National Grid plc

And welcome to National Quiz Fully Results presentation. I'm Nick Ashworth, Head of Investor Relations. And I'm thrilled to see so many people here live in the Stock Exchange for the first time since November 2019. It's been quite a long time. So thanks a lot for attending. And a warm welcome to everyone who's listening online as well. So as always, we'll start with safety. We are not expecting a fire alarm this morning. But if one goes off, then we'll have to go out into the square. The second important thing to draw your attention to is the cautionary statement, which is at the front of the presentation. So as usual, today's materials are all on the website and there'll be a Q&A with John and Andy after the presentation. Any further queries, please feel free to reach out to me or any of the IR team later today. We are around to take your questions. So with that, I'd like to hand over to our CEO, John Pettigrew.

So thank you, Nick, and good morning, everyone, and welcome back to the London Stock Exchange. As usual, I'm joined by Andy Ag, our CFO, and for the presentation, we'll both be happy to take your questions. So the results we've announced today reflect both the underlying strength of our business and the positive impact of the strategic and operational changes we made during the year. Last May, we laid out our five-year framework where we showed National Grid is uniquely positioned as the energy transition company. Today we're announcing that £24 billion, or more than 70% of our five-year framework, is investment in the decarbonisation of energy systems as aligned to the EU taxonomy principles. So by my reckoning, that makes us one of the FTSE's biggest investors in the delivery of net zero. But clearly over the last year, the world in which we operate has seen major changes, with Russia's devastating war on Ukraine, a global economic slowdown and rapidly rising inflation. Despite this, our growth objectives are unchanged and remain just as ambitious. Between 2022 and 2026, we still expect to invest £30 to £35 billion in critical infrastructure, deliver asset growth of 6% to 8% per annum, drive average underlying earning share per growth of 5% to 7% per annum, whilst maintaining a strong balance sheet. Our strategy to enable the energy transition for all, whilst delivering for customers efficiently, could not be more important. The need for action to decarbonise was clearly underscored at COP26, where we used our role as a principal partner to push for continued action in the fight against climate change. Since COP26, our strategy has been further underpinned by the UK government's Energy Security Strategy and the Infrastructure Investment and Jobs Act in the US. They both provide further interest to our growth over the longer term. The overall cost of living is clearly a major focus, and we're working hard to provide financial and practical assistance to our customers and communities. For example, in Massachusetts, we've implemented more than $1.3 billion in energy efficiency measures over the last three years. In the UK, we're returning £200 million from our interconnected business to customers early, rather than waiting for the end of the five-year assessment period. And our £400 million cost efficiency programme benefits consumers today and long into the future. These initiatives align with our vision, which is to be at the heart of a clean, fair and affordable energy future. A vision that's never been more critical than it is today. So let me now turn to some of the significant changes we've made in our portfolio over the last 12 months. In June, we completed our acquisition of WPD and the integration process as well. In March, I was pleased to announce our agreement to sell a 60% stake in our UK gas transmission and metering business to a consortium led by Macquarie's. This followed a competitive process through which we received an attractive price and we expect completion in the third quarter of this financial year. The consortium also has an option on the remaining 40% on broadly similar terms, which can be exercised through the first half of 2023. The last part of our strategic repositioning we announced last year is the sale of our Rhode Island business. We've obtained all regulatory clearances and are awaiting conclusion on the legal process. We remain confident that the transaction will complete this quarter. Together, these transactions pivot our portfolio towards electricity and bring even greater visibility and certainty of long-term growth. We also announced the sale of our 50% interest in the St. William joint venture to our partner, the Barclay Group. With substantially all of the development properties identified for transfer, this was a natural time to exit this very successful JV. And finally, last month, Bayes and Ofgem made the decision to create an independent future system operator. The electricity system operator is already legally separated from National Grid PLC, and a process to agree a full separation of sale has begun. We'll work closely with all parties to ensure an orderly transition, which is expected to be completed by the end of 2024. So, turning now to our financial performance. To help you better understand the grid's underlying performance, we've presented our prior year numbers on a pro forma basis. Operating profit of £4 billion was 11% above last year, reflecting a good performance in our UK electricity transmission business in its first year of Rio T2. The early commissioning of the North Sea Link interconnected to Norway, as well as the first full year of operation of IFA2. Higher revenues following the agreement of a new rate case in Massachusetts Gas, and gains on investments by National Wood Partners. Consequently, underlying earnings per share was up 10% compared to the prior year. Capital investment from our continuing operations was in line with guidance at £6.7 billion, 19% above the prior year, reflecting our critical role at the heart of the energy transition. And in accordance with our updated policy, the Board has proposed a final dividend of 33.76 pence per share, This takes the total dividend for the year to 50.97 pence, an increase of 3.7% in line with average CPIH inflation. So turning next to our safety and reliability performance. Last year was another year of good safety performance. However, we did see a small uptick in our last time injury frequency rate from 0.1 to 0.13, primarily due to an increase in minor incidents. This continues to be an area of close attention to ensure that we improve our performance further. Turning to our reliability, we had another excellent year with over 99.9% availability across all of our regulated networks. This is a particularly good outcome with both the US and the UK seeing several challenging storms during the year. So let me now turn to our operational performance. And I'll start with New York, where we achieved a return on equity of 8.8%, 99% of the allowed level, and in line with our target of at least 95%. During the year, we delivered capital investment of $2.6 billion, around $300 million higher than last year. This resulted in a strong rate-based growth of 7.6%. The largest element of this was our gas pipeline replacement program, where we delivered 237 miles, further reducing methane emissions across our networks. On regulation, I'm pleased with the good progress that we've made on rate filings, reaching a settlement on a three-year rate plan for Kedney and Kedley. The settlement, as you know, was delayed by COVID and backdated to April 2020. Because of this, we've chosen to extend the rate plan for an additional year and expect to file for new rates in March 2023. In upstate New York, a new three-year rate settlement for NIMA was approved in January. It includes an allowed return on equity of 9%, with a capex of £3.3 billion over the three years. And we've also been working hard to progress clean energy policy. We've published a joint report with the New York Mayor's Office and Con Edison, recognising low-carbon gas as part of the long-term energy transition. And in August, Governor Hochul was sworn in with an ambitious agenda. I'm pleased with how closely aligned our aims are with the governor, having had the opportunity to meet with her recently at our Brooklyn office. So moving now to New England, where we've made good regulatory progress with a new five-year rate plan for our Massachusetts gas business. This includes an allowed return on equity of 9.7% and a formula which factors inflation into our revenues along the same lines as our electric business. Our achieved return on equity was 8.3%, 85% of the allowed level. And while this was 80 basis points above last year, it's short of our target to reach at least 95%. However, this performance only reflects six months of the new rate case and the initial benefits of our cost efficiency program, both of which will have a fuller impact this year, helping to improve returns. During the year, we delivered capital investment of $2.1 billion, around $170 million higher than last year, with rate-based growth of 6.7%. Similar to New York, we made strong progress with our gas pipeline replacement program, whilst on the electric side, investment was focused on upgrading aging infrastructure. And our focus on working towards decarbonizing our networks also continues. Last month, we filed a proposal with the DPU on the future of gas. The proposal centered around our recently announced Clean Energy Vision, which sets out a plan for utilizing fossil-free gas and electric networks to support the state's climate goals. In the UK, our electricity transmission business has had a successful start to Rio T2, delivering a return on equity of 7.7%, 140 basis points above the allowed level. The first year of Rio has also meant a significant step up in investment, with capex increasing by 21% to £1.2 billion. And this reflects the start of tunnel boring activities on our London Power Tunnels 2 project and construction of the world's first tea pylons at Hinkley Seabank. Our investment in the UK will continue to grow. In March, we received provisional approval from Ofgem for two subsea interconnectors between Scotland and the north of England. These green links will form part of a £10 billion investment needed over the next decade for the 16 major projects identified in the ESO's recent Network Options Assessment. Included in the £8 billion of CAPEX in our five-year outlook for electricity transmission is around £1 billion of early investment in these projects, which will deliver the necessary reinforcements along the East Coast. I'll come on to talk about the government's energy strategy published last month, but it's clear... that the outlook for electricity transmission remains strong through Rio T2 and beyond. Turning now to UK electricity distribution, where WPD has continued to perform well under Rio ED1, delivering a return on equity of 13.6%. The integration process is well underway, and I'm particularly pleased to see our teams working together. So, for example, recently we were able to connect a customer faster at our Coventry substation through our transmission and distribution teams collaborating to redesign the connection. Capital investment of £899 million was driven by asset replacement and reinforcement, alongside connecting new renewable generation and electric vehicle charging infrastructure. A key focus since acquisition has been the submission of the ED2 business plan. As part of this, WPD conducted its largest ever consultation with over 25,000 stakeholders. The plan, which proposes £6.7 billion in Totex, focuses on readiness to connect an additional 1.5 million EVs and 600,000 heat pumps, and driving decarbonisation through connecting 2.6 gigawatts of renewables, all while continuing to support our most vulnerable customers. Our plan also includes more than £700 million of embedded efficiencies, despite investment increasing by more than 20%. We believe the plan balances continued affordability alongside the investment required to accelerate the energy transition and provide a fair financial return. We expect draft determination from Ofgem in June, with final determination in December. Moving next to National Grid Ventures, where capital expenditure was £452 million, similar to the prior year. We're now moving into the operational phase for our new interconnectors, with only the Viking link to Denmark to complete in 2024. IFA2 had its first full year of operation, and we were pleased to commission the North Sea link to Norway ahead of schedule. As you know, we suffered a serious fire at Arcelenge Interconnector Station in September, but since then, one gigawatt has been safely brought back online, with the remaining one gigawatt on track to return to service in December 2022. At Grain LNG, investment increased as we progressed construction of Phase 4 to expand the site's capacity. This followed the fully contracted sale of capacity for 25 years, enhancing the long-term security of UK gas supply. And in the US, our community offshore wind joint venture with RWE was successful in winning a seabed lease in New York, our share of the cost being $300 million. This lease area comprises 125,000 acres with a capacity to host 3,000 megawatts, enough to power 1.1 million homes and is expected to be in operation by 2030. And in our onshore renewables business, we started commercial operations of our 200 megawatt solar project in Illinois, This brings our total operating portfolio to 635 megawatts, and another 700 megawatts is under construction. And then finally, UK gas transmission and metering delivered a strong start to the new regulatory period, with a return on equity of 7.8%, 120 basis points ahead of the baseline returns. Capital investment was £261 million, £57 million higher than the previous year, driven by spend on asset health, emission reductions and cyber security. So, overall, we've had a year of strong performance for National Grid, whilst delivering on a strategic pivot. We're now uniquely positioned at the heart of the energy transition, making record levels of investment and delivering a better and more affordable energy future for all. Let me now hand over to Andy to take you through the financials in detail before I come back to talk through the priorities and outlook for the year ahead.

Thank you, John, and good morning, everyone. To illustrate the underlying performance of our business more clearly this year, we're presenting the comparative underlying results on a pro forma basis. This means we've adjusted FY 2021 to include an estimate for nine and a half months of WPD, together with the associated financing, and to exclude UK gas transmission and metering, which is a discontinued business, and depreciation on Rhode Island, which is held for sale. As usual, our underlying performance from continuing operations also excludes the impact of timing, major storms and its exceptional items, and is presented at constant currency. So, turning to our financial performance. Underlying operating profits on a continuing basis was £4 billion, up 11%, driven by higher UK electricity transmission net revenue to fund higher investment levels. the early commissioning of the North Sea Link interconnector, as well as the first full year of operation of IFA II. The impact of new rates in our Massachusetts gas business, gains on investments in national grid partners, and a reduced year-on-year impact from COVID. This helped underlying earnings per share to increase by 10% to 65.3 pence per share. We've made good progress on our three-year, £400 million cost efficiency programme that we announced in November. with around £140 million of savings achieved so far. And our resilient operational performance was also reflected in the 11.4% group return on equity, up 80 basis points year over year. The Board has recommended a final dividend of 33.76 pence, taking the full-year dividend to 50.97 pence per share, which is up 3.7%. This reflects our policy to aim to grow the dividend in line with average UK CPIH inflation. It was another strong year of capital investment from our continuing operations, with the group investing £6.7 billion, 19% higher than the prior year, and the highest level of investment we've ever delivered. Our investment has increased across all areas, and I'll go into more detail by business unit shortly. Higher investment has also led to strong asset growth across each of our businesses, culminating in group asset growth of 8.7%. This increasing level of investment is focused on delivering the clean energy networks needed across our UK and US regions to enable net zero. We announced back in November that 13 billion of our 30 to 35 billion five-year investment programme was aligned to our green financial framework, where we raise green financing instruments for specific projects. Today, we're going one step further and announcing that around 24 billion pounds of our five-year investment programme, over 70%, is aligned to the principles of the EU taxonomy. Of this, around £14 billion is in our UK businesses and around £10 billion in the US. This now covers most of our electricity investment across transmission and distribution, including connecting clean sources of generation, such as renewables and nuclear. It also covers investment in our gas networks, where we're reducing emissions and investing for cleaner gas. Now let me take you through the performance for each of our business segments. Starting with our new business, UK electricity distribution continues to perform well under Rio ED1. Underlying operating profit for the nine and a half months of ownership was £887 million, an increase of £34 million from the prior period on a pro forma basis. During the period we have owned the business, capital investment reached £899 million, up £45 million over the prior period. This was due to greater spend on reinforcement and connections aligned to the government's green recovery objectives, as well as more high-voltage and electric vehicle connections. Since acquisition, the RAV has grown 9.1% to £9.3 billion. Finally, it achieved a return on equity of 13.6%, 400 basis points ahead of the allowed return. Most of this outperformance relates to improved customer experience incentives, such as fewer and shorter disruptions, alongside Totec's performance. Moving to UK electricity transmission, where we've delivered a strong performance under the first year of Rio T2. Underlying operating profit was £1.2 billion, up £100 million on the prior year. This primarily reflects higher base revenues in the first year of Rio T2 as we embark on greater investment in clean energy infrastructure, partially offset by lower returns. Capital investment at £1.2 billion was 21% above the prior year, primarily driven by tunnel boring activities on London Power Tunnels 2, construction of T-pylons at Hinkley Seabank, and increased activities in our visual impact provision projects in Dorset and the Peak District. This investment helped increase our year-end regulated asset value by 8.1% to £15.5 billion. And we've achieved a 7.7% return on equity, 140 basis points ahead of baseline allowance. This is primarily from Totex incentives, including projects started under Rio T1. And we remain on track to achieve 100 basis points of average annual outperformance throughout Rio T2. Turning to the electricity system operator, underlying operating profit was down £16 million in the period to £54 million, with higher baseline revenues under Rio T2 more than offset by higher costs and depreciation. Moving now to the US, where New York achieved 8.8% return on equity, 99% of our allowed baseline return. Underlying operating profit of £706 million was £12 million lower than the prior year, primarily due to a £130 million increase in environmental reserves given higher inflation, which will ultimately be recoverable in future years, as well as increased depreciation from higher levels of investment. This was partially offset by rate case increases in Kedney, Kedley and Nymo, and a reduction in bad debt charges given the resumption of collection activities post-Covid. In both New York and Massachusetts, we're making good progress working with our state regulators on recovery mechanisms for our COVID-related bad debt expense and remain confident that the majority of costs will be recovered through these mechanisms. Capital investment was £2 billion, £231 million higher than the prior year at constant currency, driven by greater leak-prone pipe replacement activity and our investment in the upstate New York SmartPath Connect transmission project. This led to a 7.6% increase across our New York rate bases, increasing to $17 billion. In New England, we achieved an 8.3% return on equity, 85% of our allowance, slightly ahead of our forecast at the half year. Underlying operating profit was £886 million, £96 million higher than the prior year on a pro forma basis. This reflects higher rates in our Massachusetts gas business under the new rate settlement and resumed collection activities for outstanding receivables. Capital investment was £1.6 billion, £132 million higher than prior year. This was driven by higher levels of gas pipeline replacement and upgrading of ageing infrastructure. And our closing New England rate base of $12.2 billion was up 6.7%, or $763 million year over year. National Grid Ventures continued to perform well, with underlying operating profits, including joint ventures, up £167 million to £408 million for the full year. This primarily reflects the North Sea Link interconnector coming online and the first full-year contribution from IFA II, together with higher revenues from interconnector arbitrage across the portfolio and higher development income in our US onshore renewables division. IFA2, North Sea Link and our NEMO interconnectors have each delivered performance above the regulatory cap this year. As John mentioned, we've agreed a mechanism with Ofgem to accelerate the repayment of our revenues above the cap to customers, equating to around £200 million over two years. Our underlying operating profit therefore includes revenues only up to the cap for these interconnectors. Capital investment across National Grid Ventures reached £913 million, a 72% increase on the prior year, principally driven by higher investment on Viking Link and on Selinge refurbishment, our success in the New York Bight offshore wind seabed lease auction, and higher spend at our grain LNG facility for the Capacity 25 project. Four-year operating profit, including share of joint ventures for our other activities, was £47 million, £105 million higher than last year, reflecting fair value gains in national grid partners, as well as the release of an age liability related to historical balances for unclaimed dividends. The latter has allowed us to inject funds through the year to support additional community and environmental causes. Finally, turning to UK gas transmission, which will be treated as discontinued operation until the sale of the 60% stake completes, expected in the third quarter of this financial year. It's had a good start to the Rio T2 period, delivering a return on equity of 7.8%, 120 basis points ahead of allowance. Underlying operating profit was £734 million, £139 million above prior year. following higher revenues in the first year of Rio T2. Capital investment was £261 million, £57 million higher, driven primarily by gas compressor projects at Peterborough and Huntingdon. Our net finance costs were £1.1 billion, up £37 million on a pro forma basis, reflecting £145 million of higher RPI-linked debt costs, partly offset by one-off benefits relating to favourable pension interest and a property tax refund. For the year, Treasury-managed interest costs also includes £130 million of interest costs for the existing WPD debt book, as well as £100 million of financing for the WPD bridge loan, which we expect to refinance later this year as we receive the proceeds from the sales of Rhode Island and the stake in National Grid Gas. Our underlying effective tax rate before joint ventures was 24.3%, 260 basis points higher than the prior year, reflecting the in-year deferred tax impacts of the UK corporation rate tax change and US state deferred tax remeasurement due to the upcoming sale of our Rhode Island business. Underlying profit after tax was 2.4 billion pounds, with EPS at 65.3 pence, up 10% on the prior year on a pro forma basis. Moving to cash flow. Cash generated from continuing operations was £1.8 billion higher at £5.8 billion, driven by the first-time contribution from WPD, as well as higher NGV cash flows and working capital movements. Net cash outflow in the period was 45% lower at £1.6 billion, further helped by proceeds from the disposal of our interest in the St William joint venture, and a lower cash dividend given scrip uptake in the year, partially offset by higher capital investment. Net debt increased by £13.4 billion to £42.8 billion at constant currency, driven by the acquisition and financing of WPD, partly offset by £4.1 billion of debt that has been reclassified as held for sale, associated with the disposal of national grid gas. As we complete both the Rhode Island and National Grid gas sales this year, we expect net debt to reduce to just under £40 billion by March 2023. Once the transactions have completed, we expect our net debt to RAV to settle slightly above 70%. This is consistent with delivering credit metrics within the ranges required by our credit rating agencies to maintain our strong investment grade ratings. Now turning to inflation. As expected, with high levels of inflation, last year we saw the impact on IFRS operating profit in our UK regulated businesses from inflation-linked revenues, broadly offset by higher RPI-linked debt costs. And at the same time, we've worked hard to deliver flat, controllable costs as part of our cost efficiency programme. In the year ahead, we expect a similar outcome, with the impact from inflation on our UK regulated businesses, again largely offset by inflation-linked debt costs. In due course, assuming inflation moderates, UK operating profit will be driven by higher revenues given the real return on a higher regulated asset base, coupled with mitigation of controllable costs through our ongoing efficiency programme. This should then translate into improved earnings, as the current high level of index linked interest costs moderates. Within our supply chain, we're seeing some higher costs as well as lead times lengthening for certain parts. To date, this isn't having a material impact on the business. In the US, we're seeing above inflation cost increases for certain products. We're managing this by finding alternative suppliers or changing the pace of discretionary spend. Any additional spend would ultimately be picked up in the following rate cases. Finally, and before turning back to John, I want to touch on our five-year financial framework and outlook for the year ahead. We set out our financial frame last May, assuming long-term macroeconomic and energy market assumptions at that time. At the start of the year, we guided that the underlying EPS would be above our 5% to 7% growth range in the near term, as we worked through the transactions. Whilst our strong in-year performance has been better than our initial view, assuming inflation moderates in the next couple of years, we still expect to remain within our five-year framework. And specifically for the year ahead, our forward guidance this morning sets out underlying operating profit growth across our businesses. However, alongside higher RPI-linked interest costs, we will be returning nearly £150 million to customers, reflecting the previously announced Western Link construction delays within UK electricity transmission. Therefore, we expect to see a broadly flat EPS profile for the year ahead. So, in summary, we've had a strong year, with record group investment as we accelerate our spends to deliver the energy transition. a good start to our £400 million cost efficiency programme and a strong financial performance delivering 10% underlying EPS growth year over year on a pro forma basis. With that, I'll hand you back to John.