Report for the period ended
30 September 2018
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Highlights · Maintained strong reliability and safety across all networks
· Decided to exercise Cadent 39% options; sale completion in June 2019 providing £2bn cash proceeds
· Reached major milestone in the US with all distribution companies under refreshed rates
· Approved £850m investment to proceed with Viking interconnector
· Launched UK cost efficiency and restructuring programme
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Financial performance · Underlying operating profit down 6% to £1.3bn, primarily from expected return of Gas Transmission allowances and US tax reform, partially offset by favourable legal settlements of £94m
· Underlying EPS of 19.7p, up 1.2p, reflecting a lower tax rate and reduced share count
· Statutory EPS (continuing) of 12.7p after exceptional charges: UK cost efficiency and restructuring programme £127m; Massachusetts Gas workforce contingency plan £97m
· Interim dividend 16.08p/share, up 3.8% in line with policy
· Capital investment £2.1bn, up 7%
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Financial summary Six months ended 30 September – continuing operations (excluding Cadent)
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Statutory results |
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Underlying1 |
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Unaudited |
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2018 £m |
2017 £m |
% change |
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2018 £m |
2017 £m |
% change |
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Operating profit |
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1,017 |
1,274 |
(20) |
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1,285 |
1,368 |
(6) |
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Profit before tax |
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522 |
780 |
(33) |
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816 |
846 |
(4) |
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Earnings per share |
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12.7p |
17.7p |
(28) |
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19.7p |
18.5p |
6 |
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Capital investment |
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2,130 |
2,000 |
7 |
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2,130 |
2,000 |
7 |
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John Pettigrew
Chief Executive
“We have continued to make strong operational progress in the first six months whilst maintaining excellent levels of safety and reliability. Investment in our networks increased to £2.1bn, including further progress on our three major interconnector projects. In the UK, we are implementing a cost efficiency and restructuring programme to ensure that we continue to drive outperformance for customers and shareholders. In the US, we have completed a full refresh of our rate plans so that all our distribution businesses are now operating under new rates, a major milestone which will support our continued growth. We continue to seek a fair settlement on union negotiations in Massachusetts.
“Strategically, we have made good progress with the decision to exercise options for the sale of our remaining 39% share in Cadent and the final investment decision on the Viking interconnector. Looking forward, National Grid is well positioned for the ongoing energy transition and we are on track to achieve asset growth at the top end of our 5-7% range in the medium term.”
OVERVIEW
National Grid has continued to deliver strong operational and safety performance, with an employee injury frequency rate of under 0.1 – less than one lost time injury per million hours worked. Capital investment increased by £136 million at constant currency to £2,130 million for the first six months of the year. This reflects significant investment in developing and maintaining gas and electricity infrastructure that provides critical services for millions of customers in the UK and US.
Underlying operating profit decreased £79 million (or 6%) at constant currency versus the prior period to £1,285 million. This mainly reflects the expected return of UK Gas Transmission allowances associated with Avonmouth, the impact of US tax reform, and lower profits in the US due to storm costs. This was partly offset by increased revenue from our new US rates, and benefits from legal settlements.
GROWTH
Balanced portfolio to deliver asset growth and sustainable dividend
National Grid aims to deliver value to shareholders through maintaining a portfolio of businesses with strong operational performance alongside attractive annual asset growth of around 5 to 7% assuming long-run average UK RPI inflation of 3%. The Group aims to deliver this growth while maintaining an efficient balance sheet that allows continued funding of its investment programme, and maintaining the policy of aiming to increase dividend per share by at least RPI for the foreseeable future.
£2.1 billion of capital investment across the Group
We continued to make significant investment in energy infrastructure in the first six months of the year. Capital investment across the Group was £2,130 million, an increase of £136 million or 7% at constantcurrency compared to the first half of 2017/18.
FINANCIAL STRENGTH
Over £1 billion of new long-term financing
National Grid's balance sheet remains robust, with strong investment grade credit ratings from Moody's, Standard & Poor's and Fitch.
During the first six months of the year, National Grid raised over £1 billion of new long-term debt. All of the funding was for the US business, with the majority at holding company level. Net debt increased to £25.6 billion in the six months, £2.6 billion higher than at 31 March 2018 (£23.0 billion). This increase was driven by movement in exchange rates (£1.4 billion), and underlying business requirements (£1.2 billion).
Interim dividend of 16.08p, increased in line with policy
The Board has approved an interim dividend of 16.08p per ordinary share ($1.0616 per American Depositary Share). This represents 35% of the total dividend per share of 45.93p in respect of the last financial year to 31 March 2018 and is in line with the Group's dividend policy. The interim dividend is expected to be paid on 9 January 2019 to shareholders on the register as at 23 November 2018.
The Group's dividend policy is to aim to grow the ordinary dividend per share at least in line with the rate of UK RPI inflation each year for the foreseeable future. The 2018/19 interim dividend of 16.08p represents a 0.59p (3.8%) increase over the interim dividend for the year ended 31 March 2018 of 15.49p.
The scrip dividend alternative will again be offered in respect of the 2018/19 interim dividend. As previously announced, we do not expect to buy back the scrip shares issued during 2018/19 or 2019/20, unless there is sufficient balance sheet capacity.
OUTLOOK
Following the refresh of our rate case programme, good financial performance is expected to continue in the US business. The UK business remains on track to deliver outperformance in the 200-300 bps range, and the contribution from National Grid Ventures and Other activities is expected to be above prior year.
Looking ahead, National Grid sees strong growth prospects across the Group. There are a wide range of growth drivers for the US, UK and NGV businesses, which are expected to deliver high quality asset growth of at least 7% for the next two years, and at the top end of our 5-7% range in the medium term.
The business continues to be well positioned with a balanced portfolio and an efficient balance sheet that underpins asset and dividend growth.
2018/19 TECHNICAL GUIDANCE
The outlook and technical guidance contained in this statement should be reviewed, together with the forward-looking statements set out in this release, in the context of the cautionary statement. It is prepared on the basis of the Group's continuing operations, excluding the results of Cadent which have been classified as a discontinued operation.
UK Electricity Transmission
Net Revenue (excluding timing) is expected to increase by approximately £80 million compared to 2017/18, reflecting inflationary increases on base revenues and revised system operator incentives.
Totex outperformance is expected to increase compared with 2017/18, partly reflecting the higher allowances available to us in the reopener decision as well as improved incentive performance. Overall Return on Equity outperformance is expected to be above the 200-300 bps range.
UK Gas Transmission
Net Revenue (excluding timing) is expected to decrease, with approximately £160 million of lower revenue allowances compared to 2017/18, primarily due to the return of revenues relating to the Avonmouth project through the annual MOD adjustment2.
Totex performance is expected to be lower than 2017/18 primarily reflecting lower allowances from the RIIO-T1 reopener decision. Incentive performance is also expected to be marginally lower. As a result Return on Equity is expected to be slightly lower than the allowed level in 2018/19.
UK Timing
Revenues will be impacted by timing of recoveries including impacts from prior years. Electricity Transmission is expected to under-recover by around an additional £100 million compared to 2017/18. Gas Transmission timing is expected to under-recover at a similar level to 2017/18.