REG - National Grid PLC - Results for the year ended 31 March 2015 <Origin Href="QuoteRef">NG.L</Origin> - Part 2
15/07/2015 18:44
- Part 2: For the preceding part double click ID:nRSU8507Na
(£m) 2015 2014 % change
Net revenue 1,933 1,732 12%
Regulated controllable operating costs (283) (269) (5)%
Post-retirement costs (36) (32) (13)%
Other operating costs and provisions (1) (1) -
Depreciation and amortisation (376) (343) (10)%
Operating profit 1,237 1,087 14%
Less: Timing impact (89) (60)
Operating profit excluding timing 1,326 1,147 16%
Excluding the impact of timing, net revenue (net of pass through costs) increased by £230m. This primarily reflected an
increase in the core regulated revenue allowances and also the benefit of legal settlements.
Regulated controllable operating costs increased by £14m; reflecting additional maintenance expenditure (delivering overall
totex benefits by reducing capex requirements) and business change costs partly offset by one-off benefits from legal
settlements. Excluding these effects, underlying regulated controllable costs were flat year on year. Post-retirement costs
increased by £4m.
Depreciation and amortisation increased by £33m, reflecting investment driven growth in the asset base.
REVIEW OF UK GAS TRANSMISSION OPERATIONS
Strong operational performance driven by recent investments and winter preparation
UK Gas Transmission delivered a good year in the second of eight years under the RIIO price controls, building on the solid
results of 2013/14 to produce an improved Return on Equity. The business continued to deliver good safety performance,
repeating the exceptionally strong levels of last year in the operations business, with a second full year of zero lost
time injuries amongst both employees and contractors. There were no exceptionally cold spells during the winter and there
were also fewer threats from flooding than in 2013/14. However, the system was called upon to respond to a number of
challenges, including supply volatility from Norwegian gas fields. The key to meeting these challenges is to maximise
system availability, and the business has made good progress in this respect. In 2014/15 UK Gas Transmission delivered
strong levels of network availability, reflecting the benefit of recent investments and improvements in planning and
maintenance processes, particularly in relation to the compressor fleet.
Performance reflects continued prior period benefit and strong incentive delivery
Return on Equity 420bp above base levels
Return on Equity for the year, using a long run inflation rate of 3%, was 14.2% compared with a regulatory assumption, used
in calculating the original revenue allowance, of 10.0%. The principal components of the difference are shown in the table
below.
Return on Equity 2014/15 2013/14
Base return (including avg. 3% long run inflation) 10.0% 10.0%
Totex incentive mechanism (0.4)% (0.4)%
Other revenue incentives 2.4% 1.1%
Return including in year incentive performance 12.0% 10.7%
Pre-determined additional allowances 2.2% 2.1%
Operational Return on Equity 14.2% 12.8%
The business performed slightly below the targets set by the new totex incentive mechanism in the second year of RIIO.
Operating costs were around £4m higher than allowance reflecting £6m of residual costs associated with the restructuring
programme of 2013 and 2014. Totex spend was approximately £290m compared with an estimated allowance, adjusted for outputs
and phasing, of around £270m. The Company's share of this difference is expected to be £(9)m.
Underlying totex performance reflects actions, taken in 2013 and early 2014, to address the cost challenges of the new RIIO
price controls, including organisational restructuring. Throughout 2014/15, the business has continued to focus on
delivering operational efficiencies, in particular in improving the efficiency of asset health and investment delivery
processes. Successful innovation is expected to be a key contributor in achieving future cost efficiencies. In the year, UK
Gas Transmission was awarded £6m under Ofgem's network innovation competition to pursue development of a new robotic device
that can inspect below-ground pipework at high pressure installations.
The business delivered a good year of performance within its revenue incentive schemes framework. In particular, gas
permits performance (a one off incentive) was £29m in the year and constraint management, transportation support services
and shrinkage incentives performance remained at similarly good levels to those achieved in 2013/14. The positive
performance under stakeholder and customer service incentives reflected increased efforts by the organisation in recent
years to identify and address the needs of a wide variety of stakeholders. Overall, the UK Gas Transmission business
delivered around 240 basis points of additional returns through other revenue incentives. On a pre-tax basis, this equates
to an estimated £58m of additional revenue allowance, most of which is due to be recovered in future years under the RIIO
funding mechanisms.
The strong contribution from pre-determined allowances results mainly from legacy incentives relating to entry and exit
capacity mechanisms. This is expected to decrease significantly next year in accordance with the profile set out under the
RIIO price control.
Regulated Financial Performance up 17% year on year
An explanation of the regulatory financial performance measure can be found in the section on UK Electricity Transmission
and in the glossary before the notes to this statement.
Regulated financial performance for UK Gas Transmission increased to £648m from £552m, up 17%. This reflected the improved
achieved operational Return on Equity performance and the increase in underlying revenues associated with increased
regulated asset value. This was partly offset by lower allowed cost of debt (2.72% real compared with 2.92% real in
2013/14).
Reconciliation of regulated financial performance to operating profit (£m) 2015 2014 % change
Operating profit 437 417 5
Movement in regulatory "IOUs" (16) (28)
Deferred taxation adjustment 85 12
RAV indexation (3% long run avg.) 166 162
Regulatory v IFRS Depreciation difference (22) (2)
Fast/Slow money adjustment 54 44
Pensions (49) (46)
Performance RAV created (7) (7)
Regulated financial performance 648 552 17
Regulated Financial Position broadly unchanged with RPI below long run expectations
RAV was broadly flat year on year, with continued investment and lower than expected inflation almost entirely offset by
depreciation. Net other regulatory assets decreased by £16m, mainly reflecting revenue under recoveries and incentive
performance during the year that are deferred for future collection under regulatory arrangements, more than offset by
recovery of deferred balances relating to historic pensions contributions and logged up investment spend.
£m 2015 2014
Opening Regulated Asset Value (RAV)* 5,529 5,408
Asset additions (aka slow money) (actual) 174 187
Performance RAV or assets created (7) (7)
Inflation adjustment (actual RPI) 50 133
Depreciation and amortisation (194) (174)
Closing RAV 5,552 5,547
Opening balance of other regulated assets and (liabilities)* 174 208
Movement (16) (28)
Closing balance 158 180
Closing Regulated Financial Position 5,710 5,727
*March 2014 opening balances adjusted to correspond with 2013/14 regulatory filings and calculations
Investment activities in 2014/15 continue to focus around asset health
UK Gas Transmission invested £184m almost entirely reflecting non-load related spend. This was in line with the level of
investment in 2014/15 and included site security enhancements and investment in compressor installations including asset
replacement and emission reduction.
The business has accelerated asset health expenditure on pipeline integrity in particular in the first two years of the
RIIO controls, as these are priority assets in terms of public safety. Going forward, the business expects to increasingly
focus on other asset health areas, in addition to pipelines, in line with plans to deliver the overall eight year RIIO
targets.
During the year, the business completed final commissioning activities on the first of four expected new electric drive
compressors which are expected to improve local air quality through reduced emissions and enable the business to meet the
requirements of the Industrial Emissions Directive.
Regulatory and other business developments
The business has benefited from a stable regulatory environment during 2014/15. The import capability of the UK remains
strong and the gas supply environment is significantly more diversified than when much of the network was originally
designed. Customers now have significant flexibility over which sources of gas they choose to meet demand and the gas
transmission network therefore needs to be able to respond to changing day to day supply and demand patterns.
Over the course of 2014/15, UK Gas Transmission continued to engage with stakeholders around the changing requirements on
the gas network. This has enabled the Company to take account of customer desire for increased flexibility when developing
its proposal to address the impact of the Industrial Emissions Directive on the gas compressor fleet. The business
submitted an associated funding request to Ofgem in May 2015 and expects the outcome in the autumn. The level of investment
within this submission would represent a material increase in the investment programme in UK Gas Transmission compared to
current levels.
Future activities and outlook
The business will continue to monitor storage levels alongside supply and demand expectations over the summer in
preparation for the winter months. An update is expected to form part of the Winter Outlook in October.
The outlook for UK Gas Transmission in 2015/16 is positive in terms of continued delivery of good incentive performance and
asset growth. Overall achieved Return on Equity is likely to reduce somewhat compared to the strong level in 2014/15 as
there is no permit incentive scheme in 2015/16 and pre-determined revenue allowances are also expected to reduce. The
business does not expect to have the opportunity to deliver significant increases in totex efficiencies from 2014/15 levels
as the absolute level of spend in the business is expected to remain relatively low. This reflects, in particular, a lack
of demand for new UK Gas Transmission capacity.
National Grid expects to slightly reduce the level of UK Gas Transmission capital investment in 2015/16 compared to
2014/15, reflecting the completion of a number of compressor projects in the current year. As a result, regulated asset
value is expected to grow broadly in line with the rate of inflation in 2015/16.
APPENDIX to REVIEW OF UK GAS TRANSMISSION OPERATIONS
Revenue and Costs in 2014/15 on an IFRS basis
On an IFRS basis UK Gas Transmission operating profit was £437m, up £20m or 5%. This increase was slightly lower than
expectations, mainly driven by timing and closure costs of an LNG storage facility. Revenues in the year were lower than
the targeted level impacted by the milder winter weather. This forms part of the timing adjustments below. Adjusting for
timing movements, operating profit increased by £17m.
The principal components of the movement in operating profit are shown below.
(£m) Year ended 31 March
2015 2014 % change
Net revenue 780 735 6
Regulated controllable operating costs (125) (117) (7)
Post-retirement costs (18) (18) -
Other operating costs and provisions (28) (11) (155)
Depreciation and amortisation (172) (172) -
Operating profit 437 417 5
Less: Timing impact (18) (21)
Operating profit excluding timing 455 438 4
Net revenue (net of pass through costs) increased by £45m. Excluding timing impacts of £3m, net regulated revenue increased
by £42m. This included a £29m, one-off, increase in permit income, an £8m increase in core regulated allowed revenues (net
of pass through costs and revenues collected on behalf of others) under the RIIO price control arrangements and £5m higher
LNG revenues.
Regulated controllable costs increased by £8m. Excluding business change costs, underlying regulated controllable costs
increased by around £5m, up 4%, which partly reflected inflationary impacts on salaries and other costs.
Depreciation and amortisation remained flat. Other operating costs increased by £17m, mostly reflecting additional costs
relating to the closure of LNG facilities.
REVIEW OF UK GAS DISTRIBUTION OPERATIONS
Good operational, safety and financial progress focussed on customer needs
UK Gas Distribution continued to deliver strong performance in its second year of the RIIO price control period. The
business has driven innovation, maintained emergency response standards above the required levels and successfully
implemented procedures to improve customer connection services.
This year, the UK Gas Distribution business replaced around 1,400km of metallic mains with new polyethylene pipes,
delivering safety and environmental benefits and meeting key regulatory outputs. Efficiency savings in the delivery of this
programme during 2014/15 will, again, be shared with customers and will benefit their bills, starting in 2016/17 and
continuing beyond 2021. The Company continues to develop and trial innovative solutions to manage the costs of this
programme on behalf of customers and deliver an increasing level of planned workload over the remaining RIIO price control
period.
Building on the business' good safety record remains a key priority. Safety initiatives in the year included helping
landowners and construction industry organisations understand how National Grid protects its gas pipelines and how they can
operate safely around them.
Regulated Returns and Financial Performance reflect good efficiency and incentive delivery
Return on Equity 300bp above base levels
Return on Equity for the year, using a long run inflation rate of 3%, was 12.9% compared with a regulatory assumption, used
in calculating the original revenue allowance, of 9.9%. The principal components of the difference are shown in the table
below. This is in line with the Return on Equity last year.
Return on Equity 2014/15 2013/14
Base return (including avg. 3% long run inflation) 9.9% 9.9%
Totex incentive mechanism 2.3% 2.8%
Other revenue incentives 0.6% 0.2%
Return including in year incentive performance 12.8% 12.9%
Pre-determined additional allowances 0.1% 0.1%
Operational Return on Equity 12.9% 13.0%
UK Gas Distribution again drove significant outperformance against regulatory cost allowances by delivering savings and
generating additional returns through the totex incentive mechanism. Much of the totex performance came through efficient
delivery of the mains replacement programme. Most of this is delivered through the innovative Gas Distribution Strategic
Partnerships (GDSP), contractual partnership arrangements that the business put in place ready for the start of the RIIO
period. These actions have significantly reduced the unit cost of replacing metallic mains compared to pre-RIIO levels.
Overall, totex was around £890m compared with an estimated allowance, adjusted for outputs and phasing of spend, of almost
£1bn. The Company's share of this efficiency saving is expected to be around £64m, partly reflected in an estimate of
increased regulatory asset value (Performance RAV).
Other revenue incentives, though a smaller part of the return, more than doubled this year. Leakage, shrinkage and capacity
incentive performance all improved. National Grid continues to reduce the impacts of its activities on the environment by,
for example, reducing gas leakage from its pipeline network through active pressure management and the mains replacement
programme. Stakeholder satisfaction measures published during the year showed a strong improvement with UK Gas Distribution
being the best performing network operator for 2013/14. The business also delivered improved performance under the
customer satisfaction incentives. Overall the UK Gas Distribution business delivered around 60bp of additional returns
through other revenue incentives after sharing. On a pre-tax basis, this equates to an estimated £25m of additional revenue
allowance.
Regulated Financial Performance down 4%
An explanation of the calculation of regulatory financial performance can be found in the section on UK Electricity
Transmission and in the glossary before the notes to this statement.
Regulated financial performance for UK Gas Distribution decreased to £819m from £855m. This reflected an increase in
underlying revenues associated with increased regulated asset value, more than offset by lower allowed cost of debt and a
slightly reduced achieved return.
Reconciliation of regulated financial performance to operating profit (£m) 2015 2014 % change
Operating profit 826 904 (9)
Movement in regulatory "IOUs" (28) (59)
Deferred taxation adjustment 60 85
RAV indexation (assuming 3% RPI inflation) 255 252
Regulatory v IFRS Depreciation difference (148) (149)
Fast/Slow money adjustment (182) (197)
Pensions (5) (9)
Performance RAV created 41 28
Regulated financial performance 819 855 (4)
Regulated Financial Position steady
Regulated asset value was flat year on year, with investment and a share of savings delivered in the form of performance
RAV offset by regulatory depreciation. The contribution to growth from RPI inflation in the year was relatively low,
compared to long run levels. During the year, net other regulatory liabilities increased by £28m, leaving a closing balance
of £83m to return to customers in future years. Much of this movement relates to timing over-recoveries in the current
year.
£m 2015 2014
Opening Regulated Asset Value (RAV)* 8,495 8,389
Asset additions (aka slow money) (actual) 333 313
Performance RAV or assets created 41 28
Inflation adjustment (actual RPI) 76 205
Depreciation and amortisation (434) (420)
Closing RAV 8,511 8,515
Opening balance of other regulated assets and (liabilities) * (55) 8
Movement (28) (59)
Closing balance (83) (51)
Closing Regulated Financial Position 8,428 8,464
*March 2014 opening balances adjusted to correspond with 2013/14 regulatory filings and calculations
Investment activities in 2014/15
UK Gas Distribution continues to invest in new approaches to deliver capital and replacement projects in innovative and
lower cost ways. The business has developed technology that contributed to a reduction in the volume of excavations and is
exploring a number of alternative "no dig" solutions to achieve further reductions to volume and duration of excavations in
future years. National Grid will trial a number of these technologies in the summer of 2015, including Tier One Robotic
System (TORS), that will allow the connection of mains and services with minimal excavations and Pipe Renewal In-Situ
Manufactured (PRISM), a multi-partyproject translating existing technology used in the water industry to the gas
distribution industry.
Overall capital investment in UK Gas Distribution was £498m, including £360m of replacement expenditure (£14m higher than
2013/14) and £138m of other capex, in line with last year.
Regulatory and other business developments
2014/15 was the second year of the eight year RIIO price control reflecting a stable regulatory environment for the
business. As the UK's energy mix changes, National Grid continues to develop its networks to accommodate gas from new
sources. This included further bio-methane connections being made this year, increasing the total number of connections to
10.
Gas Distribution successfully rolled out an improved customer connections process across two of its four networks over the
course of the year. This included a reduced number of touch points for customers to manage, a new web portal and the
outsourcing of a number of elements of the process. The new process has delivered clear improvements and is now being
adopted in the remaining two networks.
Future activities and outlook
The outlook for UK Gas Distribution in 2015/16 is positive in terms of continued delivery of returns and steady asset
growth. The business has the opportunity to build on the good totex incentive performance in the year and to further
improve on revenue incentive performance.
The business remains on track to deliver the RIIO risk reduction outputs and the annual Health and Safety Executive
requirement for length of main replaced over the course of the eight year RIIO period.
For the first two years of the price control, UK Gas Distribution has delivered its primary replacement output, risk
reduction on metallic mains, in line with the eight year RIIO target. The run rate of the secondary replacement metric,
length of metallic main replaced, is below the eight year average but is in line with the business' delivery plans. The
Company expects to increase the length of mains replaced each year as the RIIO price control progresses (and has phased the
allocation of totex allowances accordingly when calculating Return on Equity). At the same time, the business expects to
leverage the benefits of innovation to drive further totex performance and customer value.
The business will continue to focus on key success factors. These include: managing the critical GDSP contracts to achieve
the maximum sustainable benefits available; implementing performance excellence and improving processes to increase
business efficiency and reduce internal costs; improving safety performance and making further progress to improve customer
satisfaction. UK Gas Distribution will aim to embed the new connections process and review and improve the customer
experience for planned work.
National Grid expects UK Gas Distribution capital investment and replacement expenditure to increase slightly in 2015/16 to
over £500m and, as a result, to grow regulated asset value in line with RPI inflation for the year.
APPENDIX to REVIEW OF UK GAS DISTRIBUTION OPERATIONS
Revenue and Costs in 2014/15 on an IFRS basis
On an IFRS basis UK Gas Distribution operating profit was £826m, down £78m or 9%. Regulated revenues in the year were lower
due to a change in remuneration of replacement spend under the regulatory arrangements. Costs increased and depreciation
was higher than last year. Lower pass through costs than expected and an RPI true up have led to an over recovery of £13m
in the year. Adjusting for timing movements, operating profit decreased by £62m.
The principal components of the movement in operating profit are shown below.
(£m) Year ended 31 March
2015 2014 % change
Net revenue 1,504 1,531 (2)
Regulated controllable operating costs (353) (331) (7)
Post-retirement costs (36) (40) 10
Other operating costs and provisions/contribution release (3) 15 (120)
Depreciation and amortisation (286) (271) (6)
Operating profit 826 904 (9)
Less: Timing impact 13 29
Operating profit excluding timing 813 875 (7)
Net revenue (net of pass through costs) decreased by £27m. Excluding timing impacts of £16m, net regulated revenue
decreased by £11m.
Regulated controllable costs increased by £22m. Excluding business change costs, underlying regulated controllable costs
increased by around £14m, up 4%, partly reflecting inflationary impacts on salaries and other costs. Post-retirement costs
decreased by £4m and the benefit from contribution releases net of other operating costs decreased by £18m reflecting a
provision for additional asset protection costs.
Depreciation and amortisation increased by £15m, reflecting investment driven growth in the asset base.
REVIEW OF US REGULATED OPERATIONS
Solid performance in 2014/15 while investing at record levels
National Grid's US Regulated operations delivered another solid year. Revenue increases under several existing rate plans
and the addition of new customers helped, in part, offset the impact of additional costs associated with prolonged cold
weather and several other one off items. At the same time, record capital investment of $2.4bn in the year resulted in a 7%
increase in the underlying regulated rate base.
Network performance and reliability were good, delivering essential services to many customers facing a second year of
prolonged cold weather as well as numerous regional snow storms. The gas and electricity networks stood up well to the
increased load demands with record gas volumes, heavy snow, with record snowfall in Massachusetts, and local storm
activity. As a result, the business achieved almost all of its key reliability metrics. This performance reflected the
benefit of infrastructure investment in recent years as well as local teams' effective storm response. The business
continued to invest in strengthening resilience and "hardening" of networks which should help future performance.
Regulated returns reflect financial performance and rate base growth
Return on Equity
Return on Equity for the year was 8.4% representing 87% of the 9.7% overall allowed return used in calculating the original
revenue allowances. This compared to a prior year achieved return of 9.0%. The following table sets out the detailed
returns for each business and the contribution to the overall year on year movement.
Regulated Return on Equity Achieved (%) Calendar year Most recent granted (%)
US Regulated Entity 2014 Contribution to overall US return movement (bp) 2013 2012
New York
KEDNY 8.5 (13) 9.5 11.0 9.4
KEDLI 6.5 (25) 8.8 7.2 9.8
NMPC Gas 8.3 (17) 10.3 5.3 9.3
NMPC Electric 9.0 15 8.0 8.7 9.3
Total New York* 8.2 (40) 8.8 8.5 9.4
Massachusetts
Massachusetts Gas 7.8 (3) 8.5 12.2 9.8
Massachusetts Electric 4.6 (21) 6.4 8.3 10.4
Total Massachusetts * 6.2 (24) 7.4 10.1 10.1
Rhode Island
Narragansett Gas 11.6 7 9.9 5.1 9.5
Narragansett Electric 9.5 (3) 10.1 6.4 9.5
Total Rhode Island* 10.4 4 10.0 5.9 9.5
FERC
Long Island Generation 10.5 (8) 11.9 13.6 10.0
New England Power 11.6 13 11.7 11.6 10.6
Canadian Interconnector 13.0 (1) 13.0 13.0 13.0
Narragansett Electric Transmission 12.1 (1) 12.0 11.6 10.6
Total FERC* 11.5 3 11.8 12.2 10.5
Total US* 8.4% (57) 9.0 9.2 9.7
* total return weighted by average rate base
Overall, revenue increases from existing rate plans, including capex trackers, together with additional income from gas
customer growth were only partly able to offset increased operating costs and an increase in rate base. Higher investment
in the year led to an increased level of underlying rate base growth (excluding working capital) which will attract future
revenues through allowed returns and should support future improvements in overall achieved returns. In the short term,
however, this has had a modest adverse impact on reported returns as some of the growth has been over and above the scope
of existing tracker mechanisms. Overall the growth in rate base in the year impacted US returns by around 30bp. This should
be largely corrected for once the increased rate base is reflected in rates through a successful rate filing programme.
Stabilisation of the new financial system was completed in the first half of 2014/15. As a result, compilation of 'test
year' data for new rate filings started on 1 October 2014. The new test year data will form the basis of important future
rate filings.
As indicated at the time of the Group's half year results, the gas businesses incurred additional costs associated with
mains repair and emergency leak response as well as higher bad debt, following the exceptionally prolonged and cold winter
in 2013/14, adding a significant headwind to improving returns in many of our businesses. In addition, underlying
inflationary cost increases had an adverse impact on this year's returns.
In New York, overall returns reduced by 60bp to 8.2%, reflecting in large part the costs associated with the winter weather
and the need to file for new rates in KeySpan Energy Distribution New York (KEDNY) and KeySpan Energy Distribution Long
Island (KEDLI). Returns in Niagara Mohawk Electric (NMPC or NiMo Electric), which had materially underperformed against its
allowed returns over the previous few years, were 9.0%. This represented over 95% of the allowed return of 9.3%. The
improvement in NiMo Electric largely reflected the benefit of additional revenue increases under its three year rate plan,
agreed in early 2013. For KEDNY and KEDLI, the extra costs associated with the winter weather added to the underlying gap
between the current level of operating costs and the costs allowed under the rate plans agreed in 2008. Mitigation of this
issue can only be completely addressed by new rates and the Company expects to file for these to ensure new revenues are in
place from the start of 2017. Included in the filings will also be requests for additional trackers for selected costs,
increased capital allowances and recovery of deferred environmental and other costs.
In Massachusetts, returns fell by 120bp. Gas activities were adversely impacted by the winter weather and increased main
leak investigation and repair. Returns in Massachusetts Electric also reduced, reflecting an increased level of bad debts
and also a continued gap between actual costs and the allowances set in the 2009 rate plans, which again can only be
addressed by new rates which are expected to be in place during 2016.
Combined Rhode Island returns improved by 40bp to 10.4% reflecting the continued impact of updated rates in 2013 with
additional tracker and true-up mechanisms as well as their Infrastructure, Safety and Reliability (ISR) programme with
concurrent recovery which is updated on an annual basis. The ISR programme covers both capital expenditures and some
operating expenses.
Activities regulated by the Federal Energy Regulatory Commission (FERC) delivered another year of good returns where the
impact of recent investments and associated revenues were partially offset by the reduction of New England allowed base
transmission returns to 10.57% from 11.14%, which came into effect from October 2014.
Financial performance
Overall, US Regulated operating profit was £1,164m, £39m higher at actual exchange rates. The year on year movement in
exchange rates had a £30m favourable impact on operating profit. As a result, operating profit was £9m higher on a constant
currency basis. Adjusting for year on year timing differences of £20m, operating profit at constant currency for the year
excluding timing was £11m (1%) lower than 2013/14.
The principal components of the movement in operating profit are shown below.
Year ended 31 March
(£m, constant currency) 2015 2014 % change
Net revenue 4,078 3,977 3
Regulated controllable operating costs (1,424) (1,407) (1)
Post-retirement costs (76) (74) (3)
Bad debts (119) (57) (109)
Other operating costs and provisions (843) (854) 1
Depreciation and amortisation (452) (430) (5)
Operating profit 1,164 1,155 1
Less: Timing impact 30 10
Operating profit excluding timing 1,134 1,145 (1)
Net regulated revenue (excluding timing) increased by £81m, primarily related to increased revenue allowances from the 2013
NiMo rate plans together with capex trackers, higher FERC recoveries, new customer growth and some positive volume impacts.
Regulated controllable costs increased by £17m. This included around £37m of additional costs associated with additional
maintenance and gas mains repair, more than offset by some one-off items that resulted in a net, year on year, reduction in
costs. Excluding these effects, underlying regulated controllable costs increased by around £35m, less than 3%, reflecting
inflationary impacts on salaries and other costs partly offset by a continued drive for efficiency.
Post-retirement costs increased by £2m and bad debts increased by £62m partly due to customers' difficulty paying high
winter bills following the extreme winter weather. Depreciation and amortisation increased by £22m and other costs,
including the impact of year on year changes in environmental liabilities and the impact of smaller storms, decreased by
£11m.
Regulated Financial Position
Overall, US regulated assets increased by $1.3bn to $20.0bn, up 7%. In dollar terms, rate base increased by 5% compared to
a 9% increase in the previous year. The benefit of increased investment was somewhat offset by working capital outflows,
compared to inflows in the previous year. Excluding these working capital effects US rate base grew at an increased rate
of 7%, compared to 5% in 2013/14.
US Regulated Assets ($bn as at 31 March)
2015 2014 % change
Rate Base excl. working capital (w/c) 16.3 15.1 7
Working capital in Rate Base 0.9 1.2 (21)
Total Rate Base 17.2 16.3 5
Reg. assets outside Rate Base excl. w/c 2.4 2.0 23
Working capital outside Rate Base 0.4 0.4 9
Total regulated assets outside Rate Base 2.8 2.4 21
Total US Regulated Assets 20.0 18.7 7
£bn as at 31 March
2015 2014 % change
Total US regulated assets at actual currency 13.5 11.2 20
Total US regulated assets at constant currency 13.5 12.6 7
Increased investment in 2014/15 driven by gas mains replacement
The US Regulated business invested $2.4bn or £1.5bn during 2014/15, £250m more than in 2013/14 at constant currency. This
increase was across many areas of the business but mainly related to increased demand for natural gas, continued focus on
higher mains replacement and mandated programmes, reliability and reinforcement spend in electric and FERC transmission
projects.
The business continues to invest in strengthening system resilience by assessing vulnerabilities throughout the networks
and targeting investment where it can have the biggest benefits. This has been of increased importance given the recent
varied weather patterns.
Detailed US Rate Base: Rate Base ($m) as at 31 March
US Regulated Entity 2015 2014 % change
New York
KEDNY 2,387 2,390 -
KEDLI 2,146 2,094 2
NMPC Gas 1,060 1,013 5
NMPC Electric 4,453 4,248 5
Total New York 10,046 9,745 3
Massachusetts
Massachusetts Gas 1,747 1,515 15
Massachusetts Electric 1,905 1,812 5
Total Massachusetts 3,652 3,327 10
Rhode Island
Narragansett Gas 496 466 6
Narragansett Electric 570 567 1
Total Rhode Island 1,066 1,033 3
FERC
Long Island Generation 446 433 3
New England Power 1,380 1,277 8
Canadian Interconnector 16 27 (41)
Narragansett Electric Transmission 607 499 22
Total FERC 2,449 2,236 10
Total US rate base 17,213 16,341 5
Regulatory and other business developments
During 2014/15 the business has continued to strengthen its customer-led service culture, responding to local, community
focused, needs. In recent months an expansion of the current jurisdictional model, developed around National Grid's four
service areas, has been implemented to further enhance this localised service offering.
Regulators and government organisations in the US continue to prioritise investments in safe and reliable supply of gas and
electricity through mains replacement, localised grid modernisation, as well as transmission projects.
The New York Public Service Commission (NYPSC) approved recovery mechanisms (with some concurrent recovery) for additional
capital spend of just over $200m per annum for gas main replacements, system resilience and customer growth during calendar
years 2015 and 2016 for the KEDLI gas distribution business on Long Island. In addition, on 30 April 2015, the
Massachusetts Department of Public Utilities issued an order associated with National Grid's proposed Gas System
Enhancement Plan for expansion of the leak prone pipe replacement programme to $175 million in calendar year 2015 with
concurrent recovery similar to the ISR tracker in Rhode Island. Recently, the NYPSC launched a proceeding to enable new
funding mechanisms, such as surcharges, for utilities to accelerate the replacement of leak prone pipe. The NYPSC
highlighted KEDLI as the first utility to implement such a surcharge. This funding mechanism would help mitigate the
regulatory lag related to accelerated pipe replacement and should have a positive benefit to National Grid's other New York
gas utilities in the event that further workload increases are required.
In electricity distribution, both Massachusetts and New York regulators are pursuing grid modernisation initiatives that
will include elements such as advanced metering, communications systems, grid control and distributed resources, aligning
well with National Grid's own Connect 21 programme for network investment. In its Reforming the Energy Vision (REV)
proceeding, the NYPSC issued the Track 1 order adopting a regulatory policy framework to develop markets for distributed
energy resources. National Grid intends to file demonstration projects by 1 July 2015 and a wider implementation plan by
December. Track 2 of the REV proceeding, which will address ratemaking questions, will commence in the summer. In
Massachusetts, the Company will submit its first 10 year grid modernisation plan on 5 August. The plan will detail
investments to ensure the modernisation and effectiveness of the network, improving reliability and incorporating
distributed generation and certain smart grid elements.
In New England, in February 2015, the New England independent system operator (ISO) selected a transmission project jointly
proposed by National Grid and Eversource Energy as the preferred transmission solution for reliability challenges in the
Greater Boston area. The Company's share of the project is approximately $200 million, which will be subject to FERC
formula rates and incentives. Construction is expected to start in 2016.
In addition to the leak prone pipe programme, infrastructure investments in the year included around $125 million further
investment in the New England East-West Solution transmission project and $35 million to complete the Brooklyn Queens
Interconnect project, the first new interstate pipeline in New York City in 40 years, addressing long term supply issues.
In addition, the Company continues to pursue FERC regulated gas and electric projects including the recently announced
partnership in Northeast Access which supports gas pipeline expansion in New England as well as the Greenline
Infrastructure Alliance to build transmission projects in New England.
National Grid is confident that an improved investment framework can form part of many of the new rate filings that the
business expects to make over the next few years. Many recent investments in grid modernisation and gas mains replacement
have led the continuing improvements in service levels and reliability across National Grid's US service territory,
providing strong support for future discussions and filings.
Future activities and outlook
The 2015/16 outlook for National Grid's US Regulated activities is one of continued investment and growth. At the same
time, the Company will continue to focus on delivering efficient, local customer-led services that safely support network
reliability. New rate filings will form the basis for improvement in achieved returns. In the meantime, National Grid will
look to manage costs proactively and maximise revenue opportunities pending revenue and cost allowance increases. As a
result, the business expects to deliver a similar level of operating profit in 2015/16 to the level achieved this year,
excluding any impact from timing.
US Regulated capital investment should be broadly unchanged in 2015/16, compared with 2014/15. While there will be lower
spend on transmission projects, continued investment in gas programme's and electricity distribution infrastructure should
provide some mitigation. As a result, underlying growth in rate base (i.e. before working capital movements) is expected to
be around 6% in 2015/16.
National Grid expects to make full rate filings for the KEDLI and KEDNY businesses so that new rates can be in effect by
the start of 2017. In Massachusetts, revenue improvements from a full filing could take effect as early as the middle of
2016. The filings will be made after relevant consultation with regulators around the future operating and capex
requirements of the business and the appropriate rate making mechanisms to remunerate these programmes.
REVIEW OF OTHER ACTIVITIES
Good performance from existing businesses and increased business development activity
Operating profit by principal activities (£m) 2015 2014 % change
Metering 160 162 (1)
Grain LNG 72 74 (3)
French Interconnector 103 85 21
Property 28 31 (10)
UK corporate and other activities (43) (37) (16)
Sub-total UK operating profit 320 315 2
US corporate and other activities (121) (184) 34
Total operating profit 199 131 52
Total operating profit - constant currency 199 126 58
Share of post-tax results of joint ventures and associates 46 28 64
Metering profit steady; cash flow remains strong
The Metering business' operating profit decreased slightly by £2m due to lower tariffs and a gradual reduction in its
population of meters, driven in part by the replacement of National Grid meters by third party smart meters. These
reductions were partially offset by a lower depreciation expense and reduced operating costs. Capital investment also
decreased by £7m due to lower meter work and information system spend primarily resulting from the decrease in meter
population.
This year, the Company implemented new software that allows remote customer self-service access for some industrial and
commercial services. Customer satisfaction scores for industrial and commercial and domestic customers remain on track and
the Company continues to work with customers on areas of further improvement.
Grain LNG profit steady; new services aim to increase revenues
National Grid's LNG import terminal on the Isle of Grain delivered a consistent level of performance and generated £2m less
operating profit than last year due to a £3m environmental provision. The Company continues to look for additional ways to
generate additional revenues from its investment. This year Grain LNG launched a new ship cool down service to help ships
that have been out of service re-load full LNG cargos. Next year, the Company expects to launch a new LNG road tanker
facility that will provide tankered LNG to service off grid customers and as a transportation fuel. Capital investment in
the year was £43m (2013/14: £44m).
Increased power price differentials drive 20% increase in French Interconnector profit
The 2GW capacity French Interconnector delivered another year of strong performance, increasing operating profit to £103m
(2013/14: £85m). This primarily reflected a high power price differential between France and the UK, increasing the revenue
generated from the auctions of interconnector's capacity, and improved availability following a significant valve
replacement programme. The vast majority of the flows in 2014/15 were from France to the UK.
Property delivered steady operating profit; joint venture formed with Berkeley Group
The Property business delivered an operating profit of £28m (2013/14: £31m), principally derived from property sales. In
November, the Property business entered into a joint venture with Berkeley Group to develop a number of its sites in London
and the surrounding area.
National Grid will remediate sites and, once planning consents and other conditions have been met, will transfer sites into
the joint venture, with Berkeley Group contributing the equivalent agreed land value as cash to fund the development over
time.
At the time of the transfer, National Grid's Property business would expect to recognise half of any uplift of the transfer
price compared to book value. As sites are developed and sold, National Grid Property would expect to gradually recognise
the other half of any uplift, with the Group's share of development profits being reported as joint venture profits.
National Grid expects to transfer its first site into the joint venture in 2015/16 with development profits expected to
begin in 2018/19.
Increased level of business development activity
National Grid is pursuing a series of attractive investment opportunities in both the UK and Northeast US to provide
environmental benefits and enhance the security of supply for customers. These opportunities would require investment over
the later part of this decade and would be expected to deliver cash flow benefits from 2019 onwards.
Final investment decisions made on two new UK interconnectors
National Grid recently agreed to proceed with two new subsea electricity interconnectors. The Company expects to invest
around E350m in the 1GW Nemo Link between Great Britain and Belgium and around E1bn in the 1.4GW NSN Link between Great
Britain and Norway. National Grid will have a 50% stake in each project and both will be governed by their own cap and
floor regulatory regime. The Company expects to have completed development of both of these projects by early next decade.
National Grid also progressed plans for potential new interconnection projects to France and Denmark and continues to
consider an interconnection project to Iceland.
US partnerships formed to enhance Northeast transmission infrastructure
National Grid has formed partnerships to develop electricity and gas transmission infrastructure in the Northeast US. In
December, National Grid announced the formation of the Greenline Infrastructure Alliance with Anbaric Transmission which
will initially develop a proposal for a 1GW land and sea cable to transmit renewable energy from Maine and eastern Canada
to Massachusetts.
In February, National Grid joined Eversource Energy and Spectra Energy as a co-developer (with a 20% equity interest) of
the proposed $3 billion Access Northeast gas pipeline expansion project. The project is anticipated to save electricity
customers an average of $1 billion annually by reducing fuel supply constraints for gas-fired electricity generators.
National Grid made further progress with NY Transco, a new joint venture between affiliates of the publicly listed New York
transmission owners in which National Grid has a circa 30% stake. In December 2014, NY Transco made a filing with FERC for
five proposed transmission projects to modernise the transmission system and eliminate capacity bottlenecks, with an
expected total cost of $2bn. On 2 April 2015, FERC approved certain elements of the filing, including a 50bp Return on
Equity adder for joining NYISO and a project-specific 50bp adder for risks for the largest project, but rejected the
detailed cost allocation proposal. This may be resolved via a subsequent settlement proceeding.
Other costs down reflecting completion of US system stabilisation upgrade
Including business development costs, UK and US corporate and other costs were £164m, down £62m from 2013/14 at constant
currency primarily due to reduced US financial system implementation costs. Costs to complete the system stabilisation
upgrade totalled £56m, down £97m from 2013/14. This reduction was partially offset by around £16m of asset related charges
in the US.
Other selected financial information Year ended 31 March
(£m) - constant currency 2015 2014 % change
Operating profit 199 131 52
Depreciation (196) (213) 8
Depreciation (actual exchange rates) (196) (211) 7
Capital investment (£m) - actual currency
Metering 46 53 (13)
Grain LNG 43 44 (2)
French Interconnector 1 5 (80)
Property 2 - n/a
Other UK 16 11 45
Other US 105 67 57
Capital expenditure excluding joint ventures 213 180 18
Investment in joint ventures (JVs) - 4 n/a
Capital investment including investment in JVs 213 184 16
Joint Ventures
Share of post-tax results by principal activities (£m) 2015 2014 % change
BritNed 31 15 107
Millennium 9 7 29
Iroquois 7 6 17
Other (1) - -
Share of post-tax results of joint ventures and associates 46 28 64
Joint ventures in the Group consist principally of interests in an electricity transmission interconnector and gas
pipelines. These include a 50% interest in the 1GW BritNed electricity interconnector between
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