REG - National Grid PLC - Results for the year ended 31 MARCH 2017 <Origin Href="QuoteRef">NG.L</Origin> - Part 2
18/05/2017 07:07
- Part 2: For the preceding part double click ID:nRSR4855Fa
year efficiencies with customers.
These metrics include Return on Equity and regulated financial performance.
Year ended 31 March Regulatory Debt:Equity assumption AchievedReturn on Equity Base or Allowed Return on Equity
% 2017 2016 2017 2016
UK Electricity Transmission 60:40 13.6 13.9 10.2 10.2
UK Gas Transmission 62.5:37.5 10.8 12.5 10.0 10.0
US Regulated avg. 50:50 8.2 8.0* 9.5 9.7
Group 11.7 12.3
* US return reported on a 2015 calendar year basis for fiscal 2015/16
Overall Group Return on Equity was 11.7% (prior year 12.3%) reflecting a reduction in the contribution from Other
activities and the expected lower returns in the UK, partially offset by improved returns in the US, reflecting increased
revenues from new rate plans in Massachusetts Electric, KEDNY and KEDLI.
As at 31 March Regulated Asset Value or Rate Base and Invested Capital Total Regulated Assets or Invested Capital
(£bn, at constant currency) 2017 2016 2017 2016
UK Electricity Transmission 12.5 11.8 12.0 11.7
UK Gas Transmission 5.8 5.6 5.7 5.7
US Regulated 15.4 14.6 17.1 16.2
Other Activities (invested capital only) 2.2 2.0 2.2 2.0
Group - Continuing 35.9 34.0 37.0 35.6
Group regulated and other assets grew 4% at constant currency, including adverse movements in assets outside of rate base,
in part driven by current year timing over recoveries. Excluding assets outside regulated assets, which principally
comprise UK timing differences and US capital work in progress, total group regulated and other assets grew by 5%.
Year ended 31 March AdjustedOperating profit
(£m, at actual exchange rate) 2017 2016Re-presented
UK Electricity Transmission 1,372 1,173
UK Gas Transmission 511 486
US Regulated 1,713 1,185
Other Activities 177 370
Group - Continuing 3,773 3,214
Group adjusted operating profit for continuing operations increased by 17% to £3,773m.
UK ELECTRICITY TRANSMISSION
2016/17 Overview
At the mid-point of its eight year RIIO price control period, UK Electricity Transmission delivered another solid
performance, with a growing asset base, while maintaining high standards of reliability and safety. However, last year one
of our UK employees lost his life in a tragic incident. We have undertaken a comprehensive investigation and are
implementing a number of changes to reinforce our strong focus on the safety of our employees, contractors and the public.
The business continues to look for innovative ways to deliver efficiency savings against its totex allowance. An example of
this is phase one of the 400kV Wimbledon sub-station which is expected to be commissioned later in 2017/18, replacing an
existing 275kV substation on the same site in urban London. We have used a variety of technological innovations to deliver
such a complex project safely, efficiently and to high standards of quality, on a constrained site. This includes the
procurement of new switchgear which is smaller and built off site, which enables more efficient installation and a greater
level of quality control. We built the cost of carbon into the tender process to stimulate innovation. The project also
made use of digital engineering where the entire build project was computer modelled reducing capital costs and carbon
emissions and improving our ability to manage safety risks throughout the project. These initiatives helped to reduce the
total cost by 20% for this complex project.
In its role as System Operator, the business balanced the network to maintain security of supply throughout the year. The
business contracted additional balancing services of 3.5 GW for the winter period to be available to manage periods of peak
demand. Last year we developed new balancing services as system needs evolved which led to procurement of 501MW of
additional support from a combination of distributed generation, demand side response and battery storage. This included
provision for end users shifting demand during the summer months to times of the day when system usage is lower.
In November 2016, Ofgem confirmed funding for new Network Innovation Competition projects. We were successful in our bid
with UK Power Networks on the 'Power Potential' project, which is a new £9.5 million market trial relating to voltage
control. Also, National Grid will work with SP Energy Networks on a £19.9 million project that will help address some of
the current and future challenges associated with maintaining the stability of Britain's electricity transmission system as
we transition to low-carbon energy.
Regulated Returns and Financial Performance reflect efficiency and incentive delivery
Return on Equity 340bps above base levels
Return on Equity for the year, normalised for a long-run inflation rate of 3%, was 13.6% compared with a regulatory
assumption, used in calculating the original revenue allowance, of 10.2%. The principal components of the difference are
shown in the table below
Year ended 31 March 2017 2016
Base return (including avg. 3% long-run inflation) 10.2 10.2
Totex incentive mechanism 1.9 2.1
Other revenue incentives 0.7 0.8
Return including in year incentive performance 12.8 13.1
Pre-determined additional allowances 0.8 0.8
Return on Equity 13.6 13.9
Return on Equity decreased 30bps year-on-year, mainly due to lower totex allowances. Totex was £1.2bn compared with an
estimated allowance, adjusted for outputs and phasing of spend, of £1.4bn. Our share of this efficiency saving is expected
to be £87m. Much of this saving is reflected in an estimate of increased performance RAV.
The consistent totex performance in the year principally reflects efficiencies and innovative engineering within the
capital investment programme in relation to both load and non-load related projects. National Grid aims to deliver the
essential maintenance and outputs required by the RIIO framework sustainably and at the lowest total cash cost in order to
deliver best value for consumers and shareholders. Innovative solutions such as predictive analysis and new engineering
approaches are essential to achieving this and continued to be a focus for the business over the course of 2016/17.
The business delivered a consistent level of performance under other revenue incentive schemes during 2016/17, generating
around 70bps of total return, equivalent to £41m of additional revenue. The current BSIS contributed £28m of pre-tax profit
which included £15m of performance related to prior periods. Stakeholder satisfaction and renewable wind forecasting also
delivered improved performance, offset by reductions in the customer satisfaction and SF6 incentives. UK Electricity
Transmission is working to identify opportunities for future outperformance across these areas.
Investment activities in 2016/17
Capital investment in UK Electricity Transmission was £1,027m, £57m lower than the prior year. The reduction was in part
driven by lower spending on London Power Tunnels and Western HVDC Link projects as these projects near completion. These
decreases were partially offset by increasing spend on overhead lines, circuit breakers and transformers to deliver RIIO
outputs.
The business continued to seek improved totex efficiency in its investment. Placing an emphasis on engineering for best
value reduces capital spend and customer bills and supports attractive levels of asset growth, through the creation of
performance RAV. Overall, investment in the year reflected £632m of non-load related investment whilst load related spend
was £395m.
Regulated Financial Performance down 1% year-on-year
The regulated financial performance calculation adjusts reported operating profit to reflect the impact of the business'
regulatory arrangements when presenting financial performance.
Regulated financial performance for UK Electricity Transmission decreased to £1,184m from £1,195m, down 1%. The
year-on-year reduction primarily reflects the lower achieved operational return, driven by lower totex outperformance.
Reconciliation of regulated financial performance to operating profit (£m) 2016 % change
2017
Operating profit 1,372 1,173 17
Movement in other regulated assets and liabilities (288) (147)
Deferred taxation adjustment RAV indexation (avg. 3% long-run inflation) 62356 80339
Regulatory v IFRS depreciation differenceFast/Slow money adjustmentPensions (379)34(47) (368)92(54)
Performance RAV created 74 80
Regulated financial performance 1,184 1,195 (1)
Regulated Financial Position up 2.7%
In the year, RAV grew by 5.0% driven by continued investment and the impact of inflation, which at 3.1% was in line with
our long run assumption. Net other regulatory liabilities increased by £288m, partly reflecting revenue received in the
year associated with timing over recoveries, customers' share of efficiency benefits and also relating to RIIO outputs
where delivery has either been deferred to later in the price control period or where outputs are no longer expected to be
required by customers during RIIO.
2017 2016
Opening Regulated Asset Value (RAV)* 11,871 11,285
Asset additions (aka slow money) (actual) 944 1,042
Performance RAV or assets created 74 80
Inflation adjustment (actual RPI) 375 181
Depreciation and amortisation (800) (758)
Closing RAV 12,464 11,830
Opening balance of other regulated assets and (liabilities)* (129) 49
Movement (288) (147)
Closing balance (417) (98)
Closing Regulated Financial Position 12,047 11,732
*March 2016 opening balances adjusted to correspond with 2015/16 regulatory filings and calculations
Regulatory and other business developments
Ofgem concluded its mid-period review of the RIIO price control. The outcome for Electricity Transmission was a reduction
to allowances of £38 million for the Transmission Operator and an additional £21 million to fund new tasks the System
Operator has been asked to undertake. The outcome was in line with our expectations and provides certainty over our core
revenues for the remaining RIIO period.
Through the ongoing reviews of our investment plans, we took the decision to volunteer a deferral of £480 million of RIIO
allowances, at 2009/10 prices. This deferral will enable better alignment of the allowances with the likely timing of spend
and also help to lower bills in the near-term. The need for these deferred investments and the associated level of funding
will form part of RIIO-T2 discussions.
We issued a joint statement with BEIS and Ofgem about the enhanced role and greater separation of the Electricity System
Operator (ESO) function. While the proposals are subject to consultation, we support the principle of greater separation of
the ESO role within National Grid. We believe it is the most effective way to balance the interests of consumers with the
need to maintain security of supply in a fair and competitive energy market. We look forward to working with the regulator
and our stakeholders to deliver the best possible outcome for UK consumers.
Ofgem continues to consult on the introduction of onshore competition for electricity transmission. National Grid remains
supportive of competition where it is in the interests of consumers and is working to ensure that the costs, benefits and
risks of competition are properly understood in relation to any proposals on a case by case basis. In its role as
electricity system operator, National Grid is assisting Ofgem in developing the competitive regime in the interests of
consumers and chairs an Electricity Networks Association facilitated working group to develop an early tendering model, as
part of its overall contribution to the process.
Future activities and outlook
UK Electricity Transmission expects to continue to deliver good returns and asset growth in 2017/18 with opportunities for
the business to deliver healthy outperformance led by the totex incentive. The business will continue to focus on using
process improvements, efficiency and innovation to deliver the RIIO outputs at the lowest sustainable cash cost, generating
savings for consumers and shareholders. The business expects to generate savings from finding new and innovative ways to
maintain, repair and replace its assets.
National Grid expects UK Electricity Transmission capital investment in 2017/18 to increase compared to the 2016/17 levels,
reflecting increased load and non-load investments to meet RIIO outputs. The business expects to deliver growth in
regulated asset value, including the benefit of efficiencies, above the rate of inflation in 2017/18.
The majority of our capital expenditure will be non-load related, including the replacement of existing assets, system
upgrades and improvements to site safety and visual amenity. The load related spend, mainly includes the connection of new
generation sources, although the majority of the work related to the new nuclear connections, in particular Moorside is now
expected to fall into the RIIO-T2 time-frame.
APPENDIX to UK ELECTRICITY TRANSMISSION
Revenue and Costs in 2016/17 on an IFRS basis
On an IFRS basis UK Electricity Transmission operating profit was £1,372m, up £199m or 17%. Net revenues in the year were
higher, largely due to increased timing over recoveries. Adjusting for timing movements, net revenues increased by £67m,
consistent with the increase in operating profit.
The principal components of the movement in operating profit are shown below.
Revenue and Costs Year ended 31 March
(£m) 2017 2016 % change
Net revenue 2,146 1,947 10
Regulated controllable operating costs (286) (311) 8
Post-retirement costs (43) (40) (8)
Other operating costs and provisions (24) (33) 27
Depreciation and amortisation (421) (390) (8)
Operating profit 1,372 1,173 17
Less: Timing impact 137 5
Operating profit excluding timing 1,235 1,168 6
Net revenue (net of pass through costs) increased by £199m. Excluding timing impacts of £132m, net revenue increased by
£67m. This primarily reflected inflation driven increases, higher unlicensed commercial income and higher post-vesting
connections income.
Regulated controllable operating costs decreased by £25m, reflecting the release of an environmental provision, partially
offset by higher headcount and cost inflation. Post-retirement costs increased by £3m and other operating costs and
provisions decreased by £9m following asset write downs in the prior year.
Depreciation and amortisation increased by £31m, reflecting investment driven growth in the asset base.
UK GAS TRANSMISSION
2016/17 Overview
In 2016/17 UK Gas Transmission delivered a solid performance. We continued to invest in asset health in order to meet
Network Output Measures (NOMs) which was reflected in strong levels of network availability. Our safety performance was
strong, we have halved the number of recordable injuries in 2016/17 compared to 2015/16 however our lost time injuries
increased to three, compared to two in the prior year.
The business is operating under challenging allowances which makes it even more important to identify efficiencies.
Examples include at our Feeder 9 project to build a gas transmission pipeline under the Humber Estuary where we have
applied emerging best practice techniques from comparable projects around the world to reduce our construction costs. Also,
at the Aylesbury compressor station we have been innovative through the use of catalytic converters within the exhaust
stack to reduce carbon monoxide emissions to meet new standards more cost effectively. These two examples are expected to
generate over £70m of savings.
We have used our regulatory innovation funding to develop ways to serve our customers more effectively, provide greater
value, and shape the energy systems of the future. Project CLoCC (Customer Low Cost Connections) is challenging every
aspect of the current gas customer connections process. It aims to reduce the time to connect from three years to less than
one, and reduce the cost from up to £2 million to significantly less than £1 million. It will also make it easier for
non-traditional customers to connect to the National Transmission System.
Performance reflects continued strong incentive delivery and recovery of additional allowances
Return on Equity 80bps above base levels
Return on Equity for the year, using a long-run inflation rate of 3%, was 10.8% 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.
Year ended 31 March 2017 2016
Base return (including avg. 3% long-run inflation) 10.0% 10.0%
Totex incentive mechanism (0.8)% (0.2)%
Other revenue incentives 1.1% 1.2%
Return including in year incentive performance 10.3% 11.0%
Pre-determined additional allowances 0.5% 1.5%
Return on Equity 10.8% 12.5%
The business performed below the targets set by the totex incentive mechanism in the fourth year of RIIO. Totex spend was
£351m, compared to an estimated allowance, adjusted for outputs and phasing of £312m. Performance reflected higher asset
health spend and a small reduction in allowances reflecting the outcome of the MPR. The Company's share of this difference
is expected to be £17m.
The business had another good year of incentive performance, just below the performance levels in 2015/16. Increased
efforts to identify customer and stakeholder needs, were offset by lower shrinkage performance. Overall, the UK Gas
Transmission business delivered around 110 bps of additional returns through other revenue incentives. On a pre-tax basis,
this equates to an estimated £29m 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 50bps, a decrease year-on-year, as expected and in accordance with the agreed
profile.
Regulated Financial Performance down 7% 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 £499m from £535m, down 7%. The year-on-year reduction
reflected a lower operational return on equity, mainly as a result of the reduction in legacy allowances.
Year ended 31 March
Reconciliation of regulated financial performance to operating profit (£m) 2017 2016 % change
Operating profit 511 486 5
Movement in other regulated assets and liabilities (120) (80)
Deferred taxation adjustment 39 45
RAV indexation (3% long-run avg.) 168 166
Regulatory v IFRS depreciation difference (21) (18)
Fast/Slow money adjustment (14) 18
Pensions (53) (77)
Performance RAV created (11) (5)
Regulated financial performance 499 535 (7)
Regulated Financial Position broadly unchanged
RAV increased 2.8% in the year reflecting the impact of inflation and continued investment, partially offset by
depreciation and adverse performance RAV. Net other regulatory assets decreased by £120m, mainly reflecting current year
revenue over recoveries associated with lower than expected inflation and higher volumes.
£m 2017 2016
Opening Regulated Asset Value (RAV)* 5,597 5,525
Asset additions (aka slow money) (actual) 201 185
Performance RAV or assets created (11) (5)
Inflation adjustment (actual RPI) 175 85
Depreciation and amortisation (207) (196)
Closing RAV 5,755 5,594
Opening balance of other regulated assets and (liabilities)* 56 157
Movement (120) (80)
Closing balance (64) 77
Closing Regulated Financial Position 5,691 5,671
*March 2016 opening balances adjusted to correspond with 2015/16 regulatory filings and calculations
Investment activities in 2016/17 focussed on asset health
UK Gas Transmission invested £214m during the year, a £28m increase on prior year, which was due to higher asset health
spend and the ramp up of our Feeder 9 project.
Asset health expenditure forms part of an essential and co-ordinated programme of work throughout the RIIO period. This
programme is designed to enable UK Gas Transmission to maintain a safe network and continue to meet regulatory output
requirements.
Regulatory and other business developments
During 2016/17, Ofgem finalised its mid period review, the outcome was largely unchanged from its minded-to position
announced on 18 August 2016. This resulted in a reduction in allowances of £169 million for a pipeline project at
Avonmouth, as anticipated at the start of RIIO.
On 31 March 2017 Ofgem finalised its review of allowances associated with the high-pressure gas pipeline entry point at
Fleetwood, reducing our allowances by £278 million. Allowances related to Fleetwood were excluded from our calculation of
RoE and RAV in anticipation of this outcome.
We also submitted a new NOMs methodology to Ofgem which we believe significantly improves our ability to articulate the
risks we are managing and also assists in explaining how the investments we make ensure these risks are being managed
effectively.
Future activities and outlook
UK Gas Transmission expects continued good incentive performance, offset by higher totex spend compared to our allowances.
As expected some legacy allowances will cease, as a result Return on Equity is expected to be around the allowed level in
2017/18.
The business continues to focus on finding and delivering operational efficiencies, in particular 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 2017/18 is expected to increase compared to 2016/17 reflecting the increased
asset health activity and compressor reengineering projects as well as the continued construction of our Feeder 9 project.
As a result, regulated asset value is expected to grow above the rate of inflation in 2017/18.
APPENDIX to UK GAS TRANSMISSION
Revenue and Costs in 2016/17 on an IFRS basis
On an IFRS basis UK Gas Transmission operating profit was £511m, up £25m or 5%. Excluding the impact of timing, operating
profit was £30m higher reflecting increased net revenues offset by an increased depreciation charge.
The principal components of the movement in operating profit are shown below.
Year ended 31 March Revenue and Costs
(£m) 2017 2016 % change
Net revenue 857 826 4
Regulated controllable operating costs (137) (135) (1)
Post-retirement costs (19) (18) (6)
Other operating costs and provisions (4) (9) 56
Depreciation and amortisation (186) (178) (4)
Operating profit 511 486 5
Less: Timing impact 62 67 (7)
Operating profit excluding timing 449 419 7
Net revenue (net of pass through costs) increased by £31m. Excluding adverse timing impacts of £5m, net revenue increased
by £36m. This primarily relates to an increase in allowed base revenue and inflation.
Regulated controllable costs increased by £2m. This was primarily driven by higher headcount to support increased asset
heath and data and technology workloads.
Depreciation and amortisation increased by £8m and Other operating costs were £5m lower.
US REGULATED OPERATIONS
2016/17 Overview
National Grid's US Regulated business delivered solid operational performance as it continued to deliver a significant
capital investment programme to reinforce, modernise and grow its networks. The gas networks maintained their high level of
reliability and the electricity networks stood up well to adverse weather conditions that included severe storms.
The most significant storm activity occurred during March when severe wind storms were followed by snow and freezing rain,
impacting services to more than 400,000 customers. National Grid was able to respond swiftly, restoring power to the vast
majority of impacted customers within the first 24 hours.
The US business continued to focus on safety, this year expanding safety plans to all managers. This helped drive a 5%
reduction in Occupational Safety & Health Administration recordable events in 2016/17. Road traffic collisions remained
flat year on year and lost time injury frequency rate increased slightly. In 2017/18 the key focus will be on hazard
elimination and reducing road traffic collisions as the business strives to achieve world class performance.
Return on equity in-line with expectations
Beginning in 2016/17 the US regulated business is now reporting Return on Equity on a fiscal year basis to be consistent
across the Group. Return on Equity for 2016/17 was 8.2%, an increase of 20 bps compared to calendar year 2015. The increase
reflects a partial-year impact from new rate plans for our Massachusetts Electric, KEDNY and KEDLI businesses.
On a comparable basis, US Regulated Return on Equity for fiscal year 2015/16 was 7.6%, 40 basis points below the calendar
year 2015 return. The difference was driven by the impact of milder winter weather in the fourth quarter of 2015/16 on non
decoupled revenues.
Another year of significant capital investment
Capital investment in the Company's US regulated business increased by approximately $100m to a new high of $2.9bn on an
IFRS basis, or $2.7bn on a US GAAP basis.
Of the $2.7bn, approximately $1.4bn was associated with the gas distribution networks, primarily on mandated programmes to
replace ageing infrastructure and on adding new customers to the networks. In total National Grid replaced approximately
400 miles of leak prone pipe, exceeding our regulatory targets for each operating company, and added approximately 25,000
new gas customers.
Approximately $800m was invested in the electricity distribution networks, primarily to improve asset health, system
capacity and performance. Significant investment was also made in response to customer requests including almost 19,000
distributed generation connections across the territory. Approximately $400m was invested in the existing FERC regulated
businesses.
Regulated Financial Position
Overall, the US rate base increased by 5.7% (or 6.6% excluding working capital movements) to $19,297m driven by increased
capital expenditure partially offset by depreciation, timing over recoveries and deferred tax movements.
US Regulated Assets ($bn as at 31 March)
2017 2016 % change
Rate Base excl. working capital (w/c) 18.6 17.5 7
Working capital in Rate Base 0.7 0.8 (13)
Total Rate Base 19.3 18.3 6
Reg. assets outside Rate Base excl. w/c 2.2 2.1 3
Working capital outside Rate Base (0.1) (0.1) -
Total regulated assets outside Rate Base 2.1 2.0 1
Total US Regulated Assets 21.4 20.3 5
£bn as at 31 March
2017 2016 % change
Total US regulated assets at actual currency 17.1 14.1 21
Total US regulated assets at constant currency 17.1 16.2 6
Financial performance
Operating profit increased to £1,713m, an increase of £528m at actual exchange rates including a £184m benefit from the
stronger dollar.
On a constant currency basis, net revenue (excluding timing) increased by £226m to £5,321m, due to increased revenue
allowances from the Massachusetts Electric, KEDNY and KEDLI rate cases, our capex trackers and higher FERC revenues driven
by increased rate base. Regulated controllable costs excluding pensions increased by £152m largely due to the write off of
prior year capital costs and higher spending on new energy programmes that have not yet received funding.
Post-retirement costs decreased by £7m and bad debts decreased by £32m compared to last year. Depreciation and amortisation
increased by £24m and other costs increased by £28m due to the impact of storm costs and a higher cost of removal
associated with continued high level of investment.
Adjusting for year-on-year timing differences of £283m, operating profit at constant currency for the year excluding timing
was £61m (4%) higher than 2015/16.
The principal components of the movement in operating profit are shown below.
Revenue and costs(£m, constant currency) Year ended 31 March
2017 2016 % change
Net revenue 5,520 5,011 10
Regulated controllable operating costs (1,830) (1,678) (9)
Post-retirement costs (104) (111) 6
Bad debts (120) (152) 21
Other operating costs and provisions (1,111) (1,083) (3)
Depreciation and amortisation (642) (618) (4)
Operating profit 1,713 1,369 25
Less: Timing impact 199 (84)
Operating profit excluding timing 1,514 1,453 4
Regulatory and other business developments
Utilising a jurisdiction model, National Grid works collaboratively with regulators and other stakeholders to ensure the
necessary investments are made to construct and maintain safe and reliable networks, while managing costs to customers.
Where appropriate, National Grid continues to propose further projects and initiatives to provide benefits to customers
through the use of new technology or by facilitating the transition to a low carbon economy.
During 2016/17 the business agreed three full rate plan filings in Massachusetts and New York, the Company's first full
rate plans in over 6 years for Massachusetts Electric and over 10 years for KEDNY and KEDLI. The filings successfully
updated cost recovery and are enabling an increased level of customer driven investment. The business also agreed a capital
investment petition for Niagara Mohawk allowing for an increased level of investment with no impact on customer bills.
In April, National Grid filed a new rate case for its largest utility, Niagara Mohawk, and an outcome is expected in March
2018 with new rates in effect from April 2018.
Future activities and outlook
The 2017/18 outlook for National Grid's US Regulated activities remains positive, with an increased level of investment and
increasing returns. We will see the full benefit from the rate cases agreed during 2016/17 and will continue our rate
filing programme with the NIMO filing followed by filings for Massachusetts Gas and Narragansett (Rhode Island) Electric
and Gas during 2017 and 2018.
Alongside the ongoing rate case programme, we will continue to manage costs proactively. As a result, the business is
targeting a Return on Equity at 90% of the average allowed return this year.
US Regulated capital investment is expected to increase in 2017/18. As a result, growth in rate base excluding working
capital movements is expected to increase in 2017/18.
New York
The New York Jurisdiction consists of KEDNY and KEDLI, gas distribution companies in downstate New York, and Niagara
Mohawk, an electricity and gas distribution company in upstate New York.
KEDNY and KEDLI are currently operating under jointly proposed, three-year rate plans that came into effect on 1 January
2017. The rate plans provide for the first increase in rates since 2008 which on a combined basis total more than $500m
over three years. The plans allow a return on equity of 9% with opportunities to earn performance incentives for
outperforming targets in key areas including leak prone pipe replacement and leak repairs. Customer bill increases, which
are more closely aligned with IFRS revenue reporting, will be phased in more gradually over the three year plans.
Importantly, the joint proposal also increased the level of fully-funded investment to $3bn over the three year plan,
allowing National Grid to replace nearly 600 miles of leak prone pipe over the period. In order to meet the increased level
of investment, the plan also allows for 380 new positions which have now been filled.
Return on Equity for 2016/17 increased 110 bps to 8.2% for KEDNY and by 220 bps to 9.5% for KEDLI, reflecting higher
revenues associated with the joint proposal.
NIMO is currently operating under a rate plan that began in April 2013 and allowed for revenue increases through March 2016
and a capital investment petition that allows for $1.3bn of capital investment over 2016/17 and 2017/18. The petition was
funded through the use of deferred credits to provide incremental US GAAP revenues to National Grid with no immediate bill
impact to customers.
The NIMO Return on Equity for 2016/17 increased by 40 bps to 8.5% for the electricity business and decreased by 180bps to
6.6% for the gas business. The NIMO electricity business Return on Equity benefited from higher net margin from the latest
capital filing. The gas business' return on equity decreased due to higher operating costs and the non-recurrence of a
reserve release for energy efficiency and sales tax in calendar year 2015.
On 28 April 2017, National Grid filed a full rate case for Niagara Mohawk Electric and Gas to modernise the electricity and
gas networks to enhance reliability and resilience, to continue to provide a high level of customer service and assist the
most vulnerable customers and to develop the energy infrastructure and technologies that support the State of New York's
energy vision. This is a one-year plan; however, National Grid filed two additional years of data to provide the
opportunity for a multi-year plan that would phase in customer bill increases to mitigate the impact.
The filing requests revenue increases of $326m and $81m for electricity and gas, respectively, and an allowed return on
equity of 9.79%. It also includes a proposed capital plan of $652m for electricity and $171m for gas, based on a combined
three-year plan of $2.7bn. A decision is expected in March 2018 for rates effective from 1 April 2018.
Return on Equity Achieved (%) Most recent granted (%)
Regulated Entity FY17 CY15 CY14
New York
KEDNY 8.2 7.1 8.5 9.0
KEDLI 9.5 7.3 6.5 9.0
NMPC Gas 6.6 8.4 8.3 9.3
NMPC Electric 8.5 8.1 9.0 9.3
Total New York* 8.4 7.7 8.2 9.2
* total return weighted by average rate base
On a US GAAP basis, capital investment in 2016/17 remained flat at $1.3bn. Investment is expected to increase in 2017/18
with current levels of investment funded by the KEDNY/KEDLI joint proposal and the NMPC capital petition.
Rate Base ($m) as at 31 March
New York Regulated Entity 2017 2016 % change
KEDNY 2,722 2,525 8
KEDLI 2,256 2,176 4
NMPC Gas 1,052 1,160 (9)
NMPC Electric 4,737 4,621 3
Total New York 10,767 10,482 3
National Grid continues to develop and implement projects to progress New York state's Reforming the Energy Vision (REV)
programme which seeks to help consumers make more informed energy choices, develop new energy products and services and
protect the environment while creating new jobs and economic opportunity throughout the state. The initial four electricity
projects are progressing well and this year the Company proposed two additional electricity projects. The Smart Home Rate
project and the Distributed Generation Interconnection demonstration project are currently being evaluated by the Public
Service Commission. National Grid has also begun four gas projects agreed to within the recent KEDNY/KEDLI rate agreement.
Massachusetts
The Massachusetts Jurisdiction consists of the Massachusetts Electric business (including Nantucket Electric) and the
Massachusetts Gas business (including Boston Gas and Colonial Gas).
For the first half of 2016/17, Massachusetts Electric was operating under rates that became effective in 2010, based on a
2008 historic test year. In September 2016, National Grid received a final rate order for Massachusetts Electric that
established new rates effective from 1 October 2016. As Massachusetts uses historic test years the rate plan is not for a
fixed term but rather resets rates moving forward. The order increased revenues by $101m and allows for a 9.9% return on
equity. Importantly, the approved plan also includes an increase in funded annual capital investment of up to $249m from
$170m.
Return on Equity for Massachusetts Electric increased by 90 bps to 4.3% reflecting increased revenues associated with the
rate case partly offset by increased operating costs. More of Massachusetts Electric's revenues are earned during the
period of higher demand in the summer months and therefore the company will not see the full benefit from the rate case
until 2017/18.
Massachusetts Gas is currently operating under rates that became effective in November 2010. In 2015, National Grid agreed
a Gas System Enhancement Plan (GSEP) of up to $219m, allowing the business to earn a return on an increased level of
investment in leak prone pipe. As part of this plan, National Grid has expanded its gas workforce, hiring approximately 220
additional gas workers to deliver the increased level of investment.
Return on Equity for Massachusetts Gas decreased by 70 bps to 7.7% reflecting increased operating costs from inflation.
National Grid plans to file a full rate case for Massachusetts Gas in 2017-2018.
Return on Equity Achieved (%) Most recent granted (%)
Regulated Entity FY17 CY15 CY14
Massachusetts
Massachusetts Gas 7.7 8.4 7.8 9.8
Massachusetts Electric 4.3 3.4 4.67.8 9.9
Total Massachusetts * 6.0 5.8 6.2 9.8
* total return weighted by average rate base
On a US GAAP basis, capital investment in the region increased by $96m to $791m. Investment is expected to increase in
2017/18 with current levels of investment funded by the 2016 Massachusetts Electric rate case and the 2015 Massachusetts
Gas GSEP.
Rate Base ($m) as at 31 March
Massachusetts Regulated Entity 2017 2016 % change
Massachusetts Gas 2,251 1,945 16
Massachusetts Electric 2,281 2,156 6
Total Massachusetts 4,532 4,101 11
National Grid's Massachusetts business has a number of initiatives underway to help the state meet its low carbon
objectives. National Grid continues to develop utility-scale solar generation through multiple phases. This year, the
Company completed Phase 2 of the project which added 16 MW of capacity to the initial 5 MW. National Grid also received
approval for Phase 3, which will provide a further 14 MW of capacity alongside a 7 MW storage solution.
In December, National Grid received an interim extension of its smart grid pilot in Worcester while the Massachusetts DPU
undertakes a full process to decide on a possible two-year extension of the programme. The pilot allows the company to test
grid modernisation applications on a small scale and allow customers to benefit from the programme.
This year, National Grid filed a proposal with Massachusetts to develop 1,200 electric vehicle charging stations, including
80 fast charging stations, across the state. If approved, the Company would partner with businesses and organisations to
install the stations on their premises. The Massachusetts DPU does not have a timeframe for responding to this proposal.
National Grid is still awaiting a decision on its Grid Mod filing made in 2015. The filing included four proposals to
modernise the electric network ranging from approximately to $200m to approximately $900m over a five-year period.
Rhode Island
The Rhode Island Jurisdiction consists of a Rhode Island Electric business and a Rhode Island Gas business that cover the
majority of the state.
Both the gas and electric businesses are recovering base operating costs under one-year rate plans that became effective in
February 2013, using a 2011 test year. Other costs, including capital, pension and property taxes, are recovered through
annual trackers. These include gas and electric Infrastructure Safety and Reliability (ISR) capital trackers that allow
National Grid to agree a level of investment for the coming year and concurrently recover the full costs associated with
investment in year.
Return on Equity decreased to 7.7% for the combined Rhode Island business, as a results of cost pressures since rates
became effective in 2013. In particular, Rhode Island Electric decreased to 6.2%, primarily due to inflation, higher storm
and employee benefit costs since rates became effective in 2013. National Grid expects to file a full rate case for the
Rhode Island business in 2017.
Return on Equity Achieved (%) Most recent granted (%)
Regulated Entity FY17 CY15 CY14
Rhode Island
Narragansett Gas 9.4 9.8 11.6 9.5
Narragansett Electric 6.2 10.5 9.5 9.5
Total Rhode Island* 7.7 10.2 10.4 9.5
* total return weighted by average rate base
On a US GAAP basis, capital investment remained flat at just under $200m. Investment is expected to increase in 2017/18
with current levels of investment funded by the 2016 ISR capital tracker.The South Street substation in Providence, an
estimated $80m project that is a key part of the city's redevelopment is underway and progressing well.
Rate Base ($m) as at 31 March
Rhode Island Regulated Entity 2017 2016 % change
Narragansett Gas 640 577 11
Narragansett Electric 665 657 1
Total Rhode Island 1,305 1,234 6
In 2016/17 National Grid's Rhode Island electricity business undertook a Volt Var Optimization (VVO) pilot, deploying
technology at 7 feeders across the network to improve circuit operational performance and reduce overall energy consumption
in the feeder. The pilot saw a demand reduction of more than 3% across the feeders. Based on this success, the programme
has been expanded under the ISR plan. In early 2017, the Governor launched the Power Sector Transformation initiative to
develop a framework that promotes a nimble grid and enables Rhode Islanders to take full advantage of new clean energy
technologies.
FERC
The FERC Jurisdiction consists of the Long Island Generation business, the Canadian Interconnector, New England Power, and
Narragansett Electric (Transmission).
Long Island Generation and the Canadian Interconnector are contracted investments, meaning that they earn revenues from
long-term contracts with customers. The contracts are regulated by FERC and allow for an agreed return on equity. New
England Power and Narragansett Electric (Transmission) use formula rates that allow for the businesses to earn returns on
incremental investments almost immediately.
Return on Equity for the FERC Jurisdiction decreased 10 bps to 11.3%, reflecting a lower allowed return on equity following
FERC rate challenges.
FERC previously lowered the base ROE for the New England transmission owners from 11.14% to 10.57% for the period of
October 2011 to December 2012. Following that decision, National Grid refunded customers where appropriate and reduced the
rate at which customers are charged to reflect this decision. In April 2017, the US Court of Appeals found the FERC failed
to articulate a satisfactory explanation for its actions and National Grid will evaluate whether further action is needed.
The decision by the US Court of Appeals will impact three further FERC ROE complaints and there is no timeframe for
resolutions.
Return on Equity Achieved (%) Most recent granted (%)
Regulated Entity FY17 CY15 CY14
FERC
Long Island Generation 12.0 12.5 10.5 9.9
New England Power 11.1 11.0 11.6 10.6
Canadian Interconnector 13.0 13.0 13.0 13.0
Narragansett Electric Transmission 11.4 11.2 12.1 10.6
Total FERC* 11.3 11.4 11.5 10.5
* total return weighted by average rate base
Capital Investment in the FERC companies increased slightly to $382m, including reliability projects, asset modernisation,
and the connection of new customers. This year, New England Power completed its $45m Tewksbury substation and began
construction on the Merrimack Valley Reliability Project, a competitively tendered joint initiative with Eversource Energy
that will address regional reliability needs.
Narragansett Electric transmission made history this year with completion of the sea2shore project which connected the
first U.S. offshore wind farm to the mainland power grid. This project was a collaborative effort with National Grid's
Rhode Island Jurisdiction.
Rate Base ($m) as at 31 March
FERC Regulated Entity 2017 2016 % change
Long Island Generation 422 420 0
New England Power 1,543 1,405 10
Canadian Interconnector 31 11 182
Narragansett Electric Transmission 697 608 15
Total FERC 2,693 2,444 10
The FERC Jurisdiction continues to look for innovative ways to maintain asset health and reliability and where possible,
share best practices with the UK Electricity Transmission business. This year, the FERC Jurisdiction began using LineScout,
a robot that has been used in National Grid's UK business, to perform line inspections in areas that are difficult to
access. This facilitates condition assessments and improves safety. Additionally, the business has begun demonstrations
using unmanned aerial vehicles to conduct asset inspections.
The FERC Jurisdiction is also undertaking a programme to deploy new technology to improve digital communication within its
transmission substations. This will standardise communications within substations which is expected to improve safety,
increase system availability and reduce operating costs.
OTHER ACTIVITIES
Good performance in the year
Continuing operating profit by principal activities (£m) 2017 2016 % change
Metering 161 162 (1)
Grain LNG 74 72 3
French interconnector 72 123 (41)
Property 65 56 16
UK corporate and other activities (137) (65) (111)
Sub-total UK operating profit 235 348 (32)
US corporate and other activities (58) 22
Total operating profit 177 370 (52)
Total operating profit - constant currency 177 373 (53)
Share of post-tax results of joint ventures and associates 63 59 7
Metering profit steady; cash flow remains strong
The Metering business's operating profit decreased slightly by £1m reflecting increased costs of our smart meter pilot, and
the displacement of its legacy meters, this was partially offset by lower maintenance and operating costs. Capital
investment decreased by £4m.
Grain LNG profit steady
National Grid's LNG import terminal on the Isle of Grain delivered a £2m increase in operating profit in 2016/17 due to an
increase in performance in the reloading and road tanker loading services and reduction in maintenance costs. Capital
investment was lower in the year at £6m (2015/16: £25m) due to the completion of a second cryogenic line and the road
tanker load facility (commissioned in November 2015). During 2016/17, Grain LNG completed its 1000th road tanker reload.
IFA profitability in line with expectations
The 2GW IFA delivered performance in line with expectations, with an operating profit at £72m (2015/16: £123m). The year on
year decrease primarily reflected an unusually high power price differential between France and the UK in the first half of
2015/16, increasing the revenue generated from the auctions of the interconnector's capacity during this period. IFA
profitability was not adversely impacted by the work to repair two pairs of subsea cables damaged in Storm Angus as the
loss was recovered through insurance and is reflected in the results of our captive insurance company.
Continued high level of property sales and good progress in St William JV
The Property business delivered an operating profit of £65m (2015/16: £56m), following property sales at Bristol and
Uddington in the second half of the year and the previously announced Battersea sale in August 2016. Construction has now
commenced on 955 new homes at Battersea. Our estate management, gas holder dismantling and contaminated land clean-up
programmes continue to reduce operational risk across our portfolio.
A third new interconnector will commence construction later in 2017
Following Board approval for the Belgian (Nemo Link) and Norwegian (North Sea Link) interconnectors in 2015, significant
progress has been made on both projects.
Nemo Link, developed between National Grid and Elia, the Belgian transmission system operator, will connect Richborough in
the UK and Herdersbrug in Belgium. The subsea cable will be 130 kilometres in length and have a capacity of 1 GW. Seabed
surveys and construction work have already taken place on the project, which is planned to be operational in 2019.
North Sea Link (NSL) will connect Blyth in the UK and Kvilldal in Norway. Developed between National Grid and the Norwegian
transmission system operator Statnett, NSL will be the longest subsea cable in the world at 720 kilometres. The 1.0 GW link
is expected to be operational by 2022. Construction started in Norway in 2016, while work in the UK will begin this year.
The Board also approved the 230 kilometre IFA2 interconnector in November 2016. Developed with RTE, the 1.0 GW subsea cable
will connect Hampshire in the UK and Normandy in France. The link is expected to be operational in 2020, with construction
starting in early 2018.
Corporate and other
In total our corporate and other performance decreased by £152m reflecting the write off of US business development
projects, the prior year Iroquois gain of £57m and one-off business change costs of £60m to ensure we are well positioned
to meet our growth targets efficiently and at the same time build a stronger foundation for the future.
Sunrun partnership
In January, the company announced a partnership with Sunrun, a leading provider of residential solar services. In this
partnership, we have committed $100m in a portfolio of roof-top solar assets, which will allow us to better understand
customer behaviour and the impact of distributed technologies on the network.
New transmission and storage opportunities in the US
The evolving energy landscape is creating new opportunities for transmission and storage opportunities in our US
territories.
The connection of low carbon generation is creating the need for new transmission lines to transport renewable energy to
load centres. In the northeast, this means bringing wind from upstate NY towards New York City and bringing wind and hydro
from Canada into New England. Projects can be developed in response to a specific request for proposal from a state or
regional transmission organisation or by independently signing up customers.
National Grid continues to propose potential projects to meet specific energy needs and currently has a number of projects
under consideration. This year, the Company proposed the Granite State Power Link, a potential HVDC transmission line that
would
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