National Grid PLC (NGG) 2019 Q4 法說會逐字稿

Good afternoon, everyone. I'm Alexandra Lewis, Group Treasurer for National Grid. This afternoon's call is to provide an update to debt investors on our 2018/'19 full year results. I will give a summary of this morning's presentation, including how our businesses have performed, our priorities going forward as well as additional commentary on future debt funding.

The update will last for about 25 minutes, followed by some dedicated time during which you will have the opportunity to ask questions. The presentation is available to download from the Presentations section of our investor website. And I would like to refer you to the cautionary statement included in 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, a replay of the webcast is available on our website.

Let me begin on Slide 3 with our financial highlights for the period. Details of the results by segment are included at the end of the presentation in the Appendix. On an underlying basis, that is excluding the impact of timing, major storms and exceptional items, operating profit of GBP 3.4 billion was down 4%. This reflects the expected reduction in UK Gas Transmission allowances as well as the impact of U.S. tax reform and slightly higher-than-anticipated U.S. costs. We also incurred some significant exception charges in the last year that are excluded from our underlying results, and I'll expand on these shortly.

We've achieved a group return on equity of 11.8%, delivering ongoing sustainable returns for our shareholders. We invested heavily in network safety, reliability and modernization with our CapEx increasing to GBP 4.5 billion, driving asset growth of 7.2%. So as you can see, it's been a solid year of financial performance.

On the next slide, as you know, our safety, reliability and customer performance are key to our success. During the year, we continued our campaign to make safe working second nature to all our employees and contractors. And as a result of our efforts, we've maintained an injury frequency rate of 0.1, which is comparable to world-class safety performance. We also maintained excellent reliability across our networks despite significant winter storms in the U.S. Customer performance has also been a major priority, and I'm pleased that our customer satisfaction scores have increased for both our U.K. and U.S. businesses.

Before I turn to the detail, on Slide 5, let me outline the strategic highlights for the year, starting with capital investment. As was just mentioned, we had another strong year of organic growth, investing GBP 4.5 billion and delivering asset growth of 7.2%. As announced last November, we exercised our option over our final stake in Cadent with GBP 2 billion of cash proceeds expected in June. In addition, we made good regulatory progress in the U.S. with all our distribution companies now operating under refreshed rates. And we continued our regulatory engagement on RIIO-T2 in the U.K. We also made good progress with our cost-efficiency program in the U.K., taking action to remove costs to make us a more efficient and agile organization, and we're also undertaking a similar exercise in the U.S.

With regards to our interconnector developments, they've continued at pace with the commissioning of Nemo and the decision to proceed with Viking. And we also completed on our Fulham property site, transferring it into our St William joint venture with the Berkeley Group. So we're pleased with the significant progress and continued momentum we've made, underpinned by strong organic growth.

So let's now look at the key achievements and developments across the group. Turning to the next slide, I'll start with the operational performance in the U.S. We've achieved a return on equity of 8.8%, representing 93% of our allowed returns. We had good performance in most of our operating companies, however, we incurred some higher costs as a result of additional compliance work in New York and restoration work following a gas interruption in Rhode Island.

U.S. regulated underlying operating profit decreased 10% to GBP 1.6 billion at constant currency. Net revenues were up GBP 99 million, reflecting significant rate increases, partially offset by tax reform and the impact of adopting IFRS 15. Controllable costs increased due to the Rhode Island gas interruption and additional safety compliance work in New York.

Depreciation costs increased due to growth in rate base. Other cost increases included higher minor storm activity, additional decommissioning costs in New York and bad debt. Of the cost increases, as mentioned, around GBP 80 million are not expected to recur next year.

Our U.S. business invested $3.5 billion in the year, resulting in asset growth of 9.2%, up 180 basis points from last year. This meant the rate base grew by 9% to $22.9 billion. The focus of our investment has been maintain the safety of our networks whilst also modernizing them, providing better reliability and resilience.

In addition, our new U.S. cost-efficiency initiative is vital, ensuring we deliver our capital investment program as efficiently as possible. This is in the context of a business that's more than doubled its capital investment in the last 7 years. Whilst early in the process, this program should deliver cost savings of around $30 million this year and $50 million in 2020/'21.

I'm also pleased to say that in January, we reached a satisfactory agreement on union negotiations with members of our Massachusetts Gas workforce. As a reminder, we entered into contingency workforce plans in June, which affected 1,250 union members. We did this to seek agreements on new terms and conditions in line with what we'd already agreed with many other unions, representing approximately 8,000 employees.

During the protracted labor dispute, we had to bring in contractors and additional supervision in order to complete almost 65,000 jobs. As a result of the contingency plans, we incurred an exceptional charge of GBP 283 million. While significant, this reflects our commitment to safety and implementing the right contracts for the future. And I'm pleased that since January, we've also reached agreements with a further 2 unions on similar terms to those agreed in Massachusetts.

Next, on Slide 7, I'll move to our regulatory progress in the U.S. During the year, we agreed new rates for Rhode Island and Massachusetts Gas. This completed the full refresh of rates for all our distribution businesses, which was a significant milestone for us. We're also seeking to support New York's clean energy goals with the filing in November for smart meter infrastructure. We've requested $650 million to install over 2.3 million gas and electric meters between 2021 and 2024. And finally, we've submitted new rate filings for Massachusetts Electric and KEDNY and KEDLI, and I'll provide more detail on these later.

I'll now focus on U.K. operational performance on Slide 8. Here, we delivered another year of good returns with a return on equity of 12.4% within the range of 200 to 300 basis points of outperformance that we've committed to under RIIO-T1. As announced in November, a cost-efficiency program is well underway. This will make us more agile and strengthen our position ahead of RIIO-T2. We've incurred GBP 136 million of restructuring costs for this and expect to deliver cost savings of GBP 50 million this year and GBP 100 million from 2020/'21 onwards.

In September, Ofgem reached a final decision on funding for certain projects, which were subject to reopeners as we entered RIIO-T1. And as we said in November, we were pleased that Ofgem allowed the necessary funding for physical and cybersecurity. However, we were disappointed not to get the full funding for our compressor works.

In addition, we also reached another milestone on operational performance with the legal separation of the Electricity System Operator from 1 April 2019.

And finally, as you'll have seen in the press recently, both the NuGen and Horizon nuclear projects have been canceled, along with their proposed connection agreements with us. Under IFRS, we've recognized an exceptional charge of GBP 137 million for development costs. However, the regulatory arrangements we have in place have substantially mitigated the economic impact of these cancellations.

At an entity level, underlying operating profit for Electricity Transmission of GBP 1.1 billion was up 4%, largely due to higher net revenues. This was partially offset by our ESO separation activities, higher pass-through costs and increased depreciation. Electricity Transmission's capital investment at GBP 925 million was lower than last year, primarily due to lower load-related spend. And for Gas Transmission, operating profit was down, primarily due to the expected return of Avonmouth allowances. Capital investment was GBP 308 million, in line with last year.

Let me now turn to National Grid Ventures where we've continued to make significant progress on our interconnector portfolio. The Nemo project, which is a GBP 265 million investment in a 1 gigawatt, 140-kilometer link with Belgium was commissioned 2 months early and under budget. Progress on our new interconnectors to France and Norway, IFA2 and NSL, has continued on track. And during the year, we made the final investment decision on Viking, our interconnector to Denmark. We already have all the planning approvals needed and will start construction early next year.

In March, we announced our proposed acquisition of Geronimo Energy and a joint venture with the Washington State Investment Board, which is expected to complete in June, subject to the usual approvals. This is our first meaningful step into renewable generation in the U.S., providing us with a pipeline of over 6 gigawatts of solar and wind projects at different stages of development. And the joint venture will hold the renewable assets developed by Geronimo.

In terms of financial performance, National Grid Ventures contributed GBP 316 million to group operating profit, an increase of 10% on last year, mainly due to reduced business development costs. Capital investment increased again to GBP 444 million. As we've said before, we expect around GBP 250 million of EBITDA contribution from our new interconnectors from FY '25 onwards.

Moving on next to Slide 10 on interest, tax and earnings. Financing costs decreased by 1% to GBP 993 million despite an increase in average net debt. This was primarily due to lower U.K. RPI. The effective interest rate also decreased from 4.6% to 4.3%.

The underlying effective tax rate was 19.6%. This is 420 basis points lower, primarily as a result of a full year impact from U.S. tax reform. Underlying earnings increased to GBP 2 billion.

Next, on Slide 11. Operating cash flow was GBP 4.5 billion, GBP 238 million lower than last year. Higher underlying operating cash flows were more than offset by the cash cost of the exceptional charges discussed earlier.

During the year, we raised nearly GBP 3 billion of new long-term financing largely in the U.S. Closing net debt was GBP 26.5 billion with a GBP 1.5 billion adverse movement in exchange rates and a further GBP 2 billion underlying increase. This was slightly below our expectations of GBP 2.5 billion, partly due to timing over recoveries in the U.S., helping offset the cash impact of the exceptional items.

Our credit metrics benefited from the over recoveries in the U.S. The RCF-to-debt ratio was 9.4% or 10.8%, excluding exceptional items. S&P's FFO-to-debt metric was at 12.6% or 14.7%, excluding exceptional items.

And during the year, we reduced the level of the balance sheet hedge of our U.S. assets to around 80%. This better aligns our debt portfolio with the currency mix of our retained cash flow. As a result, our U.S. dollar-denominated currency balance stood at $21 billion, down from $25 billion last year.

Moving on to Slide 12. As we look ahead to next year, we expect capital investment to increase close to GBP 5 billion and to remain at around that level in FY '21. In our U.S. regulated business, we continue to invest to update and modernize our networks. Investments in the U.K. regulated business will increase primarily driven by asset health spend. In our National Grid Ventures and other activities segment, we expect to see a significant increase in our interconnector capital spend together with the initial investments in Geronimo Energy. As a result, we expect continued high-quality asset growth of around 7% in FY '20 and FY '21.

Turning to Slide 13, our objective is to maintain an efficient balance sheet. For our current rating, this means regulated gearing in the mid-60% range. We do this by maintaining a balance between cash generation and capital investment while delivering dividend growth. As expected, our regulated gearing at March 2019 was 66%, which will reduce in June when we receive the final Cadent sale proceeds.

With capital investment expected to rise to close to GBP 5 billion in FY '20, we'll continue to fund the group through issuing new debt at attractive rates; internally generated capital delivered through strong financial performance; and additional capital from the scrip dividend option, which is put in place to support the business during high-growth periods. We, therefore, expect to continue to utilize the scrip dividend in FY '20 and FY '21. As a result, we expect gearing to remain around the mid-60% level through to FY '21.

I'd now like to summarize our technical guidance for FY '20 on the next slide. And as ever, you can find more details in our full year results statement. Overall, we expect our combined U.K. regulated businesses to continue to deliver 200 to 300 basis points of outperformance, including the benefit of the GBP 50 million of efficiency savings.

In the U.S., returns are expected to increase to at least 95% of the allowed return, benefiting from updated rates, the nonrepeat of this year's one-off cost headwinds as well as the cost efficiencies we expect to deliver. Our interest charge will increase, reflecting an increase in average net debt and the nonrepeat of one-off gains, and we expect a tax rate of around 21%. In FY '20, net debt is expected to increase by around GBP 1 billion, including the benefit of the GBP 2 billion of Cadent proceeds expected in June and GBP 0.4 billion increase from the impact of IFRS 16.

So let me now turn to our longer-term objectives and priorities for the year ahead. I'll start on Slide 16 with the U.S. where we have 3 key focus areas: firstly, a continued focus on improving our customer experience; secondly, the efficient and safe delivery of our services; and thirdly, reaching fair and progressive regulatory settlements.

On customer experience, we've already invested significantly in digital solutions such as our customer e-billing portal, and we'll continue to invest this year, working towards our longer-term ambition of paperless billing for everyone. And in terms of the efficient and safe delivery of our services, we're making significant investments in our IT systems for our gas business. These systems will enable a more efficient management of our field force, a more responsive service for our customers and further cost improvements.

Turning to Slide 17. On regulation, we filed for new rates for Massachusetts Electric in November last year and for KEDNY and KEDLI this April. Our regulatory strategy across the U.S. is to move rates to be more forward-looking, incentive-based and multiyear. This will allow us to plan our works in the most cost-effective way.

For Massachusetts Electric, we've submitted proposals that will allow for up to a 5-year settlement. This will give us good visibility on the funding of our investment plans and allow for annual inflationary cost increases offset by efficiency savings. As part of this filing, we've also taken the opportunity to advance the state's decarbonization goals. This included a request for funding for over 17,000 electric vehicle charging points and the installation of a 14-megawatt battery storage system. Separately, we've asked for a return on equity of 10.5%. This filing will support annual investment of $300 million, an increase of $50 million on the existing rate plan, and we expect to hear the outcome from this filing in September.

For KEDNY and KEDLI, we've submitted a request for a combined annual CapEx allowance of $1.5 billion. This is a 50% step up from our existing allowances. This increase in CapEx has been driven by a number of factors, including the need for increased pipeline replacement, enhancements to pipeline safety, improved system reliance and modernization of LNG facilities. Importantly, the filing also includes proposals to support a low-carbon energy future. This includes developing a green gas tariff and projects to facilitate the increased use of renewable natural gas.

I'll now turn to the U.K. outlook on Slide 18 where we also have 3 focus areas: firstly, embedding the cost-efficiency program; secondly, delivering our capital investment as efficiently as possible; and thirdly, continuing to help shape the regulatory framework for the benefit of customers and all stakeholders.

Starting with the cost-efficiency program, where this year, we'll be going live with new IT systems, which will provide better data to improve decision-making and simplify our processes further across the organization. On capital investments, our key priorities will include completing the tunneling for Feeder 9; starting work on the second London power tunnel, which will provide additional capacity and resilience to our network across south London; and initiating the works on the undergrounding of our power lines through Dorset as part of our visual impact program.

And turning to the next slide. With regards to the regulatory frameworks, as you're aware, Ofgem's RIIO-T2 sector-specific consultation was published last December. As you will have seen in our response in March, whilst their initial proposals are a step in the right direction, we don't think they'll bring about the change that consumers need in the long term. We provided feedback on 3 key areas of concern: the level of allowed return, the outperformance wedge and the approach to incentivization. As you know, the overall financial package is key, balancing both a fair return with appropriate cash flows. Taking a balanced approach to risk, and correcting for the errors in the calculations that we see, we believe a fair real RPI return on equity for RIIO-T2 is 5.5%.

With regards to the process, we expect Ofgem to publish its decision on the consultation next week. We'll be submitting our initial business plans in July for further stakeholder comment before sharing our final plans in December.

Staying with regulatory matters, let me now turn to Hinkley. As you know, we've already started the construction of the project in accordance with our contract with EDF. Ofgem continues to develop the necessary license modifications to introduce the competition proxy model. And as we've set out previously, we continue to believe this mechanism is not in the long-term interest of customers. We'll wait to see what the final modification to our license looks like later this summer before taking a decision on the appropriate next step.

Finally, turning to National Grid Ventures on Slide 20 where the major focus will be the continued investment we're making in our European interconnectors. We continue to see interconnectors as a very cost-effective way of widening the sources of electricity for the U.K. as well as connecting to low-carbon and renewable options. In fact, when the 3 interconnectors we have under construction are completed, our total interconnected capacity to Europe will be 7.8 gigawatts, and almost 90% of this will be from low-carbon sources. On Geronimo, the deal should close next month, and we plan to complete the construction of the Crocker Wind Farm in South Dakota this autumn.

Having set out our priorities for the coming year, turning to the next slide, I now want to focus on how these priorities continue to integrate and reflect our environmental and sustainability goals. For example, in UK Electricity Transmission in our trial project at Sellindge in Kent, we were the first utility in the world to use low emissions insulating gas at 400,000 volts. On climate change, we've set ourselves ambitious decarbonization targets, and we're proud to say that we've already reduced our emissions by 68%. And of course, we'll be reviewing our existing target of 80% by 2050, following the recent recommendation from the Committee on Climate Change to reach net 0 emissions by 2050.

And on sustainability, our business activities enable us to make significant conditions to a number of the UN Sustainable Development Goals, in particular, the affordable and clean energy and climate action goals, but we also want to contribute to others. We're taking action on life on land where we've set a target to recognize and enhance the value of the natural environment on at least 50 of our sites. We've worked with multiple partners and community organizations across the U.K. to deliver enhancements to 38 sites so far. These cover more than 400 hectares of land and consist of a wide variety of habitats and species. And we're also addressing good health and well-being. This commitment includes access for all employees to health and well-being services, including mental health services, such as counseling and psychological therapies.

We're also one of a small number of organizations that supports the government's Inclusive Economy Partnership. This has included playing a key role in developing a framework that supports employers to voluntarily report on disability, mental health and well-being in the workplace.

So as you can see, we have a large number of priorities across the group this year, including continuing to focus on customers, embedding cost savings and efficiently delivering investment plans. As outlined earlier, based on current investment plans, we expect to see another step-up in investment this year to nearly GBP 5 billion. This elevated level of investment is expected to continue into 2021, delivering many benefits for our customers. And in total, our asset base is expected to grow strongly by around 7% in both '19/'20 and '20/'21. The vast majority of this critical investment is covered by existing regulatory arrangements, and it's our responsibility to deliver this investment efficiently.

Turning finally to our capital markets activity over the last year and our plans for this financial year on Slide 24. In total, we issued around GBP 2.9 billion of new long-term debt in 2018-'19. Around $3.2 billion was raised by our U.S. companies with the majority issued at operating company level, including a $350 million, 10-year bond for Narragansett Electric; a $500 million, 10-year bond for Niagara Mohawk; and a $1 billion of 10- and 30-year bonds from -- for Brooklyn Union Gas KEDNY.

In addition, National Grid Electricity Transmission, NGET, returned to the bond market for the first time since 2013, raising around GBP 500 million across 4 bond issues, including a GBP 250 million, 16-year bond. Thank you for your support across these transactions.

On average, National Grid expects to issue GBP 2 billion to GBP 3 billion of long-term debt each year to fund capital expenditure and to refinance maturing debt. For the 2019 financial year -- sorry, for the 2019/'20 financial year, we expect to issue the majority of debt at operating company level, both in the U.S. and in the U.K. for NGET. We also have a EUR 1.25 billion hybrid with the first call date in June 2020. We consider hybrid capital to be an enduring part of the capital structure and are considering hybrid refinancing options as part of our efficiency plan.

In terms of available facilities across the group, we continue to maintain significant levels of committed bank lines to ensure sufficient liquidity. We currently have undrawn committed general liquidity lines throughout the group of around GBP 5.5 billion from our group's core relationship banks.

Finally, drawing attention to our strong credit ratings. With respect to National Grid plc, Moody's, S&P and Fitch have all maintained their ratings on stable outlook, while ratings remain in the single A range for our U.K. operating companies and the majority of our U.S. operating companies.

So in summary, in the last year, we've invested GBP 4.5 billion in an efficient and disciplined way, delivering strong organic growth. We've made good progress on our strategic priorities, helping to underpin our total return proposition. And we've delivered significant customer benefits.

We've also taken positive steps in evolving our regulatory frameworks in the U.S. and contributed to the shape of RIIO-T2 in the U.K. This has all been achieved while maintaining a strong balance sheet and a continued commitment to our progressive dividend policy.

And with that, I would like to thank you all for listening. I will now hand over to the operator for questions. If you have any outstanding questions at the end of the call, please send them to our dedicated debt investor e-mail, which is debtinvestors@nationalgrid.com.

Operator, please continue.

(Operator Instructions) Our first question today comes from Andrew Moulder of CreditSights.

Yes. I wanted to ask on the U.S. and Geronimo, correct me if I'm wrong, but you can't do anything similar to that in the U.K., can you, because of regulatory restrictions. Is that right?

Yes. That is right, Andrew. We're prohibited from investing in generation the U.K.

Right. Okay. I thought so. Good. Secondly, I'm just trying to look at your debt and decide what's holdco and what's opco with regards to the sort of potential for that of nationalization. And can you just confirm for me whether the British Transco International Finance bond, is that holdco or opco? If I remember, that was some kind of intermediate holdco. Would that be opco bond or not?

So that's an opco -- gas opco, National Grid Gas.

Okay. And finally, I just wanted to ask you on the floating rate debt, I mean, I was looking again at your debt portfolio, and I think you've got about -- well last year anyway, about 17% of your debt is floating. What's the plan for that floating debt when LIBOR is abolished?

Yes. So it's actually only one bond that we've got that's floating, but we're looking at how we would deal with that in relation to the LIBOR transition. We're quite well ahead in terms of our thinking on that. And obviously, that's going to develop as a plan and a strategic program over the next year or so.

Right. Okay. And perhaps finally, just on to the renationalization. I'm sorry to bring it up again. But again, looking at the debt at your opcos, I've seen, obviously, the announcement from the Labour Party that they would plan to repay the debt in full. But you obviously have quite a lot of intercompany debt between the opcos and the holdcos. Would you expect that the intercompany debt would also be repaid in full?

Yes. We would expect so in the sense that all debt is the same in a -- from a legal point of view. So we would expect that the company debt to rank in effect alongside that pari passu.

Okay. And could you perhaps just confirm to me how much intercompany debt have you got at NGET and Nat Grid Gas?

Yes. National Grid Gas has still got cash balance hanging over from the Cadent sales. So in effect its gross gearing is higher than its net gearing. Net of intercompany, it's got a lending up to plc. It's about GBP 1.4 billion. And then down into NGET from plc, it's about GBP 1.2 billion.

(Operator Instructions) We have no further questions on the line, so I'll hand back for any further remarks.

Okay. So thank you very much indeed, for taking the time for listening today. And as I said earlier, if you have any outstanding questions, please send them to our debt investor e-mail, which is debtinvestors@nationalgrid.com. Thank you very much.