National Grid PLC (NGG) 2013 Q4 法說會逐字稿

Welcome to the National Grid 2013/2014 full year results call. For the duration of the call, you will be on listen only, and at the end of the call, you'll have the opportunity to ask questions.

(Operator Instructions)

I'll now hand you to John Dawson to begin. Please go ahead, sir.

Thank you very much and hello, everyone. As you know, this morning we announced our full-year results for 2013/2014. The release and presentations are on our website and on our app, and the webcast of the replay of this morning's presentation is also available on our website.

This call is intended to provide an overview of this morning's presentation and statement, and to make sure that those investors and others who weren't able to attend have a chance to ask questions, or indeed to ask some follow-up questions, if you were there. Before I kick off, a reminder also to check our cautionary statements, which were included in the above documents. Let me just mention, I have a few other members of the team here, including Andy, George and Victoria.

Our objective today in this brief call is really to focus on what we were trying to achieve this morning. And what we were setting out was -- alongside the results, which were broadly in line of operational level, and a touch ahead after tax benefits -- a range of new and important concepts around the regulatory reporting and how we will be judged -- and how we will be judging, indeed -- our group performance going forward. These, for us, are very important changes; and I think it's worth just spending a couple of minutes looking at them.

On a business-by-business basis, the results now work across the actions we've taken to drive value under our regulatory frameworks, and then reconcile this with the IFRS operating profits in each business. This is a new way of approaching this, and it is very important to us.

Fundamentally, there probably won't be big differences over time between one measure or the other. But the actions we need to take under one framework could deliver an output or a return under RIIO may not automatically improve operating profit and earnings in that year. And it's making sure that we're not disincentivized on doing the right thing, which places a higher focus on the new measures. In turn, that's why going forward, we're looking at the returns on equity disclosures and the new value added concept occupying more of our thinking and influencing in a greater way our way of working.

Several questions came up today related to this, mainly around that value added concept. One way of looking at this, if you will, is a measure -- as a measure, is to sort of pose a simple question, are we creating enough value to finance next year's dividend, and also retaining enough capital to grow the business so that we can pay future dividends? Shortfalls over time get managed through leverage and the use of capital-like scrip; surplus value drives additional dividends or asset growth, which reinforces the model, all, as we've outlined today, minimizing this impact of scrip dilution, which we'd like to do more proactively, going forward.

Altogether, it ties in very well with our total return model we've been sharing with you for a few years, and our view that we should be able to drive sustainable 8% to 10% returns, on a book basis value, if you will, in other words ignoring the market multiple that incremental assets create. And doing this, we're combining a steady yield, allied to the sufficient growth in the balance sheet, to drive the revenues and finance future dividend growth.

It also reflects very well the realities of the UK regime, the inflation effects and revenue adjustments. As one question this morning led, if inflation falls, the value added metric falls, roughly GBP200 million per percentage point of inflation. But of course, we get longer-term, we get efficiencies, as well as through lower [COG], many driven through lower costs and lower interest. You've got to also remember, we do carry quite a lot of RPI-linked debt.

So briefly, before we turn to questions, maybe a few points on the results and the guidance. UK returns were good, in our view, for the first year under a new price control, particularly given the comparisons for gas transmission and with its low returns and incentive opportunities in year one.

Electricity transmission at 12.4% this year, compared to 11.8% last year. Gas transmission was 12.8%, compared to 17.2%, emphasizing that comparison challenge that the business had; and gas distribution was 13%, compared to 13.5%. Overall, the 12.7% average compared to just over 13% a year ago.

So this, we feel, is a pleasing outcome for the first year, particularly considering the challenging Totex allowances that have been set and the headwinds from restructuring costs, which we've included in the calculations for the first time. And with more opportunities to outperform being developed, particularly in electricity transmission, returns in the UK should have the scope to improve in future years.

In the US, the 9% headline return represented, in our view, a solid year, with the benefits of recent filings in New York and Rhode Island offset by the lower allowed returns in generation and our Brooklyn Gas business. In addition, we had a lower achieved return in Massachusetts. And this is, as Tom and Steve said today, the challenge, focusing on managing a degree of under performance there, as we prepare for the filings next year. Overall, our proved return of 11.4% represents a good first year under new arrangements, particularly given the lower base returns set as part of RIIO.

Other matters, briefly. Growth in asset base was good, at 5%, with both the UK and US businesses up a similar amount on the underlying basis, and not withstanding the lower level of inflation in the UK. The outlook overall remains consistent with similar levels of investment in 2014, 2015. And looking to the medium term, overall growth is still strong. And Steve talked to a number of organic growth opportunities that we have, both in the UK and the US, all finance-able within our model.

On technical guidance, I'm not going to cover everything that's in the statement. It's clearly quite a bit in there. But we have included some figures to help reconcile the IFRS revenues and given some guidance on areas where we expect to outperform on a regulatory basis. Perhaps if anyone has any specific questions on that, we can pick up next, or don't hesitate to call a member of the team over the next few weeks.

I think that's probably what we need to say now. Just looking at my team, is there anything else anyone wants to add? Why don't I hand back to the operator and open the call to questions?

(Operator Instructions)

Mark Freshney, Credit Suisse.

Hello. Afternoon. Just a question on the decision to try and limit the scrip take-up, but also to potentially do a buyback. Just on the mechanics of that, is it the case that if you issue primary shares in lieu of cash and then buy them back, you'll still have the RCF to debt metric benefit within the year? So what I'm asking is if there's, from this buyback, is there actually a credit metric benefit in the year? Thank you.

That's a good question, Mark. The RCF to net debt metric for us, the bigger issue is the future treatment of scrip, not historic, to be honest. And it's the way in which the credit rating agencies, by and large, look at the willingness of companies to use equity in the long-term financing of the business.

Now National Grid, over the years, has had a long-standing efficiency in the balance sheet, but at the same time, has used scrip, and indeed, if we go back far enough, has issued equity in the primary way in order to finance growth. So the rating agencies recognize that we, as a company, are willing to do that.

What we're doing with the scrip mechanism that we are proposing is to effectively become more dynamic in how we handle it, so that we can provide the same economic benefit to the metrics that are there, in terms of the RCF to net debt. So when they're looking forward, they can expect to model in a certain level of take-up, if it's required, versus an unnecessary degree of dilution at the time when you're not needing the capital. So your [gearings] come down because you've generated extra cash, and your level of investment for the next couple of years might not be at the peak levels we do expect to see within a five- or six-year window.

Why would you issue a lot of scrip, which improves a metric historically that doesn't need improving? But if the rating agencies recognize the willingness to look for that contribution for financing into the future, then it has the same effect. So it's more about the future management for the scrip than it is about the historic calculation and the RCF to net debt.

Now you linked it to the buyback. These are all one and the same thing. So when we were talking in the presentation about using tools like being able to buy back, that was effectively like other companies do, just using those tools to neutralize the dilution created by scrip.

So let's be theoretical for a second. Last year, we had a 45% take up on scrip in the final, and that was with a six-week election window. We've tightened that window down, so we may end up with -- let's speculate and assume the share price creates an opportunity for a reasonable take-up -- if we have 10% take-up, and we decide we only want 5%, then we'll, over time, after that election period is concluded and the shares have been issued, we would go in the market and we would neutralize the effect of 5% of those, at 5% of scrip take-up. But we wouldn't be doing that in one big lump, we would just be utilizing the authorities that we granted at the AGM to affect that.

But we're not planning on doing anything else, in terms of buybacks. The statement, hopefully, was quite clear about that. It's purely to use the tools that have always been there, but which have annually you seek the election approval to implement, and to use those just to handle this scrip dilution.

On a historic basis, Andy, on the RCF, if we counsel -- it's not going to matter. But does it impact the RCF in that debt calculation?

I think, traditionally, the cash dividends are a deduction in the strict calculation of RCF to debt. So if you did have a scrip take-up, that would reduce that deduction, that would help your numerator. If you then bought back the shares, I don't believe that cash outflow of buying back the shares affects the numerator, but the debt affects the denominator. But (inaudible), the numerator effect is bigger, then in theory, it would benefit. But the rating agencies, obviously, have it in their (inaudible) to adjust for that, if they choose.

Okay. And is there -- I think, when you set the new dividend policy a year ago, you said -- I think you had indicated that after three years, you would review whether you would cancel the scrip, grow the dividend more aggressively, or invest in other non-regulated enterprises. Is there still this review planned for, I guess two years time now, where you will effectively almost re-review those three things and what options you take?

Our intention, I don't think, was to be quite so formal about three years. The intent, I think, of the comments made at the time was that people, when they look at the policy -- this is supposed to be a long-term, enduring policy which introduces flexibility in the handling of dividend growth. The minimum would be inflation -- inflationary, so covering RPI. And for the first couple of years, investors would be realistic to expect that given we have to establish a level of consistent performance in terms of delivering under RIIO and improving performance in the US, investors would naturally expect us to probably be more cautious in setting dividend growth rates towards the minimum in the scheme, in the policy, rather than being more -- higher growth rates too quickly.

That was really the thrust of it. There isn't an intent to do a formal review. This, in many ways, indicates that.

We're taking an opportunity with a strong balance sheet and with an easing, because of the shape of the curves, as Steve showed on the CapEx charts, of a window when we don't really need to have significant equity in the business in order to finance the growth in assets, because the investment level's a bit more modest. Not to over or under gain the balance sheet and to use scrip as a way of achieving that, but to actually cancel the effect of the scrip and to ensure that investors don't suffer any dilution from that.

So we're trying to be more dynamic. It's about putting in place two or three tools, the growth rate in the dividend, the use of scrip, as well as the -- allied to the growth in assets, using these different things in order to be able to provide the right outcome economically for shareholders, in terms of minimizing the dilutive effects and maximizing the total return.

Okay. Thank you.

Jamie Tunnicliffe, Redburn.

Yes. Afternoon, John. The Q&A this morning, I thought, seemed to suggest that the 11% group ROE was sustainable, within those various commentary. I think you talked about 8% to 10% in your introduction. I just wanted to understand if I was comparing comparable numbers.

That's a very good question. Effectively, when you look at, say, a group return on equity, we've obviously -- they're not exactly comparable. And there's a couple of reasons for that. The basic thrust of what we are trying to achieve in our total return model is to look at the nominal value of the assets that we're investing in and how they will drive the revenues that are created in order to finance the dividend.

So in many ways, it's an internal total return. It's quite [hair shirted], and it establishes a base level off which, if people are applying market multiples to the value of the assets or the business, they can then model what that might translate into, in terms of a shareholder return.

In terms of the return on equity, it's another way of triangulating a similar output. But it's doing it in a slightly different way, driven by some other economic factors.

Andy, do you want at add anything to this? I'm just thinking whether or not, from your point of view -- do you want to talk a little bit about the economic effects of interest in this, as well, and the way we see out performance we create on other drivers comes through into internal equity, as opposed to the simple way of looking at the total return?

Well, the calculations, obviously, when we talk about -- and we've talk about our external return. That's based on the market evaluations, as well. So that's another point, obviously.

We're using internal measures that are consistent and can be affected by management. So that's part of our point about using these measures and setting our incentive targets, as well, based on these measures, is that they can at least drive the right performance.

So they use slightly different denominators, for example. We're using a measure of assets, including goodwill. That's not a pure market measure.

So there will be some differences along there. But I think the key is that by driving against the targets under these metrics, then that should incentivize management to drive towards those TSR-type targets that we've talked about in the past, and would encourage the behaviors that drive (inaudible).

So we can use the ROE as you presented to take our view on the book value growth and roll that ROE forward, and then, essentially then we take that next step of then comparing it to the market value as price to book type assessment? That's what you're inherently talking about?

In theory. Whilst we all have an interest in what goes on in terms of the markets appraisal of our performance and how that influences the share price, ultimately, we can't control the relative multiple that people ascribed to the group. So in order to focus management attention on the things that are absolutely critical to driving the intrinsic value of the business, that's where these measures come in.

So the ROE brings together all of the different value levers that we have, economically, for the group as a whole, and models them, including the ability to drive efficiency in our interest costs, the efficiency in the performance of the business. So it obviously brings together the regulatory financial performance measures from the different entities, rolls them up into a regulatory performance. We then overlay that with the different economic factors and that then drives the return on equity.

So if applied consistently, it will show whether or not we're doing the right things to drive a level of performance consistent with that that will support the total return financing in the business. And the value added metric brings in an additional tension, in some ways, because it looks at the overall cash efficiency with which we do these things. It looks at how we're applying our total assets we're employing for shareholders, not just, in many ways, the equity component, but everything that we're deploying in the business and how that then efficiently creates value.

And if we're not doing it well and we're not generating enough capital or value to be able to reinvest, that means people would look at it and say, you know what, this indicates you're going to have to use more scrip or whatever, or you might not be able to grow as fast. That would be the sensitivity that the market would apply. If we do it very well, then we'd generate surplus value which we can then redistribute, either through higher growth rates in the dividend, elimination of the scrip through this new mechanism, or potentially, applying it to higher growth opportunities, if we have those.

Thank you.

Iain Turner, Exane.

My question's been answered. Thank you very much.

I'm glad to hear it, Iain. That's good.

Thank you. We currently have no further questions coming through.

(Operator Instructions)

Travis Miller, Morningstar.

Hello, guys. Thanks. Wanted to get your thoughts, real quick, on the gas pipeline situation in the US Northeast. There have been some proposals tossed around here recently. Just wanted to get your thoughts on potential expansion projects, how you guys might participate, and how you guys view the situation there.

Travis, are you thinking in terms of the large scale gas transmission pipeline activity, or more on the distributed network for gas distribution?

The pipeline situation. The gas pipeline, the large ones.

To be honest, it isn't an area where we've looked significantly. These tend to be much better modeled with MLP style structures. George, do you want to maybe say something?

The only thing I want to add, Travis, is this is something, obviously, that the New England states are looking at. And the governors have all gotten together and they realize that they need to have more pipeline coming into the Northeast.

In terms of ownership, we're not even to that point, yet. But both storage and pipelines are being looked at currently, just because an awful lot of storage is used for peaking in the New England states.

But at this point, there isn't really much that we can say. But if there's an opportunity for us to be involved, similar to Millennium or the Iroquois pipeline, where we have an equity ownership, obviously we would welcome that.

As George says, it's an area where it's worth maybe dwelling on very briefly. The gas distribution challenge, for us, is very clear. Lots more customers want to take advantage of the lower cost of natural gas.

It's encouraging people to put in a lot more applications for connections. We'd love to build out the network. We need, therefore, local opportunities and incentives to do that, to ensure we connect customers effectively.

But at the same time you've driven gas pressure in pipe, then it's hard to provide customers with a consistent service, and that's the key thing. If the networks on the distribution level expand, we'll need the gas interconnectivity also to expand; or more storage, as George says, so that we can maintain pressure in the network.

So the opportunity is there. It isn't an area we've typically played, other than where we've had, as George says, JV 50-50 structures, or whatever. But equally, we're willing to. It just depends on how the structures work out.

And typically, because of tax reasons, it tends to play more to other structures than the ones that we typically apply. But nonetheless, we'll continue to look at it.

Okay. What's your feeling on the Algonquin expansion? Do you think it will get done?

On Algonquin? I'm afraid I don't have a strong -- I don't have a view on that. George, any insights? No, I'm afraid, Travis, we can't help.

Okay. Just checking. Thanks so much.

That's a pleasure.

Thank you. Mr. Dawson, we have no further questions coming from the telephone lines. I will hand the call back to you.

Okay. Thank you, Operator. That's fine. It's always great to have this chance to touch base with people in the afternoon, after the early morning call. If people do want to talk to the team, we are here, out and about traveling and meeting investors; but also, quite a few of us are here in the office. So please don't hesitate to get in touch if you have further questions or want to explore any of the content in today's statement and presentation. We look forward to engaging with you over the next few weeks and months. Take care.

Ladies and gentlemen, thank you for joining. You may now disconnect your lines.