National Grid Plc Q4 FY2021 earnings call

Management Statement and Operational Highlights

• Financial Performance: Underlying operating profit was £3.3 billion, 3% below prior year at constant currency due to COVID. Underlying EPS was down 7% to 54.2 pence. Dividend proposed at 49.16 pence per share.
• Safety and Reliability: Lost time injury frequency rates reduced in UK and U.S. UK Electricity System Operator developed innovative services for low demand and high renewables. U.S. electricity reliability over 99.9% but faced storm-related service quality penalty of $14 million.
• U.S. Operations: Impacted by COVID and storms, return on equity 7.2%. Increased infrastructure investment by $200 million to $4.3 billion. Progress on storm mitigation through infrastructure upgrades and digital technologies.
• UK Operations: End of successful RIIO-T1 period. Investment £1.2 billion, asset growth 2.2%. Progress on hydrogen projects like FutureGrid. Focus on RIIO-T2 price control.
• National Grid Ventures: Investment £576 million in interconnectors. IFA2 commissioned, North Sea Link and Viking Link on track. Success in Humber carbon capture project.
• U.S. Renewables: Acquisition of Geronimo (now National Grid Renewables) with over 400 MW operational and 600 MW under construction.
• Property Division: Lower profitability due to fewer land development sales.

Segment Performance

• UK Electricity Transmission: Underlying operating profit was £1.1 billion, accounting for 33.3% of the total underlying operating profit of £3.3 billion. Return on equity was 13.9%. Capital investment was £1.1 billion, with a 3.1% increase in regulated asset value to £14.6 billion.
• UK Gas Transmission: Underlying operating profit was £438 million, 13.3% of total. Return on equity was 9.6%. Capital investment was £176 million, with regulated asset value flat at £6.3 billion.
• U.S. Business: Underlying operating profit was £1.5 billion, 45.5% of total. Return on equity excluding COVID, storms, and rate case delays was 8.6%, and 7.2% including those factors. Investment was $4.3 billion, driving 8% rate base growth to $27.6 billion.
• National Grid Ventures: Contributed £354 million, 10.7% of total. Capital investment was £509 million, with focus on interconnectors and U.S. renewables.

Guidance

• Current Year: Expect FY2022 underlying EPS growth towards or above the top-end of 5%-7% range. WPD earnings to be included from deal completion. Sale of Gas Transmission business expected in second half, classified as discontinued operation.
• Long-Term: Five-year CapEx £30 billion-£35 billion. Group asset growth 6%-8% per annum to 2026. Underlying EPS expected to grow 5%-7% per annum. Dividend to grow in line with CPIH.

Risks

• COVID Impact: Residual bad debt costs (£120 million), revenue shortfall (£78 million), net direct COVID costs (£28 million), and delays in rate approvals (£70 million).
• Storm Impact: Increased storms leading to service quality penalties and challenges in cost recovery.
• Regulatory Uncertainty: Outcomes of CMA appeal on RIIO-T2, rate case delays in U.S., and uncertainties in gas transmission sale process.

Question and Answer

Q: On the CapEx numbers. In the guidance, you've given us £30 billion, £35 billion. Within that, you've obviously given us quite a tight range for ED, electricity distribution. Can you just give us a little bit of color there? Is the draft business plan being submitted before completion of WPD? And how involved have you been on developing that plan? And do you think Ofgem will adopt a number of scenarios similar to the RIIO-2 transmission program? So basically the question leading into is how much scope for uncertainties around that £4 billion to £5 billion?

A: So thanks, Dominic. So let me just pick up on the CapEx question first. So as you heard today, what we tried to set out is a range of £30 billion to £35 billion. I think to reflect the confidence that we have in the transparency of the regulatory frameworks that we now see. So as you know, in electricity transmission, we accepted the vast majority of the RIIO-T2 price control, and therefore, we got good visibility of what we expect the investment to be. Similarly you would have seen recently that we've just agreed KEDLI and KEDNY, $3.3 billion over the next three years with potential extension for the fourth year. With regards to WPD, obviously they've submitted their first draft business plan. They received feedback from their stakeholders. They are about to submit this second draft business plan at the end of July, that will go through the usual iteration that you'd expect during these types of price controls, and then make the final business plan submission in December. We've set out in our outlook that we expected to be £4 billion to £5 billion. I think we're reasonably confident with that level of investment often usually. We'll look at various scenarios, but when we look at the fundamentals in terms of asset replacement, connections for distributed generation and new customers, and then supporting EVs. I think the range that we set out for the Group of £30 billion to £35 billion, looks very sensible and we're very comfortable with that.

Q: I'm intrigued by the JV that was announced this morning with RWE on U.S. offshore wind. Can you provide some details on this? Like, what size projects are you lining up? And is this an enduring JV or is this a JV just for a one-off project in the U.S.?

A: Yes. So thanks, Dominic. So let me just pick up on the JV question. So as you know, over the last few years, we've always look to use the capabilities that we have in National Grid to look to adjacent markets. More recently over the last three or four years, that's been in our interconnectors business, as well as onshore solar renewables with the acquisition of Geronimo, which is now National Grid Renewables. So over the last few years, we built up a fantastic capability of being able to develop these offshore cables. Add to that, the local knowledge we have in the Northeast, the RWE JV just looks like a natural extension. So as always, we take a very disciplined approach to any investments that we take. We're not expecting there to be significant CapEx in the short-term. As you know, development of offshore wind has a long lead time both in terms of the seabed lease process, and then ultimately the construction. So modest CapEx in the next three to four years, but we do see it as a natural extension of our National Grid Ventures business.