NATIONAL GRID PLC annual report, Q4 FY2022

National Grid plc Form 20-F Summary

Reporting period: Fiscal year ended 31 March 2022, filed 7 June 2022. The requested “2021 Q4” period is not a separate quarterly filing; this Form 20-F reports the full 2021/22 fiscal year. Financial statements are prepared under IFRS as issued by the IASB and presented in sterling.

Business context and reporting period

National Grid operates regulated electricity and gas transmission and distribution businesses in the UK and northeastern United States, alongside electricity interconnectors, LNG infrastructure, renewable generation and energy-technology investments.

The portfolio changed materially during the year. National Grid acquired Western Power Distribution (WPD), the UK’s largest electricity distribution business, on 14 June 2021. UK Gas Transmission and metering were classified as discontinued operations and held for sale following the planned sale of a 60% stake. The Narragansett Electric Company (NECO) in Rhode Island was also held for sale, although it remained within continuing operations because it did not constitute a separate major line of business.

Financial performance and key metrics

Metric	2021/22	2020/21	Change
Continuing-operations revenue	£18,449m	£13,665m	35%
Continuing-operations statutory operating profit	£4,371m	£2,401m	82%
Continuing-operations profit after tax	£2,183m	£1,304m	67%
Continuing-operations basic EPS	60.6p	37.0p	64%
Underlying operating profit	£3,992m	£2,688m	49%
Underlying profit after tax	£2,351m	£1,493m	57%
Underlying EPS	65.3p	42.4p	54%
Total Group profit after tax, including discontinued operations	£2,354m	£1,641m	43%
Total Group basic EPS	65.4p	46.6p	40%
Total capital investment	£7,000m	£5,047m	39%
Group return on equity	11.4%	10.6%	+80 bps
Asset growth	8.7%	5.6%	+310 bps
Regulatory gearing	81%	65%	+16 percentage points
Retained cash flow/adjusted net debt	8.9%	6.6%	+230 bps

Cash flow, debt and liquidity

Cash generated from continuing operations was £5,788m, compared with £3,967m in the prior year.
Net cash outflow from continuing operations was £1,617m, after capital investment, interest, tax and dividends.
Closing net debt was £42,809m, up from £28,546m, primarily because of the WPD acquisition and debt acquired with WPD.
Total borrowings were £45,465m, including £8,179m drawn under the WPD bridge facility.
The Group had £6.8bn of undrawn committed facilities available for general corporate purposes as at 18 May 2022, including £350m relating to National Grid Gas plc.
Management stated that the planned NECO and UK Gas Transmission disposals were expected to provide proceeds to repay the bridge facility and reduce gearing.
The Group maintained strong investment-grade ratings, reported as BBB+ by S&P and Baa1 by Moody’s.

Dividends and balance sheet

Recommended full-year dividend: 50.97p per ordinary share, compared with 49.16p in 2020/21.
Proposed final dividend: 33.76p per ordinary share, subject to shareholder approval.
Underlying dividend cover was 1.3 times.
Net assets were £23,856m, compared with £19,860m at 31 March 2021.
The Group reported a net pension surplus of £3,075m, compared with £715m in the prior year.

Material changes versus the prior comparable period

WPD acquisition: Added 9.5 months of UK electricity distribution results, including £1,468m of revenue and £781m of profit before tax. WPD contributed £899m of capital investment and £4,721m of goodwill was recognised.
Portfolio repositioning: National Grid increased its strategic focus on electricity. Management expects the post-transaction portfolio to be approximately 70% electricity and 30% gas.
Profit growth: Underlying performance benefited from WPD, higher interconnector revenues, stronger NGV and National Grid Partners results, lower COVID-19 effects and property disposals.
Financing pressure: Net debt and regulatory gearing increased substantially because the WPD acquisition was funded partly with an £8.2bn bridge facility and included approximately £8.1bn of debt acquired with WPD.
Exceptional and remeasurement items: Continuing operations included a £228m gain on disposal of the St William property joint venture, £189m of released deferred income, £223m of transaction and separation costs, £66m of operating-model costs, a £458m deferred tax charge from the UK tax-rate increase and £392m of commodity-derivative remeasurement gains.
Interconnector disruption: A fire at the IFA interconnector reduced capacity by approximately 50%; management expected full service to resume in December 2022.
US customer credit: Bad-debt expense declined materially from the prior year as collection activities resumed, although COVID-19-related bad-debt exposure remained a consideration.

Guidance, outlook and management commentary

Management forecasts £30bn–£35bn of capital investment for 2021/22–2025/26, including approximately £24bn directed toward decarbonising energy systems.
Expected regulated asset growth is 6%–8% compound annual growth, with underlying EPS growth targeted at 5%–7% compound annual growth over the medium term.
Management expects gearing to peak in 2021/22 and settle slightly above 70% after the strategic transactions are completed and disposal proceeds are applied.
The Group intends to grow annual dividends in line with UK CPIH inflation, subject to business performance and regulatory developments.
The acquisition of WPD, the planned disposal of NECO and the UK Gas Transmission transaction are intended to increase exposure to electricity and support long-term energy-transition growth.
The UK Electricity System Operator is expected to transfer to an independent Future System Operator, subject to legislation and completion of the transaction process.
National Grid expects to develop fossil-free gas and electric systems in the US by 2050, using renewable natural gas, green hydrogen, hybrid heating, targeted electrification and networked geothermal solutions.
Management maintained its commitment to Scope 1 and 2 net-zero emissions by 2050, with interim reduction targets of 80% by 2030 and 90% by 2040 against a 1990 baseline.

Risks, contingencies and unusual items

Regulatory risk: Returns, revenues, cost recovery and future investment depend on UK price controls, US rate cases, licence conditions and regulatory approvals. RIIO-ED2 and future US rate proceedings remain important.
Transaction execution: Completion and proceeds from the NECO and UK Gas Transmission disposals were important to repaying the WPD bridge facility and reducing gearing. NECO completion had been delayed by an appeal by the Rhode Island Attorney General; the filing states that the NECO sale subsequently completed on 25 May 2022.
Climate-transition risk: The Group has not shortened the useful lives of US gas assets despite decarbonisation commitments. Limiting useful lives to 2050 would increase annual depreciation by approximately £180m for New York and New England combined, before considering potential regulatory recovery.
Cybersecurity and infrastructure: Cyberattack, asset failure, severe storms, flooding, supply disruption and energy-market volatility could affect operations, liquidity and reputation. Cyber risk was classified as increasing because of geopolitical tensions.
Environmental provisions: Environmental provisions were £1,877m, principally relating to US Superfund sites. Estimates depend on remediation scope, regulation, timing, technology and discount rates.
Legal and conduct matters: Former US employees were subject to federal fraud and bribery allegations. National Grid identified itself as a victim and expanded its internal investigation. The filing states that the outcome of related regulatory reviews and potential liabilities could not be predicted.
IFA insurance claim: Insurance recovery for the IFA fire was considered probable but was not recognised because reinsurer approval and the final amount and timing remained uncertain.
Commitments: Contracted future capital expenditure was £2,881m, energy purchase commitments were £18,514m and guarantees totalled £2,564m.
Audit: Deloitte issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Critical audit matters included the WPD acquisition and goodwill impairment, and the impact of climate change on US gas-asset useful lives.

Most important facts for investors to verify

Confirm completion proceeds and final accounting for the NECO and UK Gas Transmission transactions, including repayment of the WPD bridge facility.
Track post-transaction regulatory gearing, net debt, credit ratings and retained cash flow metrics.
Assess whether the £30bn–£35bn investment programme and 6%–8% asset-growth outlook remain achievable amid inflation, supply-chain constraints and higher interest rates.
Review the sensitivity of WPD goodwill to the 5.2% discount rate, 2.5% terminal growth assumption and long-term electricity-demand forecasts.
Evaluate regulatory outcomes for RIIO-ED2, the Future System Operator transition and pending US rate cases.
Monitor the IFA insurance recovery, interconnector revenue returns and the expected December 2022 restoration of full IFA capacity.
Assess the potential financial impact of US gas-network decarbonisation, including asset-life changes, hydrogen and renewable-gas availability, and regulatory cost recovery.
Review developments in the fraud and bribery investigations and any related regulatory, litigation or remediation costs.