Electricity System
Operator acts as an agent in respect of certain Transmission
Network Use of Service revenues, principally those collected on
behalf of the Scottish and Offshore transmission operators.
Key sources of estimation uncertainty that have a significant
risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year are as
follows:
-- the valuation of liabilities for pensions and other
post-retirement benefits (see note 11); and
-- the cash flows applied in determining the environmental
provisions, in particular relating to three US Superfund sites (see
note 4).
In light of the current ongoing impact of the COVID-19 pandemic,
valuations of certain assets and liabilities are necessarily more
subjective. In particular, two further areas of estimation
uncertainty impacting the Group's position as at 31 March 2020 have
been identified:
-- the valuation of certain pension assets, in particular
unquoted equities, properties and diversified alternatives, in
light of the volatile economic markets (see note 11); and
-- the recoverability of customer receivables, particularly in
relation to US retail customers, in light of the suspension of debt
collection activities and customer termination activities.
In addition, we also highlight the estimates made regarding the
useful economic lives of our gas network assets due to the length
over which they are being depreciated, the potential for new and
evolving technologies over that period, and the range of potential
pathways for meeting net zero targets (see note 10 for details and
sensitivity analysis).
1. Basis of preparation and new accounting standards, interpretations and amendments continued
Treatment of interests in Quadgas HoldCo Limited (Quadgas) -
Discontinued operations
We completed the disposal of our retained 39% interest in the UK
Gas Distribution business (held through Quadgas) at the end of June
2019. We have treated the results of Quadgas as a discontinued
operation in the consolidated income statement. Refer to note 9 for
further details.
New accounting standards adopted in the year
The Group adopted IFRS 16 'Leases' with effect from 1 April
2019. We have applied the modified retrospective approach permitted
in the Standards whereby prior year comparatives have not been
restated on adoption. Instead, the cumulative transition
adjustments are reflected through reserves. Refer to note 14 for
full details of the impact and transition adjustments arising on
adoption.
The UK's Financial Conduct Authority announced that LIBOR will
cease to exist by the end of 2021, and will be replaced by
alternative reference rates. In September 2019, the IASB amended
IFRS 9 and IFRS 7 by issuing Interest Rate Benchmark Reform, which
provides exceptions to specific hedge accounting requirements to
ensure that hedging relationships are not considered to be modified
as a result of the change in the reference rate. The amendments
were endorsed in January 2020 for adoption in the EU. The Group
early-adopted these changes to IFRS 9 and IFRS 7 with effect from 1
April 2019. There were no transition adjustments on adoption.
The Group has also adopted the following amendments to
standards, which have had no material impact on the Group's results
or financial statement disclosure:
-- IFRIC 23 'Uncertainty over Income Tax Treatments';
-- Amendments to IAS 28 'Investments in Associates - Long-term
Interests in Associates and Joint Ventures';
-- Annual Improvements to IFRS Standards 2015-2017 Cycle;
and
-- Amendments to IAS 19 'Employee Benefits'.
New accounting standards not yet adopted
The following new accounting standards and amendments to
existing standards have been issued but are not yet effective or
have not yet been endorsed by the EU:
-- IFRS 17 'Insurance Contracts';
-- Amendments to IFRS 3 'Business Combinations';
-- Amendments to the References to the Conceptual Framework;
-- Amendments to IAS 1 and IAS 8: Definition of material;
and
-- Amendments to IAS 1 'Presentation of Financial
Statements'.
Effective dates remain subject to the EU endorsement
process.
The Group is currently assessing the impact of the above
standards, but they are not expected to have a material impact. The
Group has not adopted any other standard, amendment or
interpretation that has been issued but is not yet effective.
Date of approval
This announcement was approved by the Board of Directors on 17
June 2020.
2. Segmental analysis
Revenue and the results of the business are analysed by
operating segment, based on the information the Board of Directors
uses internally for the purposes of evaluating the performance of
each operating segment and determining resource allocation between
them. The Board is National Grid's chief operating decision maker
(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 4). 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 these
financial statements.
The results of our three principal businesses are reported to
the Board of Directors and are treated as reportable operating
segments. All other operating segments are reported to the Board of
Directors on an aggregated basis. The following table describes the
main activities for each reportable operating segment:
UK Electricity The high-voltage electricity transmission networks in England
Transmission and Wales and Great Britain system operator.
UK Gas Transmission The high-pressure gas transmission networks in Great Britain
and system operator in Great Britain.
==================== ==============================================================
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.
==================== ==============================================================
The UK Electricity Transmission segment also includes the
independent Electricity System Operator (ESO). Although there is a
separate governance structure (including a separate Executive
Committee), the Board receives financial information on an
aggregated UK Electricity Transmission basis, which includes the
results of the ESO, and accordingly the ESO is included within the
reportable segment.
National Grid Ventures (NGV) is our only other operating
segment. It does not currently meet the thresholds set out in IFRS
8 to be identified as a separate reportable segment and therefore
its results are not required to be separately presented. Instead,
NGV's results are reported alongside the results of all other
operating businesses on an aggregated basis as "NGV and Other",
with certain additional disclosure included in footnotes. NGV
represents our key strategic growth area outside our regulated core
business in competitive markets across the US and the UK. The
business comprises all commercial operations in metering, LNG at
the Isle of Grain in the UK, electricity interconnectors and our
new investments in Geronimo Energy LLC (Geronimo) and Emerald
Energy Venture LLC (Emerald). Geronimo is a developer of wind and
solar generation based in Minneapolis in the US. The acquisition is
National Grid's first ownership stake in wind generation and an
expansion of our activities in solar generation.
Other activities that do not form part of any of the segments in
the above table or NGV primarily relate to our UK property business
together with insurance and corporate activities in the UK and US
and the Group's investments in technology and innovation companies
through National Grid Partners.
The segmental information is presented in relation to continuing
operations only and therefore does not include the profits and
losses relating to our interest in Quadgas for any period presented
(see note 9).
2. Segmental analysis continued
(a) Revenue
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. Refer to note 3 for further details.
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. There are no material sales between the UK
and US geographical areas.
2020 2019
Sales Sales Sales Sales
Total between to third Total between to third
sales segments parties sales segments parties
GBPm GBPm GBPm GBPm GBPm GBPm
Operating segments -
continuing operations:
UK Electricity Transmission 3,702 (8) 3,694 3,351 (20) 3,331
UK Gas Transmission 927 (16) 911 896 (12) 884
US Regulated 9,205 - 9,205 9,846 - 9,846
NGV and Other(1) 736 (6) 730 876 (4) 872
Total revenue from continuing
operations 14,570 (30) 14,540 14,969 (36) 14,933
================================= ====== ======= ========= ====== ======= =========
Split by geographical
areas - continuing operations:
UK 5,282 5,045
US 9,258 9,888
14,540 14,933
================================= ====== =========== ========= ====== =========== =========
1. Included within NGV and Other is GBP608 million (2019: GBP597
million) of revenue relating to NGV.
(b) Operating profit
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 4.
Before exceptional After exceptional
items and remeasurements items and remeasurements
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
============================================= ============= ============= ============= ===============
Operating segments - continuing operations:
UK Electricity Transmission 1,320 1,015 1,316 778
UK Gas Transmission 348 303 347 267
US Regulated 1,397 1,724 880 1,425
NGV and Other(1,2) 242 400 237 400
Total operating profit from continuing
operations 3,307 3,442 2,780 2,870
============================================= ============= ============= ============= =============
Split by geographical area - continuing
operations:
UK 1,925 1,695 1,915 1,422
US 1,382 1,747 865 1,448
3,307 3,442 2,780 2,870
============================================= ============= ============= ============= =============
1. Included within NGV and Other is GBP269 million (2019: GBP263
million) of operating profit before exceptional items and
remeasurements and GBP268 million of operating profit after
exceptional items and remeasurements (2019: GBP263 million),
relating to NGV.
2. In 2019, NGV and Other included gains of GBP95 million in
relation to cash received in respect of two legal settlements.
2. Segmental analysis continued
Below we reconcile total operating profit from continuing
operations to profit before tax from continuing operations. Total
operating exceptional items and remeasurements of GBP527 million
charge (2019: GBP572 million charge) are detailed in note 4. This
is comprised of a GBP4 million charge (2019: GBP237 million charge)
attributable to UK Electricity Transmission; GBP1 million charge
(2019: GBP36 million charge) to UK Gas Transmission; GBP517 million
charge (2019: GBP299 million charge) to US Regulated; and GBP5
million charge (2019: GBPnil) to NGV and Other.
Before exceptional After exceptional
items and remeasurements items and remeasurements
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
============================================== ================ ============ ================ ==============
Reconciliation to profit before tax:
Operating profit from continuing operations 3,307 3,442 2,780 2,870
Finance income 70 73 54 88
Finance costs (1,119) (1,066) (1,167) (1,157)
Share of post-tax results of joint
ventures and associates 88 40 87 40
Profit before tax from continuing operations 2,346 2,489 1,754 1,841
============================================== ============ =========== ============ ===========
(c) Capital expenditure
Capital expenditure represents additions to property, plant and
equipment and non-current intangibles but excludes additional
investments in and loans to joint ventures and associates. In 2020,
we transferred certain software assets and properties which are
held outside the US rate base and operate for the benefit of our US
Regulated businesses, that were previously included within the NGV
and Other segment, to the US Regulated segment. See footnote 2.
Net book value
of property,
plant and equipment Depreciation,
and other intangible amortisation
assets Capital expenditure and impairment
2020 2019 2020 2019 2020 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Operating segments:
UK Electricity Transmission 13,788 13,288 1,043 925 (469) (628)
UK Gas Transmission 4,513 4,412 249 308 (171) (181)
US Regulated(2) 29,623 24,542 3,228 2,650 (855) (700)
NGV and Other(1,2) 2,141 2,755 559 438 (145) (226)
Total from continuing
operations 50,065 44,997 5,079 4,321 (1,640) (1,735)
================================ =========== =========== ========== ========== ======= ======
Split by geographical
area - continuing operations:
UK 20,427 19,343 1,847 1,584 (784) (931)
US 29,638 25,654 3,232 2,737 (856) (804)
50,065 44,997 5,079 4,321 (1,640) (1,735)
================================ =========== =========== ========== ========== ======= ======
Asset type:
Property, plant and
equipment 48,770 43,913 4,727 4,015 (1,464) (1,560)
Non-current intangible
assets 1,295 1,084 352 306 (176) (175)
Total from continuing
operations 50,065 44,997 5,079 4,321 (1,640) (1,735)
================================ =========== =========== ========== ========== ======= ======
1. Included within NGV and Other are assets with a net book
value of GBP2,080 million (2019: GBP1,635 million), capital
expenditure of GBP550 million (2019: GBP317 million) and
depreciation, amortisation and impairment of GBP124 million (2019:
GBP114 million) relating to NGV.
2. In 2020, US Regulated includes certain software assets and
properties in the US which are outside the US rate base and operate
for the benefit of our US regulated businesses. These assets were
included within NGV and Other in 2019. In 2019, the assets had a
net book value of GBP1,062 million), capital expenditure of GBP87
million and depreciation, amortisation and impairment of GBP102
million.
Total non-current assets other than financial instruments and
pension assets located in the UK and US were GBP31,780 million and
GBP25,867 million respectively as at 31 March 2020 (31 March 2019:
UK GBP30,072 million, US GBP21,787 million).
3. Revenue
Revenue arises in the course of ordinary activities and
principally comprises:
-- transmission services;
-- distribution services; and
-- generation services.
Transmission services, distribution services and certain other
services (excluding rental income but including metering) fall
within the scope of IFRS 15 'Revenue from Contracts with
Customers', whereas generation services (which solely relate to the
contract with the Long Island Power Authority (LIPA) in the US) are
accounted for under the leasing standard as rental income, also
presented within revenue. Revenue is measured based on the
consideration specified in a contract with a customer and excludes
amounts collected on behalf of third parties and value added tax.
The Group recognises revenue when it transfers control over a
product or service to a customer.
The following is a description of principal activities, by
reportable segment, from which the Group generates its revenue. For
more detailed information about our segments, see note 2.
(a) UK Electricity Transmission
The UK Electricity Transmission segment principally generates
revenue by providing electricity transmission services (both as
transmission owner in England and Wales and system operator in
Great Britain). Our business operates as a monopoly regulated by
Ofgem, which has established price control mechanisms that set the
amount of annual allowed returns our business can earn (along with
the Scottish and Offshore transmission operators amongst others).
The IFRS revenues we record are principally a function of volumes
and price. Price is determined prior to our financial year-end with
reference to the regulated allowed returns and estimated annual
volumes. Where revenue received or receivable exceeds the maximum
amount permitted by regulatory agreement, adjustments will be made
to future prices to reflect this over-recovery. No liability is
recognised, as such an adjustment to future prices 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 allowed revenue as
stipulated by regulatory agreements.
The System Operator also collects revenues on behalf of
transmission operators, principally NGET and the Scottish and
Offshore transmission operators, from users who connect to or use
the transmission system. However, these amounts are paid to the
transmission operators before the System Operator has collected
payment from the users (electricity suppliers) and therefore the
System Operator does hold some exposure to credit losses with
electricity suppliers. The System Operator must set the charges
paid by electricity suppliers by reference to the price control
mechanism described above. That mechanism does not grant the System
Operator with discretion to deviate from that mechanism. The
transmission operators own and maintain the electricity network and
receive direct feedback from electricity suppliers on the quality
of the network they provide. There is a judgement about whether the
System Operator acts as a principal or agent in respect of the
transmission network revenues collected on behalf of the Scottish
and Offshore transmission operators (as set out in note 1). We have
concluded that it acts as an agent in respect of these transmission
revenues and therefore records the attributable revenue net of
operating costs.
The transmission of high-voltage electricity encompasses the
following principal services:
-- the supply of high-voltage electricity (including both
transmission and system operator charges); and
-- construction work (principally for connections).
For the supply of high-voltage electricity, revenue is
recognised based on capacity and volumes. Our performance
obligation is satisfied over time as our customers make use of our
network. We bill monthly in arrears and our payment terms are up to
60 days.
For construction work relating to connections, customers can
either pay over the useful life of the connection or upfront.
Revenue is recognised over time, as we provide access to our
network, and where the customer pays upfront, revenues are deferred
and released over the life of the connection.
3. Revenue (continued)
For other construction where there is no consideration for any
future services, for example diversions (being the re-routing of
network assets at our customers' request), revenues are recognised
as the construction work is completed.
The System Operator earns revenue for balancing supply and
demand of electricity on the transmission system, where it acts as
principal. Revenue is recognised as the service is provided.
(b) UK Gas Transmission
The UK Gas Transmission segment of the Group principally
generates revenue by providing gas transmission services to our
customers (both as transmission owner and as system operator) in
Great Britain. Similar to our UK Electricity Transmission business,
our business operates as a monopoly regulated by Ofgem. The price
control mechanism in place that determines our annual allowances is
also similar, as is the way in which revenue is recorded.
The transmission of gas encompasses the following principal
services:
-- the supply of high-pressure gas (including both transmission
and system operator charges); and
-- construction work (principally for connections).
For the supply of high-pressure gas, revenue is recognised based
on capacity and volumes. Our performance obligation is satisfied
over time as our customers make use of our network, and we bill
monthly in arrears with payment terms of up to 45 days.
For construction work relating to connections, customers pay for
the connection upfront. Revenue is recognised over time, as we
provide access to our network. Where revenues are received upfront,
they are deferred and released over the life of the connection.
For other construction where there is no consideration for any
future services (such as diversions), revenues are recognised when
the construction work is completed.
(c) US Regulated
The US Regulated segment of the Group principally generates
revenue by providing gas and electricity distribution services in
New York and New England, high voltage electricity transmission
services in New York and New England, and electricity generation in
New York.
Distribution services
Provision of gas and electricity distribution services in New
York and New England. This comprises the following principal
services:
-- Gas and electricity distribution: revenue is recognised based
on usage by customers (over time) and billed monthly. Payment terms
are 30 days; and
-- Connections: revenue is recognised over time, as we provide
access to our network. Where payments are made upfront, they are
deferred over the life of the asset.
Transmission services
Provision of electricity transmission services to customers and
operation of electricity transmission facilities. Our principal
services are:
-- Electricity transmission: revenue is recognised based on
usage by customers (over time) and billed monthly. Payment terms
are 30 days; and
-- Connections: revenue is recognised over time, as we provide
access to our network. Where payments are made upfront, they are
deferred over the life of the asset.
Electricity generation
Provision of energy services and supply capacity to produce
energy for the use of customers of the Long Island Power Authority
(LIPA) through a power supply agreement. This falls within the
scope of the leasing standard, where we act as lessor with rental
income being recorded as other income, which forms part of total
revenue.
3. Revenue (continued)
(d) NGV and Other
NGV and Other includes electricity interconnectors, LNG at the
Isle of Grain, Geronimo, metering, sales from our UK property
business, rental income and insurance.
The Group recognises revenue from transmission services through
interconnectors and LNG at the Isle of Grain by means of customers'
use of capacity and volumes. Revenue is recognised over time and is
billed monthly. Payment terms are up to 30 days.
Other revenue in the scope of IFRS 15 principally includes
revenues from our UK metering business and sales of renewables
projects from Geronimo to Emerald (see note 15). Revenue is
recognised as it is earned. In the case of the UK metering
business, revenue is billed monthly and payment terms are up to 30
days.
Other revenue, recognised in accordance with standards other
than IFRS 15, includes property sales by our UK commercial property
business (including sales to our St William joint venture) and
rental income. Property sales are recorded at a point in time (when
the sale is legally completed) and rental income is recorded over
time.
(e) Disaggregation of revenue
In the following tables, revenue is disaggregated by primary
geographical market and major service lines. The table reconciles
disaggregated revenue with the Group's reportable segments (see
note 2).
UK Electricity UK Gas NGV and
Revenue for the year ended Transmission Transmission US Regulated Other Total
31 March 2020 GBPm GBPm GBPm GBPm GBPm
=============================== ============== ============= ============ ======= ========
Revenue under IFRS 15
Transmission 1,992 649 425 309 3,375
Distribution - - 8,319 - 8,319
System Operator 1,610 214 - - 1,824
Other 69 15 12 296 392
Total IFRS 15 revenue 3,671 878 8,756 605 13,910
=============================== ============== ============= ============ ======= ======
Other revenue
Generation - - 369 - 369
Other 23 33 80 125 261
Total other revenue 23 33 449 125 630
=============================== ============== ============= ============ ======= ======
Total revenue from continuing
operations 3,694 911 9,205 730 14,540
=============================== ============== ============= ============ ======= ======
UK Electricity UK Gas NGV and
Geographical split for the Transmission Transmission US Regulated Other Total
year ended 31 March 2020 GBPm GBPm GBPm GBPm GBPm
=============================== ============== ============= ============ ======= ========
Revenue under IFRS 15
UK 3,671 878 - 567 5,116
US - - 8,756 38 8,794
Total IFRS 15 revenue 3,671 878 8,756 605 13,910
=============================== ============== ============= ============ ======= ======
Other revenue
UK 23 33 - 110 166
US - - 449 15 464
Total other revenue 23 33 449 125 630
=============================== ============== ============= ============ ======= ======
Total revenue from continuing
operations 3,694 911 9,205 730 14,540
=============================== ============== ============= ============ ======= ======
3. Revenue (continued)
UK Electricity UK Gas NGV and
Revenue for the year ended Transmission Transmission US Regulated Other Total
31 March 2019 GBPm GBPm GBPm GBPm GBPm
=============================== ============== ============= ============ ======= ========
Revenue under IFRS 15
Transmission 1,909 661 370 313 3,253
Distribution - - 8,941 - 8,941
System Operator 1,416 172 - - 1,588
Other - - - 284 284
Total IFRS 15 revenue 3,325 833 9,311 597 14,066
=============================== ============== ============= ============ ======= ======
Other revenue
Generation - - 367 - 367
Other 6 51 168 275 500
Total other revenue 6 51 535 275 867
=============================== ============== ============= ============ ======= ======
Total revenue from continuing
operations 3,331 884 9,846 872 14,933
=============================== ============== ============= ============ ======= ======
UK Electricity UK Gas NGV and
Geographical split for the Transmission Transmission US Regulated Other Total
year ended 31 March 2019 GBPm GBPm GBPm GBPm GBPm
=============================== ============== ============= ============ ======= ========
Revenue under IFRS 15
UK 3,325 833 - 585 4,743
US - - 9,311 12 9,323
Total IFRS 15 revenue 3,325 833 9,311 597 14,066
=============================== ============== ============= ============ ======= ======
Other revenue
UK 6 51 - 245 302
US - - 535 30 565
Total other revenue 6 51 535 275 867
=============================== ============== ============= ============ ======= ======
Total revenue from continuing
operations 3,331 884 9,846 872 14,933
=============================== ============== ============= ============ ======= ======
Revenue to be recognised in future periods, presented as
contract liabilities of GBP1,158 million (2019: GBP994 million),
relates to contributions in aid of construction. Revenue is
recognised over the life of the asset. The asset lives for
connections in UK Electricity Transmission, UK Gas Transmission,
NGV and US Regulated are 40 years, 36 years (to 2055), 15 years and
up to 51 years respectively. The weighted average amortisation
period is 18 years.
Future revenues in relation to unfulfilled performance
obligations not yet received in cash amount to GBP3.1 billion
(2019: GBP3.5 billion). GBP1.5 billion (2019: GBP1.6 billion)
relates to connection contracts in UK Electricity Transmission
which will be recognised as revenue over 29 years and GBP1.5
billion (2019: GBP1.8 billion) relates to revenues to be earned
under Grain LNG contracts until 2029. The remaining amount will be
recognised as revenue over 5 years.
The amount of revenue recognised for the year ended 31 March
2020 from performance obligations satisfied (or partially
satisfied) in previous periods, mainly due to the changes in the
estimate of the stage of completion, is GBPnil (2019: GBPnil).
4. Exceptional items and remeasurements
To monitor our financial performance, we use a profit measure
that excludes certain income and expenses. We call that measure
'business performance' or 'adjusted profit'. Business performance
(which excludes exceptional items and remeasurements as defined
below) is used by management to monitor financial performance as it
is considered that it aids the comparability of our reported
financial performance from year to year. We exclude items from
business performance because, if included, these items could
distort understanding of our performance for the year and the
comparability between periods. This note analyses these items,
which are included in our results for the year but are excluded
from business performance.
2020 2019
GBPm GBPm
============================================================= ===== =======
Included within operating profit
Exceptional items:
Environmental charges (402) -
Cost efficiency and restructuring programmes - (204)
Massachusetts Gas labour dispute - (283)
Impairment of nuclear connection development costs - (137)
(402) (624)
Remeasurements - commodity contract derivatives (125) 52
(527) (572)
============================================================= ==== ====
Included within finance income and costs
Remeasurements:
Net gains/(losses) on financing derivatives 1 (40)
Net (losses)/gains on financial assets at fair value
through profit and loss (16) 15
Net losses on financial liabilities at fair value through
profit and loss (49) (51)
(64) (76)
============================================================= ==== ====
Included within share of post-tax results of joint ventures
and associates
Remeasurements - net losses on financial instruments (1) -
============================================================= ==== ====
Total included within profit before tax (592) (648)
============================================================= ==== ====
Included within tax
Exceptional items - (debits)/credits arising on items
not included in profit before tax:
Deferred tax arising on the reversal of the reduction
in UK corporation tax rate (192) -
Tax on exceptional items 103 144
Tax on remeasurements 42 5
(47) 149
Total exceptional items and remeasurements after tax (639) (499)
============================================================= ==== ====
Analysis of total exceptional items and remeasurements
after tax
Exceptional items after tax (491) (480)
Remeasurements after tax (148) (19)
Total exceptional items and remeasurements after tax (639) (499)
============================================================= ==== ====
Exceptional items
Management uses an exceptional items framework that has been
discussed and approved by the Audit Committee. This follows a
three-step process which considers the nature of the event, the
financial materiality involved and any particular facts and
circumstances. In considering the nature of the event, management
focuses on whether the event is within the Group's control and how
frequently such an event typically occurs. In determining the facts
and circumstances, management considers factors such as ensuring
consistent treatment between favourable and unfavourable
transactions, the precedent for similar items, the number of
periods over which costs will be spread or gains earned, and the
commercial context for the particular transaction.
4. Exceptional items and remeasurements continued
Items of income or expense that are considered by management for
designation as exceptional items include significant
restructurings, write-downs or impairments of non-current assets,
significant changes in environmental or decommissioning provisions,
integration of acquired businesses, gains or losses on disposals of
businesses or investments and significant debt redemption costs as
a consequence of transactions such as significant disposals or
issues of equity, and the related tax, as well as deferred tax
arising on changes to corporation tax rates.
Costs arising from restructuring programmes include redundancy
costs. Redundancy costs are charged to the consolidated income
statement in the year in which a commitment is made to incur the
costs and the main features of the restructuring plan have been
announced to affected employees.
Set out below are details of the transactions against which we
have considered the application of our exceptional items framework
in each of the years for which results are presented.
2020
We concluded that the increase in costs associated with the
changes in our environmental provisions (GBP402 million) and the
additional deferred tax charge reflecting the impact of the
remeasurement of the Group's deferred tax liabilities as a result
of a change in the substantively enacted UK corporation tax rate
(GBP192 million) meet the criteria to be classified as
exceptional.
A further GBP10 million of COVID-19 related costs incurred in
the year have similarly not been classified as exceptional in view
of the quantum involved and all costs associated with the
settlement reached with the State of New York in respect of the
Downstate New York Gas Moratorium have also been treated as part of
adjusted profit.
Environmental charges: In the US, the most significant component
of our GBP1.9 billion environmental provision relates to several
Superfund sites, and arose from former manufacturing gas plant
facilities, formerly owned or operated by the Group or its
predecessor companies.
The sites are subject to both State and Federal law in the US.
Under Federal and State Superfund laws, potential liability for the
historical contamination may be imposed on responsible parties
jointly and severally, without regard to fault, even if the
activities were lawful when they occurred. The provisions and the
Group's share of estimated costs are re-evaluated at each reporting
period. As a result of notices issued by governmental authorities
and newly developed cost estimates prepared by third-party
engineers, we have re-evaluated our estimates of total costs and
cost sharing allocations borne by the Company, and accordingly have
increased our provision by GBP326 million. Under the terms of our
rate plans, we are entitled to recovery of environmental clean-up
costs from rate payers, but under IFRS no asset can be recognised
for this recovery.
Also included in the total environmental charge is the GBP76
million impact of the change in the real discount rate applied to
the environmental provisions across the Group, of which GBP66
million relates to the US and GBP10 million to the UK. Given the
substantial and sustained change in gilts and corporate bond
yields, we concluded it was appropriate to reduce the real discount
rate from 1% to 0.5%. The weighted average remaining duration of
our cash flows is now around 10 years.
The sensitivity of our environmental provisions to changes in
the future cash flows is as follows:
2020 2019
Income Net Income Net
statement assets statement assets
GBPm GBPm GBPm GBPm
================================= ========== ======= ========== =========
10% change in future cash flows 210 210 165 165
================================= ========== ======= ========== =======
4. Exceptional items and remeasurements continued
2019
In assessing certain items of income and expenditure against our
exceptional items framework, we concluded that the costs associated
with the Massachusetts Gas labour dispute (GBP283 million), our
cost efficiency and restructuring programme (GBP204 million) and
impairments relating to two nuclear connection cancellations
(GBP137 million) should be treated as exceptional (as described
further below).
We also considered whether the GBP95 million income from two
legal settlements received in the period should be classified as
exceptional. However, we concluded it was appropriate to recognise
the income in earnings before exceptional items (within NGV and
Other), in line with the treatment of the original costs.
Cost efficiency and restructuring programmes: Our UK and US
businesses incurred restructuring charges as we reviewed
organisational structures, operational activities and relevant
roles and responsibilities to ensure we are able to operate more
efficiently and to continue to drive outperformance for customers
and shareholders. The cash outflow for the year was GBP93
million.
Massachusetts Gas labour dispute: Between June 2018 and January
2019, National Grid implemented a workforce contingency plan across
its Massachusetts Gas business following the expiration of
contracts for the 1,250 members of the existing workforce. The net
incremental cost of the experienced contractors working alongside
supervisors and workers from other areas of the business was GBP283
million, reflecting the financial performance of the US regulated
business had the workforce contingency plan not been implemented.
The total cash outflow related to the labour dispute was GBP320
million for the year.
Impairment of nuclear connection development costs: In 2018,
Toshiba announced the cancellation of its NuGen project to build a
new nuclear power station at Moorside in Cumbria, and NuGen
terminated its connection agreement with UK Electricity
Transmission. In February 2019, Hitachi terminated its connection
agreements in respect of its Horizon projects at Wylfa and Oldbury.
As there was no realistic prospect of these schemes continuing in
their present form, we concluded that it was appropriate to impair
the assets we had been developing for over 10 years. After
deducting cash inflows relating to termination fees received of
GBP13 million, the net impairment charge was GBP137 million.
Remeasurements
Remeasurements comprise unrealised gains or losses recorded in
the consolidated income statement arising from changes in the fair
value of certain of our financial assets and liabilities accounted
for at fair value through profit and loss (FVTPL). These assets and
liabilities include commodity contract derivatives and financing
derivatives to the extent that hedge accounting is not achieved or
is not effective.
The unrealised gains or losses reported in profit and loss on
certain additional assets and liabilities now treated at FVTPL are
also classified within remeasurements. These relate to financial
assets (which fail the 'solely payments of principal and interest
test' under IFRS 9), the money market fund investments used by
Group Treasury for cash management purposes and certain financial
liabilities which we elected to designate at FVTPL. In all cases,
these fair values increase or decrease because of changes in
foreign exchange, commodity or other financial indices over which
we have no control.
We report unrealised gains or losses relating to certain
discrete classes of financial assets accounted for at FVTPL within
business performance. These comprise our portfolio of investments
made by National Grid Partners, our investment in Sunrun Neptune
2016 LLC and the contingent consideration arising on the
acquisition of Geronimo (all within NGV and Other). The performance
of these assets (including changes in fair value) are included in
our assessment of business performance for the relevant business
units.
4. Exceptional items and remeasurements continued
Remeasurements excluded from business performance are made up of
the following categories:
i. Net gains/(losses) on 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;
ii. Net gains/(losses) on financing derivative financial
instruments comprise gains and losses arising on derivative
financial instruments reported in the consolidated income statement
in relation to risk management of interest rate and foreign
exchange exposures. These exclude gains and losses for which hedge
accounting has been effective, and have been recognised directly in
the consolidated statement of other comprehensive income or are
offset by adjustments to the carrying value of debt;
iii. Net gains/(losses) on financial assets measured at FVTPL
comprise gains and losses on the investment funds held by our
insurance captives which are categorised as FVTPL;
iv. Net gains/(losses) on financial liabilities measured at
FVTPL comprises the change in the fair value (excluding changes due
to own credit risk) of a financial liability that was designated at
FVTPL on transition to IFRS 9 to reduce a measurement mismatch;
and
v. Unrealised net gains/(losses) on derivatives and other
financial instruments within our joint ventures and associates.
Items included within tax
2020
The Finance Act 2016, which was enacted on 15 September 2016,
reduced the main UK corporation tax rate to 17% with effect from 1
April 2020. Deferred tax balances were calculated at this rate for
the years ended 31 March 2017 to 2019. On 17 March 2020, the UK
Government utilised the Provisional Collection of Taxes Act 1968 to
substantively enact a reversal of the reduction in the main UK
corporation tax rate to 17% with effect from 1 April 2020,
resulting in the rate remaining at 19%. Deferred taxes at the
reporting date have been measured using enacted tax rates and
reflected in these financial statements, resulting in a GBP192
million deferred tax charge, principally due to the remeasurement
of deferred tax liabilities. The treatment of this charge as
exceptional is consistent with the treatment for the year ended 31
March 2017 when the original reduction in the tax rate was
substantively enacted, resulting in the recognition of an
exceptional tax credit of GBP94 million.
5. Finance income and costs
2020 2019
Notes GBPm GBPm
============================================================= ======= ======= =========
Finance income
Interest income on financial instruments:
Bank deposits and other financial assets 48 54
Dividends received on equities held at fair value
through other comprehensive income 2 2
Other income 20 17
70 73
===================================================================== ====== ======
Finance costs
Net interest on pensions and other post-retirement
benefit obligations (23) (22)
Interest expense on financial liabilities held at
amortised cost:
Bank loans and overdrafts (73) (72)
Other borrowings(1) (997) (970)
Interest expense on financial liabilities held at
fair value through profit and loss (22) (20)
Derivatives (39) (43)
Unwinding of discount on provisions (77) (74)
Other interest (10) -
Less: interest capitalised(2) 122 135
=======================================================================
(1,119) (1,066)
===================================================================== ====== ======
Remeasurements - Finance income
Net (losses)/gains on financial assets held at fair
value through profit and loss (16) 15
(16) 15
===================================================================== ====== ======
Remeasurements - Finance costs
Net losses on financial liabilities held at fair
value through profit and loss (49) (51)
Net (losses)/gains on financing derivatives(3):
Derivatives designated as hedges for hedge accounting (13) (37)
Derivatives not designated as hedges for hedge accounting 14 (3)
(48) (91)
===================================================================== ====== ======
Total remeasurements - Finance income and costs (64) (76)
Finance income 54 88
Finance costs (1,167) (1,157)
Net finance costs from continuing operations (1,113) (1,069)
======================================================================= ====== ======
1. Includes interest expense on lease liabilities (see note 10
for details).
2. Interest on funding attributable to assets in the course of
construction in the current year was capitalised at a rate of 3.6%
(2019: 3.9%). In the UK, capitalised interest qualifies for a
current year tax deduction with tax relief claimed of GBP15 million
(2019: GBP19 million). In the US, capitalised interest is added to
the cost of plant and qualifies for tax depreciation
allowances.
3. Includes a net foreign exchange gain on financing activities
of GBP66 million (2019: GBP264 million gain) offset by foreign
exchange losses and gains on financing derivatives measured at fair
value.
6. Tax
Tax charged/(credited) to the consolidated income statement -
continuing operations
2020 2019
GBPm GBPm
Tax before exceptional items and remeasurements 433 488
================================================================ ==== ====
Exceptional tax on items not included in profit before
tax (see note 4) 192 -
Tax on other exceptional items and remeasurements (145) (149)
================================================================ ==== ====
Total tax reported within exceptional items and remeasurements 47 (149)
================================================================ ==== ====
Total tax charge from continuing operations 480 339
================================================================ ==== ====
Tax as a percentage of profit before tax
2020 2019
% %
Before exceptional items and remeasurements - continuing
operations 18.5 19.6
After exceptional items and remeasurements - continuing
operations 27.4 18.4
========================================================== ==== ====
2020 2019
GBPm GBPm
Current tax:
UK corporation tax at 19% (2019: 19%) 179 132
UK corporation tax adjustment in respect of prior years (4) (12)
=========================================================== === ===
175 120
Overseas corporation tax (2) 8
Overseas corporation tax adjustment in respect of prior
years (41) (40)
=========================================================== === ===
(43) (32)
Total current tax from continuing operations 132 88
=========================================================== === ===
Deferred tax:
UK deferred tax 269 27
UK deferred tax adjustment in respect of prior years 6 2
275 29
=========================================================== === ===
Overseas deferred tax 64 208
Overseas deferred tax adjustment in respect of prior
years 9 14
73 222
Total deferred tax from continuing operations 348 251
Total tax charge from continuing operations 480 339
=========================================================== === ===
Factors that may affect future tax charges
On 17 March 2020, the UK government utilised the Provisional
Collection of Taxes Act 1968 to substantively enact a reversal of
the reduction in the main UK corporation tax rate to 17% with
effect from 1 April 2020. The main UK corporation tax rate
therefore remains at 19%. 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 aid
investigations. At this time, we do not expect this to have any
material impact on our future tax charges. Governments across the
world including the UK and the US have introduced various
stimulus/reliefs for businesses to cope with the impact of the
COVID-19 pandemic. We will monitor as the details become available
for any that may materially impact our future tax charges.
7. Earnings per share
Adjusted earnings and EPS, which exclude exceptional items and
remeasurements, are provided to reflect the business performance
sub-totals used by the Company. For further details of exceptional
items and remeasurements, see note 4. 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 EPS calculations are based on profit after tax
attributable to equity shareholders of the parent company which
excludes non-controlling interests. Purchased shares are held as
treasury shares.
(a) Basic earnings per share
Earnings EPS Earnings EPS
2020 2020 2019 2019
GBPm pence GBPm pence
Adjusted earnings from continuing operations 1,912 55.2 1,998 59.0
Exceptional items and remeasurements after
tax from continuing operations (639) (18.4) (499) (14.7)
Earnings from continuing operations 1,273 36.8 1,499 44.3
================================================ ======= ======= ======= =======
Adjusted earnings from discontinued operations 5 0.2 57 1.7
Exceptional items and remeasurements after
tax from discontinued operations (14) (0.5) (45) (1.4)
Earnings from discontinued operations (9) (0.3) 12 0.3
================================================ ======= ======= ======= =======
Total adjusted earnings 1,917 55.4 2,055 60.7
Total exceptional items and remeasurements
after tax (including discontinued operations) (653) (18.9) (544) (16.1)
Total earnings 1,264 36.5 1,511 44.6
================================================ ======= ======= ======= =======
2020 2019
millions millions
Weighted average number of ordinary shares
- basic 3,461 3,386
================================================ ======== ======= ======== =======
(b) Diluted earnings per share
Earnings EPS Earnings EPS
2020 2020 2019 2019
GBPm pence GBPm pence
Adjusted earnings from continuing operations 1,912 55.0 1,998 58.8
Exceptional items and remeasurements after
tax from continuing operations (639) (18.4) (499) (14.7)
Earnings from continuing operations 1,273 36.6 1,499 44.1
================================================ ======= ======= ======= =======
Adjusted earnings from discontinued operations 5 0.1 57 1.7
Exceptional items and remeasurements after
tax from discontinued operations (14) (0.4) (45) (1.4)
Earnings from discontinued operations (9) (0.3) 12 0.3
================================================ ======= ======= ======= =======
Total adjusted earnings 1,917 55.1 2,055 60.5
Total exceptional items and remeasurements
after tax (including discontinued operations) (653) (18.8) (544) (16.1)
Total earnings 1,264 36.3 1,511 44.4
================================================ ======= ======= ======= =======
2020 2019
millions millions
Weighted average number of ordinary shares
- diluted 3,478 3,401
================================================ ======== ======= ======== =======
8. Dividends
2020 2019
Cash Cash
dividend Scrip dividend Scrip
Pence paid dividend Pence paid dividend
per share GBPm GBPm per share GBPm GBPm
Interim dividend in respect
of the current year 16.57 335 241 16.08 450 94
Final dividend in respect of
the prior year 31.26 557 517 30.44 710 319
47.83 892 758 46.52 1,160 413
============================== ========== ========= ========= ========== ========= =========
The Directors are proposing a final dividend for the year ended
31 March 2020 of 32.0p per share that will absorb approximately
GBP1,123 million of shareholders' equity (assuming all amounts are
settled in cash). It will be paid on 19 August 2020 to shareholders
who are on the register of members at 3 July 2020 (subject to
shareholders' approval at the AGM). A scrip dividend will be
offered as an alternative.
9. Discontinued operations and assets held for sale
In June 2019, the Group sold its remaining 39% interest in
Cadent (held through its holding in Quadgas HoldCo Limited
(Quadgas)). This interest had been classified as held for sale from
30 June 2018 until the date of disposal, as detailed in note 10 of
the Annual Report and Accounts for the year ended 31 March
2020.
The aggregate carrying value of our investment in Quadgas at the
disposal date was GBP1,956 million. This was comprised of the
carrying value of the Group's equity interest in Quadgas of
GBP1,494 million, a shareholder loan to Quadgas of GBP352 million
and a derivative financial asset with a fair value of GBP110
million. The total sales proceeds were GBP1,965 million. The gain
on disposal was GBP9 million.
Discontinued operations
We have treated the results and cash flows arising from Quadgas
as a discontinued operation, as detailed in note 10 of the Annual
Report and Accounts for the year ended 31 March 2020. As a
consequence, we have classified the various elements of income,
expense and cash flows within discontinued operations as set out
below:
Within the consolidated income statement - discontinued
operations, we have recognised a net loss of GBP9 million,
comprising:
-- GBP23 million of operating costs relating to the final
transaction costs and other expenses;
-- GBP6 million of shareholder loan interest income and the tax
charge thereon of GBP1 million; and
-- GBP9 million gain on disposal noted above.
In the comparative period, we disclosed a profit of GBP12
million, comprising:
-- GBP23 million of shareholder loan interest income and the tax
charge thereon of GBP5 million;
-- GBP38 million of income arising from our post-tax share of
the profits of Quadgas Holdco Limited;
-- An impairment charge of GBP43 million; and
-- GBP1 million of other costs.
Within the consolidated cash flow statement - discontinued
operations, we have recognised GBP97 million of operating cash
outflows primarily in respect of voluntary contributions totalling
GBP66 million paid to the Warm Homes Fund, the utilisation of
provisions and the payment of the final transaction fees incurred
in the period (2019: GBP71 million). Within investing activities we
have recognised GBP6 million of interest receivable on the
shareholder loan (2019: GBP23 million). In 2019, we also recognised
GBP133 million of dividends received within investing activities,
however no dividends were received in the current period.
Within the consolidated statement of other comprehensive income
- discontinued operations, we have recognised a GBP6 million gain
in relation to certain cash flow hedges. In the comparative period
we recognised a gain of GBP36 million, principally relating to
actuarial gains and losses on the Cadent pension scheme (net of
deferred tax), which were reflected prior to the investment being
classified as held for sale.
10. Property plant and equipment
The analysis of property plant and equipment as at 31 March 2020
is as follows:
Assets
in the Motor
Plant course vehicles
Land and and of and office
buildings machinery construction(1) equipment Total
GBPm GBPm GBPm GBPm GBPm
===================================== ========== ========== ================== =========== ==========
Cost at 1 April 2019 (as previously
reported) 3,338 54,383 4,425 930 63,076
Right-of-use assets recognised
on transition to IFRS 16(1) 381 67 - 20 468
===================================== ========= ========= ============== ========== =======
Cost at 1 April 2019 (as restated) 3,719 54,450 4,425 950 63,544
Exchange adjustments 98 1,511 53 33 1,695
Additions 130 464 4,029 104 4,727
Disposals (79) (486) (9) (65) (639)
Reclassifications(2,3) 29 4,303 (4,433) 14 (87)
Cost at 31 March 2020 3,897 60,242 4,065 1,036 69,240
===================================== ========= ========= ============== ========== =======
Accumulated depreciation at 1 April
2019 (778) (17,794) - (591) (19,163)
Exchange adjustments (16) (372) - (20) (408)
Depreciation charge for the year (92) (1,252) - (120) (1,464)
Disposals 36 464 - 58 558
Reclassifications(2) 3 (7) - 11 7
=====================================
Accumulated depreciation at 31
March 2020 (847) (18,961) - (662) (20,470)
===================================== ========= ========= ============== ========== =======
Net book value at 31 March 2020 3,050 41,281 4,065 374 48,770
===================================== ========= ========= ============== ========== =======
Net book value at 31 March 2019 2,560 36,589 4,425 339 43,913
===================================== ========= ========= ============== ========== =======
1. GBP468 million of additional right-of-use assets were
recognised on transition to IFRS 16 on 1 April 2019. See note 14
for details.
2. Represents amounts transferred between categories, (to)/from
other intangible assets, reclassifications from inventories and
reclassifications between cost and accumulated depreciation.
3. Comprises an GBP87 million reduction in gross cost of assets
in the course of construction in our UK Electricity Transmission
business for costs previously capitalised and accrued as due to a
supplier that are no longer payable.
Right-of-use assets:
Included within the net book value of property, plant and
equipment at 31 March 2020 are right-of-use assets, split as
follows:
Assets
in the Motor
Plant course vehicles
Land and and of and office
buildings machinery construction equipment Total
GBPm GBPm GBPm GBPm GBPm
================================== ============ ============ ============= ============= =======
Net book value at 31 March 2020 364 95 - 225 684
Additions 10 1 - 73 84
Depreciation charge for the year
ended 31 March 2020 (29) (16) - (72) (117)
================================== ======== ======== ============= ========= ====
The following balances have been included in the income
statement for the year ended 31 March 2020 in respect of leased
assets:
Total
GBPm
========================================= =======
Included within net finance income
and costs:
Interest expense on lease liabilities (26)
Included within revenue:
Lease income 35
Included within operating expenses:
Expenses relating to low-value leases (12)
============================================= ====
10. Property plant and equipment continued
Gas asset lives:
The role that gas networks play in the pathway to achieving the
greenhouse gas emissions reductions targets set in the
jurisdictions in which we operate is currently uncertain. However,
we believe the gas assets which we own and operate today will
continue to have a crucial role in maintaining security,
reliability and affordability of energy beyond 2050, although the
scale and purpose for which the networks will be used is dependent
on technological developments and policy choices of governments and
regulators.
-- In the UK, the gas mains, services and regulating assets
relating to the National Transmission System (NTS) were subject to
a detailed review in January 2019. The most material components of
these are our pipeline assets, which are due to be fully
depreciated by 2070, with other assets being depreciated over
various periods between now and then. That review was undertaken
prior to the UK enacting legislation committing to net zero by
2050, but considered scenarios which included an extension of the
emissions reduction targets (80% emissions reduction target at the
time of the report). The review concluded that the most likely
outcome was for the NTS network assets to remain in use beyond
2050, including in those scenarios where the greenhouse gas
emissions of gas networks were largely eliminated.
We do not believe developments since January 2019 would change
the conclusions of this review.
-- With respect to our US gas distribution assets, asset lives
are assessed as part of detailed depreciation studies completed as
part of each separate rate proceeding. Depreciation studies
consider the physical condition of assets and the expected
operational life of an asset. We believe these assessments are our
best estimate of the UEL of our gas network assets in the US.
The weighted average remaining UEL for our US gas distribution
fixed asset base is circa 50 years, however a sizeable proportion
of our assets are assumed to have UELs which extend beyond 2080. We
continue to believe the lives identified by rate proceedings are
the best estimate of the assets' UELs, although we continue to keep
this assumption under review as we learn more about possible future
pathways towards net zero. Whilst the targets, goals and ambitions
have now been formalised in legislation in the states in which we
operate, there is widespread recognition that work needs to be done
to define the possible future decarbonisation pathways.
Asset depreciation lives feed directly into our regulatory
recovery mechanisms, such that any shortening of asset recovery
periods as agreed with regulators should be recoverable through
future rates, subject to agreement, over future periods, as part of
wider considerations around ensuring the continuing affordability
of gas in our service territories.
Given the uncertainty described relating to the UELs of our gas
assets, below we provide a sensitivity on the depreciation charge
for our UK and US regulated segments were a shorter UEL
presumed:
Increase in depreciation
expense
UK regulated US regulated
GBPm GBPm
====================== ==================== ==============
UELs limited to 2050 37 151
UELs limited to 2060 13 66
UELs limited to 2070 - 26
========================= ==================== ============
Note that this sensitivity calculation excludes any assumptions
regarding residual value for our asset base and the effect
shortening asset depreciation lives would expect to have on our
regulatory recovery mechanisms.
11. Pensions and other post-retirement benefit obligations
2020 2019
GBPm GBPm
======================================= ======== ==========
Present value of funded obligations (24,281) (24,609)
Fair value of plan assets 23,748 24,793
======================================= ======= =======
(533) 184
Present value of unfunded obligations (345) (330)
Other post-employment liabilities (75) (72)
Net defined benefit liability (953) (218)
======================================= ======= =======
Represented by:
Liabilities (2,802) (1,785)
Assets 1,849 1,567
(953) (218)
======================================= ======= =======
The net pensions and other post-retirement benefit obligations
position, as recorded under IAS 19, at 31 March 2020 was a
liability of GBP953 million compared to a liability of GBP218
million at 31 March 2019. The movement of GBP735 million primarily
reflects asset performance being less than the discount rate
(including the pensions buy-ins detailed below), and changes in US
actuarial assumptions resulting in an increase in liabilities
partially offset by changes in UK actuarial assumptions resulting
in a decrease in liabilities, and employer contributions paid over
the accounting period.
Actuarial Assumptions:
UK pensions
2020 2019
% %
========================================== ====== ========
Discount rate - past service 2.35 2.40
Discount rate - future service 2.35 2.45
Salary increases 2.90 3.50
Rate of increase in RPI - past service 2.65 3.25
Rate of increase in RPI - future service 2.45 3.20
========================================== ====== ======
US pensions
2020 2019
% %
================== ====== ========
Discount rate 3.30 3.95
Salary increases 3.50 3.50
================== ====== ======
US other post-retirement
benefits
2020 2019
% %
===================================== ============= ==============
Discount rate 3.30 3.95
Salary increases 3.50 3.50
Initial healthcare cost trend rate 7.00 7.25
Ultimate healthcare cost trend rate 4.50 4.50
===================================== ============= ============
Impact of COVID-19:
The markets for unquoted investments are illiquid and the
valuations that have been provided by fund managers as at 31 March
2020 may be based on valuation models that have unobservable
inputs. Given the current market volatility that has arisen as a
result of COVID-19, this means that the prices provided are subject
to additional estimation uncertainty. Sensitivity analyses for
changes in private equity, property and diversified alternative
valuations have been provided below.
11. Pensions and other post-retirement benefit obligations
continued
2020 2019
Income Net Income Net
statement assets statement assets
GBPm GBPm GBPm GBPm
=========================================== ========== ======= ========== =========
Pension assets:
Change in value of unquoted equities by
10% - 381 - 415
Change in value of unquoted properties by
10% - 89 - 107
Change in value of unquoted diversified
alternatives by 10% - 152 - 142
=========================================== ========== ======= ========== =======
Pensions buy-ins:
During the year, the Trustees of the NGUKPS entered into two
buy-in arrangements in order to manage various risks. The policies
provide bulk annuities in respect of some pensioner and dependant
members of Sections A and B of NGUKPS and were funded by existing
assets. In Section A, GBP2.8 billion of gilts were exchanged for a
buy-in policy with Rothesay Life. In Section B, GBP1.6 billion of
gilts were exchanged for a buy-in policy with Legal & General.
Both policies are held by the Trustee. For both transactions, the
pricing of the policies was highly competitive; however, under IAS
19 the methodology for calculating the value of the buy-ins (as an
asset held by the pension plan) differs from the price paid. This
resulted in the recognition of an actuarial loss of GBP0.7 billion
on purchase, recorded within the consolidated statement of other
comprehensive income.
12. Reconciliation of net cash flow to movement in net debt
2020 2019
GBPm GBPm
============================================================ ======== ==========
Decrease in cash and cash equivalents (183) (80)
Decrease in financial investments (7) (822)
Increase in borrowings and related derivatives(1) (23) (708)
Net interest paid on the components of net debt(2) 888 866
============================================================ ======= =======
Change in debt resulting from cash flows 675 (744)
Changes in fair value of financial assets and liabilities
and exchange movements (1,081) (1,648)
Net interest charge on the components of net debt (1,097) (1,076)
Other non-cash movements (84) (27)
============================================================ ======= =======
Movement in net debt (net of related derivative financial
instruments) in the year (1,587) (3,495)
Net debt (net of related derivative financial instruments)
at start of year (26,529) (23,002)
Impact of transition to IFRS 16 (2019: IFRS 9) (474) (32)
============================================================
Net debt (net of related derivative financial instruments)
at end of year (28,590) (26,529)
============================================================ ======= =======
1. The derivatives balance included in net debt excludes the
commodity derivative assets of GBP125 million (2019: assets of GBP2
million).
2. Excludes GBP6 million (2019: GBP23 million) cash interest
from the Quadgas shareholder loan included within discontinued
operations in the cash flow statement.
12. Reconciliation of net cash flow to movement in net debt
continued
2020 2019
GBPm GBPm
============================================================= ======= =========
Cash flows per financing activities section of cash flow
statement:
Proceeds received from loans 4,218 2,932
Repayment of loans (3,253) (1,969)
Payments of lease liabilities (121) (70)
Net movements in short-term borrowings (424) 179
Net movements in derivatives (187) 35
Interest paid (957) (914)
============================================================= ====== ======
Cash flows per financing activities section of cash flow
statement (724) 193
Adjustments:
Non-net debt-related items 34 24
Derivative cash inflow in relation to capital expenditure 13 13
Derivative cash flows per investing section of cash
flow statement (223) (412)
Cash flows relating to financing liabilities within net
debt (900) (182)
============================================================= ====== ======
Analysis of changes in net debt:
Borrowings (450) 240
Financing derivatives (450) (422)
=============================================================
Cash flow movements relating to financing liabilities
within net debt (900) (182)
============================================================= ====== ======
13. Net debt
Net debt is comprised as follows:
2020 2019
GBPm GBPm
================================================== ======== ==========
Cash, cash equivalents and financial investments 2,071 2,233
Borrowings(1) (30,794) (28,730)
Financing derivatives(2) 133 (32)
==================================================
(28,590) (26,529)
================================================== ======= =======
1. The borrowings balance includes GBP735 million of lease
liabilities under IFRS 16.
2. The derivatives balance included in net debt excludes the
commodity derivative liabilities of GBP125 million (2019: assets of
GBP2 million).
14. Transition to IFRS 16
The Group has adopted IFRS 16 'Leases', with effect from 1 April
2019. IFRS 16 introduces a single lease accounting model for
lessees (rather than the current distinction between operating and
finance leases). A contract is, or contains, a lease, if it
provides the right to control the use of an identified asset for a
specific period of time in exchange for consideration. The new
standard results in our operating leases being accounted for in the
consolidated statement of financial position as 'right-of-use'
assets with corresponding lease liabilities also recognised. It
therefore increases both our assets and liabilities (including net
debt). It also changes the timing and presentation in the
consolidated income statement as it results in an increase in
finance costs and depreciation largely offset by a reduction in the
previously straight-line operating costs.
Transition options
We have applied IFRS 16 using the modified retrospective
approach. Comparatives have not been restated on adoption. Instead,
on the opening balance sheet date, right-of-use assets (net of
accrued rent or rent-free periods, and reported within property,
plant and equipment), additional lease liabilities (reported within
borrowings) and any associated deferred tax have been recognised,
with no cumulative transition adjustment to reflect through
retained earnings. For short-term leases (lease term of 12 months
or less) and leases of low-value assets (such as computers), the
Group continues to recognise a lease expense on a straight-line
basis as permitted by IFRS 16.
We elected to apply the practical expedient to grandfather our
previous assessments of whether contracts were previously accounted
for as a lease, as permitted by the standard, instead of
reassessing all significant contracts as at the date of initial
application to determine whether they met the IFRS 16 definition of
a lease.
We have elected to apply the practical expedient on transition,
which permits right-of-use assets to be measured at an amount equal
to the lease liability on adoption of the standard (adjusted for
any prepaid or accrued lease expenses).
In addition, we have also elected the option to adjust the
carrying amounts of the right-of-use assets as at 1 April 2019 for
any onerous lease provisions that had been recognised on the Group
consolidated statement of financial position as at 31 March 2020,
rather than performing impairment assessments on transition.
Impact of transition
At 31 March 2019, the Group disclosed non-cancellable operating
lease commitments of GBP0.3 billion, of which the majority were in
the US. A further GBP0.4 billion of lease liabilities were
recognised due to the requirement in IFRS 16 to recognise lease
liabilities for the term that we are reasonably certain to exercise
lease extension or lease termination options for, rather than only
for the period of the minimum contractual term that was used in
determining our lease liability commitments. This was partially
offset by the GBP0.2 billion impact of discounting our lease
liabilities at the incremental borrowing rate for each lease. The
weighted average discount rate applied to lease liabilities
recognised on the transition date was 2.8%. There were some
immaterial short-term and low-value leases, which will be
recognised on a straight-line basis as an expense in the
consolidated income statement over the remaining lease term.
14. Transition to IFRS 16 continued
As a result, the Group has recognised additional right-of-use
assets of GBP0.5 billion and lease liabilities (which are included
within net debt) of GBP0.5 billion at 1 April 2019. No additional
net deferred tax has arisen. The transition adjustment is in
addition to the GBP270 million of finance leases already recognised
on the consolidated statement of financial position under IAS 17.
There has been no impact on net assets as shown in the table below,
which shows the impacted balances from the Group consolidated
statement of financial position.
31 March
2019 IFRS 16 1 April
As previously transition 2019
reported adjustments As restated
==============================================
Impact of transition GBPm GBPm GBPm
============================================== ================ ============== ==============
Property, plant and equipment - Right-of-use
assets
Land and buildings 2,560 381 2,941
Plant and machinery 36,589 67 36,656
Assets in the course of construction 4,425 - 4,425
Motor vehicles and office equipment 339 20 359
Total property, plant and equipment 43,913 468 44,381
============================================== ============ ========== ===========
Borrowings - Lease liabilities
Current (65) (48) (113)
Non-current (205) (426) (631)
Total lease liabilities (270) (474) (744)
============================================== ============ ========== ===========
Other liabilities
Trade and other payables (3,769) 3 (3,766)
Other non-current liabilities (808) 3 (805)
Net assets 19,369 - 19,369
============================================== ============ ========== ===========
Equity
Total equity 19,369 - 19,369
============================================== ============ ========== ===========
The impact of IFRS 16 on profit after tax as a result of
adopting the new standard is not material. However, it has resulted
in an increase in operating profit due to the operating costs now
being replaced with depreciation and interest charges.
The impact on the cash flow statement has also not been
material, although there has been an increase in operating cash
flows and decrease in financing cash flows, because repayment of
the principal portion of the lease liabilities is now classified as
cash flows from financing activities rather than operating cash
flows.
Ongoing accounting policy
With effect from 1 April 2019, new lease arrangements entered
into are recognised as a right-of-use asset and a corresponding
liability at the date at which the leased asset is available for
use by the Group. The right-of-use asset and associated lease
liability arising from a lease are initially measured at the
present value of the lease payments expected over the lease term,
plus any other costs. The discount rate applied is the rate
implicit in the lease or if that is not available, then the
incremental rate of borrowing for a similar term and similar
security.
The lease term takes account of exercising any extension options
that are at our option if we are reasonably certain to exercise the
option and any lease termination options unless we are reasonably
certain not to exercise the option.
Each lease payment is allocated between the liability and
finance cost. The finance cost is charged to the income statement
over the lease period using the effective interest rate method. The
right-of-use asset is depreciated over the shorter of the asset's
useful life and the lease term on a straight-line basis. For
short-term leases (lease term of 12 months or less) and leases of
low-value assets (such as computers), the Group continues to
recognise a lease expense on a straight-line basis.
15. Acquisition of Geronimo Energy LLC and Emerald Energy
Venture LLC
On 11 July 2019, National Grid Ventures acquired 100% of the
share capital of Geronimo Energy LLC (Geronimo) and 51% of Emerald
Energy Venture LLC (Emerald), which is jointly controlled by
National Grid and Washington State Investment Board (WSIB).
Geronimo is a leading developer of wind and solar generation based
in Minneapolis in the US, and the acquisition is a significant step
in National Grid's commitment to the decarbonisation agenda,
towards developing and growing a large-scale renewable generation
business in the US, and delivering sustainable, reliable and
efficient energy. This is National Grid's first ownership stake in
wind generation and an expansion of our activities in solar
generation. Whilst Geronimo develops the assets, Emerald has a
right of first refusal to buy, build and operate those assets.
The total consideration was GBP209 million, satisfied by a
combination of cash and contingent consideration. The contingent
consideration has been recorded within trade and other payables for
the amount payable within one year, with the remainder recorded
within other non-current liabilities. The fair value of contingent
consideration recognised is determined as the present value of our
best estimate of the value that we will be required to pay, taking
into consideration management's estimates of the volume of
successful development activity by Geronimo over the relevant
period.
The fair values of the assets and liabilities recognised from
both the acquisition of the subsidiary, Geronimo, and the joint
venture, Emerald, are set out below.
GBPm
=========================================== ======
Intangible assets 5
Property, plant and equipment 1
Investment in joint venture - Emerald 90
Cash 2
Other identifiable assets and liabilities 30
=========================================== ====
Total identifiable assets 128
Goodwill 81
=========================================== ====
Total consideration transferred 209
Satisfied by:
Contingent consideration - Geronimo 70
Cash consideration - Geronimo 49
Cash consideration - Emerald 90
=========================================== ====
209
=========================================== ====
The goodwill arising from the acquisition comprises the value
associated with the potential future projects that will be
developed by Geronimo as well as the expertise of the management
team that have been acquired, neither of which qualify for
recognition as tangible or intangible assets. At the acquisition
date, there were no material contingent liabilities.
Subsequent to the acquisition date, we made an additional
capital contribution of GBP50 million into Emerald.
Total acquisition-related costs of GBP3 million have been
recognised within operating costs within the consolidated income
statement, of which GBP1 million was recognised in the year ended
31 March 2020.
Geronimo earns revenue from selling its development stage assets
to Emerald and other third parties. Emerald generates revenue from
the assets it purchases from Geronimo once they are operational and
has no other business. Neither entity has generated significant
revenues or profits for the period between the acquisition date and
the reporting date. Even if the acquisition had completed on 1
April 2019, there would have been no significant revenues or
profits.
16. Post balance sheet events
In the period between 31 March 2020 and 17 June 2020, there have
continued to be substantial environmental, economic and social
changes in both the UK and US. These have had, and will continue to
have, significant ramifications for the Group. Other than as
disclosed in respect of those areas where forward-looking forecasts
are relevant (notably goodwill impairment reviews, expected credit
losses on financial instruments including trade receivables and the
presumption of the going concern basis generally), none of these
developments have impacted or caused adjustment to the financial
statements.
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-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 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.
We also have a number of APMs derived from regulatory measures
which have no basis under IFRS; we call these Regulatory
Performance Measures (RPMs). They comprise: Group Return on Equity
(RoE), UK and US regulatory RoE, regulated asset base, regulated
financial performance, regulatory gearing, asset growth, Value
Added, including Value Added per share and Value Growth. These
measures include the inputs used by utility regulators to set the
allowed revenues for many of our businesses.
We use RPMs 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. 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 and to
ensure a complete understanding of Group performance.
As the starting point for our RPMs 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 UK
system balancing costs, gas and electricity commodity costs in the
US and, prior to the adoption of IFRS 15, payments to other UK
network owners. 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.
2020 2019
=======================
Pass-
Pass- through through
Gross revenue costs Net revenue Gross revenue costs Net revenue
=======================
Year ended 31 March GBPm GBPm GBPm GBPm GBPm GBPm
======================= ============= ============= =========== ============= ======== =============
UK Electricity
Transmission 3,702 (1,528) 2,174 3,351 (1,397) 1,954
UK Gas Transmission 927 (242) 685 896 (227) 669
US Regulated 9,205 (3,460) 5,745 9,846 (3,978) 5,868
NGV and Other 736 - 736 876 - 876
Sales between segments (30) - (30) (36) - (36)
----------------------- ------------ ------------ ---------- ------------ ------- ----------
Total 14,540 (5,230) 9,310 14,933 (5,602) 9,331
======================= ============ ============ ========== ============ ======= ==========
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 pages 16 - 21 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 4.
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 2019/20,
as highlighted below, our underlying results exclude GBP147 million
(2018/19: GBP108 million) of timing differences. We have not
excluded major storm costs this year as costs were below our $100
million storm cost timing threshold (2018/19: GBP93 million). We
expect to recover major storm costs incurred through regulatory
mechanisms in the US.
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 2020,
which was $1.29 to GBP1.00. The weighted average rate for the year
ended 31 March 2019, was $1.31 to GBP1.00. Assets and liabilities
as at 31 March 2020 have been retranslated at the closing rate at
31 March 2020 of $1.24 to GBP1.00. The closing rate for the
reporting date 31 March 2019 was $1.30 to GBP1.00.
Reconciliation of statutory, adjusted and underlying profits and
earnings - at actual exchange rates - continuing operations
Major
Exceptionals storm
Year ended 31 March 2020 Statutory and remeasurements Adjusted Timing costs Underlying
GBPm GBPm GBPm GBPm GBPm GBPm
=================================== ========= =================== ======== ====== ====== ============
UK Electricity Transmission 1,316 4 1,320 (146) - 1,174
UK Gas Transmission 347 1 348 54 - 402
US Regulated 880 517 1,397 239 - 1,636
NGV and Other 237 5 242 - - 242
=================================== ======== =================== ======= ===== ====== =========
Total operating profit 2,780 527 3,307 147 - 3,454
Net finance costs (1,113) 64 (1,049) - - (1,049)
Share of post-tax results
of joint ventures and associates 87 1 88 - - 88
=================================== ======== =================== ======= ===== ====== =========
Profit before tax 1,754 592 2,346 147 - 2,493
Tax (480) 47 (433) (45) - (478)
Profit after tax 1,274 639 1,913 102 - 2,015
=================================== ======== =================== ======= ===== ====== =========
Major
Exceptionals storm
Year ended 31 March 2019 Statutory and remeasurements Adjusted Timing costs Underlying
GBPm GBPm GBPm GBPm GBPm GBPm
=================================== ========= ===================== ======== ====== ====== ============
UK Electricity Transmission 778 237 1,015 77 - 1,092
UK Gas Transmission 267 36 303 38 - 341
US Regulated 1,425 299 1,724 (223) 93 1,594
NGV and Other 400 - 400 - - 400
=================================== ======== ================ === ======= ===== ===== =========
Total operating profit 2,870 572 3,442 (108) 93 3,427
Net finance costs (1,069) 76 (993) - - (993)
Share of post-tax results
of joint ventures and associates 40 - 40 - - 40
=================================== ======== ================ === ======= ===== ===== =========
Profit before tax 1,841 648 2,489 (108) 93 2,474
Tax (339) (149) (488) 36 (24) (476)
=================================== ======== ================ ======= ===== ===== =========
Profit after tax 1,502 499 2,001 (72) 69 1,998
=================================== ======== ================ === ======= ===== ===== =========
Reconciliation of adjusted and underlying profits - at constant
currency
At constant currency
Adjusted
at actual Constant Major
exchange currency storm
Year ended 31 March 2019 rate adjustment Adjusted Timing costs Underlying
GBPm GBPm GBPm GBPm GBPm GBPm
=================================== ========== ============= ======== ====== ====== ============
UK Electricity Transmission 1,015 - 1,015 77 - 1,092
UK Gas Transmission 303 - 303 38 - 341
US Regulated 1,724 25 1,749 (226) 94 1,617
NGV and Other 400 1 401 - - 401
=================================== ========= ========= ======= ===== ====== =========
Total operating profit 3,442 26 3,468 (111) 94 3,451
Net finance costs (993) (11) (1,004) - - (1,004)
Share of post-tax results
of joint ventures and associates 40 - 40 - - 40
=================================== ========= ========= ======= ===== ====== =========
Profit before tax 2,489 15 2,504 (111) 94 2,487
=================================== ========= ========= ======= ===== ====== =========
Earnings per share calculations from continuing operations - At
actual exchange rates
The table below reconciles the profit before tax from continuing
operations as 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.
Weighted
Profit after average
Profit after Non-controlling tax attributable number of Earnings
tax interest to the parent shares per share
Year ended 31 March 2020 GBPm GBPm GBPm Millions pence
========================== ============ ================= ================= ========== ============
Statutory 1,274 (1) 1,273 3,461 36.8
Adjusted (also referred
to as Headline) 1,913 (1) 1,912 3,461 55.2
Underlying 2,015 (1) 2,014 3,461 58.2
========================== ====
Weighted
Non- Profit after average
Profit after controlling tax attributable number of Earnings
tax interest to the parent shares per share
Year ended 31 March 2019 GBPm GBPm GBPm Millions pence
==========================
Statutory 1,502 (3) 1,499 3,386 44.3
Adjusted (also referred
to as Headline) 2,001 (3) 1,998 3,386 59.0
Underlying 1,998 (3) 1,995 3,386 58.9
========================== ===
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 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". A number of costs in the UK and the US are
pass-through costs (including commodity and energy efficiency costs
in the US) and are fully recoverable from customers. 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 include an
estimation of the difference between revenues earned under revenue
incentive mechanisms and associated revenues collected. UK timing
balances and movements exclude adjustments associated with changes
to controllable cost (totex) allowances or adjustments under the
totex incentive mechanism. 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
1 April 2019 opening balance(1) (127) 59 471 403
Over/(under) recovery 146 (54) (239) (147)
===
31 March 2020 closing balance
to (recover)/return(2) 19 5 232 256
====
UK Electricity
Transmission UK Gas Transmission US Regulated Total
GBPm GBPm GBPm GBPm
1 April 2018 opening balance(1) (41) 97 245 301
Over/(under) recovery (77) (38) 226 111
===
31 March 2019 closing balance
to (recover)/return(2) (118) 59 471 412
====
1. Opening balances have been restated to reflect the
finalisation of calculated over/(under)-recoveries in the UK and
the US.
2. US over/(under) recovery and all US Regulated balances have
been translated using the average exchange rate for the year ended
31 March 2020. The over-recovered closing balance at 31 March 2020
was GBP264 million (translated at the closing rate of $1.24:GBP1).
The closing balance at 31 March 2019 was GBP407 million (translated
at the closing rate of $1.30:GBP1).
Capital investment
'Capital investment' or 'investment' refer to additions to
property, plant and equipment and intangible assets, and
contributions to joint ventures and associates, other than the St
William Homes LLP joint venture during the period. We also include
the Group's investments by National Grid Partners during the
period, which are classified for IFRS purposes as non-current
financial assets in the Group's consolidated statement of financial
position.
Investments made to our St William Homes LLP arrangement are
excluded based on the nature of this joint venture arrangement. We
typically contribute property assets to the joint venture in
exchange for cash and accordingly do not consider these
transactions to be in the nature of capital investment.
At actual exchange rates At constant currency
2020 2019 % 2020 2019 %
Year ended 31 March GBPm GBPm change GBPm GBPm change
UK Electricity Transmission 1,043 925 13 1,043 925 13
UK Gas Transmission 249 308 (19) 249 308 (19)
US Regulated 3,228 2,650 22 3,228 2,688 20
NGV and Other 559 438 28 559 439 27
Group capital expenditure 5,079 4,321 18 5,079 4,360 16
Equity investment, funding
contributions and loans
to joint ventures and
associates(1) 56 127 (56) 56 128 (56)
Acquisition of Geronimo
and Emerald 209 - n/a 209 - n/a
Increase in financial
assets (National Grid
Partners) 61 58 5 61 59 3
Group capital investment 5,405 4,506 20 5,405 4,547 19
1. Excludes GBP15 million (2019: GBP47 million) equity
contribution to the St William Homes LLP joint venture.
Net debt
See notes 12 and 13 for reconciliation of net debt.
Funds from operations and interest cover
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.
2020 2019
Year ended 31 March GBPm GBPm
Interest expense (income statement) 1,119 1,066
Hybrid interest reclassified as dividend (39) (51)
Capitalised interest 122 135
Pensions interest adjustment 16 (4)
Interest on lease rentals adjustment - 11
Unwinding of discount on provisions (77) (74)
Other interest adjustments - 1
Adjusted interest expense 1,141 1,084
Net cash inflow from operating activities 4,715 4,389
Interest received on financial instruments 73 68
Interest paid on financial instruments (957) (914)
Dividends received 75 201
Working capital adjustment (269) (40)
Excess employer pension contributions 176 260
Hybrid interest reclassified as dividend 39 51
Lease rentals - 34
Difference in net interest expense in income statement
to cash flow (187) (186)
Difference in current tax in income statement to
cash flow 67 (13)
Current tax related to prior periods (45) (52)
Cash flow from discontinued operations (97) (71)
Funds from operations (FFO) 3,590 3,727
FFO interest cover ((FFO + adjusted interest expense)/adjusted
interest expense) 4.1x 4.4x
1. Numbers for 2019 reflect the calculations for the total Group
as based on the published accounts for that year.
Retained cash flow/adjusted net debt
RCF/adjusted net debt is one of two credit metrics that we
monitor in order to ensure the Group is generating sufficient cash
to service its debts, consistent with maintaining a strong
investment-grade credit rating. We calculated RCF/adjusted net debt
applying the methodology used by Moody's, as this is one of the
most constrained calculations of credit worthiness. The net debt
denominator includes adjustments to take account of the equity
component of hybrid debt.
2020 2019
Year ended 31 March GBPm GBPm
Funds from operations (FFO) 3,590 3,727
Hybrid interest reclassified as dividend (39) (51)
Ordinary dividends paid to shareholders (892) (1,160)
RCF (net of share buybacks) 2,659 2,516
Borrowings 30,794 28,730
Less:
50% hybrid debt (1,054) (1,039)
Cash and cash equivalents (73) (252)
Financial and other investments (1,278) (1,311)
Underfunded pension obligations 1,442 845
Operating leases adjustment - 248
Derivative balances removed from debt (116) 141
Currency swaps 203 38
Nuclear decommissioning liabilities reclassified
as debt 6 18
Collateral - cash received under collateral agreements (785) (558)
Accrued interest removed from short-term debt (246) (223)
Adjusted net debt (includes pension deficit) 28,893 26,637
RCF (net of share buybacks)/adjusted net debt 9.2% 9.4%
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 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 and through the key adjustments
required to approximate regulatory profit. This measure also
provides the foundation to calculate Group 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
2020 2019
Year ended 31 March GBPm GBPm
Adjusted operating profit 1,320 1,015
Movement in regulatory 'IOUs' (99) 174
Deferred taxation adjustment 63 64
RAV indexation (average 3% long-run inflation) 406 391
Regulatory vs IFRS depreciation difference (459) (394)
Fast money/other 26 72
Pensions (52) (51)
Performance RAV created 119 90
Regulated financial performance 1,324 1,361
UK Gas Transmission
2020 2019
Year ended 31 March GBPm GBPm
Adjusted operating profit 348 303
Movement in regulatory 'IOUs' 67 68
Deferred taxation adjustment 25 8
RAV indexation (average 3% long-run inflation) 185 179
Regulatory vs IFRS depreciation difference (77) (42)
Fast money/other (17) (10)
Pensions (34) (33)
Performance RAV created (24) (30)
Regulated financial performance 473 443
US Regulated
2020 2019
Year ended 31 March GBPm GBPm
Adjusted operating profit 1,397 1,724
Bad debt provision (COVID-19)(1) 117 -
Major storm costs - 93
Timing 239 (223)
US GAAP pension adjustment (4) (80)
Regulated financial performance 1,749 1,514
1. US Regulated financial performance includes an adjustment
reflecting our expectation for future recovery of COVID-19 related
bad and doubtful debt costs.
Total regulated financial performance
2020 2019
Year ended 31 March GBPm GBPm
UK Electricity Transmission 1,324 1,361
UK Gas Transmission 473 443
US Regulated 1,749 1,514
Total regulated financial performance 3,546 3,318
US timing, major storms and movement in UK regulatory 'IOUs' -
Revenue related to performance in one year may be recovered in
later years. Revenue may be recovered in one year but be required
to be returned to customers in future years. In the UK, this is
calculated as the movement in other regulated assets and
liabilities.
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
calculated as in-year totex outperformance multiplied by the
appropriate regulatory capitalisation ratio and multiplied by the
retained company incentive sharing ratio.
Pension adjustment - Cash payments against pension deficits in
the UK are recoverable under regulatory contracts. In US Regulated
operations, US GAAP pension charges are generally recoverable
through rates. Revenue recoveries are recognised under IFRS but
payments are not charged against IFRS operating profits in the
year. In the UK, this is calculated as cash payments against the
regulatory proportion of pension deficits in the UK regulated
business, whereas in the US, it is the difference between IFRS and
US GAAP pension charges.
3% RAV indexation - Future UK revenues are expected to be set
using an asset base adjusted for inflation. This is calculated as
UK RAV multiplied by 3% (long-run RPI inflation assumption).
UK deferred taxation adjustment - Future UK revenues are
expected to recover cash taxation cost including the unwinding of
deferred taxation balances created in the current year. This is the
difference between: (a) IFRS underlying EBITDA less other
regulatory adjustments; and (b) IFRS underlying EBITDA 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
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
costs incurred is split between in-year revenue allowances and the
creation of additional RAV. This does not align with the
classification of costs as operating costs and fixed asset
additions under IFRS accounting principles. This is calculated as
the difference between IFRS classification of costs as operating
costs or fixed asset additions and the regulatory
classification.
Regulated asset base
The regulated asset base is a regulatory construct, based on
predetermined 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.
However, we include the calculation below.
'Total Regulated and other balances' includes the under or
over-recovery of revenues that National Grid's UK regulated
businesses target to collect in any year, which 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. In the
US, other regulatory assets and liabilities include regulatory
assets and liabilities which are not included in the definition of
rate base, including working capital where appropriate.
The investment in 'NGV and other businesses' includes net assets
excluding pensions, tax and items related to the UK Gas
Distribution sale.
RAV, rate base Total
or other business Regulated and
balances other balances
As at 31 March
(GBPm at constant currency) 2020 2019(1) 2020(2,3) 2019(1,2,3)
UK Electricity Transmission 14,133 13,537 13,769 13,291
UK Gas Transmission 6,298 6,155 6,305 6,099
US Regulated 20,644 18,407 22,435 20,394
Total regulated 41,075 38,099 42,509 39,784
NGV and other businesses 4,105 3,351 3,591 2,672
Total Group regulated and other balances 45,180 41,450 46,100 42,456
1. Figures relating to prior periods have, where appropriate
been represented at constant currency, for opening balance
adjustments following the completion of the regulatory reporting
pack process in 2019, and reclassifications between US rate base
and US other balances.
2. Includes totex-related regulatory IOUs of GBP411 million
(2019: GBP519 million), over-recovered timing balances of GBP24
million (2019: GBP68 million under-recovered) and under-recovered
legacy balances related to previous price controls of GBP78 million
(2019: GBP149 million).
3. Includes assets for construction work-in-progress of GBP1,510
million (2019: GBP1,813 million), other regulatory assets related
to timing and other cost deferrals of GBP642 million (2019: GBP189
million) and net working capital liabilities of GBP361 million
(2019: GBP15 million).
US rate base and total regulated assets for 31 March 2019 have
been restated in the table above at constant currency. At actual
currency the values were GBP17.6 billion and GBP19.5 billion
respectively.
Other business balances and other assets/invested capital for 31
March 2019 have been restated in the table above for the impact of
IFRS 16 leases and constant currency. At actual currency the values
were GBP2.8 billion and GBP2.7 billion respectively.
Asset growth
Asset growth is the annual percentage increase in our RAV and
rate base and other business balances (including the assets of
National Grid Ventures and National Grid Partners) calculated at
constant currency.
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
non-controlling interests.
We use Group RoE to measure our performance in generating value
for our shareholders, and targets for Group RoE are 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% RPI inflation, less adjusted interest and
adjusted taxation divided by equity investment in assets:
-- adjusted interest removes interest on pensions, capitalised
interest in regulated operations and unwind of discount rate on
provisions;
-- adjusted taxation adjusts the Group taxation charge for
differences between IFRS profit before tax and regulated financial
performance less adjusted interest; and
-- 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 National Grid Ventures
and 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.
2020 2019
Years ended 31 March GBPm GBPm
Regulated financial performance 3,546 3,318
Operating profit of other activities 269 424
Group financial performance 3,815 3,742
Share of post-tax results of joint ventures and associates 88 40
Non-controlling interests (1) (3)
Adjusted Group interest charge (1,069) (1,037)
Group tax charge (433) (488)
Tax on adjustments (117) (34)
Group financial performance after interest and tax 2,283 2,220
Opening rate base/RAV 37,459 35,045
Opening other balances 3,304 2,298
Opening goodwill 5,938 5,852
Opening capital employed 46,701 43,195
Opening net debt (27,194) (24,345)
Opening equity 19,507 18,850
Return on Equity 11.7% 11.8%
UK and US regulated RoE
Achieved Return Base or Allowed
on Equity Return on Equity
2020 2019 2020 2019
Regulatory % % % %
Debt:Equity
Years ended 31 March % assumption
UK Electricity Transmission 60/40 13.5 13.7 10.2 10.2
UK Gas Transmission 62.5/37.5 9.8 9.5 10.0 10.0
US Regulated Avg. 50/50 9.3 8.8 9.4 9.4
UK regulated RoE
UK regulated RoEs are a measure of how the businesses are
performing against the assumptions used by our UK 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%. They are
calculated by dividing elements of out/under-performance versus the
regulatory contract (i.e., regulated financial performance
disclosed above) 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 the APP scheme.
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.
US regulated RoE
US regulated RoE is a measure of how a business is performing
against the assumptions used by the US regulators. This US
operational return measure is calculated using the assumption that
the businesses are financed in line with the regulatory adjudicated
capital structure and allowed cost of debt. 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 the APP scheme.
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 for the RoE measure has been presented, as we do not
believe it would be practical to reconcile our IFRS balance sheet
to the equity base.
The table below shows the principal differences between the IFRS
result of the US Regulated segment, and the 'return' used to derive
the US RoE. In outlining these differences, we also include the
result for the US regulated Operating Companies (OpCo) entities
aggregated under US GAAP.
In respect of 2018/19, this measure is the aggregate operating
profit of our US OpCo entities' publicly available financial
statements prepared under US GAAP. For 2019/20, this measure
represents our current estimate, since local financial statements
have yet to be prepared.
2020 2019
GBPm GBPm
Underlying IFRS operating profit for US regulated segment 1,636 1,594
Weighted average GBP/$ exchange rate 1.287 1.305
2020 2019
$m $m
Underlying IFRS operating profit for US regulated segment 2,105 2,081
Adjustments to convert to US GAAP as applied in our US
OpCo entities
Adjustment in respect of customer contributions (50) (50)
Pension accounting differences(1) (13) (10)
Environmental charges recorded under US GAAP (94) (117)
Storm costs and recoveries recorded under US GAAP (9) (112)
Other regulatory deferrals, amortisation and other items 3 121
Results for US regulated OpCo entities, aggregated under
US GAAP 1,942 1,913
Adjustments to determine regulatory operating profit
used in US RoE
Levelisation revenue adjustment (122) (48)
Adjustment for COVID-19 related provision for bad and
doubtful debts(2) 150 -
Net other 51 (1)
Regulatory operating profit 2,021 1,864
Pensions(1) 19 (95)
Regulatory interest charge (491) (457)
Regulatory tax charge (408) (345)
Regulatory earnings used to determine US RoE 1,141 967
1. Based on US GAAP accounting policies as applied by our US
regulated OpCo entities.
2. US RoE is not impacted by the COVID-19 related provision for
bad and doubtful debts and includes an adjustment reflecting our
expectation for future recovery of these costs.
2020 2019
$m $m
US equity base (average for the year) 12,331 11,045
US RoE 9.3% 8.8%
=======================================
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.
Value Added and Value Added per Share and Value Growth
Value Added is a measure that reflects the value to shareholders
of our cash dividend and the growth in National Grid's regulated
and non-regulated assets (as measured in our regulated asset base,
for regulated entities), and corresponding growth in net 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 9.
Value added per share is calculated by dividing value added by
the weighted average number of shares (3,461 million) set out in
note 7.
Value Growth of 10.4% (2018/19: 11.5%) is derived from Value
Added by adjusting Value Added to normalise for a 3% long-run RPI
inflation rate. In 2019/20, the numerator for Value Growth was
GBP2,068 million (2018/19: GBP2,166 million). The denominator is
Group equity as used in the Group RoE calculation, adjusted for
foreign exchange movements.
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 NGV, UK property and other assets and
US other assets) is funded through debt. Comparative amounts as at
March 2019 are presented at historical exchange rates and have not
been restated for opening balance adjustments.
2020 2019
As at 31 March GBPm GBPm
UK RAV 20,431 19,692
US rate base 20,644 17,565
41,075 37,257
Other invested capital included in gearing calculation 4,105 2,815
Total assets included in gearing calculation 45,180 40,072
Net debt (including 100% of hybrid debt) (28,590) (26,529) change
Group gearing (based on 100% of net debt) 63% 66% 3% pts
Group gearing (excluding 50% of hybrid debt from
net debt) 61% 64% 3% pts
(1) 'Underlying' represents statutory results from continuing
operations only. It excludes exceptional items, remeasurements,
timing and major storm costs. 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
73 and reconciliations of these measures on pages 72 to 83. These
measures are not a substitute for IFRS measures, however the Group
believes such information is useful in assessing the performance of
the business on a comparable basis.
(2) Employee and contractor lost time injury frequency rate per
100,000 hours worked.
(3) Including Gas Distribution through to March 2017.
(4) In 2018/19 prices.
(5) For details of the acquisition of Geronimo Energy LLC and
Emerald Energy Venture LLC please refer to Note 15.
(6) In 2018/19 prices
(7) In 2018/19 prices
(8) Not including Assets Outside Rate Base.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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