National Grid plc

Good morning and welcome to National Grid's half-year results presentation. I'm Nick Ashworth, Head of Investor Relations, and it's great to have so many of you on the call today. Firstly, please can I draw your attention to the cautionary statement at the front of the pack. As usual, a Q&A with John and Andy will follow the presentation, so please can you join via the conference call to ask a question. All of today's materials are available on our website, and for any further queries after the call, do feel free to reach out to me or one of the AR team. So with that, I'd now like to hand you over to our CEO, John Pettigrew. John.

Thank you, Nick. Good morning, everyone, and welcome to the call. As usual, I'm here with Andy Ag, our CFO. And following our presentations, we'll be very happy to take your questions. The strong results we've announced today, alongside our upgraded five-year financial frame, reflect the resilience of our business during some of the most turbulent and challenging economic conditions we've seen in years. Between April 2021 and March 2026, we now expect to invest up to £40 billion, up from the £30 to £35 billion we originally expected. Of this, £29 billion will support the decarbonisation of our energy systems. This will deliver asset growth of 8% to 10% per annum, drive average underlying earnings per share growth of 6% to 8% per annum, whilst maintaining our strong balance sheet and attractive dividend. Our investment in critical infrastructure is fundamental to the successful delivery of decarbonisation, greater security supply and improved affordability for customers. And our focus on these areas is creating significant opportunities for us today and will drive our growth long into the future. In the near term, as we head into the winter, affordability is understandably front of mind. We've continued to progress our three-year cost efficiency programme, delivering a further £85 million of savings in the first half, on top of the £140 million last year. This is helping us keep our part of the bill as low as possible, whilst delivering asset growth over the three years of around 30%. At the same time, we've taken steps to help our most vulnerable customers who need additional support right now. We've announced that we'll provide £65 million to families most in need of support in the UK and the US to help them with their higher energy bills over the coming two winters. This is in addition to the accelerated return of £200 million of interconnected revenues that we announced back in May. Despite this backdrop, we've continued to make excellent progress to deliver on our key strategic priorities during the first half. In May, we completed the sale of our Rhode Island business. We're also on track to complete the sale of a 60% stake in our UK gas transmission business to a Macquarie-led consortium by the end of this calendar year. As part of this regulatory clearance, the CMA is expected to complete its review by the end of November. The consortium also has an option of the remaining 40% on broadly similar terms. Following the acquisition of Western Power Distribution in June of last year, we made good progress in integrating it into the wider group and have renamed the business National Grid Electricity Distribution. The conclusion of our strategic pivot repositions our portfolio towards electricity and gives even greater visibility to our growth trajectory over the long term. So turning to our financial performance, whilst reported results are elevated in the first half given structural changes to our portfolio, I'm really pleased with the performance of the business. On an underlying basis, that is excluding the impact of timing, exceptional items, and the contribution from gas transmission and metering, which is classified as a discontinued business, operating profit in the first half was 2.1 billion pounds. This reflects a full six months of contribution from both UK electricity distribution and our NSL interconnector to Norway. The planned property sales to Barclay Group, which formed part of the sale of our St William joint venture in March, as well as improved operational performance across all of our regulated networks. Excluding the timing impact of owning UK electricity distribution for longer and the property sales, underlying operating profit was up 8% compared to the first half of the prior year at constant currency. Underlying earnings per share was 32.4 pence and we now expect full-year underlying EPS to be in the middle of our new 6-8% growth range. Capital expenditure for our continued operations was £3.9 billion, 26% above the prior year, reflecting a full six months of UK electricity distribution, higher investment across both New York and New England, and in national grid ventures, higher investment on the Selinge Converter Station rebuild, our Viking interconnector, and our Isle of Grain expansion project. And in line with our policy, the Board has proposed an interim dividend of 17.84 pence per share, reflecting 35% of last year's full-year dividend. Turning next to our safety and reliability performance. Safety, as always, remains a critical focus across the business. In the first six months, we saw a slight improvement in our injury frequency rate to 0.12, but still behind our target of 0.1. Following a tragic event in Massachusetts in May, where a US employee lost his life, we've redoubled our efforts to reduce safety incidents and implemented further learnings through an updated safety strategy rolled out across the group. Moving to reliability, which has remained excellent across our UK and US networks. In the US, we've seen fewer storms than last year. The few we've had only impacted a small number of customers, with everyone reconnected within 25 hours. In the UK, we've managed well through the summer, despite the volatility of energy markets. This demonstrates the effectiveness of new tools in the electricity system operators using, which support both the energy transition and the reliability of our networks today. And I'm sure many of you would have seen the winter outlooks published last month. Given the uncertain outlook for gas this winter across Europe, both the electricity and gas system operators have set out not only the base scenarios, but also provided additional downside cases. With regards to the electricity system operator, its base scenario forecasts an electricity capacity margin of 6.3%, a similar level to recent winters and within the required reliability standards. the gas system operator is forecasting available peak capacity of over 600 million cubic metres per day, compared to a one in 20 years peak demand of 480. We're confident of delivering our usual high standard reliability across our engine networks in the months ahead, and remain vigilant as we move through winter in both the UK and the US. Moving now to the operating performance across the business, starting with UK electricity distribution. I'm really pleased with the performance of the business since we acquired it in June last year. I've seen firsthand the passion and knowledge the team brings to delivering for its customers, which I'm convinced will help to drive further improvements to performance across all our businesses. Capital investment reached £584 million in the half, following a 10% increase in new customer connections driven by low carbon technologies. And as we approach the end of ED1, our key priority is to reach a settlement on the ED2 price control. At the end of June, we received the draft determination and we're working with Ofgem on four key areas. First, streamlining the number of uncertainty mechanisms to reduce complexity and allow for efficient investment. Second, to agree more symmetrical incentives, having seen the significant customer service benefits of these in ED1. Third, narrowing the gap on Ofgem's proposed 19% reduction to our expenditure so we can deliver the outcomes our customers have asked us for. And last, given the macroeconomic situation and critical need for investment, we must reach a sensible outcome on the financing package, in particular a fair allowed cost of capital that reflects the higher cost of equity and debt we're now seeing in the market. Moving on to our UK electricity transmission business. We've made good progress with our capital programme, investing £629 million in the first half. This increased investment was principally due to higher spend on our £1 billion London Power Tunnels project, as we undertake our first full year of tunnel boring work, and our initial overhead line projects as part of our East Coast reinforcement programme, starting with the Brantford to Norwich circuit. We've also continued to make good progress on our Hinkley Sea Connection project, which is now over 75% complete and on track for full completion by December 2024. On the regulatory front, in August, the ESO published the first holistic network design, which lays out a plan for a coordinated onshore and offshore network to efficiently meet the government's ambitious targets for 50 gigawatts of offshore wind. I'll come back later and talk about the key decisions needed in the next six months to allow us to support the government in its aims. Finally, in the UK, gas transmission continued to be reported as a discontinued operation following the announced sale. The business has continued to perform well, with capital investment of £174 million up 33%, reflecting higher spend on acid health and in line with our Rio T2 regulatory allowances. Now, before moving on to the performance of our US businesses in the first half, I want to spend a moment on the clean energy vision we launched earlier this year. As those of you who attended our investor event in Brooklyn know, we envisage a fossil-free future for our networks by 2050. We're targeting a hybrid electric and clean gas approach that will utilize the gas networks, provide continued security supply, allow customers to have a choice, all whilst keeping customer bills lower than an all-electric alternative. I'm pleased that we've had such a positive response from policymakers, regulators, and local communities to this vision. So, focusing first on New York, our capital investment program at over 1.2 billion pounds during the half was 27% higher at constant currency. This was largely driven by increased resilience and storm-hardening spend, as well as large-scale renewable connection projects, such as the SmartPath Connect project, where we're upgrading 110 miles of transmission lines in upstate New York. Our leak-prone pipe replacement program continued on track with 123 miles of pipeline replaced. On the regulatory front, in July, we received approval to proceed with the phase one projects under the State Climate Leadership and Community Protection Act, or CLCPA. This represents around $600 million of investment before 2030, including projects such as the 129 miles of circuit rebuild in our Niagara Mohawk service area to support incremental renewable generation capacity. And by the end of this year, We also anticipate a response on the CLCPA phase two order, which includes a further $2 billion of investment to enable over two gigawatts of renewable generation in upstate New York. Moving across to New England, it's been a busy regulatory period for us. In September, the Massachusetts regulator approved our annual rate adjustments for electric of $44 million and for gas of $64 million. These rates became effective at the beginning of October. Also in September, the DPU approved our five-year demonstration program for community ground source heat pumps, and we aim to select a first site by the end of the year. And in October, the DPU approved just over $300 million of investments as part of our grid modernization plan. In the period, capital investment grew by 7% at constant currency to £862 million due to increased acid condition work in electricity distribution and transmission, continued leak-prone pipe replacement with 71 miles delivered in Massachusetts in the half. This growth was partially offset by lower investment in Rhode Island as we completed the sale to PPL at the end of May. And finally, moving to National Grid Ventures, where capital investment reached £478 million, up £181 million in the prior period. This reflects progress on the Selinge Converter Station rebuild, expansion work on our Isle of Grain LNG facility, continued construction of the Viking Link with 558 kilometres, or 73% of the cable now laid, and increased investment in renewables with the construction of over 670 megawatts of solar projects in the US. Elsewhere, we continue to make progress on our multipurpose interconnectors and the case for further network integration to European countries through offshore wind farms. And in the US, our offshore wind joint venture with RWE has been developing proposals that we expect to submit to New York State in January as part of their third solicitation for offshore wind. So with that operational overview of the first half, let me now hand over to Andy to take you through the financials before I come back and talk about our priorities for the rest of this year. Andy.

Thank you, John, and good morning, everyone. I'd like to highlight that, as usual, we're presenting our underlying results, excluding timing, exceptional items, and that all results are provided at constant exchange rates. And as a reminder, we continue to report our UK gas transmission business, including our legacy gas metering business, as a discontinued operation whilst we complete the 60% stake sale. As such, all earnings from this segment have been excluded from the underlying earnings of the continuing group. Before turning to our financial results for the half year, I'd like to start by expanding on the comments John has made about our strong and resilient business model. This is partly driven by the regulatory frameworks we have in place, but it goes much further than this to the efficient delivery we drive and the long-term financing strategies that we put in place. Together, these enable us to manage the impact of changes in exchange rates, inflation, and interest rates. And it's why we're able to deliver an attractive balance of growth and yield year after year. In order to reduce exchange rate volatility from our US businesses and to reduce the exposure of our ratings metrics to changes in FX, we consistently hedge around 70% of our US assets with dollar-denominated debt. This means, from an earnings perspective, our general rule of thumb is that for every $0.05 move in the US dollar sterling exchange rate, we expect to see a plus or minus 1p move in EPS on an annualized basis. Moving to inflation, as we said back in May, in the near term, inflation is broadly neutral to our EPS as higher UK underlying operating profit is offset by higher index-linked debt costs. In due course, and assuming inflation moderates, UK operating profit will benefit from real returns on a higher regulated asset base. This should then translate into improved earnings as the level of index-linked interest costs reduce. Finally, with interest rates moving higher, we do expect our funding costs to rise as we look forward. Our regulated operating businesses broadly match leverage to our regulatory frameworks, which enables us to recover efficient debt costs. We also have just under £12bn of debt at the holdco level, with maturities out to the early 2030s. the higher expected interest costs of this refinancing has been factored into our updated five-year financial frame. And so, pulling all this together, our updated five-year frame demonstrates the strength of our business model. For the period from April 21 to March 26, we now see capital investment for the group of up to 40 billion pounds from our prior guidance of 30 to 35 billion pounds. As we said in May, inflationary impacts were taking our expected capex to the top end of our prior range. This has now been further increased by a stronger US dollar and incremental confirmed investment for the energy transition. This higher level of investment will increase our asset growth CAGR to 8% to 10% over the period and drive a higher EPS CAGR of 6% to 8% from the FY21 baseline. and we continue to aim to grow the dividend in line with average CPIH. Importantly, these higher levels of investment and growth can be delivered whilst credit metrics remain within the bands required to maintain our strong investment-grade credit rating. Indeed, once the transactions are complete, even with higher levels of investment, we expect net debt to RAV of around 70%. Nearer term, as well as updating our five-year financial frame, we're also upgrading our FY23 EPS guidance. We now see underlying EPS for this year growing in the middle of our new 6% to 8% CAGR range, based on our assumption of an average US dollar exchange rate of 1.2 for the year, and after taking into account the new winter support package that John talked about earlier. As well as the move in FX, we are also seeing an improvement from higher capitalized interest as rates have increased, as well as some improvement across our interconnected portfolio and from higher fuel gas income at the Isle of Grain across our National Grid Ventures division. So, turning to our half year performance. Underlying operating profits on a continuing basis increased by 647 million pounds to 2.1 billion pounds. This increase in operating profit was mainly driven by a full six months of earnings in the period from UK electricity distribution following its acquisition in June, 2021. The completion of property sales following the sale of our stake in the St. William joint venture to Barclay Group, a higher interconnector contribution following the commissioning of our Norwegian interconnector NSL in October, 2021, as well as good underlying performance across our regulated businesses. Higher operating profit, partially offset by a rise in interest costs, has resulted in underlying earnings per share increasing by 42% to 32.4 pence. Capital investment from continuing operations was markedly up to £3.9 billion, 26% higher than the prior year. This reflects the full six months' inclusion of UK electricity distribution capital investment this period, as well as higher non-cash lease additions in New York and New England. In line with our policy, the Board has proposed an interim dividend of 17.84 pence per share, representing 35% of last year's total. Scrip uptake in the summer on the full-year dividend was 9%, and we'll 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 UK electricity distribution, underlying operating profit was 579 million pounds, up 322 million pounds from the prior year. This was largely driven by the additional two and a half months of earnings this year, alongside higher index revenues and a small gain on disposal of its smart metering business. Capital investment increased to £584 million for the half year, an increase of £269 million compared to the prior period. We've achieved network reliability of 99.995% and have the industry-leading broad measure customer satisfaction score of 9.01 out of 10 across our 8 million customers. Moving to electricity transmission, where underlying operating profit was £564 million, up £12 million compared with the last half year. Whilst we've seen a good first half performance, as we announced back in May, we returned £69 million related to the Western Link settlement in the period. Capital investment was £629 million in the period, delivering system resilience, asset health, and new connections. And we're making good progress in our significant capital projects, with tunnel breakthroughs at London Power Tunnels 2, and the installation of new T pylons at our Hinkley Connection project. Finally, in the UK, the electricity system operators saw underlying operating profit up £3 million in the period to £52 million. Moving now to the US, where underlying operating profit for New York was 202 million pounds, 40 million pounds higher than the prior year. This reflects higher revenues for our rate case settlements and our successful efforts to recover COVID costs from prior periods, partially offset by higher environmental provisions. Capital investment was 1.2 billion pounds, 264 million pounds higher than prior year at constant currency. £150 million of this increase was driven by non-cash lease additions, which are not expected to be repeated in the second half. Turning to New England, underlying operating profit was £316 million, £32 million higher than the prior period. This reflects higher rates in our Massachusetts gas business under its new rate settlement and the annual performance-based regulatory reset in our Massachusetts electric business, partly offset by the disposal of Rhode Island in May, resulting in four months or about a £60 million lower contribution. Capital investment was 862 million pounds, 58 million pounds higher than prior year at constant currency. This was driven by around 150 million pounds of additional investment in Massachusetts, offset by lower levels in Rhode Island, given its sale in the period. National Grid Ventures continued to perform well, with underlying operating profit, including joint ventures, up 133 million pounds to 331 million pounds in the half year. This primarily reflects the contribution from our Norwegian interconnector, which commissioned in the second half last year, increased profit at the Isle of Grain, driven by high fuel shrinkage income, and insurance proceeds received following the 2021 fire at our converter station in Selinge. The rebuild of the IFA asset is on track with 500 megawatts of the one gigawatt offline due back this month and the remaining 500 megawatts expected to return to service in December 2022. This results in two gigawatts of expected available capacity going into this winter. Capital investment across National Grid Ventures increased £181 million to £478 million in the period. Operating profit for other activities for the half year was £145 million, £130 million higher than last year. This is principally driven by property sales completing in the first half as part of the St William transaction, partially offset by fair value losses at National Grid partners given adverse market conditions. Capital investment was £46 million, broadly flat on the prior year. As John said, we expect to complete the sale of a 60% stake in our gas transmission and metering business by the end of the calendar year. We therefore continue to report this segment as discontinued. For the period, operating profit excluding timing was £381 million. This is £49 million higher than the prior year, largely driven by the cessation of depreciation as the business is treated as held for sale. Capital investment was 174 million pounds, 43 million pounds higher than the prior year. Net finance costs were 732 million pounds, up 221 million pounds, primarily driven by index-linked debt, given higher levels of inflation in the period. This period also included an additional two and a half months of UK electricity distribution and bridge facility financing costs. The underlying effective tax rate before joint ventures was 19.7%, 70 basis points higher than the prior year. For the full year, the underlying effective tax rate, excluding the share of joint venture post-pact profits, is expected to be around 22%. Underlying earnings were 1.2 billion pounds, with EPS at 32.4 pence, up 42% on the prior year. Moving now to cash flow. Cash generated from continuing operations was 2.4 billion pounds, up 16% compared to the prior year. This reflects the full six months contribution from UK electricity distribution and the sale of property sites to the Barclay Group in the half year. Net cash outflow in the period amounts to 3.1 billion pounds given higher levels of capital investment and higher levels of cash dividend given the lower script uptake. Net debt increased by £3.7 billion to £46.5 billion, with a stronger US dollar accounting for £3.4 billion of this. The remaining net cash outflow was broadly offset by proceeds from the sale of Rhode Island. For the full year, net debt is expected to reduce by 5 billion pounds from this September level, assuming a 1.2 US dollar exchange rate, driven by the expected receipt of sales proceeds from gas transmission and metering, as well as the sale of our interest in the Millennium pipeline. Finally, I want to touch on our debt structure. As of September, our split of net debt is 71% fixed, 19% floating, and 10% index linked. As we close the sale of gas transmission and continue to pay down and refinance the bridge loan that we've had in place since the acquisition of Western Power, we would expect the level of floating rate debt to be more in line with levels pre-transactions at around 10%. We remain comfortable with our funding requirements, which are on average between five to six billion pounds per annum. And in the first half, we've already completed four billion pounds of bond financing. So to summarize the first half, we've shown that we have a strong and resilient business model and performed well against a volatile economic environment. Demonstrating this, we're upgrading our five-year financial framework as well as upgrading our earnings outlook for FY23. With that, I'll hand you back to John.