REG - National Grid PLC - Results for the year ended 31 MARCH 2016 <Origin Href="QuoteRef">NG.L</Origin> - Part 2
19/05/2016 07:10
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successfully managed this period and the rest of the year.
Performance reflects continued prior period benefit and strong incentive delivery
Return on Equity 250bps above base levels
Return on Equity for the year, using a long-run inflation rate of 3%, was 12.5% 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 2015/16 2014/15
Base return (including avg. 3% long-run inflation) 10.0% 10.0%
Totex incentive mechanism (0.2)% (0.4)%
Other revenue incentives 1.2% 2.4%
Return including in year incentive performance 11.0% 12.0%
Pre-determined additional allowances 1.5% 2.2%
Operational Return on Equity 12.5% 14.2%
The business performed slightly below the targets set by the totex incentive mechanism in the third year of RIIO. Operating
costs were £3m higher than allowance reflecting increased spend on safety. Totex spend was £0.3bn, marginally above the
estimated allowance, adjusted for outputs and phasing. The Company's share of this difference is expected to be £3m.
The business had another good year of incentive performance, consistent with performance levels in 2014/15 after excluding
the gas permits performance (a one off incentive) from the prior year. Increased efforts to identify customer and
stakeholder needs, undertaken by the business, continued to support good customer incentive performance. Overall, the UK
Gas Transmission business delivered around 120 bps of additional returns through other revenue incentives. On a pre-tax
basis, this equates to an estimated £31m of additional revenue allowance, most of which is due to be recovered in future
years under the RIIO funding mechanisms.
Contribution from legacy incentives was 150bps, a decrease year-on-year, as expected and in accordance with the agreed
profile.
Regulated Financial Performance down 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 decreased to £535m from £648m, down 17%. The year-on-year reduction
reflected in part a one off benefit in the prior year related to gas permit incentive income.
Reconciliation of regulated financial performance to operating profit (£m) 2016 2015 % change
Operating profit 486 437 11
Movement in regulatory "IOUs" (80) (16)
Deferred taxation adjustment 45 85
RAV indexation (3% long-run avg.) 166 166
Regulatory v IFRS depreciation difference (18) (22)
Fast/Slow money adjustment 18 54
Pensions (77) (49)
Performance RAV created (5) (7)
Regulated financial performance 535 648 (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 £80m, mainly reflecting current year revenue over recoveries
associated with lower than expected inflation and higher volumes.
£m 2016 2015
Opening Regulated Asset Value (RAV)* 5,525 5,529
Asset additions (aka slow money) (actual) 185 174
Performance RAV or assets created (5) (7)
Inflation adjustment (actual RPI) 85 50
Depreciation and amortisation (196) (194)
Closing RAV 5,594 5,552
Opening balance of other regulated assets and (liabilities)* 157 174
Movement (80) (16)
Closing balance 77 158
Closing Regulated Financial Position 5,671 5,710
*March 2016 opening balances adjusted to correspond with 2014/15 regulatory filings and calculations
Investment activities in 2015/16 focussed on asset health
UK Gas Transmission invested £186m during the year, a slight increase on prior year, which was almost entirely non-load,
asset health and emissions reduction work.
Asset health expenditure forms part of an essential and co-ordinated programme of work throughout the RIIO T1 period. This
programme is designed to enable UK Gas Transmission to maintain a safe network and continue to meet regulatory output
requirements, known as Network Output Measures (NOMs). During the year, work commenced on the Feeder 9 crossing of the
Humber Estuary a £180m project to ensure system integrity at a critical point on the network.
Investment in emissions reduction work continued to support the business in improving the local air quality around its gas
compressors sites in line with both the Industrial Emissions Directive (IED) and Integrated Pollution Prevention and
Control (IPPC) legislation.
Regulatory and other business developments
During 2015/16, UK Gas Transmission has responded to Ofgem's open consultation on the potential RIIO-T1 Mid-Period Review
and on 12 May 2016, Ofgem announced its intent for a Mid-Period Review. As expected, the scope of this review is narrow
with no changes to key financial parameters. Ofgem will run a consultation process this summer, with any changes to be
implemented in April next year.
The business agreed an exemption in the latest draft of the Medium Combustion Plant (MCP) Directive with an extended date
for compliance of 2030 for gas compressor stations, (previously 2020). This followed tripartite meetings between the
European Parliament, European Commission and MEPs and was ratified by the European Parliament in September 2015. The
exemption will allow the UK Gas Transmission business to be more efficient in complying with the Directive and is expected
to provide a reduction in future costs to customers.
Diversity of supply benefits Great Britain's gas security but the varied sources lead to greater operational
unpredictability. The business continues to work with the industry to understand its flexibility requirements and will
publish an update in its Winter Outlook Report ahead of winter 2016/17.
Future activities and outlook
UK Gas Transmission expects to outperform its base allowances in 2016/17 through continued delivery of good incentive
performance. Overall achieved Return on Equity is likely to reduce somewhat compared to the level in 2015/16 as legacy
allowances are expected to reduce in accordance with agreed profiles.
The business continues to focus on finding and 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.
Capital investment in UK Gas Transmission in 2016/17 is expected to increase compared to 2015/16 reflecting the increased
asset health activity and as the construction of Feeder 9 project progresses. As a result, regulated asset value is
expected to grow slightly above the rate of inflation in 2016/17.
APPENDIX to REVIEW OF UK GAS TRANSMISSION OPERATIONS
Revenue and Costs in 2015/16 on an IFRS basis
On an IFRS basis UK Gas Transmission operating profit was £486m, up £49m or 11%. This increase was mainly driven by timing
and closure costs of an LNG storage facility in the prior year. Excluding the impact of timing, net revenues in the year
were lower due to lower gas permit income. Adjusting for timing movements, operating profit decreased by £36m.
The principal components of the movement in operating profit are shown below.
(£m) Year ended 31 March
2016 2015 % change
Net revenue 826 780 6
Regulated controllable operating costs (135) (125) (8)
Post-retirement costs (18) (18) -
Other operating costs and provisions (9) (28) 68
Depreciation and amortisation (178) (172) (3)
Operating profit 486 437 11
Less: Timing impact 67 (18) 472
Operating profit excluding timing 419 455 (8)
Net revenue (net of pass through costs) increased by £46m. Excluding timing impacts of £85m, net regulated revenue
decreased by £39m. This primarily relates to £29m of prior year permit income.
Regulated controllable costs increased by £10m. This included higher TO and SO transformation costs and higher Xoserve
charges.
Depreciation and amortisation increased by £6m. Other operating costs decreased by £19m, mostly reflecting additional costs
relating to the closure of LNG facilities in 2014/15.
REVIEW OF UK GAS DISTRIBUTION OPERATIONS
2015/16 Overview
In the third year of its RIIO price control period, UK Gas Distribution completed all major outputs ahead of required
levels. The integrated operational model of Gas Distribution provided further efficiency through utilisation of resource
across the four networks to support delivery of repair, maintenance and emergency response requirements. The business has
continued to make improvements in its customer processes.
During the year, the business increased its mains replacement activity replacing around 1,900km of metallic mains with new
polyethylene pipes, delivering safety and environmental benefits and meeting key regulatory outputs. By delivering the
increased replacement activity efficiently in the year, the business has generated further savings which will help to
reduce bills for its customers. UK Gas Distribution has made good progress in the further development and trials of
innovative "no dig" solutions. When implemented these innovations should help to drive down the costs of the mains
replacement programme on behalf of customers and deliver an increasing level of planned workload to further improve the
safety and reliability of the networks.
Regulated Returns and Financial Performance reflect good efficiency and incentive delivery
Return on Equity 310bps above base levels
Return on Equity for the year, using a long-run inflation rate of 3%, was 13.0% 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 2015/16 2014/15
Base return (including avg. 3% long-run inflation) 9.9% 9.9%
Totex incentive mechanism 2.0% 2.3%
Other revenue incentives 1.0% 0.6%
Return including in year incentive performance 12.9% 12.8%
Pre-determined additional allowances 0.1% 0.1%
Operational Return on Equity 13.0% 12.9%
In 2015/16, UK Gas Distribution again drove significant outperformance against regulatory cost allowances by delivering
savings and generating additional returns through the totex incentive mechanism. The Gas Distribution Strategic
Partnerships (GDSP) contractual arrangements that the business put in place ready for the start of the RIIO period have
helped to drive much of the totex performance through innovative and efficient delivery of the mains replacement
programme.
Overall, totex was around £0.9bn compared with an estimated allowance, adjusted for outputs and phasing of spend, of
£1.0bn. The Company's share of this efficiency saving is expected to be £56m, partly reflected in an estimate of increased
regulatory asset value (Performance RAV).
Other incentive performance in UK Gas Distribution increased compared with 2014/15 levels. Continued performance in
environmental, stakeholder and customer satisfaction activities delivered consistent levels of performance to 2014/15,
while the reliability (exit capacity) incentive was up £15m on prior year. Overall the business delivered around 110bps of
performance through incentives and other legacy allowances.
Regulated Financial Performance
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 remained consistent with the prior year at £819m. This reflected a
similar achieved operational return on equity.
Reconciliation of regulated financial performance to operating profit (£m) 2016 2015 % change
Operating profit 878 826 6
Movement in regulatory "IOUs" (35) (28)
Deferred taxation adjustment (34) 60
RAV indexation (assuming 3% RPI inflation) 255 255
Regulatory v IFRS depreciation difference (104) (148)
Fast/Slow money adjustment (168) (182)
Pensions (13) (5)
Performance RAV created 40 41
Regulated financial performance 819 819 -
Regulated Financial Position steady
In the year, RAV grew by 2% with investment and a share of savings delivered in the form of performance RAV partially
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 £35m, leaving a closing balance of £124m
to return to customers in future years. Much of this movement relates to revenue over recoveries due to lower than
anticipated inflation in the current year.
£m 2016 2015
Opening Regulated Asset Value (RAV)* 8,513 8,495
Asset additions (aka slow money) (actual) 392 333
Performance RAV or assets created 40 41
Inflation adjustment (actual RPI) 133 76
Depreciation and amortisation (402) (434)
Closing RAV 8,676 8,511
Opening balance of other regulated assets and (liabilities) * (89) (55)
Movement (35) (28)
Closing balance (124) (83)
Closing Regulated Financial Position 8,552 8,428
*March 2016 opening balances adjusted to correspond with 2014/15 regulatory filings and calculations
Investment activities in 2015/16
Overall capital investment in UK Gas Distribution was £549m, including £417m of replacement expenditure (£57m higher than
2014/15) with substantially more pipe replaced than the prior year. Other capex was £132m, down £6m on last year.
UK Gas Distribution continues to explore new and innovative approaches to deliver capital and replacement projects at lower
costs. 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 trialled number of these technologies in the summer of 2015, including Tier One Robotic System (TORS) which
will allow the connection of mains and services with minimal excavations and Pipe Renewal In-Situ Manufactured (PRISM), a
multi-party project translating existing technology used in the water industry to the gas distribution industry which could
revolutionise the replacement of ageing gas pipes using a polymer in existing pipelines.
Regulatory and other business developments
During 2015/16, UK Gas Distribution responded to Ofgem's open consultation on the potential RIIO-GD1 Mid-Period Review. On
12 May 2016, Ofgem announced that it will not carry out a Mid-Period Review of UK Gas Distribution.
In March, the business agreed with Ofgem that it would make a charitable donation of £3m to National Energy Action (NEA) to
support fuel poor initiatives as recognition that the business did not achieve certain repair network outputs in 2014/15.
2015/16 was the third 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 and adapting its network to the future role of gas. This included further bio-methane connections being made this
year, increasing the total number of connections to 22. The business has also developed a demonstration plant for BioSNG
technology which would enable household waste to be converted into gas to be transported through its distribution network.
In addition, UK Gas Distribution has completed the UK's first Local Transmission System (LTS) connected Compressed Natural
Gas filing station. This facility located in Leyland, Lancashire is capable of refuelling more than 500 heavy goods
vehicles per day.
UK Gas Distribution has been instrumental in an industry wide initiative to provide better services to more vulnerable
customers. Leading a cross-industry working group, the business has developed a common set of needs codes for vulnerable
customers which will be used across utility industries to identify the services that these customers require.
Sale of majority stake
In November 2015, National Grid announced the potential sale of a majority stake in the UK Gas Distribution business. As
this business is fully integrated with the other UK businesses, it needs to be separated. Since November, the business has
made good progress on the activity needed to create a standalone business that can operate efficiently, while maintaining
its primary role as a provider of safe and reliable networks. The necessary consultations are underway with internal and
external stakeholders to enable a smooth separation process.
Future activities and outlook
UK Gas Distribution is expected to sustain its incentive performance and the business expects to build on the good totex
incentive performance in the year.
The business remains on track to deliver the RIIO risk reduction outputs and the Health and Safety Executive requirement
for length of main replaced over the course of the eight year RIIO period.
In the first three 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 in line with the business' delivery plans. The
business expects to increase the length of mains replaced 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.
National Grid expects total investment by UK Gas Distribution to be broadly in line with 2015/16 levels. As a result, the
business expects to grow its RAV slightly higher than RPI inflation for the year.
APPENDIX to REVIEW OF UK GAS DISTRIBUTION OPERATIONS
Revenue and Costs in 2015/16 on an IFRS basis
On an IFRS basis UK Gas Distribution operating profit was £878m, up £52m or 6%. Regulated revenues in the year were higher.
Costs increased and depreciation was higher than last year, offset by favourable provision adjustments. Adjusting for
timing movements, operating profit increased by £39m.
The principal components of the movement in operating profit are shown below.
(£m) Year ended 31 March
2016 2015 % change
Net revenue 1,566 1,504 4
Regulated controllable operating costs (374) (353) (6)
Post-retirement costs (39) (36) (8)
Other operating costs and provisions/contribution release 23 (3)
Depreciation and amortisation (298) (286) (4)
Operating profit 878 826 6
Less: Timing impact 26 13 100
Operating profit excluding timing 852 813 5
Net revenue (net of pass through costs) increased by £62m. Excluding timing impacts of £13m, net regulated revenue
increased by £49m. This increase was primarily driven by higher allowed revenue collections relating to a change in the tax
treatment of replacement expenditure and higher reliability incentive performance.
Regulated controllable costs increased by £21m, up 6%, reflecting higher leasing costs, NEA donation and legal settlements.
Post-retirement costs increased by £3m and other operating costs decreased by £26m reflecting a prior year provision for
additional asset protection costs.
Depreciation and amortisation increased by £12m, reflecting investment driven growth in the asset base.
REVIEW OF US REGULATED OPERATIONS
2015/16 Overview
US Regulated operations delivered solid operational performance reflecting National Grid's continued focus on efficiently
delivering significant investment to enhance the resilience of its networks. The gas and electricity networks stood up to
increased demands including record gas send-out in New York and Massachusetts on 14 February. The Company's electricity
transmission network delivered availability of over 99% and the broader US business achieved almost all of its key
reliability metrics, reflecting the benefit of infrastructure investment in recent years as well as continued focus on
effective storm response.
The US saw significant improvements in all three of its primary safety measures; lost time injury frequency, road traffic
collisions and Occupational Safety & Health Administration recordable events. Safety continues to be a focus of the
business as it strives to achieve world class performance.
Return on equity in-line with expectations
Return on Equity for the year was 8.0%, a reduction of 40 bps compared to last year. As expected, this reduction was due to
some entities operating under old rate plans and a high level of rate base growth, a portion of which is not reflected in
current rate plans. The additional rate base growth will drive future revenues, but places an additional pressure on
returns until rate base is reflected in updated regulatory allowances. This should be largely corrected through the current
and planned rate plan filings.
Regulated Return on Equity Achieved (%) Calendar year* Most recent granted** (%)
US Jurisdiction 2015 2014 2013
New York 7.7 8.2 8.8 9.4
Massachusetts 5.8 6.2 7.4 10.1
Rhode Island 10.2 10.4 10.0 9.5
FERC 11.4 11.5 11.8 10.5
Total US* 8.0 8.4 9.0 9.7
* operating company return weighted by average rate base** a weighted average by rate base of each of National Grid's operating companies granted returns
Another significant year of capital investment
Capital investment to enhance and extend the Company's US networks increased by around $400m to $2.7bn. This increase was
supported by a continued focus on mains replacement as well as reliability and reinforcement expenditure in the electricity
companies, mandated programmes and ongoing transmission projects. Of this investment approximately $1.3bn was in gas
distribution, $0.9bn in electricity distribution and $0.4bn in transmission and other FERC regulated assets. The business
continues to invest in network resilience by assessing vulnerabilities throughout the networks and targeting investment
where it can provide the most benefit.
Detailed US Rate Base: Rate Base ($m) as at 31 March
US Jurisdiction 2016 2015 % change
New York 10,482 10,046 4
Massachusetts 4,101 3,652 12
Rhode Island 1,234 1,066 16
FERC 2,444 2,449 -
Total US rate base 18,261 17,213 6
Regulated Financial Position
Overall, US regulated assets increased by 2% to $20.3bn. The increase was driven by growth in rate base excluding work
capital of 7% reflecting the significant level of capital investment in the US business offset by depreciation. This growth
was partially offset by lower levels of working capital and increased deferred tax liabilities.
US Regulated Assets ($bn as at 31 March)
2016 2015 % change
Rate Base excl. working capital (w/c) 17.5 16.3 7
Working capital in Rate Base 0.8 0.9 (11)
Total Rate Base 18.3 17.2 6
Reg. assets outside Rate Base excl. w/c 2.1 2.4 (13)
Working capital outside Rate Base (0.1) 0.4 (125)
Total regulated assets outside Rate Base 2.0 2.8 (29)
Total US Regulated Assets 20.3 20.0 2
£bn as at 31 March
2016 2015 % change
Total US regulated assets at actual currency 14.1 13.5 4
Total US regulated assets at constant currency 14.1 13.9 1
Financial performance
Headline operating profit increased to £1,185m, an increase of £21m at actual exchange rates including an £81m benefit from
the stronger dollar.
At constant currency, net regulated revenue (excluding timing) increased by £81m to £4,412m, primarily related to increased
revenue allowances from third year of the Niagara Mohawk rate plans together with capex trackers, Smart Grid recoveries and
new customer growth. Regulated controllable costs decreased by £71m. This was driven in part by lower gas leak response
costs and proactive cost management.
Post-retirement costs increased by £15m and bad debts were at similar levels to last year. Depreciation and amortisation
increased by £51m and other costs, including the impact of higher cost of removal increased by £36m.
Adjusting for year-on-year timing differences of £105m, operating profit at constant currency for the year excluding timing
was £45m (4%) higher than 2014/15.
The principal components of the movement in operating profit are shown below.
Year ended 31 March
(£m, constant currency) 2016 2015 % change
Net revenue 4,339 4,363 (1)
Regulated controllable operating costs (1,453) (1,524) 5
Post-retirement costs (96) (81) (19)
Bad debts (132) (127) (4)
Other operating costs and provisions (938) (902) (4)
Depreciation and amortisation (535) (484) (11)
Operating profit 1,185 1,245 (5)
Less: Timing impact (73) 32
Operating profit excluding timing 1,258 1,213 4
Regulatory and other business developments
National Grid continues to work with regulators and other stakeholders on infrastructure spend to modernise the gas and
electricity networks to provide safe and reliable service to its customers through mains replacement, localised grid
modernisation and transmission projects.
During 2015/16 the business submitted three full rate plan filings in Massachusetts and New York, the Company's first full
rate plans in over 6 years for Massachusetts and over 10 years for the New York utilities. The purpose of these filings is
to provide updated cost recovery and enable an increased level of customer driven investment. The Company continues to
focus on a customer led service culture, operational progress and efficiency while strengthening the jurisdictional model
to provide enhanced local capabilities.
The requirements for network investment have been increasing as customers are requiring a more resilient, modernised,
responsive network with quicker network restorations. Outside of the traditional rate plans, regulators are pursuing grid
modernisation initiatives that will include elements such as advanced metering, communications systems, grid control and
distributed resources. These initiatives align well with National Grid's own programmes for network investment and National
Grid continues to play an active role in the ongoing industry progression.
Future activities and outlook
The 2016/17 outlook for National Grid's US Regulated activities remains one of expected continued investment and growth.
The Company expects to focus on delivering efficient, customer-led services that support a safe and reliable network. New
rate decisions expected later in the year are expected to help offset rising costs and increase returns, although the full
year impact of the rate decisions are not expected to be until the 2017/18 financial year. In the meantime, National Grid
expects to manage costs proactively and maximise revenue opportunities. As a result, the business expects to deliver a
similar level of IFRS operating profit in 2016/17, excluding any impact from timing.
US Regulated capital investment is expected to increase in 2016/17. Most of the increase will be in the Massachusetts and
FERC jurisdiction while the remaining jurisdictions should have capital spend similar to this year. The capital investment
reflects continued investment in upgrading the gas and electricity distribution infrastructure and the start of the Rhode
Island LNG project. As a result, underlying growth in rate base (i.e. before working capital movements) is expected to
remain around 7% in 2016/17.
US JURISDICTION UPDATE
New York
The New York jurisdiction had a year of solid performance across the utilities. The gas utilities achieved record send-outs
on 13-14 February and the gas system performed well under these extreme conditions and the electric business achieved all
its reliability targets. The $70m Brooklyn Queens Interconnect project completed, providing the first new gas supply
delivery point in New York City in 40 years and addressing long term supply issues. In addition, the Company received
approval for two demonstration projects in the upstate region, a solar project in its Western New York service area and a
microgrid solution project in a Northern New York community. The projects are part of the New York State 'Reforming the
Energy Vision' (REV) programme and will be used to gather information on the feasibility of future projects.
In New York, overall returns reduced by 50bps to 7.7%, reflecting in large part increases in operating costs at KEDNY due
to mandated gas safety and compliance work not covered in current rates and higher operating costs at Niagara Mohawk (NMPC)
electric that also exceeded current rate allowances. KEDLI benefited from an increase in revenues due to customer growth
from its gas expansion program and its capital expenditure tracking mechanism that went into effect beginning January 2015.
New rates for KEDNY are also expected to be in place at the start of calendar year 2017 which will address cost increases
that are not covered by current rate allowances. NMPC plans on filing for new rates to become effective in 2018 to also
address cost increases in excess of current rate allowances.
Regulated Return on Equity Achieved (%) Calendar year Most recent granted (%)
Regulated Entity 2015 2014 2013
New York
KEDNY 7.1 8.5 9.5 9.4
KEDLI 7.3 6.5 8.8 9.8
NMPC Gas 8.4 8.3 10.3 9.3
NMPC Electric 8.1 9.0 8.0 9.3
Total New York* 7.7 8.2 8.8 9.4
* total return weighted by average rate base
In January, the New York jurisdiction filed new rate plans for the KEDNY and KEDLI utilities to address cost increases that
are not covered by current rate allowances. The filings include requested revenue increases of $245m for KEDNY and $142m
for KEDLIto cover increased operating and investment costs. The filings remain on track and a decision is expected in
December 2016 with new rates expected to be in place in early calendar year 2017.
In addition to the two full rate filings, the New York jurisdiction filed a proposal with the New York Public Service
Commission in December 2015 to invest $1.4 billion over a two year period in its upstate NMPC utility. The Company plans on
filing a full rate plan for both NMPC gas and electric to become effective in 2018.
On a US GAAP basis, capital investment in the region reached a record high of $1.3bn focused mostly in the gas companies.
Part of this investment is tracked under the KEDNY capital agreement allowing for a total spend of $900m for calendar years
2015 and 2016 and the second year of a $400m capital plan for KEDLI. In New York, the Company started the $100m, Queens
Reliability Project, which will modernise part of the Queens' natural gas system.
Rate Base ($m) as at 31 March
New York Regulated Entity 2016 2015 % change
KEDNY 2,525 2,387 6
KEDLI 2,176 2,146 1
NMPC Gas 1,160 1,060 9
NMPC Electric 4,621 4,453 4
Total New York 10,482 10,046 4
Massachusetts
The Massachusetts jurisdiction's networks performed reliably throughout the year. Similar to New York, the gas system
performed well, with record gas send-out on 14 February. On the electric side, the business is in the second year of its
two-year Smart Energy pilot that integrates customer and grid facing technologies and includes the installation of around
15,000 smart meters as well as the installation of advanced distribution automation devices and advanced grid monitoring
devices. In addition, the business submitted a grid modernisation plan to the regulator last year that includes several
alternatives for advanced technologies including communication, metering and grid system automation.
Overall return on equity for the Massachusetts Jurisdiction was 5.8%, impacted by low returns in the electric business.
These declining returns were partially offset by increased returns in the gas business, reflecting the partial elimination
of regulatory lags associated with a new forward looking capital tracker on leak prone pipe replacement.
Regulated Return on Equity Achieved (%) Calendar year Most recent granted (%)
Regulated Entity 2015 2014 2013
Massachusetts
Massachusetts Gas 8.4 7.8 8.5 9.8
Massachusetts Electric 3.4 4.6 6.4 10.4
Total Massachusetts * 5.8 6.2 7.4 10.1
* total return weighted by average rate base
In November, the Massachusetts jurisdiction submitted a full rate plan filing for its electric business, the first since
2009. The Company requested a revenue increase of $143m to cover increased operating and investment costs and expects a
Commission decision in September, with new rates beginning in October 2016.
On a US GAAP basis, the Company invested a record high of around $700m, including expenditure to improve the resiliency of
the electricity distribution network, replace ageing gas pipe and connect new customers. The majority of the over $200m in
gas business leak prone pipe investment is covered within the approved capital tracker, allowing for concurrent recovery.
Required customer-driven investment in the electricity distribution network exceeded the agreed plan by approximately $120m
which the Company expect to be included in the rate base following the outcome of the ongoing rate filing.
Rate Base ($m) as at 31 March
Massachusetts Regulated Entity 2016 2015 % change
Massachusetts Gas 1,945 1,747 11
Massachusetts Electric 2,156 1,905 13
Total Massachusetts 4,101 3,652 12
Rhode Island
The Rhode Island jurisdiction continues to perform well across its electric and gas utilities. All of the gas and
electricity regulatory reliability goals were met, including gas leak response, and electric interruptions and recovery.
National Grid was also recognised nationally by the Edison Electric Institute for its storm performance during a severe
storm in August which caused significant damage to the electricity system with 121,000 customer outages. The Company was
able to restore power to 90% of the customers within 48 hours due to its continued commitment to improve its storm
restoration activities.
The Rhode Island jurisdiction achieved return on equity outperformance for both its gas and electricity utilities. This
reflects the continued impact of updated rates in 2013 with additional tracker and true-up mechanisms including the
Infrastructure, Safety and Reliability (ISR) programme that allows for concurrent cost recovery. The ISR programme covers
capital expenditure and some operating expenses and is updated on an annual basis.
Regulated Return on Equity Achieved (%) Calendar year Most recent granted (%)
Regulated Entity 2015 2014 2013
Rhode Island
Narragansett Gas 9.8 11.6 9.9 9.5
Narragansett Electric 10.5 9.5 10.1 9.5
Total Rhode Island* 10.2 10.4 10.0 9.5
* total return weighted by average rate base
Under the state's ISR programme, which is approved each year, capital investment in the region was approximately $200m on a
US GAAP basis.
Rate Base ($m) as at 31 March
Rhode Island Regulated Entity 2016 2015 % change
Narragansett Gas 577 496 16
Narragansett Electric 657 570 15
Total Rhode Island 1,234 1,066 16
Federal Energy Regulatory Commission (FERC)
Robust, long-term transmission improvements are more important than ever for New England, as the business looks ahead to
support an energy future that will include retirement of older power plants and increased renewables. The FERC jurisdiction
continues to construct and manage federally regulated transmission infrastructure to meet these needs.
The FERC jurisdiction delivered a regulated return on equity of 11.4%, demonstrating consistently strong performance
compared with the allowed returns. Within this, improved performance by the Long Island Generation business was 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.
Regulated Return on Equity Achieved (%) Calendar year Most recent granted (%)
Regulated Entity 2015 2014 2013
FERC
Long Island Generation 12.5 10.5 11.9 9.9
New England Power 11.0 11.6 11.7 10.6
Canadian Interconnector 13.0 13.0 13.0 13.0
Narragansett Electric Transmission 11.2 12.1 12.0 10.6
Total FERC* 11.4 11.5 11.8 10.5
* total return weighted by average rate base
In the ongoing New England FERC transmission ROE proceeding, the FERC administrative law judge released his initial
decision in March 2016 which recommended that the New England transmission ROE should be reduced from 10.57% to 9.59% for a
retroactive 15-month period (January 2013 to March 2014) but then increased to 10.9% for a second retroactive 15-month
period (August 2014 to October 2015) and moving forward. FERC will review the recommendation and input from the other
parties to the complaint and issue a final order expected in late 2016 or early 2017.
This year, the $725m NEEWS project, one of the Company's largest multi-year transmission projects, finished ahead of its
deadline and under budget. Overall capital investment in the FERC jurisdiction this year was around $400m, on a US GAAP
basis.
The Company also started a new project, with a total estimated investment of $115m, in Rhode Island to connect the first
offshore wind farm in the US.
Rate Base ($m) as at 31 March
FERC Regulated Entity 2016 2015 % change
Long Island Generation 420 446 (6)
New England Power 1,405 1,380 2
Canadian Interconnector 11 16 (31)
Narragansett Electric Transmission 608 607 -
Total FERC 2,444 2,449 -
The Company continues to pursue competitively tendered FERC regulated gas and electric projects including the partnership
in Access Northeast which supports gas pipeline expansion in New England as well as the Green Line Infrastructure Alliance
to build transmission projects in New England.
REVIEW OF OTHER ACTIVITIES
Strong performance in the year
Operating profit by principal activities (£m) 2016 2015 % change
Metering 162 160 1
Grain LNG 72 72 -
French Interconnector 123 103 19
Property 56 28 100
UK corporate and other activities (61) (43) (42)
Sub-total UK operating profit 352 320 10
US corporate and other activities 22 (121) 118
Total operating profit 374 199 88
Total operating profit - constant currency 374 191 96
Share of post-tax results of joint ventures and associates 59 46 28
Metering profit steady; cash flow remains strong
The Metering business's operating profit increased slightly by £2m as the displacement of its population of meters, driven
in part by the replacement of National Grid meters by third party smart meters was more than offset by lower maintenance
and operating costs. Capital investment decreased by £7m.
Grain LNG profit steady; two capital investment projects commissioned in year
National Grid's LNG import terminal on the Isle of Grain delivered a consistent level of financial performance in 2015/16.
Operating profit was flat year-on-year, with reduced environmental provisions compared to the prior year offset by higher
depreciation. During 2015/16, Grain LNG commissioned a road tanker facility which provides LNG to off-grid customers and
heavy goods vehicle operators. In addition, the business completed its first UK LNG ship reload, becoming the only facility
in the UK to offer small scale ship reloading facilities. The Company continues to look for additional ways to generate
additional revenues from its investment. Capital investment was lower in the year at £25m (2014/15: £43m) due to lower
investment in a second cryogenic line and the road tankering load facility (commissioned in November 2015) as these
projects were completed during the year.
Increased power price differentials drive 19% increase in French Interconnector profit
The 2GW capacity French Interconnector delivered another year of strong performance, increasing operating profit to £123m
(2014/15: £103m). This primarily reflected a high power price differential between France and the UK in the first half of
the year, increasing the revenue generated from the auctions of the interconnector's capacity.
Significant property sales and good progress in St William JV
The Property business delivered an operating profit of £56m (2014/15: £28m), principally derived from property sales at
Tottenham and Northfleet.
National Grid Property has exchanged contracts on the sale of the first seven sites to St William Homes, its joint venture
with Berkeley Group plc. These seven sites provide almost 40 acres of brownfield land to be regenerated with up to 3,500
new homes to be developed around London and the South East of England. Further conditions remain to be met prior to site
sale completion, including gasholder demolition, obtaining vacant possession, site remediation, operational plant
relocation and the securing of planning consent. As a result, no profits on sale have been recognised to date. Once
completion takes place, National Grid's Property business would expect to recognise half of any uplift of the transfer
price compared to the book value and, presently, the Company expects to see the first benefit to operating profit from the
first sale completion in 2016/17.
Increased level of business development activity
National Grid continued to pursue a series of attractive investment opportunities in both the UK and Northeast US in the
year. Requiring investment over the latter part of this decade, these investments would provide environmental benefits and
enhance the security of supply for customers, and would be expected to deliver cash flow benefits in future years.
Two new UK interconnectors under construction, two more close to investment decision
National Grid commenced construction on two new subsea electricity interconnectors in the year. The Company expects to
invest around E350m in the 1GW Nemo Link between Great Britain and Belgium and around E1bn in the 1.4GW North Sea 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 regimes. The Company expects to have completed development of both of these projects by early
next decade.
National Grid also made progress on its plans for potential new interconnection projects to France (IFA2) and Denmark
(Viking) and continues to consider an interconnection project to Iceland. It is currently expected that IFA2 will progress
to a final investment decision in late 2016 whilst the decision on the Viking project is expected to follow in early 2018.
US partnership projects to enhance Northeast transmission infrastructure continue to progress
As part of the Green Line Alliance, the partners submitted the Vermont Green Line project in January 2016 in response to
New England's Clean Energy Request for Proposals which is a competitive process. This project is a 400MW buried HVDC
transmission line that will deliver wind and hydropower from Plattsburg, NY to load centres in New England.
Further progress was made in the $3bn Spectra Access Northeast pipeline project in which National Grid has a 20% interest.
In February 2016, several New England electric distribution companies filed precedent agreements with the state regulators
for their review and approval. The approval of these agreements is needed for cost recovery associated with this pipeline.
National Grid made further progress with NY Transco, a project between affiliates of the publicly listed New York
transmission owners to modernise the transmission system in which National Grid has a 28% interest. In March 2016, FERC
approved 3 of the 5 submitted projects with a 10% ROE and 53% equity ratio. The cumulative total cost of the 3 projects is
approximately $230m. Other projects expect to be added to Transco after a competitive FERC Order 1000 process and award by
New York Independent System Operator (NYISO). This includes National Grid's Edic to Pleasant Valley line in upstate New
York.
On 13 October, National Grid joined as a limited partner in Energy Impact Partners Fund LLC (EIP) which will focus on
investments to optimise energy consumption and improve sustainable energy generation. National Grid believes that working
with EIP will enable the Company to benefit from technological innovation and will help the Company to identify and
effectively plan for the changes to its existing business that will accompany new technologies.
Other costs down reflecting Iroquois exchange and completion of US system upgrade
Other costs, including business development costs and UK and US corporate costs were £39m, down £133m from 2014/15 at
constant currency primarily due to the non-recurrence of US financial system implementation costs and the £49m gain on the
exchange of National Grid's interest in the Iroquois Pipeline for shares in Dominion Midstream Partners, LP.
Capital investment (£m) - actual currency 2016 2015 % change
Metering 39 46 (15)
Grain LNG 25 43 (42)
French Interconnector 5 1 400
Property 15 2 650
Other UK 49 16 206
Other US 85 105 19
Capital expenditure excluding joint ventures 218 213 2
Investment in joint ventures (JVs)* 53 - -
Capital investment including investment in JVs 271 213 27
*excludes £63m (2014: £nil) equity contribution to St William property joint venture
Other selected financial information Year ended 31 March
(£m) - constant currency 2016 2015 % change
Operating profit 374 191 96
Depreciation (213) (199) (7)
Depreciation (actual exchange rates) (213) (196) (9)
JOINT VENTURES AND ASSOCIATES
Share of post-tax results by principal activities (£m) 2016 2015 % change
BritNed 50 31 61
Millennium 11 9 22
Iroquois 3 7 (57)
Other (5) (1)
Share of post-tax results of joint ventures and associates 59 46 28
Joint ventures and associates in the Group consist principally of interests in an electricity transmission interconnector
and gas pipelines. At the start of the year these included a 50% interest in the 1GW BritNed electricity interconnector
between the Netherlands and England, a 26% interest in the Millennium natural gas pipeline in New York State and a 20%
interest in the Iroquois gas pipeline between Long Island and the Canadian border. In September 2015, National Grid
exchanged its equity interest in the Iroquois gas pipeline for a $225.4m stake in Dominion Midstream Partners, LP. This
took the form of approximately 6.8 million Dominion Midstream common units. Dominion Midstream has existing interests in
the Cove Point LNG facility and the Carolina Gas Transmission Company and is expected to grow further through future
contributions of assets.
National Grid's share of post-tax results of joint ventures for the year was £59m, an increase of £13m compared with
2014/15. This reflected a significant increase in the contribution from the BritNed Interconnector reflecting increased
power price differentials between the Netherlands and the UK.
APPENDIX: BASIS OF PRESENTATION, DEFINITIONS AND METRIC CALCULATIONS
BASIS OF PRESENTATION
Adjusted and Statutory Results
Unless otherwise stated, all financial commentaries in this release are given on an adjusted basis at actual exchange
rates. Prior year earnings per share figures are restated to reflect the impact of additional shares issued as scrip
dividends (refer to note 6 on page 56).
'Adjusted' results are a key financial performance measure used by National Grid, being the results for continuing
operations before exceptional items and remeasurements. Remeasurements comprise gains or losses recorded in the income
statement arising from changes in the fair value of commodity contracts and of derivative financial instruments to the
extent that hedge accounting is not achieved or is not fully effective. Commentary provided in respect of results after
exceptional items and remeasurements is described as 'statutory'. Further details are provided in note 3 on page 53. A
reconciliation of business performance to statutory results is provided in the consolidated income statement on page 45.
DEFINITIONS
Constant currency
'Constant currency basis' refers to the reporting of the actual results against the results for the same period last year
which, in respect of any US$
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