NATIONAL GRID PLC annual report, Q4 FY2018

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National Grid plc Form 20-F Summary

Business context and reporting period

National Grid plc is a UK-incorporated electricity and gas utility operating regulated transmission and distribution networks in the UK and northeastern United States, alongside National Grid Ventures and other non-regulated activities. The filing is an annual Form 20-F for the fiscal year ended 31 March 2018, filed 4 June 2018. It is not a quarterly filing for “2017 Q4”; the source text does not provide a separate quarter-end financial statement.

The financial statements are prepared under IFRS as issued by the IASB and adopted by the EU. The 2017 comparatives reflect the disposal of a 61% controlling interest in the UK Gas Distribution business, now Cadent, with National Grid retaining a 39% associate interest.

Financial performance and position

  • Revenue: £15.25 billion, up from £15.04 billion.
  • Statutory operating profit: £3.493 billion, up from £3.208 billion.
  • Statutory profit after tax from continuing operations: £3.592 billion, versus £1.810 billion. The increase was driven largely by a £1.510 billion deferred-tax credit from US tax reform and other exceptional items and remeasurements.
  • Adjusted profit after tax: £2.061 billion, down 4% from £2.141 billion.
  • Underlying profit after tax: £2.090 billion, up 3% versus 2016/17 pro forma results including the Cadent overlay.
  • Underlying EPS: 60.4 pence, up 3% versus 58.6 pence on a pro forma comparable basis. Statutory continuing EPS was 103.8 pence versus 48.1 pence.
  • Operating margin: statutory operating margin was approximately 22.9%; adjusted operating margin was approximately 22.7%.
  • Cash flow: cash generated from continuing operations was £4.702 billion, up from £4.452 billion; net cash inflow from continuing operating activities was £4.710 billion.
  • Capital investment: £4.251 billion, up 10% from £3.862 billion, including £2.424 billion in US Regulated, £1.309 billion in UK transmission and £518 million in National Grid Ventures and Other.
  • Net debt: £23.002 billion, up from £19.274 billion, primarily reflecting the £4.0 billion return of capital following the Cadent disposal.
  • Adjusted net debt: £22.777 billion; retained cash flow to adjusted net debt was 9.7%, compared with 14.9%.
  • Interest cover: 4.4 times, versus 5.0 times.
  • Total borrowings: £26.625 billion, versus £28.638 billion. Cash and cash equivalents were £329 million, with £5.683 billion of undrawn committed borrowing facilities.
  • Net assets: £18.848 billion, down from £20.384 billion after the shareholder distribution and foreign-exchange effects.
  • Return on equity: Group RoE was 12.3%, versus 11.7%; US regulated RoE was 8.9%, versus 8.2%; UK regulated RoE was 12.1%, versus 12.7%.
  • Dividend: proposed full-year ordinary dividend of 45.93 pence per share, up 3.7%. A special dividend of 84.375 pence per share, approximately £3.170 billion, was paid in June 2017. The Company also completed an approximately £835 million share buyback.

Material changes versus the prior comparable period

  • The reported year benefited from the US Tax Cuts and Jobs Act, which reduced the US federal corporate tax rate from 35% to 21% and generated a £1.510 billion exceptional deferred-tax credit. Management expects the regulatory effect to be economically neutral over the long term as tax benefits are returned to customers.
  • US Regulated revenue increased 10% to £9.272 billion, but adjusted operating profit declined to £1.698 billion due to foreign exchange, major storm costs of £142 million and higher depreciation.
  • UK Electricity Transmission adjusted operating profit declined to £1.041 billion from £1.372 billion, primarily because of lower timing recoveries, returned efficiencies and lower required outputs.
  • National Grid Ventures and Other adjusted operating profit increased to £231 million from £177 million, supported by property disposals and lower business-change costs.
  • The Group launched National Grid Ventures on 1 April 2017 to pursue interconnectors, LNG, metering, renewables, distributed energy and emerging technologies.
  • The US dollar weakened against sterling, reducing reported revenue by approximately £536 million and adjusted operating profit by approximately £98 million.
  • The Group’s net pension and other post-retirement benefit deficit improved to £263 million from £1.933 billion, primarily because of actuarial gains and employer contributions.
  • National Grid announced an agreement after year-end for the potential sale of its remaining 25% interest in Quadgas HoldCo, the holding company for Cadent, for approximately £1.2 billion. The accounting impact included a £213 million impairment of the retained equity interest and a £110 million derivative fair-value gain.

Guidance, outlook, commentary and risks

  • Management targets annual regulated asset growth of 5% to 7% and ordinary dividend-per-share growth at least in line with UK RPI for the foreseeable future.
  • Management expects to continue substantial investment in US networks, including approximately $2.5 billion over three years under the approved Niagara Mohawk rate plan.
  • Three UK interconnectors under construction were expected to add 3.4 GW of capacity, with Nemo Link targeted for 2019 and IFA2 and North Sea Link targeted for 2020 to 2021/22.
  • The Company is preparing for the UK RIIO-T2 regulatory framework beginning in April 2021 and for legally separate operation of the UK Electricity System Operator by April 2019.
  • National Grid disputed Ofgem’s proposed delivery and compensation model for the Hinkley-Seabank connection, stating that the proposed returns may not reflect project risk and cost.
  • Key risks include regulatory and political uncertainty, Brexit and energy-market access, possible UK network renationalisation, US and UK rate-case outcomes, cyber security, asset failure, severe weather and storms, environmental remediation, pensions, foreign exchange, interest rates, commodity prices, liquidity and access to capital markets.
  • Environmental provisions totaled £2.052 billion, including £1.531 billion for environmental remediation. The filing states that much of the US environmental expenditure is expected to be recoverable from ratepayers, but recovery depends on regulatory arrangements.
  • Contractual commitments included £1.843 billion of contracted future capital expenditure, £5.328 billion of energy purchase commitments and £2.669 billion of guarantees.
  • The Board concluded that the Group was a going concern and had a reasonable expectation of remaining viable through May 2023 based on a five-year assessment.
  • The filing states that management and Deloitte concluded internal control over financial reporting was effective as of 31 March 2018, while also noting ongoing remediation work relating to UK finance processes and IT access controls.
  • IFRS 15 was expected to reduce reported 2017/18 revenue by approximately £1.056 billion if applied retrospectively to certain pass-through arrangements, with no profit impact, and to reduce profit after tax by approximately £56 million for connection contributions. IFRS 16 was expected to increase reported assets and liabilities when adopted.

Most important facts an investor should verify

  • Reconcile statutory profit and EPS to adjusted and underlying measures, particularly the £1.510 billion US tax-reform credit and other exceptional items.
  • Assess whether the 9.7% retained cash flow to adjusted net debt ratio remains consistent with the Company’s 9% long-term target after dividends, buybacks and capital investment.
  • Review regulatory treatment and timing of US tax reform benefits, storm-cost recovery, environmental remediation, pension costs and timing balances.
  • Confirm the terms, exercise mechanics and final outcome of the agreement to potentially sell the retained 25% Cadent interest.
  • Evaluate the sustainability of the proposed 45.93 pence dividend against net debt of £23.002 billion, planned capital investment and refinancing requirements.
  • Review Hinkley-Seabank regulatory decisions, RIIO-T2 allowances and the planned Electricity System Operator separation.
  • Monitor US rate-case decisions in Massachusetts and Rhode Island, achieved versus allowed RoE, and the execution of the Niagara Mohawk capital programme.
  • Assess exposure to severe weather, cyber security, environmental liabilities, pension assumptions and foreign-exchange movements.