National Grid PLC (NGG) 2014 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the National Grid 2014-2015 half-year results. My name is Faye, and I will be your coordinator for today's conference.

(Operator Instructions)

I will now hand it over to your host to begin today's conference. Thank you.

Thank you, Faye. So, good afternoon, everyone, and welcome. Thank you for joining us on what I am sure is a very busy day for you all. As you know, this morning, we announced our half-year results for 2014-2015. The release and presentation is on our web site and on our app, and the webcast replay of this morning's presentation is also available on our web site. This call is really intended to provide a brief overview of this morning's presentation and statement, and to make sure that those investors and analysts who weren't able to attend have an opportunity to ask questions, or some follow-up questions, if they wish.

Before I kick off, a reminder also to check our cautionary statements, which are included in the above documents. I also have with me here today Michael and Victoria from the IR team. As we set out last year, and at the time of our full-year results, the details we can now provide on our performance mid-year are of more limited use than historically. This is principally driven by then annual nature of our new RIIO incentives, and how those are reflected in our key performance metrics, particularly around returns and value-added.

As a result, our objective today was to present the IFRS results as a matter of historical fact, but more importantly, discuss the key developments and opportunities that will inform views on our full-year performance. In that context, the message overall for the half year is that we started the year well, and we are on track to deliver another good result for the year as a whole, with a strong group return on equity, healthy growth in assets, which we believe will drive good value-added.

On an IFRS basis, the half year is also good, up 2% at the operating profit level, and up 16% at earnings and EPS. In the UK, the Company's delivering the benefits of the streamlined processes and efficiencies in design, contracting and procurement. These have resulted in good operational performance and delivery of the capital program. As a result, we believe the business is on track to deliver improved returns on equity alongside asset growth of around 5% for the full year.

In the US, operational progress was also good. Strong asset growth to date and completion of our major financial system upgrade was balanced by increased gas mains repair costs following the exceptional cold winter in 2013-2014. The new systems are clearly designed to facilitate not only our improved financial disciplines and structures, but also facilitate future regulatory filings, which we believe will capture the benefits of the increased investments.

Rate-based growth is accelerating due to increasing investment in gas mains replacement activities, and the end of bonus depreciation. These elements will present some head winds for US returns, which are expected now to be in the range of 8.5% to 8.9% for the year as a whole. Planning has now started on work to prepare suitable test years of data for the rate case filings in our Massachusetts and New York companies. In the meantime, we have filed for incremental allowances for some of the costs we are making and investments we are making at the moment in our KEDLI and Massachusetts gas businesses.

National Grid's other activities also made good contributions. In particular, the property business from increased asset sales. UK corporate cost increased due to the non-recurrence of one-off insurance gain of around [$40] million including an additional [$13] million of costs and US corporate costs reduced, reflecting the lower US system stabilization costs, which as I said before, relates to the program now complete.

We have also today announced a deal with Berkeley Group to unlock some of the value of National Grid's property portfolio, which we believe recognizes the potential to realize a higher valuation than the current book value of around GBP500 million. CapEx out turned the period at GBP1.6 billion, around GBP137 million lower than last year. We expect CapEx of about GBP3.1 billion to GBP3.3 billion of the full year, which will be a bit lower than last year, and a touch lower than our guidance in May.

Uncertainly in the generation landscape continues, and now it now seems unlikely we will see material step up in our UK investment in the intermediate years. However, investment in the US continues to increase, as I said before, with the accelerated gas mains replacement activities, and electricity system reinforcement projects. Questions from our meeting this morning focused mainly on property. The expected outcomes from the capacity auction in December in the UK, and the US regulatory developments.

Before I hand over the questions, briefly, let me just talk a little bit about guidance. Our outlook for the balance of the year is slightly more positive, driven by the legal settlement in the UK and the better performance on interest and tax, particularly due to the effects of RPI indexation, but also FX, and a lower cost of carry, because with we are using up some of the cash balances that we have been carrying since we raised quite a lot of debt back in 2013 and early 2014. This was partially offset by the higher emergency response costs in the US and the 18a rebates, which impact the IFRS figures.

Other activities benefit year-on-year from the elimination of stock costs. The net result of all of this is broadly positive to the previous guidance we provided, and of course, you will need to overlay your own views on underlying performance to complete the loop. If you have any questions, don't hesitate to call a member of the IR team here at National Grid. We will be out and about with investors over the next few weeks, but we will get back to you as soon as we can, if we are not able to do so immediately.

Thank you, and why don't I hand back to the operator of Michael, Victoria, and I to take any questions that you may have.

(Operator Instructions)

Our first question is from the line of Mark Freshney from Credit Suisse.

Can I please ask a question on the US returns? Over the last six or seven years, it has been very -- it has taken a lot of time and effort from National Grid to get returns where they are, and now they're starting the to decline. I think guidance has them coming down for two consecutive years now. I guess the first question is, what are you doing to try to improve them, and when do you think you can improve them? My second question is, at what point do the returns become unacceptable, and you have to start to consider other measures? And I am thinking toward the aggressive cost cutting you launched about three years ago now, where you took $200 million out. Is there anything like that you can do to improve returns in that business?

So that's a great question, and quite far reaching in terms of the scope for answers. So, let me start by just a bit of context. I mean clearly, our US business is made up of 14 separate regulatory entities, and each of them has allowances and growth rates and investment expectations set by their respective regulators.

The key ones in terms of underlying economic performance are obviously the principal distribution businesses, whether in gas or electricity, because they're the ones that attract the biggest cost of service, and our ambition here is to get into a fairly routine regulatory reporting cycle with the different jurisdictions, so that we can keep the key features of those different rate cases up to date. Now, we have done that with four of them in just the last two years, particularly in New York with the two NiMo electric and gas cases, and also in Narragansett, the Rhode Island business, where we've done the same for the two parts there.

And the benefits of that filing process is very clear, the returns in all of those businesses, as we reported last year, and indeed, we hope as people see this year, will be satisfactory. The operation and the way in which they're responding and the flexibility of those different businesses get from having topical up-to-date allowances, is significantly better than they were if you go back a few years. The business where we haven't had a chance to do that since we refiled it successfully in 2010, which is nearly five years ago now, is the Massachusetts Electric case, primarily. Same in gas in Massachusetts, but the big issue is mainly around electric, where the investment is pretty consistent but the cost of service continues to be impacted by inflation, et cetera.

So if you are trying to look at the overall mix of activities here, you get this situation where depending on how frequently you can file, you get positives in some rate cases, you get head winds in others. The net-net of all of that is that as we set out back in May, given the challenge created to an extent by the SAP system and the inability to file, we've had to live with a slight moratorium on filings, which has principally impacted the Massachusetts gas and electric rate cases.

Now, we're going to get back into filing those toward the middle or end of next year. That is our ambition. We'll do that on the back of good data, we'll do that on the back of what will be very clear and well-argued rationale as to why we need certain different expense allowances, and we would expect the benefits of those filings to come through into our rate plans in due course. And as and when other rate cases need filing, we will do so as well.

So, it's a mixture of moving parts, and the great thing about where we are today compared to four or five years ago is that actually, there isn't that structural inefficiency in the business, in terms of that being a large stage of costs that we need to attack, and to take out in the way that we did at that time. This is much more about being very focused on what individual regulatory needs are, and making sure that they are managed accordingly.

Now, coming to your point on the trend, I mean you are right to say, since we achieved a 9.2 in 2012, last year we achieved a 9. This year, we are guiding to slightly lower than that, and we would hope that we would be able to find a way in which we can manage efficiency in the business to be able to maintain a reasonable return until we get the benefit of the rate case filings to come through. But the key difference from four or five years ago, there isn't a fundamental problem with the efficiency of our North American business. It's just the ability to get into that routine filing process, and to make sure that businesses stay up to date with what the regulators expect.

To the second part of your question therefore about more radical action, we don't believe that's a necessity at the moment. Now, we are clearly trying to develop a dialogue with our different regulatory parties in New York, Massachusetts, about being -- creating the regulatory filing environment about progressive investment and modernization. As we talked about this morning, finding a way of incentivizing the regulatory utilities to do much more around demand site management, as well as just providing network efficient energy. And all of those things create opportunities for us to do things very differently in our rate plans and our filing processes going forward.

So there's an awful lot of areas and scope for discussion and debate. We're enjoying exploring those at the moment, and we're going to continue to do so over the next year. And we'll get rate plans in place in order to make up the gaps in the underlying performance of the business accordingly. So, I don't think people should see it in same way they would have four or five years ago, I guess is the bottom line of what I'm saying. There's a lot more opportunities to do things to progressively maintain and improve the performance of the business.

Okay. Thank you, John.

(Operator Instructions)

We have no further questions coming through. I will hand you back to our host to conclude today's conference.

Okay. While I appreciate that it is a Friday afternoon and it is a very busy time for everybody. Thank you all very much for joining. If there are further questions, as I mentioned at the outset, please don't hesitate to talk to the team. We're always enjoying engaging with you, and we look forward to meeting many of you over the next few weeks, as we're out and about on the road with Steve and Andrew. Take care. Have a good weekend. Bye bye.

Thank you for joining today's call. You may now replace your handset.