National Grid plc Q4 FY2023 earnings call

Management Statement and Operational Highlights

• Strategic Pivot: Completed the strategic pivot, with the portfolio repositioned to capture growth in the energy transition. Sold Rhode Island business and a 60% stake in U.K. Gas Transmission, and acquired U.K. Electricity Distribution.
• Investment in Energy Transition: Record levels of investment in U.K. and U.S. businesses, including energizing world's first T-Pylons, Rewiring London project, and various clean energy interconnector projects.
• Financial Performance: Underlying operating profit up 15% to GBP4.6 billion, underlying earnings per share 69.7 pence, up 7%, capital investment a record GBP7.7 billion, cost-efficiency program delivered GBP236 million in savings.
• Safety and Reliability: Good safety performance with a small improvement in lost time injury frequency rate, reliability over 99.9% across regulated networks, including support during extreme weather events.
• Operational Projects: Progress on Viking Link interconnector, North Sea Link to Norway, Grain LNG utilization, and offshore wind joint venture with RWE.

Segment Performance

• U.K. Electricity Transmission: Underlying operating profit was GBP1.1 billion, capital investment was GBP1.3 billion, achieving a 7.5% return on equity, 120 basis points ahead of baseline allowance.
• U.K. Electricity Distribution: Underlying operating profit was GBP1.23 billion, up GBP343 million from the prior year, capital investment increased to GBP1.22 billion, delivering a return on equity of 13.2%, 360 basis points ahead of the allowed return.
• U.S. New York: Achieved an 8.6% return on equity, 20 basis points lower year-over-year, underlying operating profit was GBP874 million, GBP91 million higher than the prior year, capital investment was GBP2.5 billion, GBP280 million higher than the prior year.
• U.S. New England: Return-on-equity was 8.3%, 30 basis points improved on the prior year excluding Rhode Island, underlying operating profit was GBP819 million, capital investment was GBP1.7 billion, an increase of GBP226 million excluding Rhode Island.
• National Grid Ventures: Underlying operating profit, including joint-ventures, up GBP278 million to GBP693 million for the year, capital investment decreased by GBP62 million to GBP906 million for the year.

Guidance

• 2024 Outlook: Expect another good year of underlying performance, but due to U.K. Government's spring budget changes to capital allowances, underlying EPS expected to be modestly lower year-over-year. The impact of capital allowance changes is economically neutral but has an IFRS accounting impact, resulting in 0.06 pence to 0.07 pence per share impact on 2024 EPS.
• Five-Year Outlook: Reconfirming financial framework from April 2021 to March 2026, expecting capital investment of up to GBP40 billion, asset CAGR 8% to 10%, underlying EPS CAGR 6% to 8%, and aim to grow dividend in-line with average CPIH.

Risks

• Regulatory and Policy Uncertainty: Need for faster development of policy and regulation to support energy transition, including planning system reform, governance framework setup, and community benefits framework.
• Permitting Challenges: Delays in permitting and connecting infrastructure, impacting the pace of energy transition.
• Market Conditions: Impact of interest rate changes and inflation on debt costs and operational performance.

Question and Answer

Q: Jenny Ping from Citi asked about the strategic pivot and EPS guidance ex deferred taxes.

A: John Pettigrew stated the strategic pivot left National Grid comfortable with the business mix, and Andy Agg mentioned the tax impact is a three-year transition and under review.

Q: Martin Young from Investec asked about gas transmission and portfolio financing.

A: John Pettigrew discussed the need for regulatory clarity on ASTI projects and Andy Agg talked about focus on regulatory frameworks for financing.

Q: Harry Wyburd from Exane asked about gas transmission sale proceeds and political impact.

A: John Pettigrew discussed the call option for gas transmission and political recognition of energy transition investment needs.

Q: Jingjie Yang from UBS asked about 2024 guidance and gas transmission option.

A: John Pettigrew discussed the gas transmission call option and Andy Agg explained the EPS guidance impact of capital allowances.

Q: James Brand from Deutsche Bank asked about 2025-2026 guidance and competition legislation.

A: John Pettigrew discussed competition legislation advocacy and Andy Agg explained the five-year guidance framework.

Q: Rob Pulleyn from Morgan Stanley asked about permitting and political process.

A: John Pettigrew discussed community benefits and engagement in permitting processes.

Q: Ruisi Liu from Bank of America asked about U.S. gas plan and ROE.

A: John Pettigrew discussed U.S. gas role in decarbonization and Andy Agg explained ROE guidance framework.

Q: Mark Freshney from Credit Suisse asked about debt and rate impact.

A: Andy Agg discussed debt mix and regulatory linkage to rate changes.

Q: Pujarini Ghosh from Bernstein asked about offshore transmission and U.S. ROE.

A: John Pettigrew discussed strategic infrastructure business unit and Andy Agg explained ROE guidance.

Q: Dominic Nash from Barclays asked about nodal pricing and cost of debt/equity.

A: John Pettigrew discussed locational pricing consultation and Andy Agg explained debt and equity cost linkage.

Q: Ajay Patel from Goldman Sachs asked about renewables and obstacles.

A: John Pettigrew discussed renewables returns and focus on policy and regulatory frameworks.

Q: Nicholas Ashworth asked about ED2 ROE outperformance and cost savings.

A: John Pettigrew discussed ED2 plans at Investor Day and Andy Agg explained cost efficiency program offsetting inflation and growth costs.