National Grid PLC (NGG) 2023 Q4 法說會逐字稿

[We're good to go]. So good morning, everyone, and welcome to National Grid's full year results presentation.

So I'm Nick Ashworth, Head of Investor Relations. And I'm really pleased to see so many of you here at the stock exchange this morning. And I know we've also got a good number of people listening and watching online as well.

So look. As always, we will start with safety. We're not expecting a planned fire alarm test this morning, but if there is one, please vacate the billing. And we'll meet out on Paternoster Square and maybe (inaudible) out there. The second important thing to draw your attention to is the cautionary statement which is at the front of the presentation. All of today's materials are available on the website.

And as usual, there will be a Q&A with John and Andy after the presentation. If you need more info, then please do feel free to reach out to me or the IR team later in the day.

And so with that all said, let's start the presentation.

(presentation)

Good morning, everyone. It's great to see so many of you here today and have so many of others joining online.

As usual, I'm joined with Andy Agg, our CFO. And following the presentation, we'll both be happy to take your questions.

So it's been another good year of performance for National Grid. Our significant progress is demonstrated by the positive impact of record levels of investment on both earnings growth and the energy transition. Our portfolio is now repositioned to capture attractive growth for many years ahead -- and the continued support we're providing to our customers and communities during these challenging times. Last year, energy was in the spotlight for many different reasons, not least due to the affordability issues caused by much higher commodity prices. We've seen this galvanize government's and regulators' resolve to accelerate the energy transition as they look to bring an end to expensive and unpredictable fossil fuel costs, increase the level of renewable generation and deliver greater levels of domestic energy security. National Grid is at the heart of this push, empowering change through investment in critical energy infrastructure. And we're doing this across all areas of our business, such as in our UK Electricity Transmission business, where Ofgem have recently awarded us 17 major onshore transmission projects to enable greater levels of offshore wind connection; and in our U.S. businesses, where we've had approval for $3.8 billion outside of rate cases to drive greater investment in the connection and delivery of clean energy, but the energy transition isn't just about the future. We're delivering it today with another record year of investment across the U.K. and U.S. Northeast.

You'll have seen in the opening video we've energized the world's first T-pylons as part of the Hinkley connection project, which will connect 6 million homes and businesses to low-carbon electricity. We're rewiring London, with 90% of tunnel boring complete at the 33-kilometer London power tunnel project. Across our UK Electricity Distribution business, we've enabled twice as many EV connections in the past 2 years than all previous years put together. In National Grid Ventures, we continue to make great progress on Viking Link, our 1.4-gigawatt clean energy interconnector to Denmark. Across our U.S. gas businesses, we've replaced over 360 miles of leak-prone pipe, taking the cumulative total to over 4,200 miles and avoiding annually 134,000 metric tons of CO2 equivalent. And in New York, we broke ground on our $600 million Smart Path Connect transmission project, which will bring clean energy from upstate New York to demand centers down state.

The investments that we're making right now are driven by our vision to be at the heart of a clean, fair and affordable energy future. And our key focus is to capture future growth opportunities by delivering the critical infrastructure required as safely and as efficiently as possible. National Grid has never been as well positioned to do that as we are today. The strategic pivot we announced just over 2 years ago is now complete. Our UK Electricity Distribution business, formerly Western Power Distribution, is now well embedded within National Grid with a new leadership in place. As part of the pivot, we've completed the sale of our Rhode Island business to PPL in May 2022. In January, we also completed the sale of a 60% stake in our UK Gas Transmission business to a Macquarie-led consortium. And as a reminder: The consortium has the option to acquire the remaining 40%.

We continue our work to set up the future electricity system operator as an independent, separate body ahead of [agreeing a] time line for separation with the U.K. government. And finally, following Ofgem's decision in December to award us the 17 major onshore transmission projects, we've created a new strategic infrastructure business unit. This will oversee and efficiently deliver the significant increase in transmission infrastructure needed in the U.K. over the next decade and beyond, so it's been a very busy time for National Grid.

Today, our geographic and regulatory diversity with a portfolio that's broadly 70% electricity and 30% gas ensures we're in a strong position to capture the considerable opportunities the energy transition brings. And I'm also proud of the way we've stepped up as a company in the past 12 months, helping our people, customers and communities through an incredibly tough economic environment. Today, we're announcing the early return of GBP 100 million of interconnector income, where we've collected revenues above our cap. This comes on top of the GBP 200 million of revenues we've already committed to return early. In the U.K., this winter, we allocated nearly GBP 24 million of our GBP 50 million energy support fund to help 30,000 households through the energy crisis. And in the U.S., we launched our customer assistance program, contributing $6 million so far, to help support vulnerable households.

We also continue to play our role within our communities. September saw the second day of service for our Project C initiative, with over 2,000 colleagues dedicating 11,000 hours across more than 200 locations, double last year's achievement. As a responsible business, we will continue to do what we can to support our customers in easing bill pressures as we move through this challenging period, but it's clear to me this isn't a quick fix. Only significant investment in clean energy will bring customer bills down in the long term.

So turning now to our financial performance. On an underlying basis, that is excluding the impact of timing, major storms and exceptional items, underlying operating profit was up 15%, or 10% on a constant currency basis, to GBP 4.6 billion. This reflects a full year of earnings for UK Electricity Distribution, good operational performance across all of our regulated networks and a strong performance in National Grid Ventures. This was partly offset by the sale of our Rhode Island business and the energy support fund we launched to help vulnerable customers this winter. Underlying earnings per share were 69.7p, up 7% compared with the prior year.

Capital investment from our continuing operations was a record GBP 7.7 billion, 8% above the prior year at a constant currency. We've also made great strides with our cost efficiency program, delivering a further GBP 236 million of savings on top of the GBP 137 million previously announced and within close reach of our GBP 400 million target.

And in accordance with our policy to grow the dividend in line with U.K. CPIH, the Board has declared a final dividend of 37.6p per share. This takes the total dividend for the year to 55.44p, an increase of 8.77%.

Turning next to our safety and reliability performance. Last year was another year of good safety performance, with a small improvement in our lost time injury frequency rate. However, following the tragic event in Massachusetts last May when an employee lost his life, we've been focused on ensuring the lessons learned are being shared across the whole organization. Safety continues to be an area of close attention for us to ensure that we continue to improve our performance.

Moving to reliability. We've had another excellent year of reliability with over 99.9% availability across our regulated networks. I'm particularly pleased with this outcome given some of the challenging weather we experienced this year and proud of the role we've been playing in safeguarding security of supply. In the U.S., winter storm Elliott saw historic levels of snow, wind and low temperatures, with the largest field force in Western New York's history helping to restore power to over 200,000 customers. In the U.K., July saw the hottest temperatures on record. Our electricity transmission teams took extra measures to ensure our networks continued to operate efficiently, including continuous monitoring for overheating and guarding against wildfire hazards close to our overhead lines. And our electricity system operator developed one of the most comprehensive winter preparedness plans we've ever had, ensuring that we successfully navigated what could have been a very difficult winter.

So let me now turn to our operational performance, starting with New York, where we achieved a return on equity of 8.6%, 96% of the allowed level. During the year, our capital investment increased by GBP 340 million to GBP 3 billion -- $340 million to $3 billion, resulting in strong rate base growth of 9.9%.

And it's been a busy period for policy and regulation in New York. In July, we received approval to proceed with the $691 million of transmission investment projects to support the Climate Leadership and Community Protection Act or CLCPA. In February, we received an additional $2.1 billion of funding to enable over 2 gigawatts of renewable generation in Upstate New York. In December, New York's Climate Action Council approved the scoping plan which outlines recommended policies to help meet the goals of the CLCPA. Within this, we were particularly pleased to see recognition for the importance of a decarbonized gas network in the state as well as the role alternative fuels such as hydrogen and RNG can play in this decarbonization pathway. The plan also made the case for continued investment in the replacement of leak-prone pipe, which will improve network safety, whilst continuing to reduce emissions.

Moving to New England, where we've seen similar momentum in regulatory approvals for clean infrastructure investment. Our achieved return on equity was 8.3%, a 30 basis points improvement on last year. I'm confident the programs underway to streamline and modernize our systems in Massachusetts will be a significant contributor to getting closer to the allowed level. During the year, we delivered capital investment of $2 billion, which excluding Rhode Island was $276 million higher than last year, with a rate base growth of 6.3%. As I noted earlier, over the last few months, we received funding outside of rate cases for new clean energy investments. This includes nearly $340 million for grid modernization projects; $487 million for the rollout of the Advanced Metering Infrastructure program; and $206 million for EV infrastructure, which will provide over 30,000 charging points.

In the U.K., our electricity transmission business continued to perform well, with capital investment increasing by 9% to GBP 1.3 billion. The business delivered a return on equity of 7.5%, 120 basis points above the allowed return of 6.3%. Ofgem published its Accelerated Strategic Transmission Investment decision document in December. This confirmed the award of 17 projects to National Grid, with much of the investment expected to be in the second half of the decade. However, included in the GBP 9 billion of CapEx in our 5-year outlook is around GBP 1 billion of early investment in these projects.

Getting to certainty was one of the key priorities that I talked about back in November and is just one of several positive developments in the past 6 months. The establishment of the new Department for Energy Security and Net Zero should bring increased prominence to the clean energy transition within government. In March, the department announced its Powering Up Britain package, highlighting networks as a key enabler of the transition. As part of this, the government restated its intention to streamline planning processes to accelerate the delivery of transmission upgrades. And we are pleased to see that the community benefits framework that we've been advocating for help to address planning barriers is now out for consultation. With this all -- whilst all this is encouraging progress, in order to meet the government's climate ambitions, we still need to see faster development of policy. I'll come on to talk more about this later.

Turning now to UK Electricity Distribution. In the final year of ED1, the business continued to perform well, delivering a return on equity of 13.2%, including a 360 basis points of outperformance and customer satisfaction scores of 8.99 out of 10. Capital investment grew by 10% to GBP 1.2 billion, driven by increased customer connections for renewable generation and electric vehicle charging infrastructure. In March, we announced our acceptance of the 5-year RIIO-ED2 price control, which started on the 1st of April. Whilst the final determination is stretching, we believe there's a strong position to deliver the outcomes customers require as well as our regulatory commitments.

And lastly, moving to National Grid Ventures, where capital investment was GBP 906 million. We're making good progress on the Viking Link to Denmark. We've now laid 75% of the cable and expect to commission the project by the end of the calendar year. Our North Sea Link to Norway has completed its first full year of operation. And I was delighted that we resumed full service of our IFA link to France in January.

Grain LNG had a record year of utilization with 102 ships offloaded, supporting energy resilience in the U.K. and Europe. And we remain on track to deliver the Phase 4 project, with the outer walls and roof for the main tank now completed. In the U.S., our offshore wind joint venture with RWE submitted proposals to NYSERDA, and we expect them to announce the winning bid in the coming months.

So as you can see, it's been a great year of progress right across the group. And following Andy's presentation on the financials, I will come back and share with you our key priorities for the coming year.

Andy?

Thank you, John. And good morning, everyone.

I'd like to highlight that, as usual, we're presenting our underlying results excluding timing, major storms, exceptional items; and that all results are provided at constant exchange rates. Furthermore, following the completion of the 60% stake sale of our UK Gas Transmission and Metering business in January, we continue to hold the remaining 40% as held for sale.

So turning to our numbers, I'm pleased to be reporting another good year of financial performance. Underlying operating profit on a continuing basis increased by GBP 411 million to GBP 4.6 billion. This was mainly driven by a full 12 months of earnings from UK Electricity Distribution following its acquisition in June 2021; good performance across our regulated businesses, further supported by our efficiency program and a higher contribution from National Grid Ventures coming from a first full year contribution from our Norwegian interconnector NSL; IFA business interruption recoveries relating to the Sellindge fire in September 2021; and continuing good performance across the interconnector portfolio.

Higher operating profit, partially offset by a rise in interest costs, helped underlying earnings per share increase by 3% to 69.7p per share, an increase of 7% at actual exchange rates. We have now delivered GBP 370 million of enduring efficiency savings and are within close reach of our GBP 400 million target. And our robust operational performance was also reflected in the 11% group return on equity.

In line with our policy, the Board has recommended a final dividend of 37.6p, taking the full year dividend to 55.44p per share, representing an 8.77% increase compared to the prior year reflecting 2023 average CPIH inflation.

We continued to deliver record levels of investment with capital programs to drive forward the energy transition on both sides of the Atlantic. Capital investment from continuing operations increased to GBP 7.7 billion, 8% higher than the prior year, alongside the full 12-month inclusion of UK Electricity Distribution. This also reflected higher New York investment on electricity system reinforcements, as well as across cyber, digital and customer experience; increased investments in U.K. electricity transmission as we make progress on our GBP 1 billion London Power Tunnels project; and in National Grid Ventures given the rebuild at our IFA1 interconnector converter station at Sellindge, following the fire, and investment in Grain as we advanced the work on the Phase 4 project.

Now let me take you through the performance of each of our business segments.

Starting with UK Electricity Distribution. Underlying operating profit was GBP 1.23 billion, up GBP 343 million from the prior year. Whilst this reflects a full year of ownership, we saw a strong final year of delivery in the ED1 price control with an ROE of 13.2%, 360 basis points ahead of the allowed return. Across the 8 years, electricity distribution exceeded its 76 ED1 business plan commitments with delivery of 2% outperformance against totex allowances, all whilst keeping network reliability at 99.995%. Capital investment increased to GBP 1.22 billion, an increase of GBP 321 million compared to the prior year, in part reflecting our first full year of ownership.

Moving to electricity transmission, where underlying operating profit was GBP 1.1 billion, down GBP 45 million compared to last year. The underlying operating performance was offset by the near GBP 150 million we've returned to customers in the year following the Western Link settlement. Capital investment was GBP 1.3 billion in the period, as we delivered network reinforcements, asset health programs and new connections; as well as made good progress on London Power Tunnels, where the main tunneling is 90% complete; and the installation of new T-pylons at our Hinkley connection project. We've achieved a 7.5% return on equity, 120 basis points ahead of baseline allowance. And we remain on track to achieve 100 basis points of average annual outperformance throughout RIIO-T2.

Finally in the U.K. The electricity system operator saw underlying operating profit of GBP 31 million, and the RAV ended the year at GBP 360 million.

Moving now to the U.S., where New York achieved an 8.6% return on equity, 20 basis points lower year-over-year. Underlying operating profit was GBP 874 million, GBP 91 million higher than the prior year. This reflects rate increases across our operating businesses as well as strong efficiency delivery, partially offset by higher property taxes due to increased investments as well as a higher bad debt accounting charge. This relates to agreed COVID bad debt relief arrangements in New York, where we now have certainty of COVID cost recovery in the coming years. Capital investment was GBP 2.5 billion, GBP 280 million higher than the prior year. This was partly driven by higher investment across our electric business on reinforcement and renewable connection projects such as through our CLCPA investment and Smart Path Connect project in Upstate New York. It also recognizes noncash capital leases at the Gowanus environmental site and the Volney-Marcy transmission line.

In New England, the return on equity was 8.3%, 30 basis points improved on the prior year, excluding Rhode Island. Underlying operating profit was GBP 819 million. Excluding the impact of the sale of our Rhode Island business in May last year, it was GBP 104 million higher, reflecting the annual performance-based regulatory reset in our distribution businesses as well as a continued focus on efficiency delivery, partially offset by higher spend on cyber and vegetation management. Capital investment was GBP 1.7 billion, an increase of GBP 226 million excluding Rhode Island. This was driven by higher electric investments on asset condition work, system capacity and customer-requested work; and fewer COVID-related restrictions, leading to increased leak-prone gas pipeline replacement.

We had another strong year in National Grid Ventures with underlying operating profit, including joint ventures, up GBP 278 million to GBP 693 million for the year. This primarily reflects a first full year from the North Sea Link interconnector to Norway, continued higher revenues across our interconnector portfolio, insurance recoveries following the Sellindge fire as well as higher income through incentives at Grain LNG. Capital investment decreased by GBP 62 million to GBP 906 million for the year, with increased investment at IFA and Grain marginally offset by the nonrecurrence of the seabed lease purchase at our New York Bight offshore wind project in the prior year.

Operating profit from other activities for the full year was GBP 31 million, GBP 9 million higher than last year. This increase is principally driven by property sales completing as part of the St William transaction, mostly offset by fair value losses at National Grid Partners, given adverse market conditions, and our community support payments through this winter. Capital investment was GBP 72 million, down year-over-year due to lower investments by National Grid Partners.

Net finance costs were GBP 1.5 billion, up GBP 378 million, with treasury-managed interest GBP 493 million higher driven primarily by inflation movements on index-linked debt costs and refinancing of the underlying portfolio. This was partly offset by higher non-treasury interest income from higher pension and capitalized interest. For the full year, the underlying effective tax rate excluding the share of joint ventures was 23.1%, 120 basis points lower than the prior year. This reflects a lower remeasurement of state deferred taxes following the Rhode Island sale and U.K. property sales with a lower effective tax rate.

Underlying earnings were GBP 2.5 billion, with EPS at 69.7p, up 7% on the prior year at actual exchange rates.

Moving now to cash flow. Cash generated from continuing operations was GBP 6.4 billion, up 11% compared to the prior year. This primarily reflects stronger operating profit and the full year impact of UK Electricity Distribution. Net cash outflow of GBP 3.1 billion was nearly double the GBP 1.6 billion outflow from the prior year, driven by higher levels of capital investment and lower levels of scrip dividend uptake in the year.

Net debt at the full year was GBP 41 billion, 7% or GBP 3.1 billion lower than the prior year at constant currency, as we received proceeds from the sale of Rhode Island, gas transmission and the Millennium pipeline through the year. Following the repayment of the acquisition bridge loan, our levels of floating-rate debt are back in line with levels pre transactions at around 10%. Around 70% of our debt sits within our regulated operating companies and has a high degree of regulatory protection, with our overall debt book having an average maturity of 11 years. The GBP 7 billion of bond financing completed in the past year demonstrates our strong access to financial markets, and we expect to issue between GBP 5 billion and GBP 6 billion in the coming year.

Lastly, I'll turn to our full year 2024 guidance and longer-term outlook, starting with 2024. We expect another good year of underlying performance. However, following the U.K. government's spring budget and changes to capital allowances, we now expect underlying EPS to be modestly lower year-over-year.

Looking more closely at those changes to capital allowances. The U.K. government has announced increased rates of relief for expenditure on qualifying plant and machinery, running from the 1st of April 2023 to the 31st of March 2026. For our U.K. regulated businesses, the impact is economically neutral, as we will receive lower revenue allowances through our system charges to reflect the lower amount of cash tax that we will pay. For our electricity transmission business, we expect the impact on revenue to be around GBP 200 million per annum; and for electricity distribution, around GBP 100 million. However, this does have an IFRS accounting impact. Our total accounting tax charge will remain broadly unchanged, as we will pay lower cash tax today but recognize a deferred tax liability to reflect higher future payments.

Without this change in legislation, we would have seen underlying EPS growth in 2024 within our 6% to 8% CAGR range, but with the implementation of the capital allowance legislation, which as I've said is economically and cash neutral to the group, we now expect a 6% to 7% -- 6p to 7p per share impact on our underlying EPS for full year 2024. And this results in our 2024 EPS guidance being below our reported underlying 2023 EPS. Furthermore, we expect the 6p to 7p per share impact to grow modestly each year through to '25, '26 as our capital investment grows. If the policy does end by March 2026, we would see a significant optical benefit to EPS in the following year, as we'd received higher allowed revenues given the increased cash taxes we would then pay.

Moving to our 5-year outlook. We're reconfirming our financial framework from April '21 to March 2026. As a reminder: We expect to deliver capital investment for the group of up to GBP 40 billion, which will drive asset CAGR of 8% to 10%; an underlying EPS CAGR of 6% to 8%, with the change in capital allowance legislation now moving our expectation towards the lower end of the range by 2026; and an aim to grow the dividend in line with average CPIH, all of this whilst maintaining credit metrics within the bands required consistent with our strong investment-grade credit rating and with net debt-to-RAV to remain in the low 70s.

With that, I'll hand you back to John.

Okay, thank you, Andy.

I want to spend the next few minutes looking at the year ahead and the journey we're on to support all aspects of the energy transition. This is a huge and exciting period for our industry. I can't think of a time over the last 30 years where we've seen so much opportunity for growth. As these opportunities become reality, National Grid can deliver a cleaner, more resilient and more flexible system that in turn will help to lower costs for consumers, create new supply chains and new jobs across the economies we invest in. And whilst I'm encouraged by the progress that's been made in the last 6 months and optimistic about the future, we need to see even greater urgency both in terms of action and mindset from government and regulators and other key stakeholders.

In the U.K. and U.S., we played our part in helping to significantly improve understanding where it's most needed on the scale of the job ahead, but the development of policy and regulation still needs to move at a much faster pace. And given the similar issues that we see on both sides of the Atlantic, National Grid is uniquely positioned to provide solutions. In the U.K., one of our key priorities this year is to help drive forward the significant regulatory and policy changes needed to meet the government's clean energy ambitions at an affordable cost to consumers. This week, we published a detailed policy statement where we've set out 5 priorities that require action by government and the regulator.

First, the planning system needs to be reformed to provide the clarity and certainty required to support the delivery of net zero infrastructure along with a streamlined consenting process. Second, governance frameworks need to be set up to enable new delivery models; and must include expanding Ofgem's mandate to support the delivery of net zero, regulation that enables anticipatory investment at scale, competition legislation for major transmission projects given the significant levels of investment that will be required in the next decade and beyond and creating the new Future System Operator.

Third, the regulator must transform the connections process from today's "first come, first served" model to one that prioritizes strategically critical projects over those that aren't progressing. And we were pleased to see Ofgem's recognition of this earlier this week. Last year saw an incredible 60% increase in transmission connection requests. Today, the connection pipeline in England and Wales is about 170 gigawatts, nearly 3x the current generation capacity. That's a lot more generation in the pipeline than is needed to meet the current targets. Fourth, communities and consumers must be at the forefront of the transition. Government is consulting on a comprehensive community benefits framework for hosting local infrastructure. Getting this right will address many of the local consenting issues seen today.

And finally, for the U.K. to compete in the global race for resources, supply chain capacity and green skills need to be invested in right across the country. Regulatory support is required to provide the supply chain the clarity and certainty needed to really scale up. And whilst it's early days, these priorities seem to be resonating with politicians and stakeholders. And in the months ahead, we will continue to drive these 5 areas forward, but as you'd expect, we're not standing still. As I mentioned, we've established a new business unit which will deliver the ASTI major transmission projects. This business unit will deliver the projects as one program of work rather than individually whilst putting in place a new contractual framework to enable efficient delivery. And on connections, changes are already underway to reduce waiting times. In electricity transmission, we're optimizing the connection offer process. And the electricity system operator set out its own 5-point plan, including an amnesty to exit the queue without cost and a new commercial framework that requires progression against key milestones.

And finally on the U.K., I just want to touch on electricity distribution, where we'll share more details on our future plans at our investor event in July. It will be hosted by Cordi O'Hara, who has recently taken over as its president. And without stealing too much of Cordi's thunder, it's fair to say that the business is laser-focused on a strong start to the new price control, stepping up investment in key areas including distributed generation, EVs and heat pumps. And now that UK Electricity Distribution is well established within National Grid, we will start to drive further value across the group, particularly in transmission and our distribution businesses in the U.S.

So moving to our U.S. priorities and starting with our gas business. As regulators and policymakers work to define pathways to meet their aspirations, we're working alongside them to share our knowledge and experience, including setting out pragmatic options to achieve their goals. The pathway to net zero will be challenging, but our clean energy vision sets out a plan that also balances the need for clean energy [to be] reliable and affordable. It marries the need for world-class energy efficiency whilst accelerating the electrification of buildings and the use of fossil-free gas networks.

And whilst we're seeing increased recognition by policymakers, whether it's the Climate Action Council's recognition of the important role that carbonized gas networks will play in delivering net zero or the significant exemptions in the recently passed "all-electric building act," the debate continues around the pace and feasibility of delivering greater levels of electrification. And therefore, our focus will be to continue engagement around the vital role of -- our gas networks will play in ensuring reliable and affordable options for customers alongside electrification. And we're taking action now to deliver this hybrid clean energy future through our ongoing program of pipeline replacement with pipes that can handle decarbonized gas, delivering the $1.2 billion (sic) [$2.1 billion] in energy efficiency measures across New York and Massachusetts approved in our rate plans as well as continuing to progress the Northeast hydrogen hub proposals.

So turning to our electric businesses. At the federal level, the Inflation Reduction Act and Infrastructure Investment and Jobs Act support the clean energy vision and have the potential to dramatically accelerate the energy transition. However, like the U.K., this will only happen if accompanied by the significant permitting and siting reform needed to enable investment at pace. And as you'd expect, we're working at the federal and the state level to advocate for reforms to streamline these processes without compromising environmental protection or local input. And whilst undertaking this advocacy work, we will continue to develop our growing number of transmission projects, including the CLCPA Phase 1 and 2 projects I mentioned earlier; the New York Propel project, enabling offshore wind to be brought into the state; and the Twin States Clean Energy Link, connecting Canadian hydropower to Vermont and New Hampshire.

On the regulatory front, last month, we filed for new rates in our Downstate New York businesses KEDNY and KEDLI. These comprehensive proposals are aligned to the state's clean energy goals whilst ensuring continued safe operation of the network and affordability for customers. Investment is driven by targeted replacement of leak-prone pipes, which support not only asset safety and reliability but also lower methane emissions. And lastly, in Massachusetts Electric, we're preparing for our next rate case and expect to file this October for new rates effective in October 2024.

So in summary. It's been another year of exciting progress and strategic change for National Grid. We've against -- we've executed against our key priorities, including completing our strategic pivot, whilst investing a record GBP 7.7 billion as we continue to build clean energy infrastructure that is critical for the future. Our positive collaboration with governments and regulators on both sides of the Atlantic has helped to improve the understanding of the scale of the task ahead. National Grid is delivering the energy transition today. And we're uniquely positioned to meet the scale of the challenges ahead to drive forward a clean, fair and affordable energy future for all.

So with that, I will take any questions with Andy.

Okay, so what we're going to do: We'll take questions from the room, first, and then we'll take questions online. (Operator Instructions)

Jenny Ping from Citi. 2 questions, please. Firstly, John, you talk very much about the strategic pivot being completed. Can you -- can we take that as you're effectively happy with the mix of business? And I'm specifically referring to the 30% of the gas that you still have in the U.S. Are you happy with that as status quo? And then the second question, for Andy, on the EPS guidance. Clearly all the deferred tax noise is causing a bit of havoc in your guidance, so I just wondered. Given some of your peers actively give guidance ex deferred tax, is that something that you've considered and will consider as we go forward?

So thanks, Jenny. So in terms of the strategic pivot, I mean, just to remind people: When we set out on the strategic pivot, we said that what we were trying to achieve was to get the shape of the group to really reflect the energy transition. So the sale of a majority stake in gas transmission and the Rhode Island business and the acquisition of WPD really achieved that. We still continue to believe that electricity has got the leading role in the energy transition but that gas has got a really important role to play. The strategic pivot leaves National Grid 70% electric, 30% gas; broadly 50-50 U.S., U.K., which today we're very, very comfortable with. Andy?

Yes. Thanks. On the tax point, look. I think we've looked closely at it. We think it's a 3-year transitional arrangement that's been announced, runs through 2026. And we think that what we've chosen to do, which is to reflect how that flows through our numbers in full, is the right way to do it. That said, if it becomes an enduring change and it looks like it's going to stick around and it's going to continue to have a significant impact, then we will obviously continue to keep that under review. The important thing is to reinforce that it's entirely uneconomic. It's neutral from an economics and cash perspective, but we'll absolutely keep that under review if it becomes a permanent and enduring change.

It's Martin Young at Investec. Just one question. And I guess it's a bit of a follow-on from Jenny's, in part, but if I look at everything that's been talked about this morning, there is quite clearly a considerable investment opportunity that goes way, way beyond this decade. When you allude to the way that you look at financing and your level of gearing, you only talk to March 2026. Now that date is approaching us very, very quickly, so when we then think about the financial structure of the group beyond 2026 and the way that you will finance these investments, it does bring us back to how you might look at that portfolio. And clearly, in the past, you have made disposals of assets to finance -- to free up the ability to move into other areas of investment, so if I then look at the gas-electricity split, particularly in the U.K., you have stepped away from the molecule in the U.K. both in terms of selling the gas transmission business. You've decided not to progress carbon capture and storage or transport facilities in the North of the country, so where does Grain fit into all of this? Because that is a gas asset in a country where you are principally electric. So I just wondered what your thoughts on that were, please.

Okay, there's quite a lot in that, so let me just start with the frame that we set out today. So as you saw from Andy's presentation, what we set out is that our expectation remains that -- over the period '21 to '26, that we'll invest up to GBP 40 billion. You'll remember that we updated that in November last year. And in updating that, that really reflects some of the more recent events that we've seen, particularly in terms of the acceptance of ED2, which is a distribution price control; as well as it really reflects our understanding of the KEDLI and KEDNY rate filings that we've made recently as well. And it includes about GBP 1 billion of investment for the ASTI projects that Ofgem confirmed that they want National Grid to take forward by -- 17 projects to take forward that they announced in December. So beyond that, actually there's still work to be done in terms of getting clarity about exactly what we're being asked to do and actually what the profile investment is and what the regulatory framework is. So as we get more transparency on that, and you will have seen our policy document that we issued on Monday that sets out some of the areas that we need to see progress on to be able to do that, then we'll be able to update the market about what beyond 2026 looks like, but we're reaffirming today up to GBP 40 billion for 2026.

In terms of the overall mix of the business, I always think about the businesses in terms of its contribution to the investor proposition both in terms of growth and in terms of yield and always look at those businesses. And if they're not contributing to that -- you have seen that National Grid has taken action in the past to address that. At the moment, we're very comfortable with the portfolio. With regards to Grain specifically, we're in the midst of a huge construction program to expand the capacity of it by 20%, but it continues to contribute to our investment proposition and therefore is an important part of the portfolio as it sits today. Andy, do you want to pick up on the sort of financing side [of it]?

Yes. And I think, Martin, just maybe to build on what John has set out and give out some of the -- his comments in the presentation this morning. We're clearly in a place where there's a lot of work still to be done around things like ASTI and a number of the other potential U.K. investment opportunities, around what is the regulatory framework. And that will be critical in terms of determining not just returns that come with those types of projects but the other characteristics like asset lives, speed of money and so forth. And that's really the -- before you can start thinking about financing, strategies and so forth beyond 2026, that's where we have to start. And that's our focus today. Beyond that, as you know, we have a number of opportunities. As you said, we -- you talked there about the portfolio. We've talked previously about the amount of additional hybrid capacity. We're relatively light in hybrids at this point, so a lot of untapped capacity there. So a number of other levers that we have, but the critical thing today is to make sure we focus on the right regulatory frameworks.

Thank you. Yes, sir?

It's Harry Wyburd from Exane. So 2 from me. First, just on gas transmission and the 40%. So that's held for sale, but have you made any assumptions on the sales proceeds if it gets sold and the use of those proceeds? And could you give us an update on what your thinking is on the likelihood that you would end up disposing of that? And then the second one is on politics. So it strikes me there are sort of crosscurrents. You, on the one hand, are sort of calling on government to make various changes that you walked us through earlier. On the other hand, you've got sort of John Penrose calling for a more aggressive stance from regulators on monopoly businesses, so I wondered how do you feel this is going to shake out. Should we fear that there's a looming crackdown on regulated businesses or, moreover, on the regulators? Or is it the opposite actually, that we might get more favorable regulatory and government policy for you, given the obvious need to accelerate net zero and transmission capacity?

Why don't I pick up the politics? And Andy, if you want to pick up the gas transmission.

So I think -- in terms of the energy sector, I think there is an increasing recognition of the scale of the investment that's needed and how important it is to have a stable and predictable regulatory framework that supports that. I mean I think -- if anybody listened to Jonathan really speak this week, I think you'd get a sense of his recognition that the regulatory framework needs to change going forward and that Ofgem have an aspiration to be seen as an enabler in support of the energy transition. So from our perspective, one of the reasons we put the policy document out on Monday was that we wanted to be absolutely clear where we felt the focus needed to be over the next few months, enable to not just maintain the momentum of the energy transition but actually to accelerate it because of the scale of the infrastructure investment that's needed. So from an energy perspective, I think what I've seen and certainly in the discussions I've had is that the regulators are recognizing that. More broadly than that, there are broader issues around the water companies and so on, which I'm not going to comment on, but I think -- for us, in the conversations we are having, I think what we're seeing is a sense that everybody needs to come together to get the right regulatory and policy framework to be able to deliver the transition over the next decade.

And in terms of the 40% on gas transmission, you're absolutely right. So you'll have seen it's accounted as held for sale. And that relates back to the existence of the option. The option window runs to the end of July, and it's entirely a call option for the Macquarie-led consortium. So we're just in the first month of that option window and that's driving the accounting. In terms of the likelihood, I am not going to comment on that. You'd have to ask the consortium in terms of -- but as I say, the option window runs to the 31st of July. And then in terms of the proceeds, given the quantum, we're looking to, next year, be investing sort of north of GBP 8 billion of capital. So I'd say, in terms of expected use of proceeds, we'll be redeploying them into funding that. Okay, should we go to the front, first? And then we'll go behind, but I can't quite see who it is.

Jingjie Yang from UBS. So my first question is on the '24 guidance. Could you clarify a little bit? So my understanding is, your 5-year framework, it's unchanged. So it's now going to be towards the lower end by 2026. And now you've delivered 2 very strong years results on underlying EPS, and this year nearly 70p already, so is my understanding correct that for the next 3 years -- so to go from 70p to the lower end of 60 to 8 -- 6% to 8% CAGR, then 2026, you will be landing on something like 74p, 75p, And then that means, for the next 3 years, you will have only 1% to 2% growth each year. And if that's correct, then -- you've mentioned that, if excluding the consideration of the capital allowance, then the '24 guidance would have been within the 6% to 8% increase from the '23 numbers. Then does it mean that, if not for the tax change, you would have to upgrade your guidance a lot for '24? That's my first question.

Second one is on a -- the follow-up on the gas minority. So obviously we are still on the first month of the option window, but they already have sort of a long period of time to think about if they will take it or not. And by this time, they haven't really actioned on it yet. And what do you think the reason could be? Is that the valuation and FX change that's make them change their mind? Because if they made the decision, they will have act on the 1st of May, I would think. Yes, that's my 2 questions.

Okay. So on the -- I'll take the gas issue and then if -- Andy, if you could talk about guidance. On the gas issue, as Andy said, they have a call option. That option is exercisable until the end of July, so it's for them to make that decision by that time scale. From our perspective, as Andy has also indicated, we have good governance in place for the 40% that we do own. And ultimately if the call option isn't exercised, then the Board will consider what action is appropriate, but actually we could also hold onto the asset as well. So we'll take that decision as and when we get to the end of the call option, if it's not exercised, but as Andy also said, it's a decision for Macquarie as to what they want to do.

In terms of the guidance, I think yes, so -- and probably separate out the 5-year frame that we've set out and then what we said about next year, to be clear. So let me talk about the 5 years, first: Absolutely. So we've continued -- we reaffirmed in November that the 5-year frame is unchanged; and that, we've said that again this morning. Remember that the 5-year CAGR, the 6% to 8%, runs from a FY '21 baseline. And we said right from the start that there would be years of higher growth and years where the growth might be slightly lower than that. And you're right, that we had some higher yields early on, particularly as we stepped through the transactions. And we've reaffirmed this morning that, over the 5 years, we still expect to be in the 6% to 8% range, albeit now, as you say because of the tax, towards the lower end of that range. That's absolutely right. In terms of the 1-year version for FY '24, yes, you're right. We said, absent the tax, we expected to be -- given the underlying performance across our businesses, that we would have been in the 6% to 8% on a 1-year basis, but we're just -- that's not changing our guidance and to say we will always be in the 6% to 8% range. The 6% to 8% is a 5-year frame, so now reminding you again that it's economically neutral, but from an IFRS reporting perspective, we do expect to be slightly down next year.

Sorry. A little bit follow-up on the guidance. So you said that's going to be -- so if not considering the tax effect, it's going to be 6% to 8% for '24 only, for this -- for next year only. Then -- but the actual number we've land on '23, it's already nearly 70p. And then the next -- for the next 3 years, there will be a smaller range of growth to achieve the CAGR lower end of 6% to 8%. And then to compare -- so it will be 1% to 2% for each year in the next 3 years. Is that correct?

You have to remember that effectively, as we've guided this morning, the tax impact is 6p to 7p in year 1. And we expect that to grow slightly higher, so we're delivering the 6% still over the 5 years, taking account of that. So in terms of the underlying performance of the business against that 6% to 8%, I think the -- if you do the maths on what 6% to 8% is at the end of 5 years, it's a wide range. And that sort of 6p to 7p per share, as it grows over -- with the CapEx over the 3 years, you -- the underlying performance would probably put you much higher in that range by the end. So you -- I think you're doing your maths, but you've got to remember we will still have that tax drag in the final year.

James Brand from Deutsche Bank. Just on this 2025, 2026 guidance point, is the right -- is there an explicit underlying upgrade really going on here for 2025, 2026 guidance? Because if we'll take the low end of your range, we add on 6p, 7p, plus however much it's growing. We actually get to the top end or maybe above your guidance range, so is that the right way to look at it? And then secondly, John, you mentioned the need -- in your priorities for the U.K. a need for competition legislation, which was the only one that kind of jumped out at me as maybe being a bit more surprising, so I was wondering whether you could just talk -- are you advocating for -- I guess you are advocating for competition legislation. What would you like to see? Because I guess most people's kind of assumption would probably be that you wouldn't want more competition. You'd want to stick with the status quo.

Yes, okay, so I'll take the competition one. And Andy can talk about guidance. So in terms of competition, actually National Grid has consistently said for several years that actually we'll be supportive of competition. I guess what we'd like to see is a decision made on that because actually the energy transition is accelerating. There are still outstanding questions about which projects are going to be put out to competition. Legislation is going through, but we need to get to a position where we have clarity going forward. And the scale of the investments needed in the U.K. and beyond is probably bigger than any single company or any single of the transmission companies that exist today, so we're just advocating for let's make a decision on this and we can move forward.

Yes. And then just on the guidance point. So we'd previously not guided specifically within the range for the -- at the end of the 5 years. We'd said in November that we expected to be in -- now in the 6% to 8% range, but as I said in the previous question, if you do -- if you look at what that 6% to 8% range over 5 years gets you, the range is close to 10p. So given we are now expecting to be at the lower end of that range with the tax drag, then I can't disagree that, without the tax drag, you would have been towards the top end of that 6% to 8% by year 5. And I'll remind you again it's a 3-year transitional change to the tax allowances regime at the moment. And if that doesn't get extended, we would expect the optical jump back up in EPS when you get to FY '27, but we'll have to see where we get to.

Rob Pulleyn from Morgan Stanley. I have one question and then an observation, if I may. And neither is on guidance or accounting, you would be glad to hear. So firstly, I think everyone can agree that the biggest bottleneck, and it's on your priority slide, is permitting. And one of the biggest issues on permitting is local opposition, which is remarkable at a time of affordability, of crisis around living costs both in the U.K., Europe and the U.S., so what do you and other energy transition companies need to do to make the argument stronger to get local support such that permitting can improve? The observation, if I may, is regarding the political process. We -- and given the fixed-term parliament act. We are within sort of 12 months-ish slightly under of -- those in government may not be there for much longer. Do we need to see or will we not see a significant improvement in the framework until actually you get a new government in place with a mandate and a time horizon over 5 years to actually go and change things in a way that you wish?

Yes, well, thanks for the question. I mean just so it's clear: I mean National Grid has a very defined process that it set out in the national policy statements as to how we assess what's the right infrastructure to connect things like offshore wind farms and therefore what are the options. And therefore, it means for local communities. And we work incredibly hard to engage with local communities over multiple years to set up what those options are; and also to share with them the criteria on which we, through legislation, are obliged to assess those options. So the economics, the engineering, the aesthetics, the environmental impacts and also the local communities' views. And we do that every single time that we're looking to build major infrastructure, but we're very sympathetic to not everybody will want to host infrastructure, albeit on behalf of the U.K., as part of the energy transition, so one of the things that National Grid has been advocating for quite strongly as part of the planning process as well as streamlining the process to make it quicker is that there should be community benefits for those local communities that do host infrastructure. And we were particularly pleased actually that the government has actually launched a consultation on that. And as part of that consultation, we were also pleased that one of the options that they're considering is that actually what that community benefit looks like should actually be something that you engage with the local communities on. So rather than dictating it something, it can be lower energy prices. It could be investment to create jobs. It could be investment in the local community, but that is something that should be discussed with the local community so that they can agree what those benefits are.

So we're a big advocate of that. We've been pushing for that quite strongly. We are really pleased that the government is consulting on it. One of the reasons we put our policy statement out on Monday is being bold. And having pace are going to be really important, which is why we set out on Monday that, that is one of the key things that we see as part of the new planning regime going forward. Can you just pass it back one, please? Thank you.

Ruisi Liu from Bank of America. Can I ask you too on the U.S., if that's okay? So the first one is regarding the New York City gas ban that's coming into place next year. What are your thoughts on that? And have you -- how that sort of impacts your guidance. I think in the testimony you filed you've said that's going to impact KEDNY more than KEDLI. So if you can comment on that one. The second one is on the 9.8% ROE, I think, you requested to the New York regulator. Can you give us an indication of how that conversation is going? And maybe -- sorry for coming back to the guidance. Is that 9.8% what you used for the 6% to 8% EPS guidance? Because I think ConEd went in with a 10% request and came out with a 9.25%. So I'm just wondering if that's your base case or that's what you're using for your guidance.

Okay. So I'll come to you for guidance, Andy. So in terms of gas, let me just talk about U.S. gas. I mean I think people will recall that National Grid set out a vision for how we see a road map for gas evolving as part of the energy transition in the U.S. in April last year. And actually I've been very pleased with the way that people have leaned into that. And as you heard in my remarks this morning, we're also quite pleased that some of the documents that have been produced in the -- in New York over the last year have recognized that gas networks have got an important role to play, albeit it should be part of a decarbonization agenda. So things like blending for hydrogen and renewable natural gas has been recognized as a potential pathway for that. So for all those reasons, I'm quite pleased that actually those things are recognized. In terms of the building ban for, I think it's, "less than 7 story" buildings in New York City, actually when you look at all the exemptions, it has quite a small impact. And actually, for our gas business, new connections is certainly not a driver for the growth that we've been seeing. Actually our leak-prone pipe replacement program is the significant driver for our growth, so it's not going to have an impact, a material impact, on National Grid and its gas business, but one of the things that we -- I was talking about in my remarks is that we need to continue to work on articulating how gas plays an important role in our jurisdictions in the Northeast and how it supports the electrification agenda as well. And we do that by setting out pragmatic examples and also recognizing the affordability issue that customers are concerned about. So [materially], it doesn't have a huge impact on the sort of the business underlying.

In terms of the 9.8%. So for New York, for both KEDLI and KEDNY, we've been working very closely with stakeholders and with the regulators in preparation for making the filing for the rate cases. There is quite a well-defined methodology that we've used and the regulators use for ROE. And in the rate case filing, we've done that. It's at a very early stage, so we will now start the discussions in detail with the regulator to make sure we get the balance right between what we need to do from a safety and reliability perspective, what we need to do as part of the energy transition and how we balance that with affordability. And we'll see where we get to as part of those discussions. It's quite a long process. It can take 12, 16 months in New York to go from a filing to actually get an agreement, but we're just at the beginning of that.

And in terms of the guidance point, look. When we put the 5-year guidance out originally, we always aimed to make the frame robust, so not subject to change for individual outcomes on individual rate cases, so I'm comfortable that any sort of sensible outcome on that rate case isn't going to move us -- move the guidance, moves us outside of the guidance that we've put out this morning for the 5 years.

It's Mark Freshney from Crédit Suisse. Just Andy, looking holistically, we're in a different environment now to the one we were in 18 months ago, on many levels but particularly on interest rates, right? We've gone back to higher rates. You've got very quick trackers in the U.K., slower in the U.S. And you've got substantial net debt at group level outside of the rate bases, so if you put that together, how much lag do you think there is? When rates go up, how much lag do you think there is before you actually find that your EBIT and your returns actually go up? And also on the debt element, as I understand, a significant fraction of your debt is floating which is fixed for shorter periods -- and if you could take that into account as well.

Sure. So let me just quickly in terms of the mix of the debt book today. So as I said this morning, around 70% of our debt is within our regulated entities, so around 30% is holdco across the U.K. and U.S. In terms of fixed float, post the transactions with the repayment of the bridge, we're now very much back in line with where we were previously sort of around 79% long-term fixed, 11% index linked and 10% floating. And that's a balance we're very comfortable with going forward. So it's only 10% of the total book is floating. In terms of the linkage to regulation, I think here, in the U.K., you're right. We have the tracker. That trues up each year. And obviously the risk-free rate also flows through the cost-of-equity mechanism under both T and D, so I would anticipate that, that will get trued up very quickly, but in the U.S. -- so I think your comment was that it's much slower. I think I'd probably phrase that slightly differently, which is it depends on the cadence of rate cases because cost-of-debt allowances are set and reset when you file, but you will give an allowance for future filings as well. So as long as you issue with inside that, you do get that recovered in full. And I think we've been very successful in making sure that our regulatory arrangements in the U.S. accommodate predicted debt filings as well as past ones, so I don't see that there's a significant lag from a regulatory perspective in the U.S. either. So we're comfortable both sides of the Atlantic, so as I said in previous presentations, the focus is therefore on the holdco debt. And there, as I said this morning, we have -- the average maturity of the whole group is around 11 years, so -- and we've absolutely included the impact of interest rates in our 5-year guidance view as well.

So I'm going to go online because we're getting (inaudible)...

(inaudible).

Okay, well, so I'll go online, first, because we've got (inaudible). So I'm going to start with Ajay from Goldman Sachs. (Operator Instructions)

(technical difficulty)

(inaudible).

Okay, all right, so let's try [Brad] from JPMorgan.

(technical difficulty)

Okay, well, in the meantime, I think there's another question in the room, so I'm going to take that while we -- sort of that technical hitch.

This is Pujarini from Bernstein. So on offshore transmission, for some time, you've been talking about this holistic network design. And given that now you've created a new division, is something moving on the ground? Could you give us some more color on that? And then coming back to U.S. ROEs: In New York, I think there was a slight decline in your ROE this year, so should we read too much into that? And also, could you give us some more color on the Massachusetts upcoming rate filing?

Okay, let me start with sort of the new business unit strategic infrastructure. So it was in December that Ofgem made the decision finally to award National Grid with 17 what we call ASTI projects. So given the scale and the nature of those projects in terms of a vast majority of them are national critical infrastructure with the significant planning processes that we talked about earlier, we've taken the decision that actually separating that out and focusing on delivering that is the right thing to do. And we've appointed a new person to lead that, which is Carl, who hopefully you'll get a chance to meet soon. The focus now is really in 2 areas. The first area is to work with the supply chain to put in place the right contractual frameworks to deliver that program of work. So you heard me say in my remarks delivering that work as project by project on an individual basis is not going to be the most effective way to do that. And given that the U.K. is competing globally with the supply chain, we need to put in place a program that gives supply chain the visibility and the transparency of the work that we're going to ask them to doing over the next decade, so Carl and the team are very much focused on getting our contractual framework right. The second step then is, having got agreement from Ofgem that we're doing the work, we now need to put the regulatory framework in place to deliver that. And again there are 2 aspects to that. The first is to make sure that we've got a regulatory framework that allows us to deliver this work as a program of work. So historically, for those who are close to it: The lofty projects tend to be individual projects, but you have to go to the regulators to get approval individually. But delivering this as a program of work means we need some changes to the regulatory framework. And then ultimately we also need to agree the financial frame, as Andy mentioned earlier, in terms of the returns and speed of cash and those sort of things. That may not get done until Q3 because actually the vast majority of the CapEx is not going to be spent until Q3 and beyond, but actually we will continue to encourage the regulator to give us clarity on that as well. And we'll continue to work on that, so that's the focus in those areas.

In terms of New York. I mean we're very pleased actually. 96% of allowed is a good return. We've had some cost pressures in New York, which is just reflected in our book. The underlying performance of the business continues to be strong as we go into the new rate filings for KEDLI and KEDNY. And in terms of Massachusetts, we're just currently putting together our plans on that. One of the things I've been very pleased about in Massachusetts is, outside of the rate filings, we've been able to agree with the regulator some significant investments for smart metering and grid modernization and EVs. So the rate filing will focus very much on the core of the network, in terms of making sure that we've got the investments for asset replacement, resilience, storm hardening and those types of areas, but we will also be discussing with the regulator what is also needed for the energy transition as well and creating optionality around that.

So I think there's -- we've got -- yes. [So there's] one question waiting, which is Dominic of Barclays.

Okay. So Dominic, if you're on the line, let's take your question.

Yes, it's Dominic Nash here from Barclays. I hope you can hear me -- or not.

We can hear you, Dominic.

Brilliant. Okay, a couple of questions for me, please. The first one is on REMA. That's obviously trundling along on the sort of rate review of the -- with the power markets and sort of nodal pricing versus sort of a one market, et cetera, but I just wanted to know what your thoughts were on this policy, as to what you would like to see for the price signal, say, for transition with -- transmission nodal pricing. And/or will we also be looking at things like "first come, first served" versus auctions for connections and other sort of policies that will affect the energy transition? And when do you think we'll get a response from Ofgem, [I mean], on that?

And secondly, I just wanted to quickly ask a question on -- following up sort of from Mark Freshney's question. What is your current cost of debt, do you think? And what do you think the current cost of equity. Because I'm looking at your costs -- your returns on U.K. And U.K. transmission is sort of 6.3% nominal and that looks quite low to me. What do you think you actually do need to meet your cost of equity?

So I'll take the first, Dominic. And then I'll ask Andy to take the second. I mean it -- in terms of the 2 areas that you referenced, particularly locational marginal pricing and nodal pricing, I think the real debate to be had, certainly in my mind, is whether that is truly going to be effective in the U.K. given that to a large extent the locational decisions on where generation is set for the next several decades has been decided in that we are going to be a network that is predominantly dominated by offshore wind which is going to be located in the North Sea and in the (inaudible). And to the extent that there is a nuclear program, we know where the nuclear will be as well, so I think there is a debate to be had around how effective that type of mechanism will be for the U.K. given that the key decisions have been made and we're feeding into that as part of the consultation process.

In terms of "first come, first served" on things like connections, one of the things that we set out in our policy document is actually we do think there is a need for fundamental reform. One of the thoughts that we've had is actually, as we move forward, that linking it with things like anticipatory investment, it may be more efficient for customers if actually you can create connection zones where you've done the investment. You create the capacity. And rather than individuals deciding where they want to connect on the transmission system, you create capacity and let people know where the capacity is and they connect into it. And that potentially may be a much more efficient way of delivering the energy transition than the existing mechanism where any of you can choose to connect anywhere and then you have to build up the infrastructure to support it. So that's something that set out on the policy document and we're going to spend some time talking to Ofgem and others about in the months ahead. Andy?

Yes. Thanks. So Dominic, I mean, on cost of debt, you're absolutely right that we have seen a tick-up in our overall effective interest rate, partly driven by obviously higher inflation feeding through the index-linked portion of the debt book this year. So that's as you'd expect. I mean, in terms of your point on cost of equity, clearly I'm not going to give you a view on what National Grid's cost of equity is or so forth, but in terms of what are the -- how we see the regulatory returns, I think you mentioned 6.3%. That's what it has been for the past year, but as we look forward into FY '24, I think the base return, base allowed return, for both ED2 and T2 if you neutralize the gearing impact is 5.28%, so the -- you've then got CPIH on top of that. And as you will have heard this morning, we've reaffirmed our guidance of aiming for outperformance of 100 basis points, operational outperformance, on top as well. So that's how we see those regulatory frameworks building. And yes, I think the number you mentioned is slightly lower than that because of the gearing change on transmission, but if you allow for that, that's where we see sort of allowed returns going forward.

Okay, thanks, Dominic. So I think we've got a question from Ajay from Goldman Sachs.

Can you hear me?

Yes, we can.

I had a couple of questions. Just on the renewables side, is there any indication of the returns that you're making there and how they compare with the rest of the business? And if that was to be proven to be more successful, would you allocate more capitals in that direction? And then when I'm just looking at the overall business, the reviews, the opportunity in CapEx that you highlighted, I'm just wondering. Like what are the key sort of obstacles here for you? What keeps you up at night? It feels like things are very clear in terms of direction you're having. I just wanted to know what may be considerations that maybe I haven't looked at.

Okay, thanks, Ajay. I mean, in terms of renewables, I mean, our position has always been very consistent in that we see our renewables business as adjacent to our core networks business. And we look in a disciplined way to invest in projects where we think we'll get a return which is above what we see in our sort of onshore networks business. That has always been the case within National Grid Renewables. I think we've got about 1,000 megawatts now in operation and about 800 megawatts as part of a joint venture with Washington State Investment Board that we're taking forward which will be delivered over the next couple of years. So we continue to see opportunities in National Grid Renewables with good returns. And on top of that, of course, we're also progressing on the offshore wind project with our joint venture with RWE. In terms of the second question, I didn't catch the beginning of it. Sorry, Ajay. If you can just repeat it, in terms of -- I heard the word "obstacles," but not the rest of it.

Yes. It was very high level, but I'm just trying to understand. Like what keeps you awake at night here? As in like it feels like the story in terms of the CapEx opportunities are there. And ASTI is just driving that even more so on the U.K. electricity side. I just wonder. What are the obstacles in delivering this plan? Or what are the things that effectively keep you up at night when you look at the business as it currently stands? Just I mean it all feels like everything is just running very smoothly.

Well, I'm pleased to hear that, Ajay, because that was the intent in the presentation, which was giving that. I mean genuinely I think we're in a very good position. We've spent the last 2 years executing on the strategic pivot and we've come out of that. We've done that whilst performing very well, so we do see significant opportunities ahead of us. And we think that National Grid is very well placed to take advantage of opportunities. And one of the key messages, we're acting now, which is you've seen that we just established a new business unit to deliver those ASTI projects because we think that is the most efficient and effective way of doing that. In terms of obstacles, I guess the policy document that I put out on Monday is really setting out, from our perspective, we recognize that networks are a key enabler to the energy transition; that those are the things that we believe regulators and governments should now be really focusing on and they need to do, as I said, with pace, and to be bold, if we're going to continue and increase the momentum in the energy transition. So I'm not sure I'm losing sleep. I'm a pretty good sleeper, but those are certainly the things that are on my mind as we look forward to the opportunities ahead of us. Nick has a question. I assume this is from online.

Yes. It's not from my old days. It's -- where is -- I lost it -- yes. So I've got 2 questions from Bartek from SocGen. So the first one is, "What ROE outperformance do you expect for ED2 during, well, RIIO-ED2?" And secondly, "How to reconcile your cost savings with the fact that controllable costs have increased across all divisions." Thank you.

Okay, do you want to take the second, Andy?

Yes.

I mean, in terms of the [REO] performance in ED, what I'd say, I mentioned in my remarks is to please come to our Investor Day in July. So I mentioned that I'm really pleased actually with the progress we've made in integrating electricity distribution [in an] international grid. We've appointed a new leadership team. Now that we've got the outcome of ED2, we're very focused on looking at how we deliver both the regulatory commitments, the customer needs but also how we deliver financially against that. So Cordi O'Hara is looking forward to actually meeting you all and sharing her plans with you at the beginning of July, so I look forward to seeing you all there. Andy, do you want to talk about the costs?

Yes. So as we said this morning, we've had a good year in terms of delivering our cost reduction initiatives up to GBP 370 million, but as you said, in terms of the total cost base and as we guided last year, this is very much now they're helping us offset both the headwinds that inflation is bringing as every business is facing and also offsetting the growth of the business. We're growing at [8% to 7%] per annum. That brings with it additional costs of maintaining and managing that asset base, and therefore, the efficiency program is making sure that we're offsetting some of that, those cost pressures as well. So we're very pleased with how it's delivering and that's where it's working for us.

No more questions?

[None on the]...

Okay, in which case, I'm going to thank everybody for joining us this morning. I guess, in summary, I think it's been a good year for National Grid. We're really pleased to have completed on the strategic pivot. I do think it positions us well for the future. And we're really looking forward to seeing many of you at the July event on our electricity distribution.

Thanks for seeing you all.