National Grid plc

Good morning and welcome to National Grid's full year results presentation. I'm Angela Broad, Head of Investor Relations, and it's great to have so many of you on the call today. I'd like to 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. Please join via the conference call to ask a question or use the tab at the bottom of the webcast to submit a written question. All of today's materials are available on our website. And of course, for any further queries after the call, please do feel free to reach out to me or one of the IR team. So with that, I'd now like to hand you over to our CEO, John Pettigrew. John.

Many thanks, Angela. Good morning, everyone. Thank you for joining us to discuss our full year results. I hope to see many of you later today at our Building Our Energy Future event for a deep dive on major capital projects we're delivering across the UK and the Northeast US. As ever, I'm here with Andy Ag, and once we've been through our respective presentations, we'll be happy to answer your questions. Last May, we announced a refined strategy focused on pure play networks. We also set out a new five-year financial framework on our plans for £60 billion of capital investment. This will drive asset growth around 10% per annum and underlying earnings per share growth of 6% to 8%, whilst maintaining a strong balance sheet and delivering an inflation-protected dividend. Alongside this, we set out our comprehensive financing strategy, including our £7 billion equity raise, providing clarity over our funding to at least 2031. In the first year of the five-year framework, we've accomplished a huge amount, despite a turbulent economic and geopolitical environment. We've delivered record capital investment of £9.8 billion in line with our plan and 20% higher than last year. This reflects the scale of the activity across all of our regulated businesses, including significant progress within our ASTI portfolio, where all six of our Wave 1 projects are now under construction, a step up in asset health and network reinforcement in electricity distribution, over 350 miles of gas mains replacement across Massachusetts and New York, and good progress with our SmartPath Connect project in US electricity transmission. We've also secured the supply chain and delivery mechanisms for more than two-thirds of our £60 billion of capital investment. For ASTI, this includes contracts for the delivery of 12 onshore and two offshore projects, while also making good progress on Eastern Green Links 3 and 4 and Sea Link. And in New York, we've made further progress with our $4 billion upstate upgrade, awarding contracts for the first phase, as well as the engineering works for phase two. The policy and regulatory agenda on both sides of the Atlantic has also continued to move forward, further enhancing visibility on our investment plan. In the UK, the government published its Clean Power Action Plan in December, and Ofgem published its decision on connections reform last month, which embeds is it ready and is it needed criteria into the connections process. This will deliver a rationalised queue of projects aligned with the Clean Power Plan, and clarify the specific investments and locations required in the outer years of T3. New legislation on planning reforms was also introduced in March, which aims to reduce the time it takes to deliver infrastructure projects. Whilst the reforms will be more impactful in the 2030s, there are important measures in the bill that have the potential to further de-risk our ASTI projects. In the US, we refreshed all three of our New York rate plans, and agreed new rates for our electricity distribution business in Massachusetts over the last year. Altogether, this means that we've now agreed over 70% of our U.S. investment with regulators over our five-year frame. We also expect to receive approval for our electricity sector modernization plan in Massachusetts, where we file for up to $2 billion of capital investment over the next five years to help deliver the state's clean energy policy. So the combination of these firm foundations of our resilient business model, which provides strong regulatory protections from macroeconomic uncertainty and no significant exposure to energy prices or merchant risk, means that we're very well positioned and hugely confident in our ability to deliver our £60 billion investment programme. We'll have much more to share on capital delivery at our investor event this afternoon, where we'll showcase the sheer scale of our electricity transmission projects, and how we've transformed the way we're delivering them. So turning now to some of the key highlights for the year. We've delivered a strong performance with underlying operating profit increased 12% to 5.4 billion pounds of constant currency. This reflects robust operational performance as a result of increased regulated revenues and flat controllable costs achieved through our focus on agreeing the right regulatory frameworks and efficient delivery. Underlying earnings per share was slightly ahead of guidance at 73.3 pence and up 2%, reflecting the impact of a higher share count following the rights issue. A record £9.8 billion of capital investment helped to drive regulated asset growth of 10.5%. And in accordance with our policy to grow the dividend in line with the UK CPI-H, the Board has declared a final dividend of 30.88 pence per share. This takes the total dividend for the year to 46.72 pence, an increase of 3.21% on last year's rebase dividend. Moving next to reliability and safety. Reliability has remained strong across our UK and US networks, despite severe weather events across our jurisdictions. An example of this is Storm Dara last December. a once-in-a-decade storm that hit our UK electricity distribution networks causing significant damage across the South West, South Wales and West Midlands. Our teams worked tirelessly around the clock restoring power to 95% of customers within 48 hours. Last week the NISO published its interim report investigating the outage following the fire at our North Hyde substation in March. We welcome the report which establishes a timeline and sequence of events and outlines further steps required to deliver the final report in June. On safety, our lost time injury frequency rate was 0.1, in line with our group target. As our workload increases, we continue to invest heavily in attracting, developing and retaining a qualified and competent workforce with robust training programs built around a culture of safety. We've also set protocols for our contractors so that high safety standards are maintained right across the workforce. Turning to our operating performance across the group, starting with UK electricity transmission. Investment increased by 57% to £3 billion, reflecting the ramp up in the first wave of six ASTI projects, major substation upgrades, and a further four gigawatts of generation being connected to the network. This included the UK's largest battery storage unit at Lakeside in North Yorkshire, and a 1.2 gigawatt offshore wind farm in Dogger Bank. The business delivered a return on equity of 8.3%, outperforming its allowed return by 100 basis points. Turning to regulatory developments, in December we submitted our £35 billion Rio T3 business plan, representing the most significant investment in the UK's electricity transmission network in a generation. This ambitious plan will nearly double the power that can flow across the country, directly connecting 35 gigawatts of generation and 19 gigawatts of demand, and create optionality for further 26 gigawatts, all whilst maintaining world-class levels of reliability. Our submission also included clear evidence of the need for an investable financial framework, including a real 6.3% allowed cost of equity, appropriate levels of cash generation, and incentive mechanisms that will deliver benefits to both networks and consumers. Under our proposals, we expect our investment plans to avoid constraint costs around £12 billion over the price control period, offsetting the impact of investment to customer bills. In addition, we're also pleased to see Optium's decision on the advanced procurement mechanism. This will provide funding for transmission owners to secure supply chain capacity, covering items like switchgear and transformers. This builds on the approach Optium adopted under the ASTRI regime, and we plan to utilize the framework from the middle of this year. Finally, on policy developments, in addition to the connections reform I mentioned earlier, the government published its planning and infrastructure bill. The bill includes a number of proposals that are important to us, including giving certain projects the flexibility to choose the type of consenting regime used and providing opportunities to accelerate the consenting process. The bill also includes proposals intended to increase public acceptability of electricity transmission projects, alongside guidance for wider community benefits. Moving to strategic infrastructure, this will get a lot of focus this afternoon, but to summarise, we now have the Great Grid Partnership up and running, the HVDC Framework Agreement in place, the supply chain secured for all 12 onshore projects, all Wave 1 projects under construction, and we've continued to build our internal capabilities and the workforce now stands at over 1000 employees. So in the last year we put the platform in place and delivery is well underway. Karl and his team will provide a lot more detail on our progress later today. Turning to UK electricity distribution, capital investment increased by 14% to £1.4 billion driven by increased spending on acid health, network reinforcement and connecting nearly 600 MW of renewable generation. The business achieved a return on equity of 7.9%, and whilst this reflects the benefit of our Synergy Savings Programme, it was heavily impacted by costs from Storm Darragh, as well as lower than anticipated allowances from Ofgem's real price effects mechanism that haven't matched what we were expecting when the price control was agreed. We're working hard to address the ongoing headwind and expect performance to improve over the remainder of the price control period. This year, we also made good progress in developing our role as the distribution system operator, or DSO, including our leading role in the development of flexibility markets. We now operate the largest market across all DSOs, allowing us to avoid over 200 gigawatt hours of renewable generation curtailment, lowering costs for consumers. On the regulatory front, Ofgem published the ED3 framework decision at the end of April, which gives us an early indication of their thinking in the next price control period and is the starting point for the development of the sector-specific methodology. And as I mentioned earlier, we were pleased to see Ofgim's decision on connections reform. Electricity distribution has been playing a leading role in driving forward these reforms, and over the last year, we've been able to implement the industry's technical limits initiative, accelerating the connection office dates on around 3 gigawatts of distributed generation. and removed over four gigawatts of capacity from connections queues. Turning to the US, our investment in New York increased by 24% to 3.3 billion pounds. This reflects a further 218 miles of gas mains replacement and a continued ramp up in our $4 billion Upstate upgrade program, including the reinforcement and upgrade works as part of CLCPA phase one and continued strong progress on SmartPath Connect, where we're rebuilding over 100 miles of transmission lines to connect large-scale renewable generation. Again, we'll have much more to say on our upstate upgrade programme this afternoon. We achieved a return on equity of 8.7%, 94% of allowed, and 20 basis points higher than the prior year, reflecting strong performance in our downstate gas businesses in the first year of our new rate plans. On the regulatory front, we reached a joint proposal in April on new rates for Niagara Mohawk business, which includes an improved return on equity of 9.5%, increased capex around 50% over the three years, reflecting our step up in electricity transmission investment and funding to modernize our electric and gas networks and support New York's clean energy goals. The joint proposal also includes provisions to mitigate bill impacts for customers by spreading increases over the three years of the plan and putting in place assistance programmes for low-income households. In New England, capital investment increased by 5% to £1.8 billion, reflecting continued gas mains replacement and increased asset condition and grid modernisation work across our electric network. Our achieved return on equity was 9.1%, 92% of allowed, benefiting from six months of the new rate agreements in our Massachusetts electric business. We've also seen a greater focus on affordability in the state, following increased bills from a colder winter. To assist Massachusetts gas customers, we agreed with the regulator to reduce winter gas bills by 10% during March and April, with a deferral to be recovered over the summer. On the regulatory front in September, the DPO issued its rate case order for our Massachusetts electric business, approving a five-year plan with an allowed return of 9.35%. The order includes a new regulatory recovery mechanism that provides timely funding for growing capital investment, an updated performance-based rate mechanism providing inflation protection for operating and maintenance costs, and increased allowances to cover the increasing cost of storms. Taken together, these enhanced recovery mechanisms are helping us to earn closer to the allowed return. And as I mentioned earlier, the DPU has also approved our electricity sector modernisation plan for anticipatory investments to support the decarbonisation of our networks. And from a policy perspective, last month we submitted our Climate Compliance Plan, setting up a strategy to enable our Massachusetts gas network to advance state decarbonisation goals whilst maintaining safe, reliable and cost-effective service for our customers. And finally, last November, Governor Healey approved legislation that reforms the permitting process for utility infrastructure. This new approach sets maximum time frames for approvals of capital projects in the state. And finally, in National Grid Ventures, capital investment was 43% lower at £378 million following completion of the Viking Link to Denmark last year. During the year, we've seen good operation performance across the National Grid Ventures portfolio, including good availability from our interconnector fleet, high levels of availability and utilization at our Long Island generation business, and at our grain LNG terminal, where we're making good progress on the construction of the new tank. On the regulatory front, last month, Ofgem published their decision on the regulatory framework for offshore hybrid assets, an important next step as we continue to develop our line link project as a next generation interconnector. So as I said at the start, we've achieved significant progress across all areas of the business in the last year, as we continue to efficiently deliver safe, secure and clean networks for the future. Let me stop there and hand over to Andy to walk you through the numbers before I come back and talk about priorities for the coming year. Andy.

Thank you, John. And good morning, everyone. I'd like to highlight that, as usual, we're presenting our results on an underlying basis and at constant currency. I want to start by expanding on what John has said about National Grid's financial resilience. The visibility that our business model provides and the stability it gives is unwavering, however volatile the macro environment, including times such as now. A large part of that can be attributed to our regulatory frameworks, but it is also a consequence of our efficient delivery, with controllable costs broadly flat this year and our robust procurement and financing strategies. Together, these enable us to manage the impacts of inflation and cost pressures, changing interest rates, and fluctuations in exchange rates. And importantly, that enables us to deliver stable and predictable growth through our significant capital program. Many of you will also know that we have substantial inflation and cost protections, particularly in our UK regulated businesses with indexation of our regulated asset base. In the US, around 90% of our supply chain is domestically sourced. And even if higher costs do come through, We can manage this through alternative suppliers or the pace of discretionary spend, with any additional spend ultimately being picked up in the following rate case. We're also positioned so that the impact of exchange rate volatility from our U.S. businesses is limited. We consistently hedge around 70% of our U.S. gross assets with dollar-denominated debt. This means, from an earnings perspective, our general rule of thumb is that for every 5 cent move in the average U.S. dollar to sterling exchange rate, we only expect to see a one pence impact on EPS on an annualized basis. Finally, from a financing perspective, our regulated operating businesses broadly match leverage to our regulatory frameworks, which enables us to efficiently recover debt costs. We also hold around 30% of our debt book at the Holdco level, with the maturities out to the 2030s and any higher expected interest costs of refinancing have been factored into our five-year financial frame. We've also set out our comprehensive financing plan, which sees us fully funded until at least the end of Rio T3. So, as I say, all of these things add up to create a very stable platform from which to operate and deliver on our plans. Now let me take you through our financial performance. I'm pleased to be reporting a strong start to our five-year plan. underlying operating profits on a continuing basis increased by £589 million to £5.4 billion, up 12% on the prior year. This was mainly driven by strong performance across our regulated businesses, including higher revenues and strong cost efficiency, partly offset by expected lower revenues from our interconnectors. Higher operating profit combined with lower finance costs has led to an underlying earnings per share increase of 2% to 73.3 pence per share, slightly above guidance and including the impact of a higher share count following the rights issue. Group return on equity was 9%, supported by the growth in our regulated earnings offset by a higher denominator reflecting the rights issue. In line with our policy, the Board has recommended a final dividend of 30.88 pence taking the full year dividend to 46.72 pence per share, representing a 3.2% increase compared to the prior year rebased dividend, and in line with average CPIH inflation. As John said, we've continued to deliver record levels of investment, with capital investment from continuing operations increasing 20% to £9.85 billion, helping drive regulated asset growth of 10.5%. Now, turning to our business segments. And starting with UK electricity transmission, where underlying operating profit was £1.4 billion, 9% higher than last year. This was helped by increased Totex allowances, indexation and higher allowed returns, partly offset by increased depreciation, reflecting growth in the asset base. Capital investment of £3 billion was up 57% versus the prior year. This included the ramp-up of our Wave 1 ASTI project spend, including Eastern Green Links 1 and 2, as well as the four onshore projects, and construction activities on new customer connections, partly offset by lower spend on London Power Tunnels 2 and the Hinkley connection. We've achieved an 8.3% return on equity, delivering outperformance of 100 basis points, and we remain on track to achieve 100 basis points of average annual outperformance throughout Rio T2. We also saw underlying operating profit of £115 million from our electricity system operator over the first half of the year, prior to its sale to the UK government. Moving to UK electricity distribution, underlying operating profit was £1.2 billion, £51 million higher than the prior year, reflecting an increase in revenues from indexation partly offset by high depreciation and one-off costs and incentive revenue impacts following the severity of Storm Darragh. Capital investment was £1.4 billion, 14% higher than last year, with increased investment in asset replacement and reinforcement work. We are on track to deliver our £100 million Group Synergies target by 2026, having achieved £88 million as of the end of this year, from areas such as procurement and operations. We achieved an ROE of 7.9% in the year, outperforming our allowance by 20 basis points, which is lower than our aim to achieve 100 to 125 basis points of outperformance. This reflects the one-off impacts from Storm Darragh and an impact arising from the Real Price Effects, or RPE, mechanism, where lower than anticipated allowances due to reductions in commodity indices since the start of the Rio ED2 period have not tracked actual costs incurred. We're working hard to mitigate this headwind and expect to improve in-year outperformance towards 100 basis points by the end of ED2. Moving now to the US. Our New York business achieved an 8.7% return on equity, 94% of its allowance and 20 basis points higher than last year. Underlying operating profit was £1.45 billion, 43% higher than the prior year. This reflects rate increases in our downstate gas businesses and cost efficiencies enabling us to deliver broadly flat controllable costs, partly offset by high depreciation on our increased asset base. Capital investment was £3.3 billion, 24% up on the prior year. This was driven by higher electric investment, including our upstate upgrade projects with SmartPath Connect on track to energize in December 2025, as well as high gas investment driven by a further ramp up in gas mains replacement under our updated downstate rate cases. In New England, the return on equity was 9.1%, 92% of its allowance. This was 10 basis points lower than the prior year and 40 basis points higher after adjusting for a one-off property tax recovery last year. Underlying operating profit was £924 million, up 15%. This was driven by higher rates in our gas and electricity businesses, including through our new capital tracker, and delivery of cost efficiencies, partly offset by higher depreciation and other costs. Capital investment was £1.75 billion, 5% higher, driven by higher electric investment for increased asset health and maintenance work, and the advanced metering infrastructure rollout. We also continue to invest in our gas networks, including the replacement of 135 miles of gas mains this year. Moving to National Grid Ventures. Underlying operating profit, including joint ventures, was £455 million, £116 million lower than the prior year. Higher profitability from a full year of Viking operations was more than offset by expected lower revenues on IFA II and the North Sea Link. Capital investments was £378 million, down 43%, reflecting the commissioning of our Viking Lint Inconnector last year, and the classification under IFRS of National Grid Renewables and Grain LNG is held for sale from the end of September, which means investments into these businesses are excluded from reported group capital investment. During the year, our community offshore wind joint venture paused development activity in line with the broader slowdown of the US offshore wind industry. Whilst there are longer term trends that give us confidence in the need for offshore wind generation in the Northeast, significant nearer term policy uncertainty has led us to recognize an accounting impairment as an exceptional charge. We recorded an operating loss for other activities of 143 million pounds. including adverse fair value movements in the National Grid Partners portfolio. Net finance costs were 1.36 billion pounds, 116 million pounds lower than the prior year, with the benefits of lower net debt following the rights issue and lower inflation on index linked debt, partly offset by the impact of higher refinancing costs, where we have issued 3.2 billion pounds during the year. For the full year, the underlying effective tax rate excluding the share of joint ventures, was 15.4%, 20 basis points lower than the prior year. This reflects higher levels of capital expenditure qualifying for full expensing compared to last year. Underlying earnings were 3.5 billion pounds, with EPS at 73.3 pence, up 2% on the prior year. Moving now to cash flow. Cash generated from continuing operations was 7 billion pounds, down 4% compared to the prior year. This decrease was driven by timing as we returned balancing charges within the ESO in the first half of the year, following over-recoveries in the prior year. Net cash inflow at 954 million pounds was 4.6 billion pounds higher than the prior year, reflecting the proceeds of our rights issue, partly offset by the increase in capital investment. Combined with disposal proceeds from the ESO and the remaining 20% stake in gas transmission, we saw a reduction in net debt of £1.7 billion to £41.4 billion. Moving to our FY26 guidance, which is presented as an assumed exchange rate of $1.3 to sterling. EPS growth is expected to be at the lower end of the 6% to 8% range, reflecting the headwind of a slightly weaker dollar. Capital investment is expected to be over £11 billion next year, driving asset growth of around 11%. And net debt is expected to increase by just over £6 billion, excluding expected proceeds from the National Grid renewables and grain LNG sales. As usual, detailed business unit guidance has been provided in our results statement. Turning to the five-year framework, as I said at the beginning, as a result of our visibility and resilience, we are reconfirming our financial framework from April 2024 to March 2029. We still expect to invest around £60 billion over five years, driving asset growth of around 10% and EPS growth of 6% to 8% from this year's baseline of 73.3 pence. Our aim remains to grow the dividends in line with average CPIH, and we remain committed to maintaining our current investment grade credit rating. With that, I'll hand you back to John.