National Grid plc Form 20-F Summary
Business context and reporting period
National Grid plc is a UK-incorporated energy infrastructure group operating regulated electricity and gas transmission businesses in Great Britain and regulated gas and electricity networks in the northeastern United States. It also operates National Grid Ventures, including interconnectors, LNG, metering, property and innovation investments.
The filing is an annual report for the fiscal year ended 31 March 2019, filed 4 June 2019, and prepared under IFRS as issued by the IASB. The requested “2018 Q4” period is not reported as a standalone quarter; the filing provides full-year 2018/19 results and comparative full-year information.
Key financial metrics
| Metric | 2018/19 | 2017/18 | Change |
|---|---|---|---|
| Continuing-operations revenue | £14,933m | £15,250m | (2)% |
| Statutory operating profit | £2,870m | £3,493m | (18)% |
| Statutory profit after tax, continuing operations | £1,502m | £3,549m | (58)% |
| Statutory EPS, continuing operations | 44.3p | 102.5p | (57)% |
| Underlying operating profit | £3,427m | £3,495m | (2)% |
| Underlying profit after tax | £1,998m | £1,945m | 3% |
| Underlying EPS | 58.9p | 56.2p | 5% |
| Capital investment | £4,506m | £4,251m | 6% |
| Group return on equity | 11.8% | 12.3% | (50)bps |
| Regulatory gearing | 66% | 64% | +200bps |
| Net debt | £26,529m | £23,002m | 15% |
Cash generated from continuing operations was £4,464m, versus £4,702m in the prior year. Net cash used in continuing investing activities was £3,190m, while continuing financing activities used £1,364m. Cash and cash equivalents ended at £252m, compared with £329m.
Total borrowings were £28,730m, including £4,472m current and £24,258m non-current borrowings. The Group raised more than £2.9bn of new long-term debt and had £5.727bn of undrawn committed borrowing facilities. Moody’s, S&P and Fitch maintained investment-grade ratings with stable outlooks.
Property, plant and equipment increased to £43,913m from £39,853m, while net assets increased to £19,369m from £18,848m. The Group’s defined-benefit and other post-retirement obligations produced a net accounting deficit of £218m, compared with £263m in 2017/18.
Material changes versus the prior comparable period
- Statutory earnings declined substantially because 2018/19 included £624m of exceptional operating charges and £499m of after-tax exceptional items and remeasurements. The prior year benefited from a £1.5bn deferred-tax gain following US tax reform.
- Underlying EPS increased 5% despite a 2% decline in underlying operating profit, supported by lower US tax rates, a lower share count and broadly stable underlying net finance costs of approximately £1bn.
- Underlying US Regulated operating profit decreased 6% to £1,594m, primarily reflecting Massachusetts labour-dispute costs excluded from underlying results, higher costs and the effect of US tax reform on regulated revenues.
- UK Electricity Transmission underlying operating profit increased 4% to £1,092m, while UK Gas Transmission declined 32% to £341m, mainly because of revenue allowance adjustments and the refund of amounts related to the cancelled Avonmouth pipeline project.
- National Grid Ventures and Other underlying operating profit increased 73% to £400m, helped by property activity and £95m of legal settlements.
- Asset growth accelerated to 7.2% from 5.9%, above the stated 5% to 7% target range. US rate base growth was 9.2% and UK regulated asset value growth was 3.6%.
- The proposed full-year dividend increased 3.1% to 47.34p per ordinary share, with underlying dividend cover of 1.2 times.
- IFRS 9 and IFRS 15 were adopted from 1 April 2018. IFRS 15 reduced reported revenue and operating costs by £1,197m on a gross-to-net basis without affecting operating profit; contract liabilities were £994m at 31 March 2019.
Guidance, outlook and management commentary
- Management expects capital investment of approximately £5bn per year and asset growth toward the top end of the 5% to 7% range.
- The UK efficiency programme is expected to generate operating-cost savings of approximately £50m in 2019/20 and £100m annually from 2020/21 onward. Similar efficiency actions are being implemented in the US.
- The Board recommended a final dividend of 31.26p per share, subject to shareholder approval, payable 14 August 2019. The stated policy is to grow the ordinary dividend at least in line with UK RPI for the foreseeable future.
- National Grid announced the exercise of options to sell its remaining 39% interest in Cadent for approximately £2bn, with completion expected in June 2019 subject to customary approvals. The interest was classified as held for sale and discontinued operations.
- National Grid completed the legal separation of the UK Electricity System Operator on 1 April 2019. Management stated that this would not affect consolidated financial results.
- National Grid Ventures agreed to acquire Geronimo Energy for $100m plus potential additional payments of up to $100m, subject to approvals, and is pursuing a joint venture with the Washington State Investment Board.
- Key strategic priorities are to optimise operational performance, grow the regulated core and evolve for the future through interconnectors, renewable energy, digital technology and innovation.
Risks, contingencies and unusual items
- Exceptional charges included £283m for the Massachusetts Gas labour dispute, £204m for UK and US cost-efficiency and restructuring programmes, and £137m for cancelled NuGen and Horizon nuclear connection projects. Management expects to recover much of the nuclear-related economic impact through regulatory arrangements.
- The Massachusetts dispute involved approximately 1,250 union employees and required a temporary contractor workforce. A new agreement was reached in January 2019.
- A January 2019 gas-supply interruption in Rhode Island affected approximately 7,500 Aquidneck Island customers. Regulatory investigations, potential enforcement actions, thousands of customer claims and two class-action lawsuits were disclosed.
- Environmental provisions were £1,639m, primarily relating to US remediation, and total provisions were £2,199m. The filing identifies significant estimation uncertainty around environmental remediation, pensions and other post-retirement benefits.
- Contracted future capital expenditure was £1,973m, energy purchase commitments were £15,709m and guarantees totalled £2,975m, including guarantees supporting interconnector projects.
- Principal risks include cyberattacks, catastrophic asset failure, energy-supply disruption, severe weather, regulatory and political uncertainty, Brexit, possible UK state ownership, adverse RIIO-T2 outcomes, financing and liquidity constraints, foreign-exchange and interest-rate exposure, pension funding, environmental liabilities and employee capability.
- The filing states that the Group expects to remain viable through May 2024 under its five-year viability assessment and that no individual risk or risk cluster was found to threaten viability over that period.
- IFRS 16 adoption from 1 April 2019 was expected to increase right-of-use assets and net debt by approximately £0.4bn, with no material impact on net assets or profit after tax.
Most important facts for investors to verify
- Reconcile statutory and underlying earnings, particularly the £624m exceptional charge and the prior-year £1.5bn US tax-reform benefit.
- Confirm completion timing, proceeds and final accounting for the sale of the remaining Cadent interest.
- Assess the effect of RIIO-T2 proposals, including the potential move from RPI to CPIH and proposed changes to allowed returns and financing assumptions.
- Monitor net debt, regulatory gearing, retained cash flow and the availability and maturity of committed facilities.
- Track the Rhode Island gas-service investigations, claims and litigation, as well as any resulting insurance or regulatory recovery.
- Evaluate whether planned capital investment, efficiency savings and asset growth remain consistent with the dividend policy and credit-rating objectives.
- Review environmental provisions, pension sensitivities and the recoverability of regulatory assets and timing balances.
- Verify the Geronimo Energy acquisition, related joint venture commitments and the execution risk of interconnector and renewable projects.