National Grid PLC (NGG) 2012 Q4 法說會逐字稿

Morning ladies and gentlemen. Welcome to you here at the London Stock Exchange and to those joining online. I'm John Dawson, Head of Investor Relations at National Grid, and it's my pleasure to introduce our full-year results presentation for 2012/'13. Before we start can I ask you switch off your mobile phones? Steve and Andrew will take you through our results and we'll have a question and answer session as usual at the end.

During today's presentation we will refer to profit and other measures and, unless indicated otherwise, we are adjusting for timing and storms, and our operating profit and interest costs will be normally at constant currency. Our presentation may contain forward-looking remarks. Please refer to our cautionary statement when considering our comments today. Just a reminder, you'll find all the materials in today's presentation and additional fact-sheets on our website and through the Investor Relations app. Thank you. Let me now hand you over to our Chief Executive, Steve Holliday.

Thank you John. Good morning everyone.

The completion of our financial year 2012/'13 marks the close of a really important two years for National Grid. It's been a period of business-wide change, successful step change in the performance of our US businesses and increasing our capital investments, and a focus on securing necessary improvements to our regulatory arrangements. In fact they cover over 80% of our asset base. The last two years have really been about laying down the foundations for our future and we're entering a period now of exceptional clarity, clarity for the vast majority of our regulated businesses, clarity around financing our growth and clarity for us as a leadership team around what we need to do to deliver that growth and attractive returns.

In fact that list pretty much sets the agenda for our remarks this morning. I'm going to start with some of the key financial highlights. I want to then reflect on the past two years, the delivery of the strategic priorities that we set, priorities that were all focused on building these foundations for delivering improvements in performance. I'll then hand over to Andrew to take you through the details of the last year's financial results with an update on returns for all of our businesses as well as his thoughts on some of our financial priorities going forwards. I want to come back and close then by outlining our plans for next year as we focus on growth and returns.

And then, as John said, Andrew and I will take any questions. Nick Winser and Tom King are here this morning as well to take part in the Q&A session. But before I talk about the strategic progress of the past few years, let's look at results.

Another strong set of results, particularly following on the back of a strong year in 2011/'12. Operating profits up 4% to GBP3.64b. Profits before tax up 6% at GBP2.74b led by a strong result in the UK and an improving performance in the US. At GBP3.7b, our capital investment is up 9% year on year or 7% in constant currency. That's investment supporting our revenue growth into the future. We've also delivered reductions in our effective tax rate and interest rates. So earnings have increased by 12%, over GBP2b. Earnings per share likewise, up 12% at 56.1p. In line with our stated one-year target we are recommending an increase in the dividend of 4%, which will bring the full-year dividend to 40.85p per share.

But let me go back and reflect on the building blocks behind these results. If I take you back to 2011, we set out some very clear objectives around our regulatory and operational challenges. In the UK we prioritized securing a good outcome to our eight-year price control discussions. And at that time the early views of RIIO indicated some potential for financing challenges, particularly around extending asset lives whilst at the same time increasing necessary investments. In the US we set out on a major restructuring and efficiency program, to reduce our costs and increase the focus on our jurisdictions.

Once these had delivered the expected benefits, we then got on with customer service and performance. We launched rate cases, a large number of rate cases, seeking to secure appropriate recovery of our costs and decent returns to support the investments we needed to make.

Against those key strategic priorities, we delivered excellent results. Firstly here in the UK, after a thorough 2.5-year review we reached a good conclusion. The final RIIO price controls provide a very clear framework, a framework against which we can now deliver essential UK infrastructure investment, deliver financing that will fund our growth and importantly deliver healthy returns for all of our investors.

The final proposals facilitate capital investments in the UK of around GBP25b over the next eight years, with real clarity around the outcomes that those investments are expected to deliver and the benefits for consumers. And they include significant incentives for us to do that efficiently, in fact avoiding spend where we can or at the very least optimizing all expenditure in the most cash-efficient way. In addition there continue to be meaningful incentives that reward our focus on customers and end-consumer needs.

And all of that's underpinned by a satisfactory financing framework, with the appropriate allowance for debt and cost of equity, and capital structure. That, together with the transition arrangements and other allowances, ensures that cash flows improve and assist with financing. Our agenda now is to ensure that we are well prepared to deliver those outputs and we maximize returns for shareholders. And I'll talk more about that later.

While that strategic progress has been achieved, in the past 12 months we've continued to ramp up our major investment program, delivering nearly GBP2.5b of new investment here in the UK, helping to grow our regulated asset value by GBP1.6b or 7% in the last year.

Last September, in preparation for implementing RIIO, Nick, John and the UK team began to put in place a new organization. Implementation of that continues into the first few months of the new financial year, with the new structure finally in place in the summer. The objectives of this are very clear. It's around focusing the business in a way that's consistent with the RIIO objectives and at the same time simplification will deliver a reduction in our cost base. For example, we've already removed over 20% of the management positions from our Transmission business.

In the US the restructuring we introduced in 2011 delivered immediate benefits, both in terms of improving our efficiency and our returns, but also providing a better focus on our regulatory activities and broader stakeholder engagement. As a result, our 2012 regulatory timetable shaped up well. We finalized and implemented four significant rate cases, with two others settled now awaiting approval. The new agreements were implemented for our upstate Niagara Mohawk electricity and gas business, and our Rhode Island Narragansett electricity and gas businesses. They provide a materially better outcome for all stakeholders, with appropriate rates, incentives to focus on customer needs and investment plans that will help improve reliability, resilience and service.

In addition, as I said, we are awaiting final approval for two others; firstly from FERC on a new long-term power supply agreement with the Long Island Power Authority, and that includes opportunities for us to re-power some of those facilities. And also at the very end of calendar year 2012 we reached an agreement to extend the existing rates for the gas distribution business in Brooklyn, KEDNY, by two years, a process that would not have been possible, or certainly would have been much more challenging, without the goodwill of our stakeholders. These achievements together provide a really strong platform on which we can build the year ahead.

If I turn specifically to the last 12 months, our US team overcame staggering damage caused by Superstorm Sandy last November and, having recovered from that, then followed up with a snowstorm in New England in February. After hurricane Irene in 2011, Sandy was frankly an unwelcomed arrival, but our teams did an excellent job. I'm hugely proud of what they managed to achieve. In addition to restoring essential supplies of electricity and gas, they went way beyond that, supporting many of our communities and customers who had lost their homes, by providing food, water and lots of support.

Since 2011 we've made improvements to our storm response, improvements particularly focused around communications and stakeholder engagement. These have had a very positive impact. They clearly provide improved information to customers today about their expectations or restoration, and how they can run their own lives as they wait for power supplies to come back.

In the past year we also invested over GBP1.1b or $1.8b in new US-regulated assets, improving infrastructure and customer service. In October we started implementation of a major new back office system, integrating and replacing multiple old legacy platforms. The new system will help address many of the US regulatory audit findings and more efficiently and effectively provide the core information on which we will base future rate filings. But this implementation has not gone as well as planned. As a result the costs related to this project have been higher than we expected. Those costs mainly relate to stabilizing the platform and now fixing several issues, not least our US payroll. Andrew will touch on this more later.

But despite the challenges of that system and the storms, our US team has delivered a strongly-positive result, with rate base growth at 4% and importantly have further improved our underlying returns, a return on equity to 9.2% from 8.8% the prior year.

I just want to wrap up by covering two key priorities that run across all our businesses. From a safety perspective we've had a satisfactory year overall, improving in pretty much every area. The number of major incidents has fallen significantly, down 15% year on year.

Our lost time injury frequency rate for all of our employees and all of our contractors is now at 0.13. That benchmarks really well with other businesses when put on a like-for-like basis. It's not been easy. It's a result of renewed effort by everybody, but there is more still to do, particularly in the US. If you take all our employees and all the contractors that work for us together, 137 people had an injury last year, which meant they had some time off work. Small in percentage terms, as I said, but statistic in its own right; not good enough.

From a service and reliability standpoint, notwithstanding the storms, 2012/'13 was another really good year. Network reliability here in the UK sustained its recent outstanding performance. In particular, our electricity transmission reliability was again very strong and we continued to improve against all of the metrics associated with our Gas Distribution business in the UK.

In the US, despite the significant damage from the storm, we've made good progress. Our community relationships are stronger and our performance is better on many fronts. We met or exceeded all but three of our regulatory targets across all of the US entities. In particular, in upstate New York. Niagara Mohawk achieved all customer service quality measures for the fourth year in succession as well as delivering the lowest complaint rate we have on record.

So overall another good year and in many aspects the close of a significant period of strategic development since 2010. The business is now well positioned with strong foundations. Importantly, we've updated regulatory arrangements that cover over 80% of our activities. This clarity for the foreseeable future sets us up, quite clearly sets us up to deliver the right returns for investors. And after Andrew's provided some more details on the financials, I'll come back and just touch on our priorities and goals. Andrew.

Thank you Steve and good morning everybody. I'm pleased to be able to continue Steve's discussion about the good progress the Group continues to make. Today I'll be covering a look back at our results, an update on our technical guidance for next year, and finally our total shareholder return and what will continue to distinguish National Grid as an investment proposition.

First, the results. Operating profit in our UK Transmission business was up 14% reflecting an increase in revenues driven by the rollover year, growth in the asset base and the linkage to RPI. This was partially offset by increases in depreciation and controllable costs due to continued investment in our technical workforce, and costs supporting reform of the UK and European energy markets.

We continue to perform well under most of our incentive schemes. The current year includes a one-year, one-off benefit of GBP50m from timely delivery of gas entry capacity arrangements over the previous price controls. This was partially offset by the expected loss in the second year of the Balancing Services Incentive Scheme. That scheme finished at the end of March and we are in the process of bringing a new one with Ofgem as we speak.

Gas Distribution profits were up 9%, again reflecting the benefit of RPI. Depreciation and controllable costs increased during the year driven by inflation and reduced benefit from metering work. There were also a number of one-off charges relating to contract renegotiations and remediation work.

On an IFRS basis profitability in our US operations grew by 3%. This improved performance was largely driven by income from a full year of the Niagara Mohawk deferral recoveries, and FERC-regulated income. Offsetting this, cost increase as a result of investment in our information systems, environmental costs and higher depreciation. Overall US returns improved to 9.2%. Going forward we look to sustain healthy returns, partly as a result of new rate plans in Rhode Island and New York, which should help offset inflationary pressures.

Growth in the rate base was 4% in line with their expectations. Working capital and rate base was higher led by commodity costs. Also underlying growth was good reflecting investment in the business. As in prior years the increase in rate base was mitigated by the impact of deferred taxes.

One-off costs impacted our other activities mainly related to storms and US systems. Metering profits were also lower as a result of the disposal of Onstream. Storm costs relate to self-insurance charges, resulting from damage to the gas systems during Superstorm Sandy.

As I discussed at the half year, we have already made a material investment in implementing a new SAP system. As can happen with major system changes, the implementation has involved greater levels of manpower and other resources than we originally anticipated mainly due to some issues during the cutover period. Consequently, operating profit has been impacted by an additional GBP91m of costs, which compares to GBP41m at the half year.

These new systems are necessary if we are to achieve our strategic objective of delivering further cost savings across the US as well as being required to address the audit findings of the Liberty and Overland audit. Since identifying the issues, we've made significant progress in solving some of the problems, but we still have a work backlog.

Regulated controllable costs increased in real terms by around 1%. Efficiency programs across both the UK and the US worked successfully to mitigate some of these increases, and cost minimization continues to be an area of important focus. RIIO offers clearly new incentives to maximize the efficiency of total expenditure or TotEx as opposed to just operating costs. As a result we are focused on making long-term sustainable savings across both capital and operating expenses, and I'll talk a bit more about this in a moment.

At a Group level operating profit increased to GBP3.6b, representing growth of 4%. Timing continues to be a feature although less so this year. In 2011/'12 we had a net timing benefit of GBP18m. This year we again over-recovered by about GBP16m so year on year the net impact was around GBP2m. We ended the year with a total balance across all of our businesses to return to consumers of GBP126m.

Reported financing costs were marginally higher than last year, but GBP6m lower after adjusting for exchange rate movements. The impact of our higher average net debt was comfortably offset by lower accretions on RPI-indexed debt and continued refinancing of maturing debt at lower rates.

In March we issued our first hybrid bonds at very competitive rates. At first glance, a hybrid bond does have an impact on earnings due to the higher coupon when compared to conventional debt. Although the coupon on these bonds is marginally above our regulated allowances, it is significantly below the weighted average cost of capital. This means that the 50% equity credit reinforces our balance sheet strength and helps to finance our ongoing investment program, whilst supporting the Group's overall credit rating.

The tax rate for the year was 4% lower than the prior year with an effective rate of 25%. The movement was driven by a reduced proportion of profits in the US, lower UK corporate taxes which fell from 26% to 24%, and a number of prior-year adjustments. Reported earnings attributable to shareholders were up GBP227m to just over GBP2b, and earnings per share were up by 12%.

Moving to cash flow, our operating cash flow was around 7% lower than the prior year, with major storms and higher working capital in the US being the major drivers.

Investment was 9% higher. Over 45% of this investment took place in our UK Transmission business. Major projects include the London Power Tunnels and the Western Link, to name but a couple. The London Power Tunnels project had a major milestone last week, with the breakthrough under St. John's Wood of the eastern stretch of the North London Link. This project continues well, on time and on budget. Spend in the UK Gas Distribution continued steadily, with mains replacement work making up around 70% of the activity.

As Steve mentioned, investment in our US business increased slightly, mainly as a result of higher transmission investment in Niagara Mohawk, and replacement of gas mains in Massachusetts. Going forward we expect US investment to be around GBP2b per annum. This reflects increased opportunities to invest in attractive regulatory assets within our renegotiated rate plans, particularly in New York.

Net debt rose to GBP21.4b, reflecting the investment I spoke about, accretions on index-linked debt and the impact of movements on the dollar/sterling exchange rate.

Moving to returns, we continue to use the same framework that I've spoken to you about in the past. When looking at performance against our regulatory allowances, our returns in the UK and the US have remained strong and have shown good improvement. In the UK we continue to deliver returns above those allowed reflecting good incentives' performance, notwithstanding the Balancing Services Incentives Scheme loss I mentioned a moment ago. In the US the business continues its progress and delivered an improved weight of return of 9.2%. This now compares much more favorably to our allowed return of 9.8% and highlights the significant progress made by the US team since 2009 when returns were at 6.9%.

Return on capital employed is the most important -- appropriate metric to compare performance between the UK and the US, taking into account the differences in capital structure and GAAP differences. Both the UK and the US improved their return on capital employed, with the UK up to 8.8% and the US up to 7.7%, both well above our cost of capital.

At the Group level the return on equity has shown steady improvement to 11.7%, up 0.4% on the previous year and maintaining strong double-digit levels.

As is our normal practice, we've included technical guidance in the statement. Key highlights include the revenue increases under RIIO, guidance on incentive performance, depreciation and accounting for deferral recoveries in storms. As I mentioned at the half year, our finance costs will be re-stated for the expected GBP200m non-cash adjustment, from introducing new rates of return for pension costs and IAS 19. This will impact both 2012/'13 and 2013/'14 in the same way.

At this early stage of the year we also expect underlying interest to increase mainly due to the fact that we have pre-financed most of next year's liquidity funding already. There is cost to carrying this liquidity as well as due to the increase in net debt next year. Our tax rate is expected to be around 28%. And finally capital investment is expected to be between GBP3.6b and GBP3.9b. All other things being equal, that will increase net debt by around about GBP1.5b.

Before I hand back to Steve, a few words on how the recent regulatory settlements focus our approach to driving performance, our fundamental financial framework and how these combine to deliver value to investors. Our principal Group value drivers remain delivering strong operational performance from our existing assets alongside organic growth that offers appropriate regulated returns.

Looking at our UK business, our approach will be to deliver the outputs required at the lowest overall cash cost. As a result TotEx becomes a large driver of returns and increases the focus on cash-efficient investment. We will still deliver significant Transmission asset growth, in turn driving long-term revenue growth and, led again by outputs, incentives should drive meaningful enhancements to performance.

In the US our focus continues to be on investment in assets approved by regulators, which immediately earn an attractive return. In addition, strengthened customer service will continue to support our regulatory engagement and of course performing within our regulatory allowances will be key to delivering our allowed returns. Our other businesses will continue their focus on efficient sustainable performance, with strong focus on cash conversion.

All of these support a focus on driving total shareholder return, led by the combination of asset --- of dividend yield and growth in the value of assets attributable to equity shareholders. In delivering an optimal total return, we are balancing the opportunities to drive in the assets on the one hand and the financing needs of the Business on the other.

Organic growth in our UK and US regulatory businesses should be around 6% to 7% per annum for the next few years. This is a level which we believe is comfortably financeable, while maintaining an A-minus level credit rating. This also affords the necessary flexibility for our debt market strategy as we look to raise on average about GBP3b per annum to refinance maturing bonds as well as financing the growth in the asset base. We will also continue to look for other efficient ways of financing this period of strong asset growth. As a result we issued the hybrid bond, which I talked about earlier, and of course we are maintaining scrip option for the dividend.

Therefore, as we look outside -- asset investments outside our regulatory core, we need to test their attractiveness through both a strategic as well as a financial lens, testing their impact on sustainable total shareholder return.

As an integrated proposition, the consistent delivery of attractive returns led by a high cash payout and well-financed balance sheet will continue to differentiate National Grid as an investment proposition.

Thank you and I'll hand back to Steve.

Thanks Andrew. So to sum up, last year was another good year. We have a clear framework in place which we can now invest in and develop our business going forwards. The conclusion of these regulatory reviews for over 80% of our business provides unique visibility of our investment agenda for the next few years.

Today we've a combined regulated asset value of around GBP35b financed roughly 60/40 debt/equity. If we invest in line with our expectations, just as an example, in five years' time the asset value will have risen to well over GBP45b, compound annual growth rate of 6%. As Andrew has set out, we are confident that that level of growth is financeable within our current credit ratings. But of course if we perform strongly any improvement in financial capacity will allow us to review our funding plans, increase the rate of dividend growth or consider further asset investments, ultimately whatever best maximizes total shareholder return.

It's against that backdrop we were delighted to announce a new long-term dividend policy to apply from this new financial year 2014 onwards targeting real growth, at least real growth. And we tested that against a range of performance and investment scenarios, and we're confident that it is sustainable for the foreseeable future.

So as we enter this new period of clarity we've also updated the internal framework we use inside the Company extensively around goals and behaviors. We call it our line of sight. Some of you who visited our facilities may well have seen it. While we have a strong regulatory platform in place and essential investments that will drive growth, we are also well aware that in order to maximize the value for these opportunities we need to enforce and reinforce a culture of performance. Increases our focus on organic growth, efficiency, outputs and customer needs and innovation, all driving incentive performance, returns and cash generation from our activities.

In the UK, our priorities for 2013/'14, are to focus on performance, as Andrew said, against the new RIIO regulatory contracts. It's all about delivering investment and a more streamlined organization. In the summer John and his team will host an investor day, setting out in more detail how we'll maximize our performance under the new RIIO price structure. Getting the organization aligned and focused is critical to that success, and John and the team will explain a lot more about how the system works, how we'll deliver the outputs and behaviors that will maximize incentives and drive the sort of outperformance that you've come to expect from National Grid.

For our US team the focus over the next 12 months will be delivering the new US rate plans and the system completion and thereafter the process improvements to enhance customer service and efficiency across all our operations. In support of this Tom and his team last year launched a new framework, Elevate 2015, focused on improving the quality of all of the touch points for customers, all around better service. It's a wide-ranging program, embraces activities such as safety, emergency response, management of our call centers and network operations, just to name but a few. But the outcome is a meaningful improvement in customer satisfaction and cost efficiency.

And of course over the next 12 months we'll be preparing for the next set of rate filings, probably for our advanced-rate gas businesses in Brooklyn and Long Island, and our electric business in Massachusetts.

Last year has been another good financial and solid operating performance, notwithstanding the cost impacts of the weather and the problems that we've had with the implementation of our new systems in the US. Our asset growth is strong at 8%, or on a constant-currency basis 7%. Regulated assets up 8% year on year. We have a pipeline of attractive investment opportunities to sustain that sort of rate of growth way into the future.

So after a couple of successful years we've been talking about delivering these changes, getting the regulatory contracts in place, the clarity we've now got allows us to drive that investment growth and focus on generating good shareholder returns. It's a pretty clear focus. It's one word, execution. We've got an energized team and we're absolutely clear about what we need to do.

And with that Andrew and I, and other colleagues will be very happy to answer any questions you may have. I guess we have some microphones somewhere.

Good morning. Edmund Reid from JP Morgan. Two questions. The first one is on US CapEx. I think in your statement you talked about increasing US CapEx guidance in the medium term and I just wondered what was driving that and how that would feed through into the revenue line for the US.

And then secondly, on RCF to debt I was wondering if you could give us what the number was for March '13.

The RCF to debt I think was 11.4%, Ed.

Thank you.

And in the US, Ed, the number that we're talking about, GBP1.3b or $2b, is all in the new rate plans. And every time we go in and file a new rate plan we believe, and clearly the regulators are supporting, a need to increase the level of investment. And that's around reinforcing the system, replacing lots of old assets, and particularly in the gas businesses replacing old gas pipe, and more in the future of tying more people into gas in Massachusetts and on Long Island. There is an upward trend. Of course the way the system works in the US, that immediately feeds into rates and returns with nominal returns.

Thank you.

We'll work our way down, Peter.

Can you slide that across there at the same time. Thank you.

Hi. Dominic Nash, Macquarie. Two questions, please. The first is on your dividend policy. When you talk about foreseeable future we all have I guess different ideas about what the foreseeable is. Is that the entire eight years or is it a shorter period than that?

Secondly, on UK Transmission, on the uncertainty mechanisms I know that Ofgem is looking at introducing competition in onshore transmission and that any of your CapEx that's in the uncertainty mechanism is at risk. Could you just give us more color on when and how this could be imposing an impact on National Grid please?

Sure. How long is foreseeable? We've got more clarity than we've ever had it in our history, actually. Clearly the UK is eight years. The way the US is set up to deliver now and the fact that we're constantly with 14 entities filing something every couple of years gives us the confidence that we can give investors a big signal about this is going to serve us very well for a long time to come. It's intentionally not four years, five years, six years. So as far ahead as we can see right now, I don't think any other business has given somebody that much clarity into the future. And, as I said, we stress-tested this against performance and against some changes. We believe it's very robust and sustainable for quite a long time.

In terms of the CapEx in the UK, there isn't a desire to try to -- if we can bring some competition in there. There's very little in our onshore plans that we believe is covered by that at all, but actually we welcome that in many ways, Dominic, as well. It's a test of our ability to deliver investment on time as well as anybody else can. You might want to add to that at all, Nick.

Yes, thanks. The only thing I'd add is Ofgem have put out a couple of documents on competition on assets, and there's some interesting stuff in there in terms of how they look at that, so they've talked about a set of criteria in a couple of documents.

In particular, the sorts of things that they would be looking to increase competition around would have to pass a test like not too deeply meshed into the system. If it's an integrated investment, that's obviously more difficult to include competition. And in particular things that they've said that they would be very aware of the possibility of delays to essential infrastructure to deliver government goals, with the implication that if there's a long consenting process and then a significant process of builds and the timescales are tight in terms of connecting up, for example, nukes or wind, that Ofgem would take that into account and potentially, if the competitive process was going to make that longer, they wouldn't put it into the competitive arena.

So by and large, as Steve said, we welcome this, but we should expect it to be around the edges of the investment plan, rather than central to it.

Thanks, Nick. Verity, can I just pass and come forward to you.

Finders keepers. If you have a mic', hold on to it. I wanted to ask about the other activities and the US systems cost. Clearly, the actual IT systems themselves, the cost will be recovered in rate cases, as I understand, but how much more of this cost will be recoverable within the regulated entities in the US?

The CapEx associated with the implementation of these systems has been filed in many of our rate cases because this is replacement of the systems that sit behind our business actually so understandably that's had the regulatory support. The costs that we've incurred because we've had a poor implementation are our costs actually, quite clearly. We would not be expecting those to be recovered. The basic system costs are. And, as Andrew said in his remarks, we're fixing those final issues at the moment. There will be a small cost again in this year, but nothing of that magnitude.

Mark.

Hi. It's Mark Freshney from Credit Suisse. Just on returns in the US, I think you'd agree that 9.2% is closer to disappointing than satisfactory. What are your aspirations and over what period do you hope to get closer to those 10% returns I guess that you flagged in the past?

And, secondly, I think in the capital investment plan that you laid out I think three years ago, the run rate for the coming year looks to be about 20% lower. If CapEx were to step up, i.e., if you were to have clarity from government on the EMR, could you handle that uplift in CapEx and maintain the dividend, i.e. if CapEx were to go to GBP5b?

Let me take your positive first question. You miserable -- 9.2% is a hell of a sight better than 6.9%, quite clearly, and we've been driving returns up consistently year on year on year. Although I agree with you, it's not 9.8%. Our objective is to earn our allowed returns and you can trust us that that is totally our focus. And we talked about the new rates that are in place in the new jurisdictions and that's what we hold ourselves to account to, But I'm very pleased with the progress we've made. It's significant progress over the last few years.

The UK, our capital plans are assuming the successful implementation in the extent of EMR. and the fact that there's obviously some timing issues around when some of the generation will be built over the eight-year timeframe, But our GBP25b is associated with the need to tie in a whole series of new generators, a need to reinforce and debottleneck the system to get power flows, particularly north to south. Andrew mentioned the Western Link. It's already under construction, which is part and parcel of that. There's a potential for an eastern link as well in this timeframe and some changes on the gas system. So it is absolutely consistent with that.

The reason why the CapEx is down slightly versus our forecast three years ago is predominantly to do with unregulated. We had assumed three years ago in that number that we would be investing about GBP2b into unregulated opportunities. We've not. You should be pleased that we haven't in a sense because the reason we haven't is our discipline around returns and cash have meant that we have said no to a whole series of opportunities. Now on the other hand I wish the answer had been yes, but we haven't found things that cross our threshold and therefore we said no to it. I think that's a good place to be.

But the CapEx that we've got in front of us for the eight years is GBP25b. It's clearly financeable and maintaining our credit rating. If we outperform, which of course would be our intention, we will create extra financial headroom, and then we have options about how we will use that headroom to drive total shareholder return.

And to what level of CapEx can the current dividend policy handle, i.e. if it were to go to GBP5b, would you be able to maintain the dividend?

How far into the future are you? We've got a total of GBP25b in the UK in eight years and we've got GBP1.5b in the US, and that's forecast to go up slightly. That's easily manageable within the credit ratings as they are today. Making assumptions, as you'd expect when you put a dividend policy out there, not actually banking on everything in terms of incentives, so making sensible assumptions about what we can do with this business, with clearly a desire to want to actually do better than that.

Mark, the other thing I would say is the credit rating metric that we are -- always the one that most challenges us is the RCF to debt ratio, which CapEx doesn't affect, so that's one point to note and just to remind you on that. Second thing is obviously if there is additional CapEx, there's additional revenues, which helps the overall metrics and drives those and helps the growth, profile as we move forward.

And then finally, if there was an actual increase, a significant increase in CapEx, there is the opportunity for us to look at other funding mechanisms. We've talked about the hybrid. We've done GBP2.1b of hybrid bonds. We have the capacity to do GBP5b. So there are definitely other options which we will continue to look at and as we always go back to that list of 10 items that we've spoken about in the past, all the options, we will continue to look through those if we needed to find additional sources of cash. So I think before we'd ever get into that debate, the hypothetical you're asking I think is quite a long way down that list.

Okay. Thank you.

Peter.

Yes, hi. It's Peter Bisztyga from Barclays. A question on dividend policy again. There's certain scenarios where an improving balance sheet headroom may not necessarily translate into higher EPS growth and I'm just wondering where the constraint on your dividend growth is. So in other words is there a certain level of dividend payout ratio you won't go above even if you could afford faster dividend growth because of your balance sheet?

Yes. I think if you look at the ratios of coverage, the 1.3 ratio that were pretty consistent when at the lowest, that's a place that we're comfortable at. And my remarks around how we stress-tested this means that under all the scenarios that we can think about that are probably even worse than some of Mark's scenarios I suspect, then we're very comfortable. We wouldn't have put out the statement about the foreseeable future and at least real growth unless we were that comfortable. It's a sustainable policy.

Bobby.

Thanks. It's Bobby Chada from Morgan Stanley. The first question is on the US rate base and the assets outside of rate base. Can you just give us a feel for how they break down between spend that you think will definitely go into rate base and spend that is effectively OpEx that you're going to get back, because obviously they have a different value?

And then secondly, you've given us a kind of interesting teaser about incentives and how the incentive schemes should positively impact performance, so I'm assuming by performance you mean profitability. Can you give any more color? I know you're saving all the firepower for August 6, but could you just give us a little bit more about some of the bigger schemes that you think will affect performance?

A little. I'll leave Andrew to come back on the rate base question in a moment, but I would say you'll see that the rate base itself actually has grown by 5% year on year so some of those things haven't gone straight into rate base during the course of this year.

What we're going to do in August is a number of things. The first thing we're going to do is, all due respect, is just take people through the way RIIO works, particularly TotEx and the assumptions around cash and the sharing between theoretical, how much of that is CapEx and OpEx, and therefore if we reduce our cash spend, how does that flow into profits and how does that flow into returns. So a little bit of understand it first of all before we the dive down into so let's now talk about the way we set the organization up, let's look at some of the tools and mechanisms we put in place that will deliver that outperformance.

The biggest of those is TotEx actually. Actually delivering a set of defined outputs at a lower cash cost, so finding ways to invest more cleverly, procure more cleverly. At times, as Andrew was alluding to, spending more operating costs in a year to defer capital expenditure creates huge value, profitability and enhanced returns for us. That's what we're going to run through on the 6th of August.

Rate base.

And on the rate base, about 60% of the rate base -- assets outside of rate base are interest bearing. That was actually the largest single part of the increase. Most of that was capital work in progress, which hadn't moved across into rate base by the end of the year, mainly due to delays as a result of the -- actually it wasn't just the two storms. There were a couple of other minor storms as well that the US had to deal with towards the end of the year, which had an impact on timing of moving that through.

The assets outside that aren't interest bearing actually stayed broadly flat at around 40%. About half of that is, as you know, is working capital and about the other half is deferrables, which will be recovered over a period of time, storm costs and so forth.

There's some work in progress in there as well isn't there, which maybe that's not in yet. That number, if we get a year with zero storms, eventually that number's going to go down. As long as we get a storm then something else has gone into this bucket, which we then need to get a recovery on clearly.

John.

Yes. Can I ask on the treatment of the implementation costs on the US systems, just the justification for why that sits in your other segment and not against the US businesses, and then not against the US returns that you've reported for this year?

It was a strategic --

If they're integral to the US operations.

They are, but they're hugely related to our financial systems at the corporate center as a Group as a whole and we believe that's the right treatment.

Yes, there's also, John, there's a couple of things that you have to think, one which is what is recoverable from regulators. The part of the cost that is recoverable is the capital cost. That actually then will be charged out and actually built into the US rate base as we move forward. So that actually will be recoverable and that reflects the returns.

If it's an asset, something that's been done which is required for regulatory purposes but actually could never actually be recovered from regulators, it's a need to catch up. So some of this is training costs etc. related to new systems implementation. It would be unfair to penalize the US business because effectively you'll have a one-turn dip and a big increase the following year so it would just create a little bit of volatility. So for clarity purposes that's why we put it in the Other segment.

It's completely transparent. It's very clear for people what we've done. I think if we had actually then been trying to explain to you how it would be spread across the different entities, and there's 14 different legal entities we would have had to spread it across, you would then have struggled to understand exactly how it was impacting US results.

It's Iain Turner from Exane. Could I just ask on the actual cash tax that you've been paying, I think it was a couple hundred million this year, a couple hundred million last year, and I think if memory is serving me right the year before you didn't pay any cash tax at all. Would you expect the amount of cash tax that you pay to increase to get nearer your tax charge over time?

And then just secondly, you've got quite a big over-recovery position in the US. Over what sort of period of time would you expect that to unwind?

The cash tax is GBP243m, Andrew, isn't it in this year?

In the UK.

In the UK.

Yes. The impact of taxes is broadly the lower level of cash tax paid is actually in the US and that's as a result of bonus depreciation. As long as bonus depreciation remains, the cash tax obviously stays as it is. So for a planning assumption, it can reverse in the event that Congress makes the decision to reverse bonus depreciation. That's the biggest driver of the cash tax charge. This year we paid about GBP243m of UK taxes, corporation taxes. That compares to GBP176m last year. It will go up again next year as a result of rises in the UK profitability so that element of it is less deferral in the UK versus the US.

Sorry. I've forgotten your second question.

Just the recovery of the --

The storms. Yes, we filed --

Not on the deferred income. The over-recovery in the --

The over-recovery in total. It's not all in the US actually. It's in the UK as well. So there's a combination across the businesses here and we would plan to pay that back over the next few years. As you can see, we were over-recovered last year and despite an attempt to pay some of that back with revenues coming in, we remain in an over-recovered position.

But it keeps getting readjusted each year as well so if you go into entity by entity in the US, and, Tom, you might add to this actually, there are trackers and true-ups. So we closed the year with an over-recovery, then because a pension tracker or a CapEx tracker or a property tax tracker, we would then owe so that actually negates off the over-recovery. So it doesn't necessarily all go back dollar for dollar in that sense, Tom, does it?

yes, that's right, Steve. I think the only thing that I would add is that when you get through the four rate cases that we did this year, the bulk of those balances would be true-up as a part of the overall settlement. Then when we go into the next round, we'll have a Long Island gas business, Massachusetts electric business, and those will go through the same process. I think it's a fairly quick true-up based on operating entity by operating entity.

And then in the UK, as we set our prices for the forward year we'll intend to get back to normal.

Peter.

Hi Steve. Peter Atherton from Liberum Capital. Two questions. Quick one on the US. As the US CapEx rises, can we expect the same sort of ratios we saw last year in terms of CapEx going straight into the rate base?

And then on the UK, we've had both SSE and Ofgem raise issues around security of supply for next couple of winters. What's your thinking on security of supply at the moment?

One of the characteristics of the new rate plans, and I don't use these opportunities to go through so much of the mechanics behind them, but one of the things that we've been able to do in all the recent rate cases is get a mechanism that ensures that CapEx gets in the rate base faster. You're seeing that. It's self-evident in the fact that the rate base has gone up by 5% this year. So we would expect that to go pretty much in line with that CapEx, Peter. As opposed to the observations on power supply in the UK, I thought you were the actually resident expert and commentator on this more generally so we should perhaps actually listen to your view on this?

Basically prices will go up.

It's pretty clear that we knew the generation shutdowns in the course of the next five or six years. It's pretty clear some of those have happened faster than were assumed, particularly on the coal plant. It's pretty clear with the economics of gas that some of the less-efficient gas plant has come off at the moment.

Now the government and Ofgem will look very closely at what's the situation looking like and we'll get involved with that as well, talking about how do we make sure we've got all the mechanisms in place that we need. There's no doubt it's tighter than it was a year ago but of course we went into the a year ago winter pretty comfortably as well.

Who was over here? Any more at all? Bobby, just as I was about to --

Sorry.

It's okay.

It's one for Tom really. US treasuries have been at very, very low levels in terms of yield for quite a long time now, but it seems that the allowed ROEs, although they've come down somewhat are not tracking down nearly as far as you might expect, particularly given that some of your jurisdictions have quite a mechanistic process for setting the allowed return on equity. So do you see these sorts of levels as a floor? Do you see the staff, particularly in New York, flexing the model they've used historically? Can you just give us a bit of color around that?

I think one (inaudible). There's a graph on the US that shows this, which is always lagging. So I think the last thing I saw was that fourth quarter 2012 was about nine-eighths, was the US average. It's been tracking down, down, down. We've just done these cases in New York so it's very clear the way that New York sees these returns. They have been tracking down. There's no question, but one of the challenges is how far do you go down before you realize that treasuries are going to come back up again and there will be a whole plethora of rate filings coming across the whole of the US.

Yes, so, Bobby, it's a great example to build on further that you're pointing out. There's no question that the trends are certainly lower than where we're ending up so I think that's it's directly attributable to where we've built a part of the strategic focus on building the relationships and the trust. So as you step back and you look at the list of things we think we need to deliver on and we need commission alignment on then they have their list of activities, including a very keen focus on managing the overall bill impacts.

So as we land on overall settlement versus a commission decision, the settlement allows us to balance a lot of the pluses and minuses in order to help us manage a return that we're comfortable with, but also help the commission manage the overall cost and the outcome on bills. So it's a balancing between what they need, what we need. And we're very comfortable with the outcome because it increases our probability on delivering on the allowed return, and we get a return that gives us comfortable that we're operating on the right jurisdiction.

And just to add a (inaudible) too. There's a real understandable enthusiasm to convert more oil to gas in the northeast of the US in many of our jurisdictions actually. So we've been asked that and we're working with, so what does that mean for rate making going forwards? But back to Tom's point, it's because the bill allows it to an extent now. The reduction in gas prices has created the opportunity in the bill to think about how you can extend the networks and get more people on gas, so alignment of objectives there.

Steve, just to add to that, especially on the gas piece of it, when you look at the downstate New York settlement, there is roughly 300m of incremental capital. The bulk of that is upgrading of the existing pipe infrastructure as well as the new connection. And certainly, as you're aware, New York City and Brooklyn, significant growth taking place there. So we're trying to balance a couple of things in, and enhancement and upgrading and modernizing the infrastructure, as well as the new connects.

And then for upstate New York, out of that settlement, the three-year plan lands on 1.6b of CapEx and a lot of that is modernization of the infrastructure. So there's a definite balancing there. We're trying to think through and discuss with them in a very open, transparent manner of how best do we bring all those needs together, but be very cautious about bill impacts.

Thank you Tom. Ed's at the back.

Two questions also on the US. Would you expect the achieved ROE in the US to be up this year on last?

And then secondly, I think in the statement you talk about the difference between the IFRS and US GAAP treatment, and the fact that this year in the US the rate cases that you've got won't necessarily impact the IFRS numbers for the US. And I was just wondering if you can talk us through a bit more why that's the case.

Let's do the latter. They will partly actually, but we've lost the deferral recoveries in NIMO. There was about GBP130m, I think.

$150m.

$150m. Some of that's gone into base rates, but not all of it. So there is a reduction in IFRS in NIMO. You don't sort of get all the benefits so it's a little bit of both. We don't forecast these, Ed. We've been pretty clear I think in answering Mark's question. You would hold us to account and expect us to continue to improve, and we're not going to rest until we're delivering what you rightly should hold us to account for, which is delivering our allowed returns. Do you want to add anything to the IFRS?

The other element of the IFRS discussion is one of the things with OPEB trackers, pension fund trackers is obviously in a period of time actually when pension cost actually has declined in Niagara Mohawk, interestingly in revenues we've actually got an offset against the deferral account this year, which goes away next year because it comes into rates, so that actually reduces IFRS. That's one of the other factors as well when you're looking at it.

So although we've got a good increase in base rates and good increase in the allowances against cost of service, they are mitigating some of those impacts, so you wouldn't necessarily just add year on year the improvement in the cost of service on Niagara Mohawk. That's what we're trying to make clear.

If I take you back three years, we set up trackers and true-ups intentionally to make sure that the customers didn't get such swings on their bills any time there was a big rate case, but also protect investors, actually, about under-recovery. This was an example, actually, where pension costs have gone down, so rightly we've been over-collecting, but that then offsets a deferral otherwise we were going to have to collect. So this system is working very well actually, as Tom says, helping smooth bills, helping us manage our own cash flows.

I was just really trying to understand the sort of impact on your statutory numbers for the US going forward. Because it feels -- I think consensus has quite a material increase in US operating profits for this year, '13/'14 versus '12/'13 and it just seems that maybe that might not be correct given some of the things you've talked about.

The other factor you also have to look at is what is your base assumptions around storms, Ed, and obviously in the US results this year there's GBP87m of storm costs, which you don't necessarily expect to recur. So again, it's about taking all those parts and my suggestion is if you speak to the IR team afterwards they'll take you through all the different implications of how that all flows through.

Alright. Thank you.

And one thing on storms. We have already got agreement in Massachusetts to collect $40m, which we're collecting this year as part of already collecting back for Sandy and Irene etc.

Okay. Thank you very much. Thanks for joining us this morning.