National Grid plc

Thank you, Felicia. And good morning, everybody, and welcome to our half-year results presentation. Thank you for joining us remotely. I hope you're safe and well. So firstly, I'd just like to draw your attention to the cautionary statement you'll find at the front of the presentation. Secondly, after the presentation, as usual, the IR team will be available by phone to help if you have any further questions. And so with that, I'd like to hand over to our CEO, John Pettigrew. John. Thank you, Nick, and good morning and welcome, everyone.

As usual, I'm here with Andy Ag, our CFO, and after our respective presentations this morning, we will, of course, take any questions you have. But before discussing our performance in the first half of the year, I want to start with an update on how we've been managing against the backdrop of COVID and the impact it's been having across our businesses. Overall, the business has adapted incredibly well to new ways of working over the past eight months. Despite the new regulations and restrictions COVID has brought, operationally we've delivered safe, reliable networks for our customers whilst making strong progress in key areas, such as capital investment, where we've delivered on our substantial investment programme, broadly in line with the first half of last year. The US, where we've had to respond to a greater number of storms. Cost discipline, where we've made good progress in mitigating some of the COVID cost pressure as well as continue to shape the organization for the challenges and opportunities ahead. Progress on regulation, as we work towards settlements across our UK and downstate New York businesses. And we've done this whilst ensuring we behave as a responsible and purpose-led business, ensuring continued focus on our safety culture, supporting our people, for example, by increasing our focus on mental health and well-being, and supporting our communities, our customers, and our supply chain. So I'm really pleased Turning to the numbers, on an underlying basis, that is excluding the impact of timing, exceptional items, and remeasurements, operating profit of 1.15 billion pounds was 11 cents below the prior year at constant currency. This largely reflects increased COVID-related costs, particularly in the U.S., higher storm costs in the period, although these are partly offset by expected revenue increases in the U.S. and significantly better operating Andy will go into more detail on the financial impact of COVID, but our full year of guidance from June remains unchanged, and as I mentioned in June, given current regulatory mechanisms and precedents, we expect to recover the majority of the COVID impacts over the median term. Underlying earnings per share was down by 14% to 17.2 pence for the period, and the Board has proposed an interim dividend of 17 pence per share, reflecting 35% of last year's total dividend. which is in line with our policy. Investment in critical infrastructure remains strong with CapEx at 2.6 billion pounds. This was driven predominantly by continued investment in large capital programs in our UK electricity transmission business, continued high levels of US CapEx, much of it mandated on safety spend, and increased spend in national adventures as we progress our interconnected projects. Overall, we maintain our financial guidance for the year and expect investment to be around £5 billion, driving asset growth towards the top half of our 5% to 7% range. So a strong half of operational performance, albeit like all companies, COVID costs have had an impact on our financial results. Turning now to our safety and reliability performance. On safety, our businesses have continued to deliver good performance, with their lost time injury frequency rates trending down. However, 2021 has brought unique safety challenges as a result of COVID, which has required us to adapt our processes. For example, in the US, at the onset of the pandemic, our safety teams created our COVID-19 health and safety plan for all employees and contractors. They delivered over 400 field visits across our operations in the month of May to ensure the new ways of working and safety expectations were clear. This has allowed us to deliver our critical investment with limited disruptions. Turning to reliability, performance has remained strong across our businesses. We've successfully managed low levels of demand, particularly in the UK, with the electricity system operator developing new flexibility tools to maintain security of supply. And in the US, we've responded to a series of big storms, including one of the biggest ever in early October, where we saw over 550,000 customers lose power. I'm pleased to say that the response was excellent, with a tremendous performance from the team. Looking ahead to the coming winter in the UK, the electricity system operator published its outlook last month and forecast an electricity capacity margin of 8.3%, lower than last year, below well within the security standards. And in terms of UK gas, expected cold day demand is forecast to be 426 million cubic metres against available capacity of almost 500. In the US, given the ever-present possibility of storms and potential for colder-than-expected weather, as we always do and are well prepared for the coming period. I'll now turn to our operational progress we've made across our businesses, starting with the US. In the first half, we've invested just over £1.6 billion, with much of it mandated on safety and reliability, a little more than we invested in the first six months of last year. Our single biggest area of investment continues to be our leak-prone gas pipe replacement program, COVID has meant that we're behind schedule at the half year, but in the past few months, as restrictions have eased, we're catching up and expect to reach our full-year target of 300 miles of mains replacement. On the electricity side, we've seen limited disruption from COVID on our overall investment levels and work output. This is largely due to the huge effort that the teams have put in to review all of the transmission and distribution projects to prioritize work required to keep the lights on. Turning to regulation, we've made lots of good progress. In downstate New York, we remain in discussions for a multi-year settlement for our Kedney and Kedley gas businesses. Whilst we've not yet reached a settlement, we remain hopeful that an agreement will be reached by the end of the calendar year that can be approved by the Commission. I'm also pleased that we're delivering solutions for the gas supply constraints in downstate New York, focusing on enhancing our existing CNG and LNG infrastructure, as well as significantly increasing efficiency and demand side response. Moving to upstate New York, we submitted a filing for our Niagara Mohawk businesses at the end of July for new rates effective from July 2021. Our filing proposes a multi-year rate plan with capital investment of $3.6 billion across three years, including significant investment in clean energy infrastructure, new incentives and earnings adjustment mechanisms, all whilst managing customer bills in response to COVID. Finally, we'll file some new rates for our Massachusetts gas business tomorrow. It's become effective in November next year. As part of our filing, we're proposing a multi-year agreement with a performance-based mechanism, similar to what we agreed for our Massachusetts electric business last year. If approved, this will give us longer-term visibility for our investments, greater protection against cost pressures, and more incentives to innovate and create value for our customers. Moving to the UK, I'm really pleased with the team's focus as we approach the end of the Rio T1 period. We've invested £633 million in the half, broadly in line with our investment in the first half of last year. On the electricity side, our two biggest projects, the 33-kilometre London Power Tunnels 2 project from Wimbledon to Crayford, and the 46-kilometre Hinkley Point connection between Bridgewater and Seabank in the southwest, are both progressing well. And we've worked closely with our contractors across both projects to minimize delays associated with COVID. And on the gas side, we've completed the tunneling and are near commissioning our largest gas project in a decade, the Feeder 9 pipeline under the Humber, which I'm proud to say holds the Guinness World Record for the longest hydraulically inserted pipeline at a little under five kilometers. This goes to show that our UK businesses continue to deliver world-class engineering solutions that will benefit consumers for many years to come. As you know, we submitted our response to Ofgem's draft determinations in September, highlighting three main areas of concern. Firstly, reduction to the reliability and resilience of our UK's energy network. Second, jeopardising the pace of progress to a net zero energy system. And third, erosion of regulatory stability and investor competence in the sector. Since then, we've provided Ofgem with detailed proposed solutions and how the regulatory framework can be modified to support the UK goals to achieve net zero by 2050. And we continue to make our case to Ofgem on the importance of striking the right balance between customer bills in the short term and ensuring fair returns to encourage much needed investment in UK infrastructure. We'll continue to work towards a settlement that is acceptable for all our stakeholders and remain hopeful that this is an outcome that can be achieved in December. Moving on to National Grid Ventures and our other businesses. We've invested 261 million pounds in the half, higher than the same period last year, excluding our acquisition of Geronimo Energy. Progress on our new interconnectors remains on track, with IFA II going live by the end of this calendar year, and our Norwegian and Danish interconnectors expected to be completed in FY22 and FY24 respectively. We announced a cooperation agreement with tenants on the 22nd of September to explore the feasibility of connecting Danish and British wind farm energy systems of both countries, so-called multipurpose interconnectors. And we continue to make good progress with our onshore renewal projects in the U.S. and recently rebranded Geronimo Energy to National Grid Renewables. In the heart, we signed a PPA with cargo for a 200 megawatt solar project in Illinois which is on track to be commissioned by the end of 2021. So in summary, a strong first half of operational performance with good progress on our strategic priorities, despite the impact of COVID on our financial results. I'll review shortly our outlook for the rest of the year, but first let me hand over to Andy to discover our financial performance in more detail.

Thank you, John, and good morning, everyone. I'd like to highlight that, as usual, we're presenting our underlying results excluding timing and that all results are provided at constant exchange rates. Before covering the group's half-year performance, I'd like to provide some more detail on the financial impact of COVID that we've experienced to date. During the first half, we estimated that COVID impacted our underlying operating profit by £117 million in three broad areas. an increase in our bad debt provision of approximately 56 million pounds, a shortfall of revenue under existing regulatory agreements of 41 million pounds, and net direct costs of 20 million pounds. In addition to this, the delay to updating rates in Kedney and Kedley at the start of COVID resulted in a further impact in the first half of approximately 24 million pounds. we continue to expect a full-year impact from COVID of around £400 million on underlying operating profit, given the seasonal nature of our US-regulated business. Whilst we see future uncertainties from COVID, I'm really pleased with the great progress we've made in alleviating much of the direct cost burden, with around £60 million of direct COVID costs mitigated during the first half. And, of course, we'll continue to find ways to maintain this progress and drive further cost efficiencies in the second half. We also maintain our guidance of up to one billion pounds of cash flow impact in the full year. On top of the underlying operating profit impacts I've just covered, we expect the continued weaker demands and lower revenues, which will be recovered as usual through regulatory through-ups in later years. Lower cash collection from our US customers, which was below prior year levels, are in line with our expectations. And a small impact from revenue deferrals related to system charges in the UK that we'll recover next year. In the U.S., we remain confident that we'll be able to recover a majority of these COVID-related costs, either through the usual course of rate filing, such as recouping revenue deferrals and collecting high levels of bad debts, or through separate filings. We're currently engaged with regulators across our states on this. For example, in New York and Massachusetts, we've already made submissions around cost recovery, following discussions with peers and our regulators. And, as you'd expect, we'll continue to work with all stakeholders on this during the second half of FY21. Now turning to our half-year performance. As John mentioned, underlying operating profit decreased by £147 million to £1.1 billion. Operating profit benefited from higher revenue from US rate case increases and higher capacity revenue in UK gas transmissions. These were more than offset by COVID and storm costs in the U.S. business and adverse mod adjustments in U.K. electricity transmission. Compared to the prior year, earnings per share decreased by 14% to 17.2 pence. Captain investment was £2.6 billion, 5% lower than the prior year. This reflects the increased investment in our U.S. regulated business, U.K. electricity transmission, and the spend on the Viking interconnector, all more than offset by lower asset health work in UK gas transmission and the non-recurrence of the Geronimo acquisition. Our strong balance sheet continues to allow us to fund this investment efficiently and to navigate through COVID successfully. In line with our policy, we'll pay an interim dividend of 17 pence per share, representing 35% of last year's total. Script uptake on the full-year dividend was around 5%, and will again be offering the script option at the half-year. Now let me take you through the performance of each of our business segments. Underlying operating profits for the UK electricity transmission business was £524 million, down £59 million compared with the last half-year. This primarily reflects adverse mod adjustments for lower data centre and cyber security allowances, and the non-recurrence of prior year electricity system operator incentives, partially offset by RPI and lower controllable costs. We invested £548 million on system resilience, asset health and new connections. This was £77 million higher than the last half year, reflecting progress on multiple large projects such as London Power Tunnels 2 and Hinkley Seabank, partly offset by lower spend on Western Link. For the full year, Totex outperformance and other performance are expected to be slightly down, with incentives above last year. Overall, return on equity outperformance is expected to be slightly above the 200 to 300 basis points range, broadly in line with last year. In the UK gas transmission, underlying operating profit was £108 million. This is £42 million higher than the prior year, driven by high capacity income favourable mod adjustments and lower year-on-year controllable costs. Gas transmission capital investment was £85 million, £82 million lower than the prior year. This primarily reflects lower assets held in emissions work and the completion of the feeder 9 Humber Estuary pipeline project. We expect the return on equity to reduce marginally compared to last year, owing to Totex and incentive performance falling due to cost pressures. Finally, I'm pleased to report that for the UK transmission business as a whole, our cost efficiency programme remains on track to exceed the targeted cumulative £100 million cost savings in 2020-21. In our US regulated businesses, underlying operating profit was £403 million, £115 million lower than the prior year. This reflects higher revenues from rate case increases. more than offset by COVID-related bad debts, incremental costs and major storm costs. Depreciation also increased from our higher investment levels. Capital investment was £1.6 billion, £75 million higher than prior year at constant currency. Increasing capex was driven by higher electricity transmission and IT expenditure, partly offset by lower gas spends due to COVID-related work impacts in downstate New York. We've seen high levels of storm activity so far this year, with $61 million of deferrable storm costs impacting our first half results. As a reminder, our approach is to remove these costs from underlying operating profit if they are above $100 million in a year, and with the recent big October storm, we expect this will be the case by the fall year. Our cost efficiency initiative is progressing well, and as with the UK business, we expect to exceed our targets and deliver savings of over $50 million from 2020-21 onwards. Overall, we expect full-year return on equity to decrease as a result of COVID-related costs, which require certainty of regulatory treatment before an associated regulatory asset can be recorded. As we explained in our full-year results, we still expect to recover the majority of these costs in due course after the regulatory approval process has concluded. Overall, National Grid Ventures continues to perform well, delivering higher levels of profitability compared to last year. Operating profit for grain was £48 million, £9 million higher than the prior year, primarily driven by lower depreciation from extended asset lives after the Phase 1 contract extension. Metering and interconnector profits were broadly similar to last year. Excluding the £206 million acquisition of Geronimo in the prior year, Capital investment increased from £223 million to £261 million in the period. This reflects higher Viking investment, partly offset by lower capex on the IFA II project. The operating loss for other activities for the half-year was £30 million, compared with £1 million last year. This principally reflects the lower land sales in our property business and reduced sales in the St William business. million lower than last year, reflecting the timing of sales from its development sites. Capital investment was £25 million, £38 million lower than last year. Finance costs were £468 million, down 15% on the prior year. This primarily reflects a fall in average UK RPI, lower refinancing rates, and the effects of the buyback and reissue of hybrid debt last year. Our effective interest rate was around 1% lower than the prior year at 3.3%. At constant currency, second-half net interest costs are expected to be slightly higher than the first half. The underlying effective tax rate before joint ventures was 16.5%, 330 basis points higher than the prior year, reflecting a reduction in the value of U.S. tax settlements. For the full year, the underlying effective tax rate, excluding the share of joint venture post-tax profits, is now expected to be around 21%. Finally, underlying earnings were £604 million, with earnings per share at 17.2 pence, down 14% on the prior year. Cash generated from continuing operations was £1.8 billion, down 13% compared to the prior year. This reflects adverse working capital movements from higher U.S. receivables and lower year-on-year cash collections. Net cash outflow in the period amounted to 2 billion pounds, and after 0.5 billion pounds of positive exchange rates and non-cash movements, net debt increased by 1.5 billion to 30.1 billion pounds. For the full year, we expect ongoing business requirements to increase net debt by up to a further 1.5 billion pounds. excluding the impact of exchange rates. In the summer, Moody's and S&P moved the group's credit rating outlook from stable to negative, reflecting concerns following Ofgem's publication of the Rio 2 draft determination and delays to expected revenue increases in the U.S. We expect both agencies to review this outlook after the Rio 2 price control arrangements are agreed. Lastly, I'm pleased to announce that we'll be issuing our first green financing report in the next couple of months covering the allocation and associated impact metrics of the green bonds we've issued since January 2020. So, to summarize our half year, we've delivered strong operational performance in the first half, and for the full year, we expect to deliver asset growth in the top half of our 5% to 7% range. Like all companies, we've felt the financial impact from COVID. However, I'm pleased to say that we've largely mitigated the direct COVID costs. Therefore, overall, our performance remains on track and our full year forward guidance remains largely unchanged. With that, I'll hand you back to John. Thank you, Andy. Let me now turn to the outlook for the rest of the year.