National Grid plc

Good morning and welcome to National Grid's half-year results presentation. Thank you for joining us this morning. I'm Nick Ashworth, Director of Investor Relations, and I'm joined this morning by our CEO, John Pettigrew, and CFO, Andy Ag. As usual, there'll be time for questions after the presentation, but given the investor day later, please focus your questions on the first six months' performance. So with that, I'd just like to draw your attention to the cautionary statement that you'll find at the front of the presentation, and I'll now hand over to John to begin.

Thank you, Nick. Good morning and welcome to the call. As usual, I'm joined by Adyag, our CFO, and after the call, we'll both be happy to take your questions. Looking across the group, I'm delighted with the progress we've made over the past six months. So let me start with the key takeaways. Following the transactions we announced in March, we were pleased to complete the purchase of WPD in June, a little ahead of expectations as we advanced our strategic pivot that places National Grid at the heart of delivering Net Zero. The sale of our Rhode Island business continues on track, with completion expected by the end of the financial year. And we've recently launched the sale of the majority stake in our UK gas transmission business, and expect to complete sometime next summer. Alongside these transactions, we've now moved to a new operating model, with seven business units across the group, as we look to deliver the financial, customer and regulatory outcomes that will be required on the journey to net zero. This has led to the creation of US business units for New York and New England, and UK business units for transmission and distribution. Management layers have been removed, with each unit having P&L accountability and clear responsibility for delivering the innovation and efficiencies specific to their area. And as we've announced this morning, it will help us deliver a new £400 million cost efficiency programme, maintaining a flat, controllable cost base, even whilst assets grow by over 20%. This focus on our cost base will in turn help us to deliver at least 95% of our log returns across our US businesses as we achieve these efficiencies and support our ability to reach our targeted 100 basis points for annual log performance through Rio T2 period alongside our continued focus on efficient capital delivery. I'm really excited to be able to talk about all of these areas and more at our investor event this afternoon where I hope to see many of you in person. Alongside these key takeaways, I've also been really pleased with the strong financial and operational performance that we've delivered in the first half. On an underlying basis, that is excluding the impact of timing, exceptional items, and the contribution from gas transmission and metering, which are now classified as discontinued businesses, operating profit of £1.4 billion was 52% above last year at constant currency. This was helped by a first-time contribution from WPD. But even excluding this, operating profit increased by 24% compared to the prior year, as we saw a first-time contribution from the new IFA II interconnector to France, part of our £2 billion investment programme to deliver four new interconnectors by 2024, an incremental £250 million of EBITDA, and a higher revenue contribution from UK electricity transmission as we start the new Rio T2 period. where we'll be investing on average over 50% more per annum than in Rio T1 to accelerate the energy transition. Consequently, underlying earnings per share was up 66% compared with the first half of last year. Given this strong start, we now expect to deliver full-year underlying EPS significantly above the top end of our 5% to 7% range. This is primarily driven by early commissioning of our new NSL interconnector coupled with higher auction prices across our interconnected portfolio, which is expected to deliver around £100 million higher operating profit. Andy will, as usual, cover the performance of each of our segments in more detail shortly. Moving now to our investment in critical infrastructure. Capital expenditure for our continuing operations was in line with guidance for £2.8 billion 22% above the prior year, reflecting our investment in enabling the energy transition across our market, including higher UK electricity transmission investment on large projects such as the connection of the new Hinkley Power Station at Hinkley Point in the southwest, the investment of £315 million by WPD, and increased US network investments in reducing emissions from our gas pipelines and storm hardening for our electricity distribution network. And in line with our policy, the Board has proposed an interim dividend of 17.21 pence per share, reflecting 35% of last year's full-year dividend. Turning next to our safety and reliability performance. Safety is at the heart of delivery across our businesses. I'm pleased to say that in the first half of FY22, we saw our lost time injury frequency rate maintained at the level of 0.11, the same as last year. turning to reliability, which has also remained excellent across our UK and US networks. In the US, we responded well to a number of storms, including tropical storms Elsa and Henry, where we saw significant disruption across our Massachusetts jurisdiction. However, despite this disruption, I'm proud to say that we were able to restore over 90% of our customers within 19 hours. And in the UK, we've managed well through the summer despite low levels of wind generation demonstrating the effectiveness of the new tools the electricity system operator is using as the energy transition progresses. And looking forward, the electricity system operator has published its winter outlook, forecasting an electricity capacity margin of 6.6%, slightly lower than last year, although well within the required reliability standards. And with regards to the UK gas network, whilst there has been heightened awareness of gas prices in the past few months, like electricity, We're forecasting sufficient capacity this coming winter, with available peak capacity of over 600 million cubic metres per day, compared to a cold day demand forecast of around 500. In the US, falling in the north-easter seen at the end of last month, and given the ever-present possibility of further storms, we've again reviewed our procedures and are well prepared for the coming period. In our National Red Ventures business, the fire at our Selinge interconnector station has led to the loss of half the capacity of I41. Following our internal investigation, we now expect 500 MW to be back online by next October, and I'm pleased we were recently able to announce that the remaining 500 MW will be back in service earlier than we anticipated by December 2022. So moving now to the operating performance across the business in the first half. And starting with our new business, WPD, where we're following our purchase on the 14th of June, we're now reporting its contribution as our UK electricity distribution business. As I've said before, I'm incredibly excited about the opportunities WPD adds to the group, its long-term, highly visible growth, and the transformation it brings to National Grid's shape and positioning at a time of significant change across the energy sector. The first few months tells me there are lots of opportunities for National Grid, learning from WPD's low-cost, customer-centric business model, and for WPD to learn from our track record of engineering excellence. You'll hear more about this from Phil Swift, the WPD President, later this afternoon. And so, in our first three and a half months of ownership, WPD's capital programme delivered £350 million of investment, mainly resulting from demand-related reinforcement, asset replacement, network faults and IT upgrades. Our focus is now on finalising the business plan for the up-and-coming Rio ED2 regulatory review, which will be submitted in early December. As with the Rio T2 process, we've taken on board significant amounts of stakeholder and customer feedback and reflected this in the plans. whilst also taking into account the lessons learned from the recent Rio T2 review. These plans will address the investment opportunity to deliver a step up in the capacity to support wider rollout of electric vehicles, greater adoption of electric home heating and more renewable generation connecting to the distribution network. Moving on to our UK electricity transmission business, the first six months of Rio T2 marked a successful start to the new regulatory period. We continued our capital programme with £587 million of investment, 17% higher than the first half of last year. This investment was driven by a further step up in our asset maintenance activity, such as network refurbishment and substation replacement. Continued progress on the Hinkley-Seambank connection, where we're utilising the new T-pylon for the first time. and higher spend on the tunnel boring phase of our £1 billion London Power Tunnels project. The last half has also seen our technical appeal reviewed by the CMA. Its final determination was published at the end of October, where it confirmed the removal of the outperformance wedge. Having spent time recently at COP26, listening to and engaging with politicians and policymakers to encourage acceleration of green investment, it's never been a more critical time to have a regulatory framework that can enable its delivery at pace, if we are to meet the challenges and opportunities of net zero. You'll hear more about this from me this afternoon. Finally in the UK, with the sale process now launched, gas transmission is reported as a discontinued operation. However, I'm really pleased with the performance in the first half of the year, as it begins this new Rio Tito period. Capital investment of £131 million was up 38%, reflecting higher spend on acid health. And like electricity transmission, it's targeting 100 basis points of outperformance through this price control period. Moving now to our US jurisdictional businesses, starting with New York. In the period, we invested £851 million, up 10% of constant currency, mainly driven by COVID restrictions in the prior period. Our biggest programme of work is the replacement of leak-prone pipes where we've delivered 171 miles in the first half, which is an increase of 80 miles in the prior period, as we further reduce methane emissions across our network. On the electric side, you'll hear later about the progress we're making with transmission opportunities in upstate New York, such as the two gigawatt New York Energy Solutions project, which will help bring more renewable energy into the state. This project will replace eight-year-old transmission lines and is due for completion by FY23. Turning to regulation, I'm pleased with the significant progress we've made where we're targeting returns of at least 95% of the allowed level each year. We've reached a joint proposal with the New York Public Service Commission staff for NEMO in upstate New York. The three-year settlement, which includes an allowable ROE of 9%, will see us invest $3.3 billion in electric and gas infrastructure, fund over 300 new positions supporting measures such as new gas safety initiatives and energy efficiency programs, and adopt innovative new features such as performance-based incentives, giving us the ability to earn incremental returns up to an additional 86 basis points in our electric business. Moving across to New England, in the period we invested £700 million flat on the prior year. Whilst we saw higher levels of investment in Massachusetts, lower spend in Rhode Island due to COVID offset this increase. Like New York, we've made strong progress with leak-prone pipe replacement and have delivered 85 miles of new pipe in the first half. On the electric side, we've continued investing to strengthen our networks against increased storm activity and to respond to customer requests, primarily in new urban residential areas. Turning to regulation, we've agreed a new rate case for Massachusetts Gas, effective from October. This follows the same formula as our performance-based rates we agreed for Massachusetts Electric last year. The rate case will allow will further allow an ROE of 9.7%, incremental operating expenses of $65 million, and over 130 new positions to support CapEx of around $3.5 billion over five years. These Massachusetts rate cases, combined with the inflation forecasts we incorporate in our New York rate plans, means we have businesses that are in a strong position to mitigate our inflation exposure. Looking now at National Grid Ventures, where we now include U.S. generation following our reorganization. Investment of £282 million was marginally up on the prior period. It was primarily focused on delivery of our interconnectors, and we're pleased that the North Sea Link, our subsea connection with Norway, came online ahead of schedule in October this year. And our Viking link with Denmark remains on track to be operational in 2024. Moving to the US, our onshore renewables business has completed the 200 megawatt Prairie Wolf solar project in Illinois, which will be commissioned by year end and will bring our capacity under operation to just over 600 megawatts. So let me now hand over to Andy to take you through the detailed financials before I come back and briefly summarize our first half year achievements. Andy.

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. The changes to our portfolio provide a bit of complexity this year and I'll shortly talk through the moving parts before turning to the group's half-year performance. However, the overall changes to our reporting lines, as John mentioned earlier, should enable a clearer understanding of our business performance going forward. With the acquisition of the UK's largest electricity distribution network, Western Power Distribution, completed on the 14th of June 2021, its contribution is now included from that date. Our UK gas transmission business, including our legacy gas metering business, is now held as a discontinued operation following the launch of the process for a majority stake sale in this business. As such, all earnings from this segment have been excluded from the underlying earnings of the continuing group. Rhode Island was classified as held for sale on the 31st of March this year and so depreciation ceased. However, since it does not meet the size criteria of discontinued operations under IFRS, we continue to include its operating profit contribution within underlying earnings until the sale to PPL is complete. This remains on track for the end of our financial year. Finally, as we move to business unit reporting, our US regulated operations will be separately reported under New England and New York. Consequently, our US generation business will now report through the National Grid Ventures portfolio. And we are now reporting a UK electricity system operator separately from electricity transmission. For comparability, prior year numbers are shown adjusted for these changes. Before I turn to our half-year performance, I just want to say a few words on the new £400 million cost efficiency programme. that we've announced this morning. The programme builds on the UK and US efficiency initiatives that we've run over the last two years that have already delivered over £150 million of savings. The move to a new organisational structure along business unit lines, as John mentioned earlier, has provided the opportunity for us to identify further efficiency savings, both in the core businesses and across the shared corporate functions. In total, we are targeting over £400 million of savings across the group over three years, with the aim to keep controllable operating costs flat whilst growing our asset base around 20%. Across our US businesses we expect the efficiencies to be over £300 million and in the UK, electricity transmission together with National Grid Ventures are targeting around £100 million of savings. These efficiencies will come through a number of areas such as the increasing use of technology and digital solutions that will deliver greater working practice productivity as well as standardizing our working practices and retaining more of this knowledge within the business. These programs fit alongside the continuing work we are doing on driving capital efficiency across the group, particularly in our large asset delivery programs, such as for Rio T2 in our UK electricity transmission business. You'll hear about some of the many areas where we are innovating and driving efficiencies across the business units later at our investor event. Now, turning to our half-year performance. Underlying operating profits on a continuing basis increased by £483 million to £1.4 billion. As John said, removing a first-time contribution from WPD, operating profits still increased 24% year-over-year, driven by the first-time contribution from the IFA II interconnector as our interconnector programme moves from construction into the operational phase, and a higher contribution from UK Electricity Transmission as we move into Rio T2, and begin to deliver a capital programme that will be over 50% greater per annum than in Rio T1. Higher operating profit, as well as a lower than anticipated increase in financing costs, given some one-off benefits in other interests, resulted in underlying earnings per share increasing by 66% to 22.8 pence. Capital investment from continuing operations was £2.8 billion, 22% higher than the prior year. This reflects the first-time inclusion of WPD capital investment this period, the impact of COVID restrictions in the US in the prior period, and progress on major electricity projects such as London Power Tunnels 2 and Hinkley Seabank in our UK electricity transmission business, all partly offset by lower interconnector spend. In line with our policy, the Board has proposed an interim dividend of 17.21 pence per share Scrip uptake in the summer on the full year dividend was 49% and will again be offering the Scrip option at the half year. Now let me take you through the performance of each of our business segments. Starting with our new business. On 14th June 2021 we acquired WPD for a total cash consideration of £7.9 billion. The deal was financed by an £8.2 billion bridge loan. which is expected to be largely repaid using the proceeds of the planned disposal of our Rhode Island business to PPL and the majority stake sale of our UK gas transmission and metering businesses. On consolidation, we made a number of accounting adjustments as required by IFRS, which have ultimately had a net positive impact on the income statement. Firstly, PP&E has been fair valued and brought onto the balance sheet at £10 billion, below the value in the WPD accounts. With only marginal changes to asset lives, this results in a lower depreciation charge going forward. This has been broadly offset by the removal of custom contributions previously recognised by WPD on the balance sheet, removing the benefit operating profit going forward. Net debt has been fair valued upwards by £1.6 billion to £8.2 billion to reflect credit spreads, interest and inflation rates at the time of acquisition. This results in a lower annual interest charge. We will recognise an intangible asset of £1.7 billion, representing WPD's regulatory licence, as well as goodwill of £4.7 billion. Both of these balances will be subject to annual impairment testing. Consequently, for the half-year, we include a contribution of £257 million within underlying operating profits and capital investments in the period of £315 million. Underlying operating profit for the UK electricity transmission business was £552 million, up £65 million compared with the last half year. This primarily reflects the move to CPIH inflation indexation and higher base revenues as we enter the first year of Rio T2. We invested £587 million on system resilience, asset health and new connections. This was £86 million higher reflecting progress on multiple large projects such as London Power Tunnels 2 and Hinkley Seabank, partly offset by lower investments in smart wires as these projects near completion. We've now had time to work through the Rio T2 final determinations in more detail since their publication. Whilst the price control will be challenging, we believe we'll be able to find ways to innovate and deliver efficiently for our customers. As we complete projects started in Rio T1, and move into Rio T2, we are targeting to deliver 100 basis points of operational outperformance on average through the five-year period. And given this profile, we also expect to deliver this level of performance in the first full year of this price control. And on the electricity system operator, underlying operating profit was up £12 million in the period to £49 million, with higher revenues at the start of the new price control more than offsetting higher costs. Moving now to the US, where underlying operating profit for New York was £141 million, £29 million lower than the prior year. This reflects higher revenues through our rate cash settlements, as well as the non-recurrence of COVID costs from the prior period, more than offset by higher storm costs in the period, increased depreciation from higher levels of investment, as well as a reassessment of recoverable environmental reserves, mainly due to inflation. Captain investment was £851 million, £76 million higher than prior year at constant currency. Increasing capex was driven by the impact of COVID restrictions in the prior year. Overall, we expect full-year ROE to increase to at least 95% of our allowed level, improving on the 2020-21 performance. Turning to New England, underlying operating profit was £247 million, £67 million higher than the prior year. This reflects higher rates in our Massachusetts electric business under its new rate settlement, lower bad debts due to the resumption of collections, as well as lower COVID costs, and the cessation of depreciation following the reclassification of Rhode Island as held for sale. Captain investment was £700 million, £7 million lower than prior year at constant currency. Massachusetts has seen higher levels of investment, primarily driven by the impact of COVID restrictions in the prior year. However, this has been more than offset by permit delays due to COVID in the Rhode Island business. Overall, full-year ROE is expected to increase compared to 2020-21, which was adversely affected by storms, and we expect to achieve over 80% of our allowed level. Looking forward, given the combination of new Massachusetts gas rates from 1 October, together with the new efficiency programme we have announced this morning, we expect to make significant progress towards our target, of at least 95% of our ROE allowances. National Grid Ventures continues to perform well, with underlying operating profit up £66 million to £147 million in the half year. This primarily affected first-time contributions from the IFA II interconnector, which commissioned earlier this year, and growth in our US renewables business. Our 50% ownership in the NEMO interconnector to Belgium also benefited from higher auction prices helping the performance of our joint ventures. However, performance was partially offset by a fire at the two gigawatts IPHA-1 converter station in Stelling, Kent in September. The fire caused significant damage to infrastructure on site with one gigawatt of capacity currently offline. We now expect 500 megawatts to be back online by October 2022 with the remaining 500 megawatts to be back in service in December 2022. We are working on ways to bring the asset back online as quickly as possible and will update on the expected cost of repairs when we have more detail. With insurance in place to largely cover business interruption and rebuild costs, we don't anticipate a material financial impact on the group. Capital investment across National Good Ventures increased from £272 million to £282 million in the period. This reflects investments in additional capacity at our LNG terminal on the Isle of Grain and renewable generation in the US. largely offset by lower capex on the Interconnector programme following last month's successful commissioning of the NSVL Interconnector to Norway. The operating profit for other activities for the half year was £14 million, £45 million higher than last year. This principally reflects fair value gains on investments held by National Grid partners, our portfolio of start-up companies, innovating and investing in new technologies that will drive a smarter energy future including Dragos, a cyber security company for critical infrastructure. Captain investment was £40 million, £15 million higher than last year. With the launch of the sales process, we are now reporting our UK gas transmission business, including the legacy gas metering business, as discontinued. For the period, operating profit excluding timing was £332 million. This was £144 million higher than the prior year. following a change in revenue charging methodology, which has removed volume linkage and will lead to lower levels of seasonality going forward. Capital investment was £131 million, £36 million higher than the prior year. This primarily reflects higher spend on asset health and emissions work. Having now assessed the final determination for Rio T2, gas transmission is targeting to deliver 100 basis points of operational outperformance on average through the five-year period Net finance costs were £475 million, up £73 million, reflecting higher financing costs following the first-time inclusion of WPD debt and funding of the inquisition bridge facility, partly offset by lower pension interest costs, as well as interest on favourable property tax settlements. Our effective interest rate was around 20 basis points lower than the prior year. at 3.1%. A constant currency, net finance costs are now expected to be around £200 million higher for the full year as a result of higher inflation, higher average net debt following the acquisition of WPD and our ongoing capital investment programme, partly offset by one-off benefits in other interests. The underlying effective tax rate before joint ventures was 19%, 330 basis points higher than the prior year due to a change in the profit mix and a reduced impact of prior year adjustments. For the full year, the underlying effective tax rate, excluding the share of joint venture post-tax profits, is expected to be around 21 cents. Underlying earnings were £8.12 million, with EVF of £2.8 million, up 66 cents over the prior year. Finally, given the strong start to the year, we now expect to live a full year under underlying EVF, significantly above the top end of our 5.77 cent range. This is primarily driven by early commissioning by the new NS Connect connector, coupled with higher auction prices across our NS Connect portfolio, which reflects they deliver around £100 million higher operating profit. Moving now to cash flow. Cash has generated from congenial operations of £2 trillion, up 27% compared to the prior year. This reflects our first firm contribution, WWDD. Net gas sales in the earlier period amounted to £1.6 billion, down 24% from the prior period, with higher capital investment, part-class debt, and lower pensioners' dividends, given the split uptake. Net debt debt increased by £12.9 billion to £41.5 billion. Reflecting the consideration of the WDD and its existing debt, part-class debt found a return on HHF debt and national gas as health sales. For the full year, net debt at expected annual rate assisted within the level of 30 October at around £41.5 billion, excluding the main payout at FX. This includes the expected daily benefit of the road island and exposed road resources. I've said previously that our net debt per hour at expected annual rate is stable above £0.077, once we have completed our announced portfolio resubmissioning, and at that level it is to be comfortably within the range required by our credit rating agencies. As a reminder, our target ratings are 7.7% Moody's Aussie debt to debt and about 10% S&P FFO debt to debt ratio. Before handing back to John and give a mark to legislation around high level legislation and interest rate rates, I just want to touch on some things that I see across our businesses. Looking across the group and the regular regulations that we have in place, Moderately higher inflation is a positive over the long term, with a perspective of real returns across the proportion of our regulatory assets, whilst moderately higher interest costs should be truly neutral over time. As an example, on inflation, in the UK, higher inflation is a positive for £23.3 billion regulated assets, given inflation. This is partly offset by £4 billion of inflation in debt, So, a one-year increase in inflation represents around £199 million, an incremental economic value. Across our income statement, whilst our inflation needs to retire interest costs from the interim term of our inflation debt, our regulation rates mean we have good inflation expectations in the long term, so our revenues catch up. In our UK regulation sentences, revenues are linked CPIEIH. And we also get an extension of specific reasons in labor and materials costs under real-time inflation mechanisms. In the U.S., our mass institutions and regulated businesses have added value increases. And in New York, we were able to include all of the prices in our rate plans. Moving to interest, the cost of debt allowance in the UK is up 10% annually, and even if we're funding debt, higher interest costs will be neutral to P&L, as we will receive revenue allowance for it over time. And in the US, regulators take into account the cost of debt, and provide for the cost of these cost customers, which is why most of this is fixed rate and long term in nature. So, to summarise our half year, We've delivered a strong financial performance and now see full-year underlying UPS significantly ahead of our 5% to 7% growth rate. We now include UK electricity to cruise business, WPD, for the first time following our strategic pivot to electricity. And are starting our InetConnect program moving to its operational phase with a first-time inclusion of I-52 and commissioning of our NHL welding. Capital investment levels are up, driven by new regulatory settlements, with a greater focus on energy transition, whilst our balance sheet remains strong, allowing us to fund our investments efficiently. And we have moved to a new operating model and announced a new £400 million cost efficiency programme, as we continue to focus on delivering a fair and affordable clean energy future for all. With that, I'll hand you back to John.