National Grid profits slump
Firm reports fall in first half earnings due to reduced returns from gas and electricity transmission
National Grid has reported a fall in first half profits due to reduced earnings from its electricity and gas transmission businesses in the UK.
Adjusted operating profits for the group for the six months to the end of September were down 13 per cent year-on-year at £1,259 million.
When excluding the impact of timings owing to over and under-recovery of regulated revenues during individual years, adjusted operating profits instead rose by four per cent to £1,368 million. This was largely the result of increased earnings from the US business, which on this basis saw a 19 per cent rise in adjusted operating profits to £526 million.
Statutory operating and pre-tax profits dropped by 13 per cent and 12 per cent respectively to £1,274 million and £847 million.
National Grid chief executive John Pettigrew said: “We have delivered a solid financial performance in line with our expectations, made further progress to evolve our business and maintained a world class, safe and reliable service. Our focus on efficiency and innovation has reduced costs and generated increased savings for bill payers.
“We also invested a further £2 billion in critical infrastructure during the period. Our improved performance in the US is encouraging, with this part of the business now representing an increasingly important part of our investment proposition. Having reshaped our portfolio in the UK, we continue to expect our electricity and gas transmission businesses to deliver high levels of performance.”
Adjusted operating profits from electricity transmission dropped by 22 per cent to £542 million. There was a smaller 11 per cent reduction to £540 million when excluding timings.
The fall in earnings was partly the result of reduced allowances under the RIIO T-1 price control following annual adjustments by Ofgem. The adjustments were enacted to return previous allowances which were not needed and share the proceeds of outperformance with customers.
Costs also increased due to the separation of the system operator role from the rest of the business.
Capital investment was down 12 per cent at £515 million, reflecting the completion of parts of a number of large projects and reduced spending on the Western Link – a £1 billion project to help deliver renewable power from Scotland to England and Wales via a subsea cable through the Irish Sea.
Adjusted operating profits from gas transmission declined by 21 per cent to £126 million, but grew by 25 per cent to £144 million when excluding timings.
Net revenues rose by £22 million, in part due to allowances related to the cancelled £168.8m Avonmouth pipeline project. National Grid has been ordered by Ofgem to return £85 million of associated allowances in 2018/19.
A higher headcount, greater depreciation and a rise in spending on the completion of UK-Link by Xoserve meant costs swelled by £11 million.
Increased expenditure on the health of assets and the Feeder 9 project – a pipeline replacement under the Humber Estuary – led to a 35 per cent growth in capital investment to £157 million.
In March this year, National Grid completed the sale of a 61 per cent stake in its gas distribution business, which was renamed Cadent following the separation.
National Grid said it has now returned the “vast majority” of the £4 billion proceeds from the sale to shareholders. The company paid out a special dividend totalling £3.2 billion in June and has so far purchased £413 million of shares as part of a £835 million share buyback programme which is scheduled to be completed by April 2018.
National Grid generated post-tax profits of £55 million from its remaining 39 per cent in Cadent over the six months to the end of September, compared to an equivalent figure of £77 million for same period last year. The fall was largely the result of timings.
In an apparent reference to Dieter Helm’s cost of energy review, which called for the system operator to be completely separated from National Grid and taken into public ownership, the results noted that there has “been wide ranging commentary on the functioning and ownership of the UK’s energy sector, and whether it is delivering value for customers.
“Since privatisation National Grid has made significant progress,” the company stated. “Electricity Transmission costs today are 30 per cent lower than pre-privatisation levels on a real basis and in the last 10 years, National Grid has invested around £14 billion in transmission infrastructure.
“Electricity and gas transmission costs represent 3 per cent of the average household bill and under RIIO, and the group continues to invest and drive efficiency.”
Speaking to Utility Week, National Grid chief financial officer Andrew Bonfield said: “We don’t believe it’s in the interests of consumers at this stage to separate the SO [system operator].
“That was part of why, when we were talking to [the Department for Business, Energy and Industrial Strategy] and Ofgem last year, we proposed greater ring fencing and legal separation of the SO from the rest of the transmission business.”
Bonfield disputed Helms’ assessment that electricity networks, and transmission operators in particular, have earned excessive returns under RIIIO.
“We believe RIIO has actually significantly benefitted consumers by incentivising outperformance on totex and those savings are flowing through to customers,” he added.