National Grid plc Q2 FY2023 earnings call

Management Statement and Operational Highlights

• Business Resilience and Investment: Upgraded 5-year financial frame to £40 billion investment (up from £30-£35 billion), with £29 billion for decarbonization. Expect asset growth 8%-10% per annum and earnings per share growth 6%-8% per annum.
• Cost Efficiency and Customer Support: Achieved £85 million cost savings in H1, provided £65 million support for vulnerable customers, and accelerated return of £200 million of interconnected revenues.
• Strategic Moves: Sold Rhode Island business, on track to sell 6% stake in U.K. Gas Transmission by end of year, integrated Western Power Distribution as National Grid Electricity Distribution.
• Financial Performance: Underlying operating profit in first half was £2.1 billion, capital expenditure £3.9 billion, interim dividend 17.84p per share.
• Safety and Reliability: Injury frequency rate 0.12, improved reliability in U.K. and U.S. networks.
• Segment-Specific Progress: U.K. Electricity Distribution working on ED2 price control; U.K. Electricity Transmission on London Power Tunnels and Hinkley C connection; U.S. businesses on rate adjustments, grid modernization, and clean energy projects.

Segment Performance

• U.K. Electricity Distribution: Underlying operating profit was £579 million, up £322 million from the prior year. Capital investment increased to £584 million for the half year, with network reliability at 99.995% and customer satisfaction score of 9.01 out of 10.
• Electricity Transmission: Underlying operating profit was £564 million, up £12 million compared to the last half year. Capital investment was £629 million.
• U.S. New York: Underlying operating profit was £202 million, £40 million higher than the prior year. Capital investment was £1.2 billion, £264 million higher than prior year at constant currency.
• U.S. New England: Underlying operating profit was £316 million, £32 million higher than the prior period. Capital investment was £862 million, £58 million higher than prior year at constant currency.
• National Grid Ventures: Capital investment reached £478 million, up £181 million from the prior period. Progress on Sellindge converter station rebuild, Isle of Grain expansion, Viking Link, and renewables.
• U.K. Gas Transmission (discontinued): Operating profit excluding timing was £381 million, £49 million higher than the prior year. Capital investment was £174 million, £43 million higher than the prior year.

Guidance

• Upgraded 5-year financial frame to £40 billion investment from £30-£35 billion, with £29 billion for decarbonization.
• Upgraded FY '23 underlying EPS guidance to middle of 6%-8% growth range.
• Expect capital investment CAGR 8%-10%, EPS CAGR 6%-8%, and dividend growth in line with average CPIH.

Risks

• Uncertainty in regulatory decisions affecting energy transition timelines and costs.
• Impact of exchange rate fluctuations, inflation, and interest rate changes on funding costs.
• Potential delays in regulatory approvals for asset sales and transmission projects.

Question and Answer

• Q: Couple of questions. First on long-term investment picture and impact of politicians' actions; second on winter energy situation and interconnector reciprocity.

A: John Pettigrew addresses investment clarity over next 6 months, winter outlook with sufficient generation and gas availability, interconnectors providing two-way support.

• Q: Good morning. Clearly, borrowing costs for all regulated utilities are high. Talk through measures if CapEx guidance increases.

A: Andy Agg mentions revised 5-year frame accounts for higher interest rates, no intention of further hybrid issuance, and ongoing dialogue with Ofgem on ED2 cost of equity/debt.

• Q: You talked about pension position. Explain discount rate change and pension liquidity.

A: Andy Agg explains discount rate moved to 5.35%, no significant pension liquidity issue due to offsetting asset/liability changes from higher discount rates.

• Q: Potential disposal of non-core assets like Millennium Pipeline. Define non-core.

A: Andy Agg states non-core assets are considered if attractive opportunities crystallize value, with focus on current portfolio for investment plans.

• Q: FX assumptions in guidance. Clarify dollar exchange rate and impact on P&L.

A: Andy Agg explains dollar exchange rate assumption of 1.2, with rule of thumb $0.05 move affecting 1p EPS, and dollar-denominated debt hedging to manage FX impact.