National Grid PLC (NGG) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the National Grid plc 2014/2015 preliminary results. My name is Suzanne, and I will be your coordinator for today's conference.

(Operator Instructions)

I'm now handing you over to Mr. John Dawson to begin today's conference. Thank you.

Thank you very much. And good afternoon, everybody, and thank you for joining the call. This is the second year of our RIIO period and the second year in which we have put together our numbers using this new format with the focus clearly on returns and value added. As a result, hopefully, people are getting used to the format of this presentation.

What I thought we would do is just very briefly summarize the key messages from today, and then maybe address one or two of the questions that we've been getting most consistently as a team, and then open it up to a question-and-answer for those of you taking part. The key message is today, well, it's clearly in our view been another year of successful performance, strong operating performance for both the UK and the US business. And we've been able to maintain a strong balance sheet. And, at the same time, we progressed several key strategic growth opportunities, particularly in our two new interconnection agreements for Norway and Belgium. But also some good advances on the US transmission projects that we have in the pipeline.

Looking to the two businesses in a bit more detail, the UK regulatory businesses, clearly, are benefiting from the ongoing -- are getting the ongoing benefits of the restructuring that they completed in 2013 and are delivering improved efficiencies in incentive performance under the broad RIIO structure. As a result, 13.7% ROEs overall, 100 basis points higher than last year. Within that, the (inaudible) RIIO period incentive performance was around 270 basis points, split between the totex incentives and traditional incentives. 60% of the contribution to overall performance really came from totex. That is a good performance in our view in year two, and we expect to continue many elements of that into next year.

Overall capital investment was GBP1.8 billion, slightly down on last year, mainly reflecting delivery delays on the Western link in relation to the cable-laying activities. We were asked a question in the results today whether or not that was indicative of being lower than the GBP16 billion to GBP20 billion range that we set out at the time of capital delivery day last September.

Broadly speaking, given the delays on that project, we think this is in line with the GBP16 billion, which is what we indicated back in September/October, with the opportunity to see some of the other projects that we would anticipate being delivered within the back end of the RIIO period still coming through and lifting the overall delivery to somewhere between the GBP16 billion to GBP20 billion.

We did talk a little bit about the overall phasing of capital delivery and the fact that more of the medium- to long-term connection commitments are moving out a little. We still have a very strong pipeline of connection activity to do, and we expect that to continue well into the 2020s. It's about the same level of activity just spread over a slightly longer period of time.

But the current level of investment is, broadly speaking, in line with delivering, at the moment, the GBP16 billion of delivery over the eight years, with opportunities to see that rise towards the end of the period. In the US business, US regulated businesses, profitability was maintained overall, supported by additional revenues from the existing rate plans in, particularly, the Narragansett and Niagara Mohawk electric and gas plants. These were largely offset by the cold winter costs, whether it was gas main or power activities or an increased level of bad debts.

As a result, the return on equity was slightly lower than we had expected, at 8.4%, really reflecting that additional cost base. But also, quite a big increase in rate base as a result of our [$2.4 billion] of capital investment in North America. As a result, we've invested a little bit ahead of getting allowed revenues and matching revenues from our regulators. We'll be looking to file those, particularly for the KEDNI, KEDLY, and Massachusetts rate cases in the course of the next 12 months or so. So, very good operational delivery, both in UK, in the US on the ground: good network reliability; good maintenance support; good storm response during the very cold winter in February and March, particularly in Buffalo and Boston where they had record snowfalls. So, overall, a pleasing year operationally.

Good strategic progress I've touched on. So, overall, a strong financial performance, maintained a robust financial position in our view. Good return on equity, was 11.8% up, 40 basis points. Value added was GBP1.7 billion. Regulated asset growth, around GBP1.3 billion, 3%, which we expect to increase in the future as inflation once again picks up.

EPS was a touch ahead of expectation of 58.1p. We've sustained our financial metrics comfortably above the A- rating, which is very important to us as a business and will continue to be a benchmark in terms of how we judge our capital structure, and that the dividend was increased by 2% in line with inflation, as per our policy. And remember, during the course of last year we bought back all of the scrip shares that were issued. And at this early stage in they year, we would expect to continue to manage the scrip program such that we buy back as much as we can, whilst being cognizant of the A- rating.

So, what other things have come up in our discussions? There's a little bit about debt buybacks. Obviously, we spent about GBP150 million of exceptional cost in buying back over GBP1 billion of high-coupon, long-term dated debt. In many cases, this has been treated as an exceptional. It is captured, it's worth noting, in the value-added calculation. So, on the one hand, there is a long-term benefit to the return on equity as a result of being able to buy back expensive debt. But, at the same time, it's captured in our value-added equation, so the net cost of buying this back is hitting the value-added calculation today.

US awarded returns, that was raised in the results presentation, what are our expectations going forward, with recent news coming out of New York around Con Ed and others. The most recent Con Ed submission awards were 9%, as we understand it, a little bit lower than the averages that have been awarded, broadly speaking, from New York and Massachusetts and other New England states in recent months.

The average still seems to be around a 9.3% to 9.5% level overall. We are confident that, if we submit the plans that we would like to with the investment cases and the benefits that would accrue from those to consumers, we will receive appropriate returns. That's why, obviously, we're going to do that. But, more importantly, we also want to catch up on some of the cost allowances that we have been living with for the last seven, eight years in the case of our downstate New York businesses. Those are out of date in terms of the investments that we've been making and the way in which we're supporting consumers now, and they need to be brought up to speed.

So, those are the main facets of the rate filings. And we'll be looking to complete those, ready for them to have revenue impact on us in early 2017 in the case of downstate New York, and sometime towards the second half of 2016 for Massachusetts. So, that's the summary.

Hopefully, a useful reprise of this morning's activities. With me are Victoria, Mike, and George from the IR team. Very happy to open it to questions, and if there's anything we can help you with now, that's great. If not, don't hesitate to call us, of course, during the course of the next few days.

Operator, waving my hand back to you.

Thank you.

(Operator Instructions)

Mark Andrew Freshney, Credit Suisse London.

Hello, John. Thank you for taking my call. I have a question on capital allocation across the group. The divergence between US returns, achieved returns on equity, and UK achieved returns on equity I don't think has ever been wider.

I think in the results presentation you mentioned 13.8% returns in the UK. The year just gone, and for the coming year you're guiding for 8% in the US. Clearly, you hope to improve the return in the US, but there's no firm target. Can you remind us of the reasons why you're still allocating capital to North America? Thank you.

That's a great question because, of course, on the face of it you look at those returns and you do wonder what the differences are and why allocating capital to North America is still a very attractive proposition. It's worth remembering when you put GBP1 of investment into the UK business, you will earn 7% real return.

And you don't earn 13.7% on the incremental pound of investment. The extra we earn is on incentives, is on doing things efficiently. It's about avoiding investment in many ways. And as a result, it's accrued to the actions we are taking on day-to-day basis rather than the net benefit of investing that GBP1 in the UK business.

So one could argue that large amounts of capital invested in the UK is, on the face of it, dilutive to your achieved return on equity as a percentage. Of course, it contributes to the long-term value of the business because it builds up the asset base and you earn profits on that. And it's those profits over time which could accrue to cash and accrue to your ability to finance the dividend.

But in theory, if you just invest capital and you don't drive any additional outperformance on it, then all you're doing is diluting your achieved return on equity in the UK. The opposite at this point in time is true in the US. If you invest GBP1 in the US business, you will earn your allowed return on it today, assuming it's built into your current rate plans for [tracker] or capital allocation methodology.

And as a result, you will earn typically 9.7% on average across our business. And of course, that is higher than the 7% because it's a nominal return. Whereas the 7% in the UK is a real adjusted return and inflation effect affects the asset value and, therefore, the long-term cash flows rather than actually giving you a higher incremental return today.

So the US business still represents, in our view, a very attractive place to invest. Plus the structure of capital investment in the US means that on a 50/50 capital basis, you earn a slightly higher return on a higher equity portion of the investment, which means that when you look at the group as a whole in our overall debt leverage structure, that can still result in a fairly attractive overall return.

So we would argue that broadly speaking they're quite comparable for incremental capital investment. If anything, the North American business on a marginal basis, because there are quite a lot of good growth opportunities for us particularly around new investment in transmission and gas distribution infrastructure and gas distribution activities, offers really good long-term return opportunities for the business. And that's why we still believe quite firmly in the US business today.

Okay, thank you.

We have no further questions in the queue.

(Operator Instructions)

There are no further questions. So I will hand you back to your host to conclude today's conference.

Thank you very much. No, that's fine. We're always happy to have minimal questions. It means, obviously, our statement is easy to digest and very straightforward. If, over time, you find that isn't the case, don't hesitate to call the team. That's what we're here for. We'll be delighted to take your calls.

All our details are in the financials result statement or available through our website. We look forward to seeing you over the next few days as we get out and about to meet investors or to talk to you on the phone if you have further questions. Thank you very much for your time.

Thank you for joining today's call. You may now replace your handsets.