National Grid plc

Good morning, everyone, and welcome to the National Grid full-year results presentation. I'm Nick Ashworth, Director of Investor Relations, and I'm here with our Chief Executive, John Pettigrew, and CFO, Andy Ag. I'm pleased that we're able to join you this morning by video and that we'll be able to see you ask questions by video. Instructions are on your webcast screen. So, before we start, I'd like to draw your attention to the cautionary statement that you'll find at the top of the presentation. And 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'll hand over to our CEO, John Pettigrew. John.

Thank you, Nick, and good morning, everyone, and welcome to the call. As usual, I'm joined by Andy Ag, our CFO, and following the presentation, we'll both be happy to take your questions. A lot has happened over the past year. We performed strongly during the pandemic, and delivered solid financial performance, testament to the resilience of our businesses and the commitment of our people. It's from this position of strength that we announced our acquisition of WPD in March. This is a transformational development for National Grid, increasing our focus on electricity, putting us firmly at the heart of the energy transition, and enhancing the long-term growth profile of the group. This transaction, alongside our decision to sell a majority stake in our UK gas transmission business, combined with a greater level of regulatory certainty, underpins the new five-year outlook that we're announcing today. But first, let me start with the financial performance for the year. On an underlying basis, that is excluding the impact of timing, major storms and exceptional items, operating profit of 3.3 billion pounds was 3% below last year at constant currency, driven by the financial impact of COVID. Consequently, underlying earnings per share was down 7% to 54.2 pence, and group return on equity was 10.6%. Excluding the increase in costs due to COVID, financial performance across our regulated businesses was in line with last year. Andy will cover the impact of COVID in more detail shortly, But as I've said previously, we expect to recover the majority of these costs over the medium term. And despite the challenges brought about by COVID, we've delivered another strong year of investment in critical infrastructure. Capital expenditure was in line with guidance at £5 billion, similar to the prior year at constant currency and adjusting for the Geronimo acquisition. This has driven group asset growth of 6%. In line with our policy, the Board has proposed a final dividend of 32.16 pence per share. This takes the total dividend for the year to 49.16 pence, an increase of 1.21% in line with UK RPI. Looking forward and reflecting the move from RPI to CPI-H in our UK regulated businesses, the Board announced in March our aim to grow the annual dividend per share in line with UK CPI-H. Turning next to our safety and reliability performance. Safety is at the heart of performance across our businesses. FY21 saw our lost time injury frequency rates reduce, with the UK delivering the best of a year of safety. In the US, we also saw a fall in our lost time injury frequency rates, whilst in national adventures, we've seen a small rise in minor incidents and are redoubling our efforts to reverse this trend. Turning to reliability, performance has remained excellent across our UK and US regulated networks. In particular, I'm really pleased with how the teams have adapted to the change in demand patterns we've seen over the past 12 months. In the UK, the electricity system operator developed new innovative services to manage periods of very low levels of demand coupled with high levels of renewable generation. And we implemented learnings from the storms in 2018, to manage the highest gas demand seen in a decade without incident or disruption to our customers. In the U.S., electricity network reliability remained excellent at over 99.9%. However, the significant number of severe storms we experienced throughout the year, particularly in Massachusetts, led us to incur a service quality penalty of $14 million. We are continuing to take action to improve performance during storms, as well as to realign our regulatory frameworks, which I'll talk about shortly. Overall, I'm pleased to say we delivered another good year of safety and reliability against the challenging backdrop. And this outcome underpinned our resilient operational performance, which I'll cover now. So starting with the US, where we've made good operational progress against our targets. Our financial performance has been impacted by the additional costs of COVID and a greater number of storms, with our achieved return on equity decreasing by 210 basis points to 7.2%. Adjusting for these headwinds and the impact of rate case delays shows our return on equity at 8.6% or 92% of our allowed return. As we highlighted in our half-year results and as the slide shows, we've seen a greater number of storms across our regions in the past year. However, we've made strong progress to minimise their impact through upgrading our infrastructure, undertaking weather impact studies, as well as introducing new digital technologies in areas such as vegetation management. Our success at reducing their impact means more storms are being categorised as minor, which do not qualify for cost deferral and recovery. We're therefore developing new mechanisms for future rate cases that will both incentivise improved storm performance and provide a greater level of upfront cost recovery. During the year, we increased investment in critical infrastructure by $200 million to $4.3 billion, with our single largest area of investment continuing to be our gas pipe replacement program. Despite challenges due to COVID, we managed to deliver over 350 miles of main replacement, exceeding our initial target of 300 miles. This means we're now well over halfway through the 20,000 miles we've identified that we need to replace. This enabled us to continue to deliver strong rate-based growth of 8% in FY21. On the regulatory front, we made significant progress this year. We've reached a joint proposal with the New York Public Service Commission staff for Kedney and Kedley in downstate New York. The three-year settlement, which includes an allowable ROE of 8.8%, will see us invest $3.3 billion to modernise gas infrastructure and enhance network safety and support a sustainable and affordable path towards a low-carbon energy future. In upstate New York, the new filings for our Niagara Mohawk business are in settlement discussions and we expect an outcome sometime this summer. And in November, we filed a five-year rate plan for our Massachusetts gas business. Hearings are underway and we expect the new rates to be effective from October this year. Finally, it's also been a good year for our electricity transmission business. With increasing focus on delivering greater levels of renewable energy, the New York Power Authority has selected National Grid as its partner in the Northern New York Priority Transmission Project. This project will see us invest an estimated $500 million over four years to rebuild a 100-mile transmission line, supporting the state in meeting its clean energy goals. So moving to the UK... where FY21 marked the end of a very successful Rio T1 period. Through the eight years, our total investment reached over £12.5 billion and generated over £850 million of savings for customers. In our last year of T1, we achieved a return on equity of 12.6% within our target range of 200 to 300 basis points of outperformance. And I'm really pleased to say that this year in both our electricity and gas transmission businesses, we saw our highest customer and stakeholder satisfaction scores of the T1 period. We continued our capital programme with £1.2 billion of investment, leading to 2.2% asset growth. Spend was driven by significant progress on our Hinkley Seabank connection and the second phase of our London Power Tunnels project. This was partly offset by lower spending gas transmission from the completion of the feeder nine project. But we're also investing in new technology that's helping to support connecting increasing levels of renewable generation on our electricity transmission system. Working with a Californian company called Smart Wires, we're installing smart power flow control devices that increase our network capacity without the need to build new lines. This is the first time this solution has been used at transmission voltages, and we've already commissioned three circuits with a further two expected this summer. On the gas side, we've made significant advances with hydrogen. For example, our ambitious FutureGrid project, which is the largest of its kind in the world, will test the options for repurposing the existing transmission network to hydrogen. And finally, our focus in the UK over the last 12 months is has very much been in reaching a successful outcome for Rio T2. Over the five-year price control, we expect substantially higher investment levels than in Rio T1, particularly in electricity transmission, where we expect to spend around £8 billion on asset health, system reinforcement to connect offshore renewable generation, and other new onshore system connections. However, whilst we were pleased with the improved package around investment levels in the final determination, we still believe there's a strong technical argument for a higher overall cost of equity and view the outperformance wedge as conceptually flawed. The CMA has recently granted permission for our appeal and will work closely with them as this process moves forward through the summer. Looking now at national adventures and our other businesses. Investment of £576 million was primarily focused on delivery of our interconnectors. IFA II was commissioned in January, and the North Sea Link with Norway and the Viking Link with Denmark are on track to come online in 2021 and 2024. Working in collaboration with Elia and Tenant, we are continuing to assess the feasibility of offshore multipurpose interconnectors and believe they can play a key role in enabling the UK Government's ambition for 40 gigawatts of offshore wind. We've been successful in our Humber carbon capture project, receiving a contribution of £56 million from government to develop a system to capture, transport and store carbon emissions from industries in the Humber and Teesside areas in partnership with a number of oil and gas majors. Moving to the US, our onshore renewables business continues to grow following the completion of our acquisition of Geronimo last year, now named National Grid Renewables. The business operates over 400 megawatts renewable generation with another 600 megawatts currently under construction, including Noble, our solar and battery project in Texas, which we expect to begin operations in the first half of 2022. With regards to our other businesses, year-on-year profitability was lower as a result of fewer land development sales in our property division. So to summarize, we've delivered strong performance across our operations in a very challenging year, And with our announced transaction in March, we further strengthened the resilience of our business as we look to the future. So, having spent some time reviewing the year just gone, and before moving on to talk about our new five-year outlook, I'd like to spend a moment talking about why I think our portfolio mix is the right one. National Grid is one of a handful of FTSE 100 companies to have consistently grown its dividend for over 20 years. helped by the balance between different regulatory regimes in the US and the UK, and the ebb and flow of CAPEX requirements as we've seen growth rise and fall at different times in different jurisdictions. The geographic and regulatory diversity has been key to delivering strong returns, with an annualised total shareholder return of nearly 10% over the past 10 years, versus the FTSE 100 delivering just under 6%. And following the completion of our transactions, I'm confident that this diversity will continue to underpin our performance in the years ahead, given the exciting opportunities we see, including the connection of offshore wind, the infrastructure requirements for EV charging, the critical investment in safety and clean gas growth, and in our National Grid Ventures business, the opportunities with interconnectors and renewables. As you can see, our portfolio places us firmly at the heart of the energy transition. And so it's against this backdrop that today, for the first time, we're setting out our longer-term expectations for the group. The next five years will see us increase our capex to between £30 and £35 billion, the highest ever level of investment for National Grid. And as we finalise the purchase of WPD and crystallise our planned asset sales, together with this higher level of investment, we expect to deliver group asset growth of 6% to 8% per annum on average to 2026. We'll deliver this growth whilst maintaining a strong balance sheet with comfortable headroom at our current credit rating level throughout the period. Growth in our assets drives growth in our earnings with group underlying EPS expected to grow by 5% to 7% per annum on average through to 2026 and to be at or above the top end of our range in the early years of this period. And this will continue to support our policy, of growing the dividend in line with CPI-H. So, with that, I'll now hand over to Andy to go through our full year results, as well as providing a little more detail on our five-year plan. I'll then come back and talk about our priorities and outlook for the coming year.

Thank you, John, and good morning, everyone. Before covering the group's full year performance, I'd like to provide the details of the COVID financial impacts we've experienced during this year. Firstly, I'd like to start by saying that I'm really pleased with the performance we've delivered. Our teams have done a great job in mitigating direct COVID costs against a tough operating backdrop whilst continuing to deliver the service our customers expect. Against our guidance of a £400 million underlying operating profit impact from COVID, we've seen an impact of £355 million. Additionally, in the last few weeks, we've recognised £59 million revenue recovery in FY21 for the commodity portion of some of our COVID bad debts. Therefore, our year-end underlying operating profit impact from COVID is £296 million. This is made up of a residual bad debt cost of £120 million, a shortfall of revenue under existing rate plans of £78 million, net direct COVID costs of £28 million, and a £70 million impact from delays to new rates being approved in Kedney and Kedley. We also guided to a cash flow impact from COVID of up to £1 billion for the full year, with our final cash impact being around £600 million, with some elements ultimately being smaller than initially estimated. As our regions emerge from COVID during FY22, we continue to expect an impact to be felt from weaker demand and reduced cash collection from our US customers. But as I've said before, in the US, we remain confident that we'll be able to recover the majority of these COVID-related costs, either through the usual regulatory mechanisms or through separate filings. Turning now to the overall group performance for the year, which was resilient in the face of COVID, delivering a solid financial performance. As John has mentioned, underlying operating profit was £3.3 billion, down 3% at constant currency versus last year, mainly reflecting the impact of favourable net income from rate case increases across our US regulated businesses. Lower controllable costs in our UK regulated businesses, which altogether were more than offset by high depreciation in UK electricity transmission. and the impact of COVID, including the bad debts in our US business. EPS was down 7% at 54.2 pence, reflecting COVID-related costs, a weaker US dollar and lower property sales, all partly offset by lower financing costs. Our resilient operational performance was also reflected in the 10.6% group return on equity, and our value added per share was 51.3 pence. Our asset base grew by 5.6%, reflecting capital investment of £5 billion in line with our guidance. The full-year dividend of 49.16 pence per share is up 1.2% in line with our policy, and the Board has recommended a final dividend of 32.16 pence. Now, looking at the performance of each of our segments in detail. UK electricity transmission delivered another year of strong operational performance, achieving a 13.9% return on equity, 370 basis points above the allowed. Totex incentives contributed 240 basis points from our streamlined capital delivery processes in load and non-load projects and further OPEX efficiency savings. Other incentives and legacy allowances contributed 130 basis points, 50 basis points above last year. Underlying operating profit of £1.1 billion was down 4%, largely due to the impact of COVID and higher depreciation. The UK efficiency programme continued to deliver savings, with a further £34 million reduction in controllable costs compared to the prior year, in total exceeding the £100 million overall UK efficiency savings target that we set two years ago. Capital investment at £1.1 billion was 3% higher than last year, primarily due to continued spend on the second phase of the London Power Tunnels project and the Hinkley Seabank project. This investment, along with the inflation-linked growth in the RAV, increased our year-end regulated asset value by 3.1% to £14.6 billion. UK gas transmission delivered a return on equity of 9.6%, reflecting the higher capital costs of key compressor and data centre projects. Other incentive performance at 90 basis points was below last year due to lower shrinkage performance. Underlying operating profit of £438 million was up £36 million, or 9%, compared to FY20. This is primarily due to higher revenues, year-on-year RPI uplift and lower controllable costs. Capital investment was £176 million, £73 million lower than last year due to the completion of several large projects and lower spend on compressor projects and IT infrastructure. And, including inflation, the regulated asset value was flat year-on-year at £6.3 billion. Turning now to our US business. The return on equity, excluding COVID, high levels of non-deferrable storm costs and the impact of rate case delays that John mentioned was 8.6%, 92% of the allowed level. After taking account of storms and incremental COVID costs, the return on equity was 7.2%. Underlying operating profit was £1.5 billion, driven by an increase in net revenues of £216 million at constant currency, reflecting rate increases and capital trackers, more than offset by an increase in controllable costs due to higher IT costs and inflation, high depreciation due to growth in the rate base, and a year-on-year increase in COVID costs. We've increased investment in our U.S. networks to $4.3 billion, driving strong rate base growth of 8% to $27.6 billion. Assets outside rate base, excluding working capital, grew year-on-year to $3.2 billion, reflecting our investment in several multi-year projects that we expect to be coming into service in future years. National Good Ventures contributed £354 million, an increase of 5% on last year, including the first period of operation for IFA II, our second interconnector to France. Grain LNG profits were higher than last year due to the extension of asset lives in line with our new contracts, and metering profits fell less than expected reflecting a slower decline in our legacy meter population. Capital investment decreased significantly to £509 million, mainly driven by the non-recurrence of the acquisition of Geronimo and lower investment in our interconnected projects as they progressed towards completion. Our other activities had a net charge of £61 million, £34 million higher than prior year, reflecting fewer property sales and slightly higher insurance costs. Our venture capital business National Grid Partners invested £38 million, £21 million lower than FY20 at constant currency, due to reduced activity at the start of the year in the early months of COVID. Financing costs decreased by 8% at constant currency to £942 million, mostly due to lower RPI and favourable borrowing rates. The effective interest rate for the year decreased from 4.1% to 3.2%. The underlying effective tax rate was 21.2%, 130 basis points higher than FY20, primarily as a result of a smaller impact on tax credits relating to prior years. Underlying earnings were down 5% at £1.9 billion, and underlying earnings per share decreased 7% to 54.2%. Operating cash flow was £4.6 billion, £300 million lower than last year, driven by increased storm costs, lower US customer collections, and reduced UK revenues. During the year, we raised over £5.6 billion of senior debt, and the year-end closing net debt was £29.7 billion, including a £1.6 billion favourable movement from exchange rates. After adjusting for Rhode Island as an asset held for sale the revised closing net debt was £28.6 billion. Our regulatory gearing for the year was at 65% and the RCF to debt and FFO debt metrics were 6.6% and 11.7% respectively. These both reflect lower revenues and COVID costs and, as we have previously said, the credit agencies have signalled they are willing to look through any short-term COVID-related weakness. Going forward, we expect to be comfortably positioned in our new rating band, and this rating position, coupled with our regulatory frameworks, means we're well placed as we look to the future. So, turning to our guidance and starting with the current year. As usual, business-by-business detail is given in our forward guidance section in the results statement. This forward guidance is based on our existing businesses for the entire year. Given this scenario, we expect FY22 underlying EPS growth to be towards or above the top end of the 5% to 7% growth range as set out in our five-year guidance. Our earnings outlook will change as the transactions move forward through the course of the year. We expect to provide guidance on WPD by half-year results, and WPD's earnings will be included in group results from the point of deal completion. we expect to commence the sale process for a majority stake in gas transmission in the second half of this financial year. And therefore, under accounting rules, we expect this business to be classified as a discontinued operation. This means we'll have to remove all of its contribution to the group results when this change in disclosure is made. For Rhode Island, we would expect to include it in earnings in RFI 22 results up to the point of sale completion. So, putting this together, we still expect to deliver FY22 underlying EPS at or above the top end of the 5% to 7% growth range as set out in our five-year guidance. Turning now to that longer-term guidance. As you'll have seen earlier, our five-year financial framework is presented based on WPD being a full member of our group, the sale of Rhode Island completing by the end of the financial year, and the sale of a majority stake of gas transmission completing during FY23. We're confident in the visibility that the £30 to £35 billion group investment levels to FY26 gives us, and I'd like to give a little more detail about this. In the UK, we expect investment levels of around £8 billion in electricity transmission will be needed during the Rio T2 period. As we explained when we accepted the majority of the T2 package, this will cover asset health anticipatory and system reinforcement to facilitate offshore generation and other new onshore system connections. We expect the WPD networks to be investing four to five billion pounds over the next five years in asset maintenance, facilitating the infrastructure for electric vehicles and directly connected generation. In our U.S. businesses, we expect investment of around 17 billion pounds over the years to FY26. And as we've previously explained, this includes safety-related projects in our gas networks, storm hardening and other net-zero investments in our electricity distribution networks, as well as incremental investment in electricity transmission projects. Lastly, we expect that National Grid Ventures will invest £2-3 billion over five years, focusing on our interconnector programme and continued investment in US renewable generations. As we complete the WPD purchase, subsequent asset sales and deliver the capital investment programme, whilst taking into account the broad economic protection our businesses have against rising macro variables such as inflation, group asset growth is expected to be 6% to 8% per year on average to FY26. I've said previously that while we settle the WPD, Rhode Island and gas transmission transactions, group gearing levels will be above current levels. Over the five years to FY26, under our central assumption of CPI at 2%, we expect regulatory gearing to increase through the transactions and then to settle above 70% once all three transactions are completed. However, throughout the period, we expect our long-run gearing levels and the other standard metrics we monitor to sit comfortably within our current BBB+, BAA1 corporate rating band from S&P and Moody's. And as a result, we do not expect any further rating action at a group level. The changing mix of the group, coupled with the strong growth opportunities we see across our businesses in the coming years, is expected to deliver compound annual growth in underlying earnings per share in the 5% to 7% range through to FY26, including our long-run average script take-up assumption of 25% per annum. As we work through the transactions together with recovery from the impact of COVID, we would expect earnings growth to be at or above the top end of our range in the early years. This will continue to underpin our sustainable dividend policy into the future. So to summarise, we perform strongly in mitigating the direct costs of COVID and continue to work with regulators on cost recovery mechanisms. we've delivered £5 billion investment in critical infrastructure and achieved a solid underlying financial performance. The recent acquisitions have enhanced the long-term growth profile of the group, and our confidence is reflected in the new five-year financial framework we have set out today. Now, John will take you through the priorities and outlook for the coming year.