National Grid PLC (NGG) 2020 Q2 法說會逐字稿

Hello, and thank you for joining today's call. (Operator Instructions) And just to remind you, this session is being recorded.

I'll now hand you over to Alex Lewis. Please begin.

Thank you. Good afternoon, or good morning, everyone. I'm Alexandra Lewis, Group Treasurer for National Grid. And this afternoon's call is to provide an update to debt investors on our 2019/'20 half year results. I'll 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 financing.

The update will last for around 25 minutes, and then we will follow that with an opportunity for you to ask any questions. The presentation is available to download from the Presentations section of our Investor website.

So starting on Slide 3. Before I review our first half performance, I want to begin with today's announcement that we've set a new target of achieving net 0 for our own emissions by 2050. The decarbonization of the energy system is one of the biggest challenges facing our planet today, and National Grid has a critical role to play in helping to accelerate towards a cleaner future.

In 2008, we set ourselves the target of reducing emissions by 80% by 2050, and strong progress has been made since then. By the end of March this year, we'd already reduced our emissions by 68%, exceeding our interim target of 45% by 2020.

Turning to the next slide. We've achieved this by focusing on a range of activities that includes a significant partner replacement program, which minimizes gas losses through leakages, reducing a high-emission greenhouse gas called SF6 from our electricity networks and reducing carbon emissions in our supply chain through low carbon construction.

In order to achieve our new ambitious target of net 0 by 2050, we're accelerating plans to further reduce our own emissions. We're also increasing our influence on other areas to support the overall industry-wide transition to a low-carbon future. And to this end, we continue to focus on driving forward a number of key initiatives. These include supporting our U.K. electricity system operator, to operate a 0 carbon system by 2025, pushing forward our proposals to ramp-up the electrification of transport in the U.K. through our EV fast-charging solution at motorway service stations. And in the U.S., continuing to work on our energy efficiency program for customers, oil-to-gas conversions for heating, proposals for renewable gas programs and hydrogen blending. And finally, progressing our interconnect projects, which provided solution to all the energy trilemma issues of security and supply, affordability and tackling climate change.

With our new commitment to decarbonization, underpinning a lot of what we're doing, today we've also published a Green Financing Framework, which I'll touch on towards the end of the presentation. But let me first review our financial and operating performance in the first half of the year, on the next slide, Slide 5.

Overall, we delivered a solid performance in the first half with continued progress across the group. On an underlying basis, operating profit of GBP 1.3 billion was up 1%. This mainly reflects higher U.S. operating profit, which is driven by new rate case revenues. This was partly offset by lower profitability in U.K. gas transmission, which is more heavily weighted to the second half than usual and no repeat of the one-off legal settlement last year.

We invested a record GBP 2.7 billion in the period towards the safety, reliability and modernization of our networks. This reflects continued strong investment in our U.S. regulated business as well as an increased investment in our interconnectors and completion of the Geronimo acquisition. This level of investment supports our strong asset growth, which we continue to expect to be at the top end of our 5% to 7% range in the near term.

We've made good regulatory progress with our new rates for Massachusetts Electric. And as you've seen, we're in live discussions in New York on the gas moratorium, which I'll cover in detail later. In the U.K., we welcome Ofgem's minded-to position on not proceeding with the competition proxy model of the Hinkley-Seabank project and on RIIO-T2, we continue to engage stakeholders, who provided helpful feedback last month from our draft business plans. And finally, our cost efficiency programs remain on track. So as you can see, it's been a solid 6 months of progress.

On Slide 6, I'll now turn to reliability, where despite a power outage on the 9th of August in the U.K., the group's overall performance remains excellent. The power cut in the U.K. was a rare and exceptional event. We were able to restore power in 7 minutes. However, we don't underestimate the significant disruption and inconvenience that it caused. We believe that both the electricity system operator and transmission network operated as designed and in accordance with our license obligations. We published a full technical report in September that provides recommendations for where we believe a wider review of policy may be appropriate. And we'll continue to work closely with Ofgem and government on their investigations.

Let me now look at some of the key achievements and developments across the group in more detail. I'll start with the U.S. on Slide 7. So far, we've invested GBP 1.6 billion in our networks, a step-up from the GBP 1.2 billion in the first 6 months of last year. Around 80% of this CapEx is driven by the need to maintain the safety and reliability of our networks. The growing levels of investment in the U.S. have been enabled by our work over the past few years to agree new rate plans across our businesses. These results show the improved revenue and profitability being delivered because of this.

We're also delivering new frameworks that are creating the opportunity to maximize performance. These frameworks give us 3 important things: longer-term visibility for our investment, greater protection against cost pressures and more incentives to innovate and create value for our customers. This can be seen in the new rates agreed for our Massachusetts Electric business. This is a new forward-looking framework. It allows revenue and investment to increase above inflation for a 5-year period and is a great example of how our frameworks are evolving into forward-looking, multiyear and incentive-based arrangements.

In terms of financial performance, in our U.S. regulated businesses, underlying operating profit was GBP 525 million, GBP 94 million higher than the prior year. This reflects higher revenues from new rate cases and lower storm costs, partly offset by higher depreciation.

Our cost efficiency initiative is progressing well, and we continue to streamline operations, simplify our supply chain and rationalize our property portfolio. We expect to deliver around $30 million of efficiency savings this year and around $50 million from 2021 onwards. This is in the context of a fast-growing business and asset base. Overall, we expect returns to increase to at least 95% of the allowed return-on-equity. This reflects the completion of the refresh of our distribution rates for the first full year contribution from new rates in Rhode Island and Massachusetts Gas.

Turning next to the U.K. on Slide 8. Operationally, both our electricity and gas transmission businesses have continued to deliver good levels of performance. Our cost efficiency program has continued on track, supporting our ambition to be a more agile organization. This has been driven by efficiencies across both electricity and gas by a range of initiatives, such as enhanced IT infrastructure and simplification of back-office processes. And of course, we've had a significant focus on RIIO-T2, with draft business plans submitted in July and October.

Following helpful stakeholder feedback, we'll continue to update these plans in the coming weeks before submitting our formal business plans to Ofgem on the 9th of December. Finally, in October, we were pleased that Ofgem have minded to use of the existing Strategic Wider Works mechanism for the Hinkley-Seabank project. As you know, we've never believed there was a robust consumer benefit case for the use of this competition proxy model. In addition, we'll continue to work with Ofgem to agree what are the efficient costs needed to complete this project including the use of a T-pylon. Our project remains on track to be ready for connection in 2025 and these negotiations will not affect the schedule.

With respect to financial performance in the U.K., which is covered in the appendix for each of our segments, underlying operating profit for electricity transmission was GBP 583 million, up GBP 27 million compared with the last half year. This primarily reflected inflationary increases on base revenues, partially offset by a true-up of prior year electricity system operator incentives. We invested GBP 471 million on reinforcing our networks and on new connections, broadly in line with the last half year. For the full year, electricity transmission return-on-equity outperformance is expected to be slightly above the 200 to 300 basis points range.

The Gas Transmission business, underlying operating profit was GBP 66 million. This is GBP 25 million lower than the prior year, driven by lower underlying net revenues. Underlying operating profit was GBP 66 million. This was -- apologies. Gas Transmission capital investment was GBP 167 million, GBP 14 million higher than the prior year, while return on equity is forecast to be around the allowed level for the full year.

Lastly, turning to National Grid Ventures and our other activities on Slide 9. It's been a busy 6 months with the continued investment in our interconnect projects as well as completion of the Geronimo acquisition. Firstly, on the interconnect side, the IFA2 project is well underway, with the majority of the cabling having been made over the summer, a good progress being made on the converter stations.

For North Sea Link, we successfully laid our cable as planned with over 650 kilometers now on the seabed. The project remains on track for completion by the end of 2021. And on Viking Link, we've awarded EPC contracts and preconstruction work is on track.

In total, we're investing around GBP 2 billion in new interconnectors that will bring cleaner sources of energy to the U.K. and create value for our shareholders. And finally, in July, we completed our acquisition of Geronimo, with a large pipeline of projects across the Midwest. We see exciting opportunities for us in large-scale solar as well as onshore wind.

In terms of financial performance, overall, National Grid Ventures continued to perform well delivering similar levels of profitability to last year. Capital investment increased to GBP 432 million compared to GBP 212 million last year, and this reflects the investment in the Geronimo acquisition, which was just over GBP 200 billion.

Moving next to Slide 10 on interest, tax, and the earnings. Finance costs were GBP 553 million, which is up 12% than the prior year. This primarily reflects U.S. long-term debt issuances, along with the hybrid buyback costs and FX, partly offset by lower RPI rates. Our effective interest rate was unchanged from the prior year at 4.4%. At constant currency, second half net interest costs are expected to be slightly higher than the first half.

Cash flow and net debt, if we turn to the next slide, cash generated from operations was GBP 2.1 billion, up by GBP 164 million compared to the prior year. This reflects favorable working capital movements and the absence of exceptional cash spend on the Massachusetts Gas labor dispute, partially offset by timing. Net debt increased by GBP 1.3 billion to GBP 27.8 billion. Net cash inflow in the period amounted to GBP 0.5 billion, more than offset by GBP 1.3 billion of exchange rate and noncash movements and GBP 0.5 billion impact from IFRS 16 lease accounting. For the full year, we expect ongoing business requirements to increase net debt by further -- around a further GBP 1 billion, excluding the impact of exchange rates, consistent with the guidance we've provided in May.

On the next slide, Slide 12, with another period of record investment for the group, let me just review how CapEx has increased in the past few years, what the drivers for this have been and the outlook for the future.

So in the last 5 years, we've seen a step change in the level of CapEx spend across the group. Since 2015, total group capital investment has risen from about GBP 3.3 billion at constant currency to around GBP 5 billion today, a 9% compound annual average growth rate across that period. This has principally been driven by growth in our U.S. CapEx as renegotiated rate plans across our businesses support this investment as well as by our interconnector program, where we're investing around GBP 2 billion.

Around 80% of investments in the U.S. is to modernize our networks, with over 85% of CapEx already agreed in rate plans in the medium term. With the exception of the KEDNY/KEDLI rate filing, where we're still in discussion with the Public Service Commission, we have good visibility on these plans, and we expect U.S. asset growth of around 8% per annum in the medium term.

For our U.K. transmission businesses, around 2/3 of CapEx in T1 has been on asset health. We've proposed a slightly higher level of CapEx as part of our draft business plans for RIIO-T2. Our baseline plans for U.K. transmission include an average CapEx spend of GBP 1.5 billion per annum in 2018/'19 prices, and we expect to hear Ofgem's feedback on our proposals in the first half of 2020.

The National Grid Ventures and other interconnected CapEx will continue out to 2023 when the Viking Link will be commissioned. FY '20 represents the peak year for interconnector CapEx reaching around GBP 400 million as the North Sea Link and IFA2 projects progress. After that, as interconnected CapEx winds down, the acquisition of Geronimo Energy will provide us with the flexibility of extra investment in U.S. renewable projects.

So pulling this all together, in FY '20, we expect capital investment across the group to increase to around GBP 5 billion. Subject to the finalization of the regulatory processes currently underway in both the U.S. and the U.K., we could expect to see investment remain at this level and with a similar segmental split in the medium term.

Turning to the next slide. We're funding this strong growth through a mix of debt, internally generated cash flows and by utilizing the scrip option. In addition, we're reinvesting the GBP 2 billion proceeds from the Cadent sale to support the organic growth in our U.S. business.

In September, we took advantage of market conditions to fully refinance a EUR 1.25 billion hybrid bond, which was callable next June, achieving the lowest ever hybrid coupon for any U.K. corporate. Our balance sheet remains robust, with strong investment-grade credit ratings from Moody's, Standard & Poor's and Fitch. This has enabled us to raise debt cost effectively with access to a wide range of debt sources. And with our strong CapEx visibility, and following the receipt of the Cadent proceeds, we expect gearing to reduce this year and remain around the 65% level.

Let me turn now to our longer-term objectives and priorities for the year ahead. We're implementing initiatives in 5 areas across our group that, we believe, will deliver long-term value for our customers, communities and shareholders. These are improving affordability for customers and enhancing their experience, efficiently delivering on capital plans, innovating and adopting new technologies to deliver smarter networks, taking actions to enable decarbonization and finally, investing in talent. I'll give you some examples of these, as I go through each area of our business.

Starting with the U.S. -- sorry, on slide 15, where alongside our continued focus on enhancing customer experience, we have 2 major near term priorities: first, addressing the gas moratorium in downstate New York; and second, delivering fair and progressive regulatory settlements.

So let me start with the gas constraints we see in downstate New York. You'll all have seen the Governor's letter, and we're working hard to address all the issues raised by him. I'm confident that we'll be able to deliver firm proposals within the expected timetable.

I'd like to spend some time updating you on where we currently are regarding the moratorium and the history behind it. A decade ago, National Grid identified the need for incremental gas supplies to serve load growth in the downstate region. Since then, we've been executing a long-term and comprehensive supply plan and delivering on a number of upgrades and new projects. The pipeline being developed by Williams called the Northeast Supply Enhancement project, otherwise known as the NESE pipeline, is the final piece of this series of projects.

In May this year, following further delays to permits for the project, and therefore, the potential lack of incremental supply to serve additional load, which is a difficult decision to stop processing applications for new or expanded gas service in our service territories. This was to ensure the safety and integrity of the system and to enable us to continue to serve our existing 1.8 million customers in New York City and Long Island.

Following an order issued by the New York PSC requiring us to connect approximately 1,100 of these accounts, we've implemented an innovative plan to expand demand response and energy efficiency programs, alongside sourcing incremental compressed natural gas. This will enable us to safely connect these customer accounts.

We recognize the hardship the moratorium has caused. We continue to work with all parties to find a long-term solution. We also recognize the importance of reestablishing a trusting relationship with all of our key stakeholders. And as I said, we're confident we'll be able to address the issues raised by the Governor in his recent letter within the expected timetable.

Turning now to Slide 16, and our second key priority, regulatory filings. We now have all our distribution companies and refresh rates. And this is enabling a strong organic growth we're seeing in the U.S. In the second half, we'll continue to focus on progressing KEDNY/KEDLI, grid modernization, electric vehicle and advanced meter infrastructure plans. With the KEDNY and KEDLI rate cases, as you know, we provided data to support a 4-year settlement with a proposed base return on equity of 9.65%. We've also requested annual CapEx allowances of $1.5 billion, the majority of which is going towards improving the safety and reliability of our networks.

The next stage in the process is for hearings to be held later this winter. For now, settlement discussions for this rate case are on hold. This means, we may need to progress with the alternative route, which is to litigate the case. If we go down this route, it will result in a 1-year settlement. Litigated rate cases are a common feature in U.S. regulation. For example, all our Massachusetts rate cases are litigated. And of course, we'll update the market as this case progresses.

Let me now talk to you through our other regulatory priorities on the next slide. In Massachusetts, we're preparing our 3-year grid modernization plan, for submission in mid-2020. In New York, we await final comments from stakeholders on the $650 million advanced metering proposals we submitted last November, and are expecting the PSC to issue an order later this year. And in Rhode Island, we expect to file our updated grid modernization vision with our advanced metering proposal in early 2020. These discussions represent opportunities to grow via new investments and provide the infrastructure needed for a cost-effective and thoughtful clean energy transition.

On Slide 18, I'll now update you on our plans for the U.K., where we have 2 major priorities, advancing RIIO-T2 discussions and driving customer benefits through delivering on our digital ambitions. So starting with RIIO-T2. Over the course of the summer, we've submitted 2 drafts of our business plans, setting out how we see our role in the 5 years through 2021. The overall financial package remains key, and we continue to believe the evidence points to a real CPI return on equity of 6.5%. The latest plan forecasts average annual totex across both transmission businesses of GBP 1.9 billion, with significant focus on ensuring that the networks deliver what our customers want, that the networks remain resilient, and importantly, that we also deliver environmentally sustainable solutions. Given the speed and scale of this challenge and the uncertainty of the route to decarbonization, we know our business plans need to be flexible. And to address this, we've included reopening mechanisms that allow us to agree funding for certain projects if they're delivered.

Examples of these include bringing multiple offshore wind farms to land using one transmission link as well as our proposals for promoting electrification transport. Following the submission of the final business plans in December, there will be a call for evidence that will last from December to early February. And open hearings will take place in March and April. Ofgem will publish its draft determination in July 2020 before final determinations are published this time next year.

On Slide 19, another key priority for the next 6 months in the U.K. is to drive customer benefits through delivering on our digital ambitions. One example of this is how our ConnectNow project that will improve the customer experience of connecting to the network. This digital platform assists customers through the application process, provides transparency as they progress through the connection journey and facilitates easy communications with National Grid.

Finally, turning to Slide 20 and National Grid Ventures, where the major focus will be the European interconnector developments and our Geronimo activities. We'll be completing the construction of IFA2 in the first half of 2020 and starting commissioning in the summer. Once in service, IFA2 will be our fourth operational interconnector and will take our total interconnector capacity to 5 gigawatts.

On Viking, we expect construction to start early in 2020 with completion of works expected by the end of 2023. And finally, for Geronimo, we'll be completing the construction of the Crocker Wind Farm in South Dakota, a 200-megawatt wind farm with a long-term PPA, and we'll also advance other renewable projects along the development pipeline.

Finally, turning to our recent debt issuance activity and expectations for the rest of the current year on Slide 22. In total, we've raised around GBP 2.4 billion of new long-term debt, so far, in the financial year as well as operating company issuances for Boston Gas and National Grid Electricity Transmission, NGET, we completed the full refinancing of our EUR 1.25 billion hybrid bond, which is callable next June, issuing 2 new tranches of euro hybrid debt that are callable in 2024 and 2027, and we thank you for your participation. For the rest of the current financial year, we expect to issue more debt at operating company level, included in the U.K. for NGET and an issue from our U.S. operating companies.

Finally, we're pleased today to have published our Green Financing Framework, which will allow us to raise sustainable financing across the group at both operating and holding company level. DNV GL has reviewed the framework and has published a second-party opinion confirming alignment with ICMA's Green Bond principles. Both documents are available in the Debt investors section of our website. We look forward to discussing this framework with you and other investors in due course. 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 of core relationship banks.

And 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 to summarize, finally, on Slide 23, power and gas networks are at the heart of the energy system. We create value by delivering world-class networks and driving decarbonization. We're, therefore, very proud of our new commitment to a net 0 greenhouse gas emissions target by 2050. We're working hard in New York, and we're confident we'll shortly be able to deliver firm proposals in response to the Governor's letter.

We absolutely want to be in a position to connect customers to the gas network. And in the first half, we delivered a solid financial performance and continued to deliver strong organic growth in an efficient way. We've also made progress -- good progress on our strategic priorities, and we're continuing to take a disciplined approach to the many attractive growth opportunities we see across the group. We believe it's this disciplined approach, coupled with efficient delivery that will enable us to continue to create long-term value for our customers and our investors.

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

Operator, please continue.

(Operator Instructions) And our first question comes from the line of Trent Black of Nationwide Insurance.

Great. Just a couple of quick questions, mainly around New York. Yes, we've -- while in the call -- excuse me, on the earnings presentation and this call, you guys seem confident that you will address the Governor's concern, but just want to kind of play, sort of, worst-case scenario-type situation here.

Let's say, we get a couple of weeks out, and no matter what you guys do, they say, not good enough. We're going to take your -- strip your license away. What's the procedures going forward after that?

Okay. Trent, yes. Thank you for the question. So just to reiterate that we are confident that we will respond in a way that addresses the Governor's concerns within the time frame set out. In terms of how it works, if that were not to be the case, under New York law, the New York State Public Service Commission can commence a proceeding against us only if we've either, a, repeated violations of the commission's rules and regulations, or there's been a failure to continue to provide safe and reliable service. Now we actually don't believe either of those is the case.

But any decision taken by the commission is also reviewable by the court. Everything we've done to this point has been solely in consideration for the safety of our customers and the public. And every action that we've taken has been done with complete transparency to our regulators.

I think I'd also point out that revocation would be unprecedented for alleged violations of this kind. And the moratorium reflected a reasonable choice in light of supply constraints, although we, obviously, understand the difficulties that it has resulted in, but we do maintain that we've been acting in good faith on behalf of customers and communities that we serve in downstate New York, and that revocation would violate the law.

And then just 2 follow-ups on that. Once again, kind of worst case, just so I can answer questions around here on it. If, at the end of the day, they would pull your license, does it then end up where it's a seizure of assets, which seems unlikely? Or is it a forced sale of the Brooklyn Union and KeySpan Gas East? How would that play out? Once again, sorry, just going worst-case scenarios here.

So I mean, we're not sure because there has not been precedence in this case. In the event that we were required to let our assets go, we would have to be compensated. So if the state had legal authority to take company's assets, the U.S. and state constitutions prevent doing so without just a reasonable compensation or on the alternative would be some kind of forced sale of the companies.

Sorry. And then one final one, and I'll get back in the queue. In terms of additional options you guys are looking at to meet the gas supply needs, it seems like it's most likely going to be a little more costly. Is that something that gets passed through to the ratepayer?

So we believe that it would be, yes. It would be something that would be passed through under the normal regulatory framework.

Our next question comes from the line of Amee Attri of Reinsurance Group of America.

Just 2 questions from me. So following on from the last question, is there an ability in your existing rate case for KEDLI and KEDNY to actually reopen that and pass-through these -- any short-term costs that will be spent in resolving the moratorium? Or is this likely to happen down the road in your next rate case?

So we believe it would be -- that they would be held on balance sheet and pushed through to the next rate case. But can I actually come back to you one-on-one and confirm that?

Sure. Yes. And then my second question is actually more to do with the U.K. and it's a bit more general. So it's to do with how the utility regulator have the currently challenging the return-on-equity -- return on equities in the U.K.? How receptive are the Board and senior management on dividend reduction rebalancing in the next price control, should costs actually be considerably lower. Yes, I'd like to know what your opinion is on that.

Yes, of course. So as you can imagine, when we look at our future business plan, we look at all sorts of scenarios coming out from the regulatory frameworks. We remain confident that we're making arguments to Ofgem in relation to the allowed return on equity. But it's only next summer, when we see the whole framework together that we can see what it looks like. And it is the whole framework in practice that we will need to look at. But we have looked at various different scenarios and remain confident that we can maintain our dividend as well as maintain the ratings that we have.

(Operator Instructions) And we have no further questions on the line, so I'll hand the call back to our speaker for closing comments.

Okay. Thank you very much indeed for joining us. And as I've said before, if any outstanding questions occur to you, please do send them through to our dedicated debt investor e-mail address, which is debtinvestors@nationalgrid.com. Thank you very much, and goodbye.

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.