National Grid Plc Q4 FY2020 earnings call

COVID Response

• Successfully implemented business continuity plans at the end of March 2020. Adjusted working practices quickly and safely, risk assessed projects, issued new working guidance, and collaborated across the industry. Maintained network reliability and delivered capital programs. Helped customers in financial difficulty, e.g., in the US, not pursuing debt collections or disconnecting customers, deferring rate increases in New York, and supporting UK suppliers with network charge deferrals.

Business Segment Highlights

• UK: Heading towards end of RIIO-T1, Electricity and Gas Transmission businesses delivered good performance. UK Electricity Transmission achieved 13.5% ROE, £1.2 billion underlying operating profit up 8%, and £1 billion capital investment. UK Gas Transmission had £402 million underlying operating profit up 18%, and £249 million capital investment.
• US: New rates agreed for Massachusetts Electric, made progress on cost efficiency program with $30 million savings in 2020 and on course for $50 million in 2021, but faced gas constraints in downstate New York.
• National Grid Ventures: Progress on interconnector projects, with IFA2 subsea cable connection completed and commissioned, and investment in North Sea Link, Viking, and Geronimo.

Strategic Priorities

• Enable energy transition, deliver efficiently for customers, grow organizational capabilities, and empower people for great performance. In the US, focus on right rate plans for post-COVID world and efficient investment program. In the UK, agree RIIO-T2 regulatory framework and drive innovation/efficiencies for customers. In National Grid Ventures, focus on interconnector program and Geronimo investment pipeline.

UK Electricity Transmission delivered strong operational performance with a 13.5% return on equity, 330 basis points above the allowed. Underlying operating profit was £1.2 billion, up 8%. Capital investment was £1 billion, 13% higher than last year, and regulated asset value increased by 4.4% to £14.1 billion. UK Gas Transmission had a return on equity of 9.8%, 30 basis points higher than last year. Underlying operating profit was £402 million, up £61 million or 18%. Capital investment was £249 million, £59 million lower than last year, and regulated asset value grew by 2.3% to £6.3 billion. US business had a return on equity of 9.3%, 99% of the allowed. Underlying operating profit increased 1% to £1.6 billion at constant currency. Net revenues were up £257 million. Bad debts increased £83 million. Capital investment in US networks was £3.2 billion ($4.2 billion), driving rate base growth of 12% to $25.6 billion. National Grid Ventures contributed £336 million, an increase of 6% on last year. Capital investment increased significantly to £815 million, mainly driven by the acquisition of Geronimo and higher investments in interconnect projects.

2021 Outlook

• Expect £400 million impact on underlying operating profit in 2021, primarily from higher costs and lower revenues in the US.
• US: Net revenue increases expected to be more than offset by bad debts and higher COVID-related costs. Depreciation expected to be around £100 million higher.
• UK: Additional COVID-related costs lead to small year-on-year reduction in underlying operating profit expectations for electricity transmission; gas transmission expected to see increase in underlying operating profits.
• National Grid Ventures: Operating profits expected to decrease by around 5% year-on-year.
• Group capital investment expected to be around £5 billion, leading to asset growth within 5%-7% target range.

• COVID impact on short-term earnings and cash flow, with uncertainty around revenue collection and cost recovery.
• Regulatory risks related to rate filings and negotiations, including uncertainty in New York gas supply constraints and UK RIIO-T2 framework.
• Storm costs and their impact on recovery mechanisms for associated expenses.

Q: Regarding the ESO and generation mix in the UK, do you think the ESO should be more vocal about the longer-term generation mix and move away from new nuclear builds to more responsive generation?

A: The Electricity System Operator has set an ambition to operate the system on zero carbon generation by 2025. We have tools to balance the system now and can develop them further. There are capacity auctions and we need to ensure tools for minute-by-minute balancing.

Q: About the £1 billion cash flow impact from COVID-19, where is the balance coming from?

A: Includes demand impacts, timing differences in revenue collection, and uncertainty around industry support schemes in the UK like network charges and balancing costs. There are elements of bad debt cash impacts and working capital impacts from delayed US receivables.

Q: What's your best estimate on recovery in the US of the cost and revenue impact in FY 2021?

A: Historically, there are mechanisms and precedents for recovering costs through rate filings and other regulatory processes. Each state is starting to dialogue about capturing COVID-related costs, and it will be through state-specific rate filings and discussions with regulators.

Q: Do you have views on future US storm risk and its impact on recovery mechanisms?

A: Storm cost recovery is discussed with regulators regularly. Some states allow ongoing recovery or logging up of excess costs. It will be part of discussions to ensure proper allowances and recovery mechanisms.

Q: On the scrip buyback, will it resume after FY 2021?

A: We reaffirm that we won't buy back scrip in FY 2021 and will review further at the normal annual review, depending on business performance and growth.

Q: On RAV growth step down, what's the visibility on US side RAV growth?

A: US RAV growth is driven by capital investment in asset health, safety, and energy transition. We expect similar levels of CapEx next year, with fundamentals not changing, so strong RAV growth expected.

Q: What are expectations from Ofgem for the July 9 draft determinations?

A: Hopeful that Ofgem will recognize arguments for a reasonable financial package, including a fair return and incentives for innovation and efficiency, considering the green agenda and post-COVID economic stimulation.

Q: Would you be open to divestments of interconnectors if needed?

A: We look at our portfolio and regulatory arrangements, but currently see no immediate plans for divestments, focusing on the breadth of the portfolio and its contribution.

Q: On bad debt and US-GAAP earnings, is bad debt adjustment included?

A: The 9.3% ROE assumes recovery of bad debt charges ultimately.

Q: On expectations for dividend sustainability through RIIO-2 in the UK?

A: Dividend policy is underpinned by sensible regulatory outcomes. The policy is reviewed regularly, and we see it as sustainable under most scenarios with proper regulatory outcomes.

Q: On environmental provisions and IT investment recovery?

A: Environmental provisions related to gas legacy are recoverable through rate filings in the US. IT investment is recoverable through rate cases as part of network investment.

Q: On taking off US dollar swaps?

A: We review and adjust swaps periodically. This year's shift was to better match dollar cash flows and hedge credit metrics, with net impact on earnings being about £11 million.

Q: On pension valuation and next triennial valuation?

A: UK pension schemes have seen small improvements, while US pensions have increased liability due to discount rate drop. Triennial valuation was as of March 2019, and we expect to continue seeing good funding for UK schemes.

Q: On CWIP and US rate base growth profile?

A: This year saw $380 million move from CWIP to rate base. Next year, we don't expect such a large movement, but overall asset growth is expected within 5%-7% range.

Q: On earnings outlook and disposal strategy?

A: Investments in regulatory mechanisms will drive earnings. We view the impact of COVID as short-term timing challenge, and we are comfortable with our balance sheet and dividend policy, not currently seeing a need for significant disposals.

Q: On bad debt historical run rate and recovery timing?

A: Bad debt typically runs at 1%-1.5% of revenues. Recovery timing varies by state and rate filing cycles, typically over 2-3 years.

Q: On demand recovery and cost recovery confidence?

A: Demand recovery depends on economic impact and restriction lifting speed. We are confident of recovering most COVID-related costs through regulatory mechanisms, though exact percentage is hard to predict.