National Grid PLC (NGG) 2018 Q4 法說會逐字稿

Good afternoon, everybody, and thanks, as always, for dialing in to our debt investor update call. So yes, as I've said, my name is Andy Agg. I'm the Group Tax and Treasury Director for National Grid.

I'm sure you'd have seen many of you recently the announcement regarding our CFO, Andrew Bonfield, who will be leaving National Grid at the end of July. At that point, I'll step up to become the interim CFO. Alex Lewis, our Group Treasurer, will be leading the treasury function going forward. So today, I'm going to hand over to Alex to take you through the presentation and at the end to answer any questions that you may have. So thank you, everybody. And over to Alex.

Thank you, Andy, and good afternoon, everyone. This afternoon's call is to provide an update to debt investors following this morning's presentation of our full year results for fiscal year 2017/'18. The update will focus on how our businesses have performed, our priorities going forward as well as future debt financing. I'll talk for around 20 minutes. And after that, there will be an opportunity for you to ask any questions you may have. There is a slide pack to accompany this update, which is available on the Presentations section of our investor website.

I'd like therefore to refer you to the cautionary statement included on the second slide. For those of you who have not yet seen the results presentation from this morning's announcement at the London Stock Exchange, there's also a replay of the webcast available on our website.

So turning to Slide 3. And before discussing our financial performance and key achievements and developments over the past year, I'd first like to touch on our safety and reliability performance. Last year, we continued our relentless focus on safety with our ambition to ensure that all our employees and contractors go home safely at the end of each day. To achieve this, we believe the most important thing is to have a culture where safety underpins everything we do, not just at operational sites but right across the organization. And it's delivering consistently on that culture that has enabled us to achieve a lost time injury frequency rate of 0.1, which is consistent with world-class safety performance. And across both our U.S. and U.K. networks, reliability has also remained strong. We achieved excellent performance for both our gas and electricity networks in the U.K. with near 100% reliability. In the U.S., we faced a unique winter with major storms across all of our jurisdictions, and almost all of the restoration costs of around GBP 140 million will be recovered by our existing regulatory mechanisms.

So moving on to Slide 4 and our performance in '17-'18. It's been a busy time for the group, and I'm pleased to report we've had a good year. Let me start with our financial highlights where we've included cadence on a like-for-like basis to help with comparison with the prior year. On an underlying basis, that is excluding the impact of timing and major storms, operating profit increased by 6% at constant currency to GBP 3.5 billion, mainly reflecting the strong performance of our U.S. business. During the year, we made significant investment of GBP 4.3 billion in critical infrastructure. That's representing an increase of 14% at constant currency. When combined with year-end inflation, this capital spend drove core asset growth of 6% in the middle of our stated range of 5% to 7%. And importantly, we achieved this whilst delivering a strong return on equity at 12.3% for the group. So as you can see, it has been a good year of financial performance with strong organic growth.

Next, focusing on the U.S. business where we've made significant progress. We now have around 80% of our distribution businesses operating under new rates. This was following the successful filings for Massachusetts Electric, our KEDLI and KEDNY businesses and, most recently, Niagara Mohawk. In addition, in November, we submitted rate cases for our Massachusetts Gas and Rhode Island businesses and expect to have updated rates in place by October. Both filings are progressing well, with the hearing for Massachusetts Gas due to conclude later this month and the hearing for Rhode Island starting in June. With the completion of these rate filings, we'll have new rates for our entire U.S. distribution business, which will contribute to improvements in performance and allow us to achieve returns as close to the allowed level as possible.

On the next slide, one of our commitments last year was to continue our recent trend of improved returns, with a goal to deliver 90% of the allowed return on equity. I'm delighted to say we achieved more than this delivering 95%, a return on equity of 8.9%, which is 70 basis points higher than the prior year due to the impact of the new filings. We also delivered strong asset growth of over 7%.

Underlying operating profit increased significantly to GBP 1.7 billion, up 20% at constant currency, driven by higher revenues from the rate filings as well as the absence of asset write-offs. Operationally, we've also continued to make good progress. With a significant increase in the levels of capital investment, we've now established a capital delivery function similar to that in the U.K., and this function is already helping us to deliver construction projects more efficiently.

And finally, we responded quickly to the U.S. tax reform that was announced in December, adjusting our rate filings for Nemo, Massachusetts Gas and Rhode Island to reflect the lower tax rate and reducing our total revenue requests, including FERC, by $180 million. I'll discuss this in more detail shortly.

Turning now to the U.K. regulated businesses and starting with our cadence investment. As you all know, we've entered into an option agreement with Quadgas for the potential sale of the remaining 25% stake. We're expecting the cash proceeds from the potential sale to be approximately GBP 1.2 billion and for these proceeds to be retained for reinvestment in the business to deliver on our growth strategy. Operationally, both our electricity and gas transmission businesses have continued to deliver high levels of performance. In the 5 years since RIIO was introduced, we've now generated approximately GBP 540 million of customer savings, which will help to reduce bills over a number of years. Last year, we were able to deliver 200 basis points of outperformance through efficiency and performance optimization. In addition, we've progressed a number of important regulatory topics in the U.K., which I'll cover in more detail later in the presentation.

So looking at the individual businesses. Electricity Transmission delivered another year of strong operational performance, achieving a 13.1% return on equity. We continue to focus on innovation and efficiency to deliver totex outperformance of 180 basis points, which was broadly consistent with the prior year. Another incentive performance of 40 basis points was lower than last year, mostly driven by the lower BSIS incentives under the arrangements for 2017, '18. Finally, additional allowances contributed 70 basis points of performance.

Underlying operating profit of GBP 1.1 billion was down 15%. This was largely due to higher MOD adjustments, increased depreciation charges and the lower BSIS income.

Turning to U.K. Gas Transmission. We delivered a return on equity of 10%, which, as noted at the half year, is down from prior year. This reflects the increased spend on asset health that is required to deliver our RIIO-T1 output and the end of legacy allowances. Operating profit for U.K. Gas Transmission was up 12% on an underlying basis, primarily due to increases in base revenues, including GBP 47 million for Avonmouth. And as mentioned at the half year, we will be returning approximately GBP 85 million today for allowances in the current financial year.

Turning next to Slide 8 to National Grid Ventures, where the major area of our activity is our interconnectors. And again, we've made good progress. All 3 of the interconnectors we currently have under construction, that's Nemo, North Sea Link and IFA2 are on track, and we reached a significant milestone on Nemo with the completion of the initial cable laying. These 3 interconnectors represent GBP 1.3 billion of capital investment and will contribute over GBP 150 million of EBITDA when operational.

Our property business also continues to make good progress in particular, at our site in Battersea, which will deliver almost 1,000 new homes in London when it's completed. In terms of financial performance for the year, National Grid Ventures performed well, making a GBP 287 million contribution to the group, including the post touch share of joint ventures and associates.

Moving on to financing, tax and earnings. Financing costs increased by 2% at constant currency to GBP 974 million. This was primarily due to higher U.K. RPI and to increase debt. These factors were partially offset by the crystallization of gains on investments in our insurance captives and on the sale of our shares in Dominion. The effective interest rate increased from 3.9% to 4.6%, reflecting higher RPI. The effective tax rate was 23.7%. This is 50 basis points lower as a result of lower U.K. and U.S. tax rates, partially offset by a higher profit mix towards the U.S. This gave rise to a tax charge of GBP 589 million. And earnings increased to GBP 2.1 billion, and underlying earnings per share increased to 60.4p.

On the next slide, operating cash flow was GBP 4.7 billion, GBP 250 million higher than last year. This reflects one-off pension contributions that were made in the U.K. and U.S. last year. Closing net debt was GBP 23 billion. This reflects GBP 1.8 billion of business-as-usual net cash outflow in the year, the return of GBP 4 billion of the gas distribution proceeds to shareholders and the benefit of GBP 2.1 billion from the strengthening of sterling versus the dollar.

Our RCF-to-debt ratio was 10.6% on a continuing basis, and FFO to debt was 16.4%.

So turning next to our growth prospects. We are seeing a step-up in the rate of organic growth. This is driven by the sale of gas distribution, which has reshaped the portfolio towards higher-growth businesses, the visibility of our U.S. growth profile due to the successful rate filings in our U.S. business and the investment in interconnectors in National Grid Venture. We therefore expect asset growth to be sustained at the top end of the 5% to 7% range for the medium term and at least 7% in the near term.

Now let's look at the organic growth opportunities in each of our businesses. And on to Slide 12. In the U.S., the business is well advanced in its rate filing strategy. Each rate filing outcome has provided for increased investment to replace and reinforce aging infrastructure as well as provide funding to support each state's decarbonization agenda. We expect to invest at least $10 billion over the next 3 years in our U.S. business. We can also expect that the vast majority of this investment will be fully remunerated, benefiting earnings from the point the investment is made. These higher levels of investment are already impacting our rate base growth, which increased to 7.4% this year. This, plus the beneficial impact of U.S. tax reform on rate base growth, means that we expect the growth rate to remain at least 7% through to 2021 and even higher in the near term.

On the next slide, in our U.K. businesses, we have significant clarity over the investment profile, particularly now that we are 5 years into the RIIO-T1 price control. We spent GBP 1.3 billion this year and expect to continue to spend around this amount through to March 2021. Assuming 3% RPI, this would deliver average asset growth of just under 5% each year over the remainder of the current price control.

Next, in National Grid Ventures, we have made very good progress on our interconnect projects. The CapEx on the 3 interconnect projects under construction totaled approximately GBP 1.3 billion. These projects are expected to complete in the early 2020s and once operating should generate EBITDA of over GBP 150 million per year. The proposed Viking project could add a further GBP 850 million of CapEx and an incremental GBP 100 million of EBITDA once operational. So bringing it all together, we expect to spend around GBP 13 billion of CapEx across the group over the next 3 years.

Now moving to U.S. tax reform. As you know, tax is a pass-through cost for utilities. The reduction in the corporate tax rate from 35% to 21% will be significantly beneficial to customers and economically neutral for utilities. However, there are some implications on cash flow. The lower bill collections have little or no offset in cash tax paid as we are currently in a net operating loss position in the U.S. We've already reduced our revenue request by $130 million relating to the 3 operating companies that were undergoing rate filings when tax reform was announced and $50 million for our FERC businesses, which operate under formula rates. In our remaining distribution businesses, we may be able to partially offset the bill reductions with faster recovery of regulatory assets or use the headroom created to fund further investments.

We filed our Massachusetts Electric proposals earlier in the month and plan to file KEDNY and KEDLI over the summer. We will also return $2 billion of existing deferred tax liabilities, which represents historic tax collections at the higher rate of 35% over 20 to 30 years as required by the legislation. Under U.S. GAAP, there is no impact at the operating company level on either earnings or U.S. ROEs. Under IFRS, there will be a small impact associated with the return of the deferred tax balance as the release of the $2 billion liability is reflected as an exceptional credit to P&L this year.

Finally, rate base growth will increase due to the lower buildup of deferred taxes in the future as a result of bonus depreciation ending for utilities. Over time, this will be beneficial to cash flow, marginally offsetting the lower tax calculations -- I'm sorry, collections.

Now on Slide 16. National Grid has a strong balance sheet and efficient capital structure, which underpins the effective financing of the group's CapEx program. The group is now entering a period of stronger growth, as I've said. We expect to finance this investment through a combination of internally generated capital delivered through continued strong returns and future cost efficiencies, capital arising from the disposal of the remaining 39% shareholding in Cadent and additional capital generated through the scrip dividend. As we've said previously, we put in place the scrip to support the business in periods of higher growth. At this stage, we do not expect to buy back the shares in 2019 and 2020, unless we have higher-than-anticipated balance sheet capacity.

We are confident in the strength of our balance sheet to finance this attractive level of growth, upon which we expect to earn strong returns. We are well positioned to deliver asset growth of 7% over the medium term and to grow the dividend per share at least in line with RPI.

So to summarize our performance this year, the financial performance across the group has been strong. Our asset growth rate has increased, and we expect 7% growth over the medium term. We've grown the dividend in line with U.K. RPI, and our financial strategy remains robust.

So let me now turn to our priorities for the year ahead and also the steps we're taking for the longer term. As I've just highlighted, we see significant capital investment and growth over the medium term. We believe that by continuing to focus on 4 drivers, we will efficiently deliver on this strong growth and earn attractive returns. To remind you, these drivers are putting our customers first, optimizing the performance of our core business, seeking out growth opportunities in a disciplined way and evolving the business for the future. Looking to the year ahead, these will continue to guide our overarching strategic focus, and I will just touch now on some of these drivers.

So on to Slide 18 and beginning with performance optimization and U.K. regulation, which will be right at the top of our agenda. We're operating in a dynamic external environment, and this is especially the case in the U.K. with the ongoing debate on the current regulatory framework and the political narrative on the ownership model. As you'd expect, we've been actively engaged with all of our stakeholders to ensure that our track record of significant investment and strong operational performance is both recognized and understood.

In May, we submitted our response to the RIIO-T2 framework consultation document. It's important to remember that these are still early days in the RIIO-T2 time line, which won't take effect until April 2021. Our focus over the next 3 years is to ensure that the final package does 3 things: provides an appropriate balance between risk and reward, drives innovation and efficiency through incentivization and ensures financeability of our networks and ultimately benefits all parties.

The next steps on the road to 2021 will be Ofgem's decision on the framework this summer and the publication in the autumn of the methodology for the sector-specific price controls.

The second area of regulatory focus for us will be Hinkley-Seabank. In January, we expressed our disappointment with the financial parameters for the project that were proposed by Ofgem. And whilst the annualized CapEx for this project is relatively small, we do not view Ofgem's position as one that fairly balances the risk and reward for this complex project. Ofgem is expected to announce its decision on this consultation in the summer. And depending on their final decision, we'll then consider all the options available to us.

The third area of regulatory focus in the U.K. is agreeing funding with Ofgem for certain projects and programs of work, in particular, projects in our gas distribution -- sorry, Gas Transmission business that were uncertain when we entered into RIIO-T1. We've made our submissions for these projects to Ofgem, and they're expecting a decision in September.

Moving now to the next slide and to performance optimization in the U.S., where we have the challenge of ensuring continued high levels of reliability whilst delivering on a major capital investment program. Given our large distribution presence in the U.S., this means delivering on thousands of small to medium-sized projects, in addition to the larger projects to modernize and expand our networks. To deliver this work, we're reviewing all our end-to-end processes to remove inefficiency. And we're strengthening the jurisdictions with greater operational support to enable the organization to deliver the significant CapEx in the most effective way. As mentioned earlier, we expect to invest $10 billion over the next 3 years in our U.S. business, 90% of which is already reflected in our rate plans.

Looking beyond the current rate filings, our strategy is to focus on efficiency so that we can deliver as close to our allowed returns as possible and help keep customer builds down. By doing so, we can optimize the frequency of rate filings. Currently, the next rate case to be filed will be for Massachusetts Electric, which we expect to do towards the end of this calendar year.

And finally, on the next slide, Slide 20, I want to cover the fourth key driver, which is evolving National Grid for the future. As we know, the U.S. and the U.K. both continue to decarbonize at pace. 2017 was the greenest year ever for the U.K. with over half of electricity generation last summer coming from low-carbon sources. And similarly, many states in the U.S. remain committed to aggressive CO2 targets. The economics for solar, wind and storage are becoming increasingly attractive with further demand for clean energy coming directly from U.S. corporates through PPAs. There is no doubt that the ongoing significant growth in large scale renewables is set to continue into the long term.

So on the next slide, for all these reasons, National Grid is actively engaged in the renewable space, which is creating new opportunities for us. In the U.K., for example, we currently have around 100 connections in the pipeline from a range of new solar and storage customers. Similarly, in the U.S., at the distribution level, we continue to connect renewables for our customers. In addition, utility scale renewables also offer attractive opportunities. For example, we connected the first offshore wind farm in the U.S. off Block Island, and we're in the process of installing a 6-megawatt battery on the island of Nantucket. And the strong ongoing growth in large-scale renewables is likely to generate further opportunities for incremental investment for us. The long-term contracted nature or regulatory underpinning makes them well suited to the risk/reward profile of our portfolio. They leverage many of our core capabilities in engineering, project development, asset management and finances.

Turning finally to our recent capital markets activity and future plans. On Slide 23, first of all, I'd like to thank you for the support you've provided across our debt issuance over the past year. We raised over $2.5 billion of new long-term debt in the capital markets, primarily to fund our U.S. business and including issues from 4 of our operating companies in the U.S.. In 2018, '19, the U.S. will again be at the center of our capital markets activity. We expect to issue new debt for our U.S. business at both operating company level to finance business needs and at National Grid North America Inc. to finance debt maturities. In terms of our available facilities, we continue to maintain significant levels of committed bank lines to ensure sufficient group liquidity. We currently have undrawn committed general liquidity lines throughout the group of around GBP 5.4 billion from our group of core relationship banks. As mentioned earlier, our financing needs will also be supported by the company's scrip dividend, which we do not expect to buy back at this stage in 2019, 2020, unless we have higher-than-anticipated balance sheet capacity.

Finally, I'd like to draw attention to our strong credit ratings, which remain in the single A category for our U.K. and the majority of our U.S. operating companies.

So in summary. Last year, we delivered strong financial and operational performance. We delivered 95% of our allowed return in the U.S., with significant regulatory progress and achieved 200 basis points of returns outperformance in the U.K. National Grid is in great shape, and we're well positioned to capitalize on the significant growth that we see in the medium term. We continue to focus on efficient delivery and on creating value for our customers and shareholders over the longer term, whilst being a leader in energy transition.

And with that, I would like to thank you all for listening.