National Grid PLC (NGG) 2012 Q2 法說會逐字稿

Well, good morning, ladies and gentlemen. I am John Dawson, Head of Investor Relations at National Grid. And it's my pleasure to welcome you here today to National Grid's first half results presentation for 2012-'13.

Shortly, I'll hand you over to Steve Holliday, who will kick off the presentation. But, before I do, a few notices. Before we start, can I please ask you, as usual, to turn off your mobile phones?

As usual, we will have a question-and-answer session at the end. Could I ask you to use some microphones, and please state your name and organization?

In today's presentation, Andrew and Steve will refer to various profit and other measures. Unless otherwise stated, these will be adjusted for timing of storms. And all operating profit and interest costs are at constant currency.

Finally, this presentation today may contain forward-looking statements. I need to draw your attention to the cautionary statements in the presentation, and in your pack, and at the start of the online presentation for those dialing in. Please refer to these when you consider our comments today.

Just a reminder, you will find all of the materials for today's presentation, and additional factsheets, on our website and on our Investor Relations App.

Without further ado, let me hand you over to Steve.

Thank you, John. Good morning, everybody. The running order for today begins with a few comments from me on the highlights from the first half.

Then Andrew will take you through the details of our financial performance for the first six months. And he'll share a few thoughts about the general progress that we've made, and the development of our longer-term financing strategy.

I'll then return to talk about our progress against this year's priorities, and the outlook for the rest of this financial year.

Nick Winser is with us today, as usual. But Tom King is not, for a change. And I'm sure you'll all understand that Tom, rightly, has stayed in the US this week.

We delivered a good financial performance over the first six months. Excluding last year's impact from Hurricane Irene in the US, and the normal swing in timing, profits before tax up 15%. On a similar basis, operating profit from the first six months are up 7%. As a result, after interest and tax, overall earnings increased by 14%.

These are pleasing results. And while there's more we can do in the second half to build on this progress, they clearly provide a strong platform for a good full year.

I'm pleased to announce that the Board has approved a 4% increase in the dividend, to 14.49p per share; in line with our policy for this year.

As we've previously said, we expect to announce a long-term dividend policy, at the latest, with our full-year results in May; of course, subject to the UK RIIO process having concluded.

This is an important year for our businesses in both the UK and the US. Securing appropriate regulatory arrangements and bedding down significant organizational changes are key actions on both sides of the Atlantic. These are about ensuring that we deliver the needs of our customers, as well as delivering our targeted returns; and securing long-term financing for the important investment program.

Here in the UK, we continue to work with Ofgem on the RIIO price controls. While it's fair to say we've been surprised over the last five months by some of the aspects of the process, we've been working hard, and constructively, with the Ofgem team to bottom out the differences and important gaps in understanding before we can finalize a new long-term price control.

Nevertheless, RIIO sets out some major changes to incentives, and the sharing mechanisms, in particular. As a consequence, we've already been making changes to our UK businesses to ensure we're well positioned to deliver the maximum benefits of RIIO, both for UK consumers and for other stakeholders. I'll share some more details on those changes later.

In the US, we've continued to make substantial progress. Building on last year's restructuring and the cost reduction program, the business has continued to embed important organizational and process changes.

One key recommendation from the 2011 Liberty Audit was the need to integrate our IT infrastructure and financial systems, whilst at the same time improving and simplifying many of our accounting processes. Andrew will talk about some of our progress in this area.

Tom's leadership team have also made significant progress, both across the business, but critically in our focus, jurisdiction by jurisdiction; the evidence of which is now starting to be seen in both our regulatory and broader stakeholder engagement, particularly in moments of crisis, as we've seen recently with Hurricane Sandy.

Although Hurricane Sandy, rightly termed Superstorm Sandy, has clearly occurred after the first half of the year, it would be totally inappropriate of me not to mention such a monumental event.

I am immensely proud of what's been achieved so quickly. I cannot express to you how fortunate we are to have such an amazing team of people, of dedicated people. Despite enormous damage, unprecedented damage, particularly on Long Island, the strength of our team, and its combined resources, those that came to help, has worked very effectively.

In Massachusetts, Rhode Island, and upstate New York, we connected 98% of those disrupted electricity customers within four days. That quickly enabled us to dispatch even more teams down to Long Island.

But for Long Island electricity customers, it's been a very different story. At its peak, over 1.1 million customers of LIPA were without power. Superstorm Sandy, followed up seven days later by the snow blizzard, impacted just about their entire network, where we, as you know, are the contractor to LIPA.

Over the past two weeks, we've mobilized 15,000 people, National Grid people, from all over our territories; contractors from across the US and from Canada, on the ground, helping with restoration. But the challenge, the combination of storm damage and flooding, has made restoration efforts very challenging.

While service was restored to nearly 900,000 customers in the first week, it's taken a lot longer to restore services in those areas with heavy flooding, and the most significant tree damage. As of last night, the LIPA distribution system was ready to supply energy to all but 8,000 homes and businesses, which are in the very worst affected areas.

But that only tells part of the story. Because there are another 30,000 homes and businesses that still don't have power, because it's not yet safe to turn that power on because of the flood damage and the severe damage to those properties. And we have to work with local officials and other services to make sure those customers can receive power as soon as possible; but, critically, safely.

Our downstate gas business also sustained unprecedented damage from flooding. We're fortunate to have employees who've worked for us for 45 years. Some of them have never seen flood damage in Brooklyn or Long Island before.

On the south shores of Long Island, Staten Island, and Queens, and Rockaway, while all those networks are restored, that's little help to customers whose properties are severely damaged, and in some cases lost forever.

Clearly, any service interruption's not good for customers, but our teams have made an enormous contribution to limiting and mitigating the impact of this terrible disaster. And we'll continue to work with all the services to help so many people who are in desperate need.

Turning to safety, as always, a high priority for us at National Grid, and very much at the forefront during an event like Superstorm Sandy. Safety, as I've said before, isn't just about keeping our employees and contractors safe; we must also do the utmost to ensure that no members of the public are impacted by our operations.

After a challenging 2011/'12, when we had a number of unacceptable safety incidents, we redoubled our efforts. In this respect, I am pleased with our progress; in particular, a 47% reduction in the severity of injuries to our employees in the first half of this year. But, as always, there is more to do to delivering a best-in-class safety performance.

So, overall, a really good start to the year; solid performance and good progress towards our strategic goals.

Let me hand over to Andrew to talk you through the financial results in more detail.

Thank you, Steve, and good morning, everybody. I'm going to cover three areas today; first, a look back at our results for the first half of the year; then I'll look -- give you a brief update on our technical guidance for the year; before finally giving you my perspectives on some of our key finance priorities over the past couple of years.

First, the results. We saw consistently strong performance from all of our main businesses. Operating profit in our UK Transmission business was up GBP75 million, or 12%. This reflects increased revenue due to RPI and investment, partially offset by higher depreciation and controllable costs.

Gas Distribution profits were up 6%, again reflecting RPI.

Profitability in our US operations grew by GBP79 million, or 19%. This was largely driven by higher revenue, mostly including the deferral recoveries in Niagara Mohawk, and lower bad debts. These were partially offset by increases in controllable and other cost lines.

Other activities saw profits reduce by GBP63 million as a result of the sale of OnStream and costs related to our US systems and finance process changes, which I'll talk about a little bit more later on.

At a Group level, operating profit increased to GBP1.6 billion, which, if you exclude health -- timing and the impact of last year's storms, saw a healthy increase of around 7%.

So we've had another good six months of operating performance. We've grown revenues; maintained really good controls over controllable costs; and made selective investments for the long-term growth of the business.

Minimizing controllable costs remains a priority. In the first half, the absolute increase was GBP33 million, or 1% in real terms. This movement is mostly due to increased support needed to support the capital investment program here in the UK.

Depreciation was up, as expected, given the level of investment.

Bad debts were down, in line with improved economic conditions in the US and lower commodity prices, whilst pensions costs increased ever so slightly.

Other costs increased by GBP34 million, and profit in our other businesses declined, as I mentioned earlier.

Financing costs were down 6%. This improvement was down to continued low interest rates, which enabled us to finance at attractive coupons; and lower interest accretions on our RPI index debt.

In the period, we have raised about GBP1.2 billion of new debt, taking advantage of the competitive bond yields to pre-fund our investment program.

Optimizing our funding costs depends, to a large degree, on maintaining stable A minus credit ratings. This not only underpins our historic debt, but also improves our ability to raise new debt needed to fund the investment program.

It is essential we retain access to a variety of international debt markets for funding. An example of this is the CAD750 million bond issue issued in September, the largest corporate Maple bond issued to date.

Our effective tax rate for the first half of the year increased by 80 basis points to 27.5%, due to the mix of profits between the UK and the US. We would expect, as per normal, that the full-year rate will be slightly higher, reflecting a higher mix of US profits in the second half. However, our guidance for the full year is a slight reduction in the tax rate to around 29%.

All this meant the reported earnings were up GBP139 million to GBP836 million. After removing the impact of timing and storms, earnings were up by 14%.

Investment was up 23% versus the same period last year. Nearly 95% of that investment occurred within our regulator operations, growing an asset base on which our allowed regulator returns will be applied. This fuels the engine that drives our future growth.

We've invested over GBP800 million in the first six months in UK Transmission; a 34% increase over the prior year. This included completing the final pressure reduction station on our Milford Haven pipeline in gas, and continued spend on the London tunnels and Western Link in the electricity business.

We have also invested more in the US. There was some phasing impact, but the increase was from higher transmission investment in Niagara Mohawk, and the replacement of gas mains in Massachusetts.

We still expect UK investment to remain in the GBP1 billion to GBP1.2 billion a year range.

Cash flow from operations was up to GBP1.9 billion, slightly higher than the prior year. Growth due to increased operating profit was partially offset by an increase in the working capital outflow.

In the first half of last year, we saw an inflow from working capital as a result of the higher levels of receivables at the end of 2011. However, this year, because there was a lower opening balance on receivables, there actually was a net outflow. That lower balance was due to the impact of commodity and lower volumes as a result of the milder winter.

Whilst we have decoupled revenues, receivables are more sensitive to weather because of the impact of pass-through costs.

Net debt was up to GBP20.4 billion, reflecting the increased investment I spoke about earlier, but partially offset by a lower cash dividend.

In August, we saw a 48% uptake in the script dividend; this is more than double the 21% average over the prior three years.

So, overall, in summary, this represents a strong start to the year, and a solid base for another good year of financial and operating performance.

Now to our guidance for the year, which is mostly unchanged, aside from some updates regarding storm -- timing and storms. We returned about GBP90 million of timing balances, mostly in the US, in the first half, which was driven by weather and commodity pricing. We do expect a partial recovery of this in the second half of the year.

Obviously, Hurricane Sandy will have an impact on our IFRS earnings on EPS. Costs associated with customer restorations in our own service territories are not expected to exceed GBP100 million on operating profit.

Finally on guidance, I'd like to look forward to the impact of IAS 19 on pensions accounting, which will impact from 2013 and 2014. This revision essentially equalizes the return on plan assets, and the interest rate on plan liabilities that flow through the financing charge in the income statement.

The impact of applying the standard in the current year would be to increase the interest charge by around about GBP180 million, or decrease earnings by about GBP130 million. It's important to remember this is a non-cash item and has no economic impact on the Group.

We will restate our results when we introduce the change, but it will not change any of our guidance on the financing capacity of the Group, nor will it change any of our credit metrics.

I would now like to spend a couple of minutes on our key finance priorities. When I joined Grid, which was some, now, two years ago, Steve and I agreed a number of key priorities for me around communication, the finance function effectiveness, and long-term financial strategy.

Since May 2011, I think we have made significant progress as a team, providing better disclosure around our regulatory assets and returns; about the portfolio, and the benefits we get from each of our businesses; and the relative performance of our operations in the UK and the US, particularly in terms of comparative returns on capital employed.

We do need to use these measures consistently and for a number of years but, based on the feedback I have received, I think we've made a good start.

In terms of improving the finance function effectiveness, I am pleased with our achievements, despite the significant external pressures on our work load. For example, in 2010 and 2011 our US finance team struggled with the request for information required to support the needs of the business.

The resulting rate case outcomes and the Liberty Audit set out some clear opportunities for improvement. Since then, we've made some significant investments to support our people and processes. Earlier this month we actually went live with the new SAP system, which is the latest milestone in that journey.

At the same time, we continue to enhance our underlying finance processes, in part to meet the outcomes of Liberty. Strong evidence of our progress has been the ability to support the rate filings in both Rhode Island and New York this year, responding effectively to the myriad number of information requests we have received.

I'm really pleased with the progress the team has made and, though we have not completed our journey, I am confident that we have a thriving finance team in the US, which will be a better place to drive the business forward.

In the UK, the finance function has been heavily involved in supporting the RIIO business plan process. As we move forward, they will also have a very important role to play in helping the business deliver the efficiencies required under RIIO.

The third, and probably the most important for you, priority was our longer term financing strategy, which will be occupying a lot of mine and Steve's time, and others on the Exec Committee, over the next few months.

Particularly as we continue to work through the final stages of RIIO, we evaluate our investment opportunities and make appropriate decisions around financing and dividend policy. As before, we expect to provide a full update on this by, at the latest, our full-year results in May next year.

We still have a lot of work to do, not least finalizing RIIO, but our overall position is unchanged. It will be key to sustain the right balance between financing at the A rating I mentioned earlier; maintaining an appropriate dividend policy; and delivering growth in the equity value of our shares. All three are critical to supporting our regulatory commitments, and to delivering long-term shareholder value.

With that, I'll hand back to Steve.

Thanks, Andrew. During the first half of this year, our focus has been centered around, as you'd expect, the main priorities that I laid out in May, each of which have important implications; not only on the next six months, but on creating the platform for the future. I just want to take you through each of those in turn.

On the UK regulatory process, I've already shared a few thoughts about the process and our progress to date, and the approach we've been taking as we work towards an appropriate conclusion early next year.

The next key date is the publication of Ofgem's final proposals on Monday, December 17. Given the complexity of these, covering six large regulated businesses with current assets in excess of GBP20 billion, we will need to study these very carefully, particularly against the context of our extensive and thorough response in early October.

And you shouldn't expect to hear our conclusions until we've not only fully assessed all of those details, but we've also made ourselves comfortable with the significant amendments that are being made to the licenses. This will take some time.

In the US, our focus in the last six months has been to take our Niagara Mohawk and Narragansett businesses through the rate filings, with the objective of securing outcomes, with a suitable focus on efficiency and customer service, and allowing us to deliver market-tested returns. If we achieve this, we'll be able to make further good progress towards raising the overall returns across our US business.

With the Narragansett gas and electric case, I'm pleased that we've reached a settlement agreement. In fact, hearings start today with the Commission; there are scheduled hearings today and tomorrow. Assuming a smooth process, this will result in a decision in January, with the new terms coming into effect on February 1, 2013.

The agreement proposes a 9.5% return on a 49% equity portion, with the necessary increases in cost allowances. They've [even] provided a scope for us to invest, invest in improving infrastructure and service levels for the benefits of our customers on Rhode Island, while permitting us to earn an allowed return, providing we manage that operation efficiently; clearly getting that fairness, that balance, right between consumers and investors.

Turning to New York, Niagara Mohawk's electric and gas businesses, that constitute the largest portion of our US regulated activities, together, they make up almost one-third of our revenues; a very important building block to delivering on our commitment to improve overall US returns.

Similar to Rhode Island, we've reached an important milestone with a tentative agreement with the Commission staff on a settlement. A joint proposal from the staff and ourselves will be filed early in December. There will be hearings scheduled in January, and the final order we expect in time to put into effect the new rates from April 1, 2013.

The agreement includes a 9.3% return on equity on a 48% equity portion. Various inflation adjustments and property taxes have facilitated a three-year deal.

The deal also allows for $1.6 billion of important capital investment; investment in new infrastructure, again, improving reliability and customer service. The impact of this structure, I'm pleased to say, will keep the customer bills broadly unchanged throughout the three years of the plan.

If we perform well; what do I mean by that? We deliver the right customer service. If we do it efficiently, we have a good opportunity to earn those targeted returns that are set out in the settlement.

Overall, those four settlements proposed would bring our allowed average return in the US to around 9.8%. But, critically, they should enable us to make further improvements on the actual returns we achieve.

Turning now to investment and efficiency, as Andrew has said, we have just invested a record amount in the first six months of this year, GBP1.825 billion, reflecting the expected increase in our UK electricity transmission program. And, as a result, very much on track to deliver an expected investment of GBP3.5 billion to GBP3.8 billion this year.

But in the UK, the RIIO outcome will have a significant impact on our longer term capital investment program. And our focus will increasingly be on delivering the required outputs at the lowest cash cost; that is capital and operating cost together, TotEx.

This enhanced focus, rightly enhanced focus, on TotEx means that the financial drivers in the UK business are dramatically changing. Our focus needs to be on ensuring that those outputs, connections, reliability, and service standards are delivered at the lowest cash cost. If we achieve that and we reduce our CapEx, it benefits customers. But, ultimately, it will benefit investors through the achievement of higher returns.

One thing in this process is certain; by April next year, we need to have an organization that's well positioned to deliver a good performance under RIIO, whatever the ultimate deal is. This will have to be achieved through a combination of financial discipline, as Andrew has just described, and efficient execution.

In order to drive that focus on execution in the UK, we've asked John Pettigrew, rather, to take on the role of UK Chief Operating Officer. John reports to Nick Winser in this role. John has a record of leadership in National Grid, and has joined my executive team. That reflects the importance on this role.

Our investments in the US are expected, as Andrew mentioned, to remain at a reasonably steady level. They're aimed at replacing aging assets and growing our transmission activities, where appropriate. We continue to look for opportunities where we can leverage those skills and capabilities.

Our US business continues to benefit from the annualized effect of the 2011 reductions in costs and, as I mentioned earlier, the new model focused on jurisdictions. The new systems investments and process changes that Andrew has talked about will cement these benefits in future periods and, importantly, help us to identify more opportunities.

Turning to the outlook for the full year, as Andrew said, notwithstanding the impacts of Superstorm Sandy, our expectations for the full year are unchanged from those we shared in May.

We have made a good start to the year and, combined with the benefits of further revenue growth and the efficiency incentives and initiatives, we're well positioned to deliver a year of good operational and good financial performance.

Now, with that, Andrew and I will be very happy to take any questions you may have.

Mark Freshney, Credit Suisse. I just have two questions. Firstly, I have a question on -- within the other activities line. There seems to be a lot of spend on IT systems. Could you please talk through the process of actually recovering those costs from the individual regulated businesses? Or is it a Group cost?

And secondly, when you talk about the long-term financing strategy, would that also include looking at ownership of the businesses, or potentially new ownership structures?

I'll take a piece of that, and then pass a piece on to Andrew because it is a good question around these costs.

The capital costs of the SAP system are in the US and, indeed, are apportioned across rate base by rate base. The ongoing operating costs of that system are in those entities as well and are part of our filings that we've been going through during the course of this year.

The somewhat exceptional one-off costs associated with all the training activities is the cost that Andrew referred to that we've kept out; that is a one-off cost to put in place the processes that we, as a company, have decided we want in place.

Your second question on financing, you can pick it up, Andrew, but there isn't anything that's changed here, Mark, about the various different opportunities we have to think about and consider on how we can finance the combination of continuing to deliver yield for investors and grow the business, we've been pretty clear about.

And we really need to understand RIIO, and have been through that, and all the rate processes, before we can be crystal clear about that strategy in May next year.

Yes. Just on the IT systems costs, that's about half of the GBP63 million reduction in other, that is principally training costs. There are about 20,000 employees we're training. Under the accounting rules, that is an expense, rather than can be capitalized. And the reason why we put it in the corporate center charge is because that won't be recoverable from regulators as we move forward. The regulator element, as Steve said, or the recoverable element, is in the regulator business.

So these are one-off charges. You should expect the costs to be lower in the second half, and actually not to recur in future years, so they will almost disappear.

Second item in other items there obviously is OnStream. It's about GBP12 million was there last year, not there this year. There's a small reduction in metering and property, which is lumpy, as you can expect, because it's dependant on transactions, was down year on year.

As regards the financing strategy, as I said, I think the thing we have to maintain is the balance between the ratings, dividend policy, and knowing how important the dividend is to shareholders, obviously, that is critical from a shareholder value perspective, and growth. We will look at that in the context of options around value and best way we can actually finance it, be it from the debt markets; be it other financial instruments; be it from ownership of entities, and so forth. So that is all part of that review.

At this point in time, the portfolio has been -- actually, benefits us by actually having the right mix between cash -- consuming assets, such as our UK Transmission business, and cash generating businesses, like our distribution businesses in the UK and the US. That balance is important if we are going to maintain the right level of yield going forward.

So that's all part of the mix. But we'll update you again, as we said, probably no later than May next year.

Okay, thank you.

Jonny Constable, Nomura. Two questions. Firstly, on the storm costs relating to Long Island, please could you give us a bit more of a steer on how we should think about the scale of these costs? And what would the process look like to recover those costs? What kind of timescales might we be talking about? If you could give us any insight into how that maybe breaks down into the different ways that you recover those costs, or expect to recover the costs.

Secondly, just coming back onto the financing policy, and just zooming in on the bit of your statement about an appropriate dividend policy, I was just wondering if you might -- I know we're going to have to wait for the financial strategy, but it would be great if you could give us a bit more of, I don't know, maybe your guiding principles and how you think about what an appropriate dividend would look like.

No, Jonny. And I'm not being facetious; I think we've given more than enough guidance. And Andrew's just reiterated in terms of we know who our investor base is, we understand how important the dividend is for an equity investor in this business.

This is about getting the balance right between how much that dividend should move in the future, and how much opportunity we've got to invest in very attractive businesses, of course, to grow the equity value of the business, and how those things are financed. That's all.

Post-RIIO, we'll come back and make that very, very clear, in May at the latest. As I said, that's providing that the RIIO process, of course, is complete by then.

In terms of the storm, I'm very clear this morning, what we've been worried about, and the reason why Tom's not here again today, is making sure that we're helping people.

We are going way beyond helping people get the electric system up. We have employees of ours whose homes are destroyed. We have over 40 of our employees whose homes are destroyed and, you know, they're coming to work. They've been working 16, 18 hour days helping with the storm response.

So the absolute focus has been, rightly, and continues to be, on restoration. Now, actually, we're moving from restoration into repair now, because as you restore power some of those restorations are temporary. So now, under LIPA's guidance, we will go back and put repairs in place.

There's a difference that Andrew was talking about earlier, of course. We own, our investors own, the assets in Massachusetts, Rhode Island, upstate New York, and those gas businesses downstate. They're our businesses and they're our costs and they get actually recovered through regulation, as you know.

We're a contractor on Long Island. The assets are owned by the Long Island Power Authority, LIPA, and we're contracted to provide a service to LIPA. Of course, we lost that contract.

So our focus is very much on a couple of things right now; first of all, getting from restoration to repair. And doing more than our job; helping people who are in serious trouble, who've lost all their possessions, all their homes, and that's working with lots of other authorities.

And then we've got to get back to the day job as well of helping transfer that contract during the course of 2013 because it actually ends, as far as we're concerned, at the end of next year. We've got to do a really good job during the course of next year in transferring that contract so the ball is not dropped between us and PSEG, who pick up the contract.

Even your people, Andrew, have been involved.

Yes, at this stage, it is far too early for us to put an estimate together. We are still actually working out and through the process of restoration. We have people out in the field, even the finance staff, so it's hard for us to do an estimate.

We don't have enough clarity around that to be able to give you a number today, or any confidence that that number will be right. We've given you an indication in the release, the number of crews on site and the length of time, which indicates it will be a multiple of what we incurred as a result of Hurricane Irene last year.

As far as recovery is concerned, and those are mechanisms which we have in place with LIPA and we don't expect any difference from prior periods relating to those.

This is not the focus. The focus just has to be, right now, on doing everything we can. It's very hard. We're in London right now. This is a warzone, almost, on the south coast of Long Island, and on the Jersey shore as well. People's homes are gone.

There are stories that are going to come out over the coming weeks, I think, are just going to be heroic stories, actually, of what many of our employees have been involved in, many of the contractors who've been working for us, people who came down from Nova Scotia and have been sleeping in tents on Long Island for two weeks and working 18-hour days. It's just an incredible event, it really is. And I'm very proud of what all people who've been helping us have been doing.

15,000 people on the island; that's where the focus is, and needs to be, at the moment.

Bobby?

I have a couple of questions. The first one, I appreciate you don't want to get into this cost issue in Long Island but, just so I understand the mechanism clearly, you have a contract with LIPA and, therefore, there are clear contractual clauses and mechanisms to pass costs on to the owner of LIPA. Is that the right way we should understand it?

We are the contractor for LIPA. It's very clear. There was Hurricane Irene last year, you can see how those mechanisms work. But just shouldn't be talking about this right, frankly.

I'm not trying to be awkward. I think it's important. When people have lost their homes, and we've still got today, we've still got 80,000 people who haven't got power back. We've got 30,000 homes and businesses that power's there and we've got to work with lots of authorities, helping people dry their homes out, dry their businesses out so they can get back to normal and that's what we really need to think about today, Bobby, I think.

Okay. So swapping back to the UK then, can you talk us through in a bit more detail the operational changes that the reorganization is seeking to put in place, and some of the benefits that we should expect from that?

I'm looking forward enormously to doing that. I think that is going to be the subject of a seminar next year.

What I wanted to do today was flag two things, I think. One is clearly this RIIO process is not finished. Until we have the final proposals, there is still a lot of uncertainty.

But the structure of RIIO, the incentives and the way that TotEx is treated is very clear; that has been -- that principle is laid down and is clear. So we've already begun to make some adjustments about how we think about that in the future; how the alignment of the organization is on the future.

There's another piece in here, of course, is that our role as the system operator has been evolving over recent years considerably. We no longer just operate the system for England, Wales, and Scotland; we operate the offshore as well. And we have a design-authority role in terms of thinking about long-term transmission strategy, so we've got to think about how we get our focus organizationally on that. And then, of course, there's EMR and how we ensure that all the separation is appropriate in EMR.

So there are lots of threads that have come together to cause us to adjust the UK organization, and we will come back, I assure you, during the course of early 2013 and run people through a lot of detail about that.

So maybe I can try for a third time lucky then. If you get the settlements that you're discussing in Rhode Island and New York, the difference between your position and the staff's position in all of these cases does not appear to be anything like the difference that we've seen in prior rate cases, where we were talking about hundreds of millions of dollars of difference on OpEx, for example.

Does that mean that if these settlements were agreed, and I appreciate that they haven't been agreed yet, you're more confident that -- or that you are either confident or more confident that you can deliver those allowed returns?

I think that's what I said in my remarks. This is a settlement agreement that I believe, and Tom and the team believe, has got the balance right between what we need to invest for customers; the costs of running those businesses for customers; and our ability to deliver those allowed returns.

If we do all those things well, you're exactly right; that is what we expect. But they are settlement agreements at this stage. They still have to go through the process of getting final approvals.

Dominic Nash, Liberum Capital. Two questions, please. Firstly, on RIIO, what would you like to see changed from the interim proposals to the final proposals?

And secondly, on the debt rate, on the GBP1.2 billion you raised this year, what was the marginal cost of debt? And is that a trend that we could see continuing in the medium term as you refinance your existing debt and add new debt in?

I'll obviously let Andrew pick up the second part of that, although there's a very important part of that, of course, that feeds into your first question.

RIIO is eight years. There's a huge implicit risk in eight years, clearly, about the ability anyone has to have a crystal ball. So I'm not going to go through our October 1 submission to the consultation of the initial proposals; that would keep us here for the bulk of today because there's an enormous amount of detail in there, frankly.

Because there were a number of areas that we felt very strongly we needed to ensure that Ofgem -- we think they misinterpreted, or perhaps we hadn't done as clear a job, and we drew out from our -- these were big complex plans, weren't they, huge complexity on a number of areas, yet again, on October 1.

But they come under three big headings, really. The first of those is financeability, so that's the linkage in here. We need to finance these businesses so they can deliver for customers and we can invest for customers.

Andrew's remark on the Maple bond was very important. That bond could not be issued if those businesses weren't A. So the financial strength of these businesses through this eight-year period is a huge part of our consultation response on the October 1. So a lot around the financing.

The second area is around some cost allowances. As we said in July, we said in our response, we found very hard to understand.

We have been building gas transmission pipe in the UK. We've built the Milford Haven pipeline. We've built the pipeline across the Pennines. We know what it costs to build pipe in the UK. We know where steel prices are; we know labor costs, etc., etc.; and the complexity of some of the planning requirements in the UK as well that are very stringent. The allowance that Ofgem came back with in those initial proposals was 47% below our experience.

So there's a lot in the consultation, therefore, about evidence around the world about the cost of building pipe. And there's a similar story, actually, around compressor cost, to replace gas compressors on the system. So there's a particular area around the cost allowances.

And then there are a whole bunch of things around efficiency. In our original plans, we proposed a series of initiatives and delivering efficiency for customers, taking costs out of our businesses. We believe we've had some gaps in understanding, I think, of what was embedded in the base plan.

So those are the three major areas. I'm sure you've read our consultation. It was very fulsome. There's a lot in there. We've been engaged with Ofgem, we now need to wait for the final proposals.

Financing, Andrew?

Financing, obviously, financing -- the index that we're going to be given under RIIO is broadly a 10-year index. So it depends where you are on the curve against that.

So if you're issuing short-term money today and you look at the spot on that index, you should do slightly better. But, obviously, you are then taking the risk that over the 10-year period, or 12-year period, you're going to have some catch up later on and it's going to hurt you over the longer end.

We do a mix of financing, so it's not comparable. But we do measure ourselves against the spot. And that's the focus for Malcolm and the treasury team, to make sure that we're not in a situation as we balance out the financing we're above the spot on the index, because that's obviously the critical strike point up against the allowance. So that's the focus we do.

And the absolute rate?

The absolute rates, the Canadian bond, was attractive, at the lower end of the scale. But that's a five-year money so, therefore, it's not directly comparable, so we're not comparing like for like.

Jamie Tunnicliffe, Redburn. I was interested in the comment about the surprises that you'd seen during the RIIO process; I think you said that, Steve. Is that mainly related to those cost allowances where you're just saying it doesn't match up with your experience on the gas pipeline costs and compressor costs, and on efficiency? I'm just interested in what those surprises during the RIIO experience have been for you.

I think we were quite clear, weren't we, at the end of July? We were surprised with the initial proposals. We recognized they were initial proposals and that there'd been a dialog.

We were challenged by Ofgem with this expression, well-justified business plan, which I think's a great expression actually. That required us to consult extensively with consumers about what they wanted from the networks, as well as the customers who directly pay the bills to us, and all the other energy companies. And we built our plan around their requirements, and around a scenario of investment in the UK.

Ofgem very early on said they were very good plans. So there was a mismatch, in some ways, then with some of the differences in the initial proposals, so that's why we were surprised. I've touched on a couple of those areas, and they're good examples.

There appeared to be quite a gap there; that's clearly why we responded in the consultation in the way that we did. And we've been working with Ofgem over recent months to try and bridge those understandings and make sure we get to an answer that works. This is about both of us getting to an answer that works, isn't it?

It's a long time, eight years. The investments we need to make are very important investments for all of us in the UK. We have to finance this big investment program as well. We've got to get the balance right, and that's, I think, a duty that Ofgem and us share and take very seriously.

Iain Turner, Exane. You've more or less broken the back of the regulatory process, I guess, inasmuch -- by that I mean you've nearly finished it in New York and Rhode Island. I just wonder what's on the regulatory agenda in the US after those two deals are concluded?

That's a great question. It's a lovely expression because I don't think we'll ever have broken the back, actually, and rightly so. We've got 14 entities in the US. And I think we've talked before, haven't we, about getting ourselves on to a drumbeat almost where there will inevitably be filings year on year on year on year.

We had, clearly, a lot of filings at the same time because we'd enter into 10-year plans that all ended up ending around the same 18-month period.

As Andrew says, the challenge on his team, the challenge on the organization, to go through those filings is just enormous. So we want to get ourselves into a position where we do have a couple each year when you've got 14.

Exactly what we do next is subject to our thinking during the course of the next six months, and subject to some pressures from the outside as well, or some challenges from the outside. Where do we feel people want to invest more, particularly in the gas businesses?

We have clearly got, with low gas prices, a lot of people who want to burn natural gas in their boilers at home today. So one of the things that was announced yesterday, actually, was permission to build an inter-connector between Brooklyn and Queens, which had to get federal authority. It actually went through the Senate yesterday, put through by Senator Schumer, get its final approval.

That's a big investment to increase the capacity of gas to get into Brooklyn and Queens. So when do we need to think about upping the investment level in those businesses? It's those sort of things that will drive the priorities on filing, Iain.

[Oli Fetal], CF Partners. Part of the drive of the CapEx in the UK is renewables buildout, and also new nuclear, I believe. At the moment, it looks like renewables buildout is a bit of a question mark because of planning permission. There were some comments recently. Also, new nuclear is not really sure if it comes because there's a big discussion about the prices the companies get. Could that influence your CapEx? And how do you look at it? And how do you deal with this uncertainty?

Yes, you're absolute right in your comments. And, of course, it influences our CapEx. But this is something that we've known about from the very beginning of RIIO, which is why the principles of RIIO, the principles, when they originally set out, were, and remain, very good principles.

It creates a base scenario around investment, and then the mechanisms to flex capital up and down, i.e., customers don't pay for things that they don't need. Likewise, if more capital is required to connect more in a short time then investors also have the opportunity to make sure that they collect returns and revenues for that.

So those mechanisms that are part of RIIO, which will be detailed in the licenses, actually -- so that's one of the things. Although we've looked at the principles of those and agree with them, the detail will be in the licenses will work.

It is very clear, if you sit here today and look at the scenario that we submitted in our original plan, that some of the investment in the early years has gone back a couple of years, exactly right.

But it will move again probably as well. This is a very moving feast around when, and of course it goes back to EMR, when do people have the incentives and build the nuclears? How much wind is onshore? How much wind is offshore?

What we do know is the Government targets are very, very clear. We know what's shutting in this timeframe. So we know there will be an enormous investment in generation. We know we have to connect all of those. And we're very clear, through the big transmission planning, where the big pieces of reinforcement are required.

As Andrew mentioned in his remarks, the Western Link is one of those, the offshore Western Link already. There's an Eastern Link in our plan as well. And there are other reinforcements that we will have to do in this timeframe. But RIIO does have the mechanism there to protect everyone in terms of the flexibility.

So it's something like a minimum or maximum CapEx per annum that you can envisage under different scenarios? Like if everything comes onstream that needs a lot of investment, and if a lot of the staff is coming very late, or it's not coming in at all, what's the range of CapEx we can think about?

That's actually on our website. We had the base scenario, and we had a very slow scenario, and we had an accelerated scenario. I think the accelerated scenario looks unlikely today, but somewhere between our base and the slow is where we will be.

And we need to flex our CapEx on things like replacement as well. You can't work in a business like this, with the supply chain in particular, by taking it up and down, up and down. That will increase the prices for customers over time.

So we need to make sure that we manage a program here. And we're not smoothing things literally, but trying to make sure that we don't get huge jumps up and jumps down. That's the job that we already do, and we'll continue to do that in the future.

Thank you.

John Musk, RBC. Just a very simple one. You signaled you were going to take your time on the RIIO response, can you just let me know the timetable, and what the deadlines are for when you have to respond?

Sure, yes, which is a good question; actually, I'm not sure everyone might be aware. We change the thing, don't we, and I put myself, as I'm saying that, in that bracket as well, about the old process; RPI and the minus [x], the way the price control process works, because RIIO is very different. The process is fundamentally different.

One of the differences actually is at the end of the process. Both the time, and also the appeal mechanisms, have changed as well so in the old world, 30 days; in the new world, it's 75 days. That's the precise answer to your question. And there's a reason for that, quite clearly, and I think I've outlined why.

There is a lot for us to look at, be confident about, before the Board can be happy with those proposals.

Peter Bisztyga, Barclays. There's going to be a lot of new incentive mechanisms under RIIO for you to either outperform or underperform on. Can you give us some indication of how different layers of management within your business will be themselves incentivized to make sure that you hit each of those metrics as best you can?

You are getting way ahead of yourself here, but you're right in terms of the things that we will be thinking about and putting in place. As we think about how we reward people inside the organization, like any business, those rewards need to be totally aligned to things that are valued by the business's customers, and indeed its investors. And there will be some tweaks around those things.

There are more incentives in here, but the incentives are around outputs. It's one of the good things about this process.

There are issues around the financing, as I said. There are issues around some details and some efficiencies. But the philosophy of rewarding outputs that customers value, reliability, connection, service, and so on and so forth, are crystal clear and so they are already aligned in many of our plans. But there is no question they'll be even more crystal clear in the future.

Thank you.

Just a question on US CapEx. You mentioned how your -- you sort of repeated the GBP1.1 billion to GBP1.2 billion per annum. But when I hear the comments about the impact of lower gas prices and what that does for demand, and also there's clearly a debate about serviceability of these assets given everything that's going on, and the shocks, and what sort of level of, I suppose, endurance and stability in the system do you want, so just is it right to still talk about GBP1.1 billion to GBP1.2 billion?

Or is it more likely that we're going to have a debate, do you think, in the US where sees that number going up from where we are? Is there risk more on the upside from here? Just any thoughts on that are interesting.

It is right to talk about GBP1.1 billion to GBP1.2 billion today. That's what we've signed up for, if you will, through our rate plan.

So the number that Andrew was referring to encompasses the capital that's enshrined in the Narragansett agreements and the Niagara Mohawk agreements, which is a lot more capital than we used to invest in those businesses, by the way. That's a -- in the first half of this year, US CapEx, as Andrew said, is up 24%. That's all part of the regulatory arrangements; replacing more gas pipe, investing in those assets. And there's nothing more than that today.

Do we believe that in the future there is a need to invest more in those assets? I think National Grid's been saying, ever since it's been in the US, that there is a need to step up investment in replacing assets. We have been doing that progressively.

But if you look at the engineering sense of the life cycle times and the investment, there is a period of investment in networks across a lot of the older US, not so much the south, but certainly in the Northeast, to replace assets. That is a conversation we'll continue to have with our customers and our regulators.

And when that becomes part of a plan then that number will change. But until that's part of a plan, Jamie, then the GBP1.1 billion to GBP1.2 billion is what we can see for the next few years.

And just to add a comment, actually, from a financeability perspective, US CapEx is more financeable than UK CapEx today because it's nominal. So, therefore -- and you get a higher return, cash return, straight away than you do in the UK. So marginal investment in the US actually will not be harmful to overall financeability, and actually will be better than what we're currently seeing under the RIIO proposals.

Have you given any input, either from a regulatory perspective or a financing or treasury perspective, to the CPAC Committee and your views on the change in formula for RPI and try and narrow the RPI/CPI wedge? I'm just interested in generally how you approach it, because it could affect you in many different ways.

Well, first of all, obviously, one of the good things that Ofgem are doing is they are consulting about the potential impact of any RPI index change, and the impact on revenues in particular.

We, obviously, also have put in about what the implications are for our RPI index bonds because in their financeability metrics they have used, obviously, the assumption around the bonds and how those -- obviously, the accretions on those, how that works and, if that changes as a result, how does that impact our overall financeability. So that's open.

As far as consulting, I think, obviously, we are a relatively small player in this area. We are considering a response but, to be honest with you, Bobby, I think there are other people, like major holders of gilts, who are far in advance in the queue than we are. But we will consider putting in something.

Okay, any remaining questions? Good. Okay. Thank you very much for joining us this morning, appreciate your time.