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National Grid (NYSE:NGG)

Interim Management Statement Conference Call

January 30, 2014 9:00 am ET

Executives

Jonathan D. S. Dawson - Head of Investor Relations, Executive Director, Chairman of Remuneration Committee, Member of Finance Committee and Member of Nominations Committee

Andy Mead

Analysts

Travis Miller - Morningstar Inc., Research Division

Mark Freshney - Crédit Suisse AG, Research Division

Harry Wyburd - Barclays Capital, Research Division

Fraser McLaren - BofA Merrill Lynch, Research Division

Operator

Welcome to the National Grid Interim Management Statement. My name is Sarah, and I will be your coordinator for today's conference. [Operator Instructions] I'm now handing the conference over to John Dawson to begin. Thank you.

Jonathan D. S. Dawson

Thank you, Sarah. Hello, everyone. This call follows our IMS, which we released this morning. Simple trading update, reinforcing the view from November. Some important milestones included and a few external factors to comment on. Important to note, our guidance remains the same. We're expecting a year of good operating performance and sustainable dividend growth.

Turning quickly to the operating performance in the quarter. [indiscernible] again, being strong over the winter period. Our networks have performed well under challenging weather conditions, flooding and winds in the U.K. and a very cold snap in the U.S. We wanted to update on the weather as we've been asked a lot of questions about this over the last few weeks, particularly with the big headlines in the U.K. around flooding and, of course, in the U.S. with these polar vortices. Overall, remediating the damage of these different storms has been effective with a strong response in the U.S. and good resilience in the U.K. There have been some costs associated with U.S. storms but nothing of the order we've experienced in the last 2 years.

So at this point in time, we have not sought to update guidance and that includes any the guidance on timing, again, an area we've been asked about during the course of this morning and recently. With the colder weather in the U.S. and warmer-than-average weather in the U.K., we recognize the potential for some timing swings at the end of the year. However, there is still a way to go, and therefore, it's somewhat early to forecast how this is actually going to turn out. We will be keeping an eye on this over the next couple of months. As you know though, we aim to report a number where we strip out the impact of these, in any case, and say all about timing rather than underlying value for National Grid.

In the U.S., turning briefly to that region, progress on our SAP implementation continues. We've handed over the management of LIPA's electricity T&D assets on time as part of the handover to PSEG on the 31st of December. This involved transferring over 2,000 employees over to the new operator. We wish them all well and thank them for their fantastic contributions to our business over many years. The handover was also a major deliverable on the path to remediating our financial systems, the program for which remains on track, with costs in line with the previous guidance, but of course, there is still some way to go in the process. And while we are making steady progress, much remains to be done.

In the U.K., we remain on track to deliver good performance in the first year of our new RIIO contracts. We've had a number of questions this morning around whether we're going to give more guidance on our TotEx performance. We're working across over businesses to deliver efficiencies and we discussed a lot of these areas at our Investor Seminar back in August. We will, of course, talk more about this at our results in May. And at the moment, we're still confident of a positive performance on TotEx at this time.

And our French Interconnector continues to perform strongly, as we also talked about in November. Guidance for our transmission CapEx is unchanged, and there have been no major changes to the short-term generation connection scenarios we talked about in the half year. We recognize that this can change, of course, and so we will continue to monitor this ahead of March and provide any suitable update with our full year results.

Overall, CapEx guidance before any major TotEx efficiencies remains at around GBP 3.5 billion for the year, which should deliver another year of healthy growth in regulated assets.

I think that's all we need to say really to cover both the IMS and also the questions we broadly had this morning. I've got Andy Mead here with me, and we're delighted now to take any questions that may arise on the IMS. Thank you. Sarah, back to you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Travis Miller from Morningstar.

Travis Miller - Morningstar Inc., Research Division

Wondered if you could talk about the dividend a little bit. When you look at where you are to date, is there any chance that we could see a dividend raise, at least minimally, above that RPI range that you've suggested? And if not, are you still on track for that RPI-type increase?

Jonathan D. S. Dawson

Well, that's a good question, Travis. And as we talked about when we introduced this policy a year ago, the intent of it is to have a sustainable policy, which can run for the foreseeable future, which is why we gave ourselves degrees of freedom within the policy to increase the dividend above RPI, if circumstances merit it. But we have been pretty consistent with investors and analysts over the first stage of this process. So if you really want to see a consistent underlying performance come through in the performance of the business, before we will probably look to try and increase the dividend growth rate much above RPI. There's still a lot to establish in terms of the economics of the program. Some of the quirks of the new RIIO foundation is that we will get a little more revenue upfront but will then have a period in which we pay some of that back as we adjust the allowances effectively for the course of the RIIO period. So until we really see that bed down, it's likely we'll probably just stick to the at least element of the policy. If opportunities do arise, then we can look at that. One of the things we have done very recently is effectively manage that sort of capital side of -- or the cash repatriation side of the equation by canceling the scrip dividend, which we did at the -- in the November dividend, which was paid at the beginning of January. That's effectively another method of being able to also ensure that the growth in the per share value of the business rather than explicitly the dividend is enhanced for the benefit of shareholders. That's an element of capital discipline, and hopefully, a reflection of the sorts of things that we're doing alongside managing the dividend policy as you've suggested in your question.

Travis Miller - Morningstar Inc., Research Division

Okay, great. And second question, in the U.K., in terms of the RIIO, where do you stand right now in terms of achieving those -- the adders or the incentives that are in that program?

Jonathan D. S. Dawson

Well, it's early days. What we've said in the statement today is that we expect to have an overall good outcome from both the efficiencies against what's known as the TotEx agenda on the RIIO, but also from the traditional long-term incentive performances for things like network safety and leakages and other system reliability measures, also customer satisfaction, et cetera. And under the -- when we -- in terms of our system operator role, we also indicated that we have a new BSUoS, as it's known, a balancing system incentive scheme, which comes into effect with this price control. That also gives us another opportunity to deliver good performance on that against our objectives there. So I think on the traditional incentives, we expect to have a satisfactory outcome in the first year and on TotEx as well, which is why we've been reasonably upbeat about the U.K. business more broadly.

Operator

And we have a question from the line of Mark Freshney from Crédit Suisse.

Mark Freshney - Crédit Suisse AG, Research Division

Can you talk about the North American rate filing plans? I know there are a couple of businesses where the ROEs are, I think, some way short of where you would expect. What's the timeline and plan for refiling there? And what would you expect to achieve?

Jonathan D. S. Dawson

So a very interesting permanent question. The -- I mean, what we have been doing, clearly, in the U.S. is focusing on getting our financial information systems in good order. Because as we saw 4 years ago, 5 years ago, if you don't have good quality financial information to stand behind in your rate filing process, then you're likely to get adverse outcomes in your filings. So first and foremost, it's basically bedding down the SAP system, making sure that that's working to the benefit of the organization and giving very clean and accurate financial statements, which we can make our filings based on. That does introduce a little bit of a delay. If you go back 1 year, 18 months, we would have been talking about filing our KEDNY and KEDLY rate cases and probably our Massachusetts electric rate case towards the end of this year. We probably are looking some time into early 2015 at the earliest for filing those based on getting good, clean test years. But we're continuing to focus very importantly on maintaining a good regulatory dialogue with our different jurisdictional leads and the regulators, ensuring that they're kept abreast of the different things that are going on in our business and the needs that we have to continue to invest but also to continue to support our cost base. So we're doing the groundwork now, and hopefully, when we do have a sensible filing program lined up, we will be able to go in knowing that we're in a good position to get sensible outcomes. The businesses, on the whole, are performing okay. So there isn't a particularly burning bridge there. We did 9.2% return on equity last year. Obviously, costs do increase and move forward, and the longer you stay out, the harder it is to earn your allowed returns. But we've got trackers in on some of the more important cost escalators, which will give us some medium-term protection for inflation and other pressures on the returns. But undoubtedly, as long as we stay out, it's going to get harder. And therefore, making sure we bat down the SAP system, making sure we prepare good, clean financials on which to build sensible filings in 2015 is critical, and that's our plan today.

Operator

Our next question comes from the line of Harry Wyburd from Barclays.

Harry Wyburd - Barclays Capital, Research Division

It's Harry Wyburd from Barclays. A couple of questions. Firstly, you talked previously about how your CapEx in the U.K. may be slightly lower than you might have originally thought at the very beginning of RIIO because of a slightly slower generation CapEx build out. Can you give an idea of whether there has been any change of CapEx projections, got higher or lower, since you last updated us? And then secondly, on your TotEx outperformance, presuming you'll update us at full year results, can you give any sort of sense about how you're going guide the market on that? Are you going to give us a sort of [indiscernible] range? Or are you going to give us explicit numbers? I mean, you -- I think previously when you had your Investor Day, you talked a lot about the timing differences. Are you going to give us a sense of how those are going to impact numbers over the next few years?

Jonathan D. S. Dawson

Some interesting related questions there, we'll come into that. The -- on TotEx, I'll tell you, let's start with CapEx. The comments we made at the half year about the shape of generation investment and what's happening as a result of the slightly more exacerbated political environment, I guess, at this point in time, really talk to the investment potential in the following years. I mean, obviously, we're quite a long way through the first year of RIIO. The shape of our U.K. capital investment program this year is pretty solid. We know what we've got to do. But with the number of capacity connections, generation connections moving backwards, there is a little bit more softness in the 2014-'15, '15-'16 year. So the CapEx numbers that we're predicting at this point in time, as we indicated in November, will be slightly lower than had been originally forecast when we put our business plans into Ofgem. But this, therefore, really plays into that interrelationship between the allowances you have for those investments and the outputs that you're delivering. If the output changes, the allowance will disappear. We're held whole on that basis, the allowance will just get paid back in the subsequent year. So -- and then, as and when that connection comes on board, the output once again triggers another allowance. So we're not too worried about it. We see it being a natural dynamic of the RIIO process, particularly when you're structuring a price control with -- over an 8-year period. But it will mean that we're probably having a slightly lower level of investment explicitly in the U.K. electricity transmission business. It's worth remembering gas distribution, with its WEPEX agenda, has a very predictable core level of CapEx for the next 8 years. There isn't likely to be major changes there. And in the first few years of the RIIO program, Gas Transmission doesn't have a particularly high CapEx agenda anyway. So the variation is really only in what we're seeing in generation connections and the knock-on effects on some of the load-related investments in Electricity Transmission. But the numbers we said in November haven't really changed. In terms of TotEx outperformance, I mean, this is still an area where Andy, myself and the team are working up how we want to propose we present the numbers. The mechanism that we -- how we talk to, in narrative terms, the generation of efficiencies and savings within the TotEx numbers and the other incentives, how that plays out against what should have been created if there had been perfect hindsight on the regulatory allowances, but what the impact is also of not having that perfect hindsight on the allowances and what that means to the phasing of and the return of revenues, if it's appropriate to the consumer, both driven by allowance changes but also driven by the TotEx efficiencies and other things where they have big sharing benefits as well. So there's quite a little bit of detail to work through. I think the way we're heading, we going to have a very transparent presentation of these different moving parts. The good thing is it will allow us to focus our narrative and our discussions around, as you highlighted, the drivers of, whether you want to call it just the return in equity or return on regulated equity. But what's driving that outcome and how that trickles down through the price control in terms of the sustainable returns and the IOUs, as they've become known as, how they get paid back to consumers or adjusted against allowances in future years. Andy, is there anything you want to add to that or. . .

Andy Mead

No, I think, that's fair. We've obviously seen -- Ofgem's run their model for November, so that kind of gives us a good indication of allowed revenues for next year. So that's sort of a first point in guidance for next year. And then, as we get towards -- as John said, as we get to our May results, we should be able to give you a reasonable view, not only of, as you say, these IOUs, but I think hopefully an early view of when we would expect them to flow through revenue adjustments because it won't at all be necessarily with a 2-year lag. There will be some of it with a 2-year lag, some of it may take longer to flow through. So yes, I think it is probably going to be down to us to lay these things out and explain them through. And I guess you'll be able to judge how good a job we do on that.

Operator

Our next question comes from the line of Fraser McLaren from Bank of America Merrill Lynch.

Fraser McLaren - BofA Merrill Lynch, Research Division

I've just got a couple of questions, the first of which is back on investment, please. And at the time of the revised CapEx guidance back in November, you were speaking about a number of offsets, particularly in the U.S. and in the nonregulated sphere. Just wondering if you could speak a little bit about how your thoughts have developed there over the last month or 2. And then just secondly, on U.K. politics, since the results back in November, we've seen a number of -- in fact, all of the local electricity distribution companies helping the government out with some adjustments to their allowed revenues. Just wondering if you've been approached along the same lines, please.

Jonathan D. S. Dawson

Okay. Firstly, on investment, I mean, obviously, when we were talking in November, we were trying to contextualize what is quite a long-term agenda on investment against the shape of what could happen on some of the core investments under RIIO and also in our regulatory framework in the U.S., but also some of the extra opportunities that we were seeing in businesses in which we were obviously directly related, like the Long Island Power generation and some additional transmission investments in upstate New York. Those sorts of opportunities we still see as being very important to our continued engagement with regulators and state officials and also good return opportunities because, obviously, on the U.S. business, you earn your regulatory return on the assets you invest in. It's good business if we can find ways of developing our footprint in -- with secure regulatory revenues. So those remain there. They're obviously very long-term projects. They're not going to happen overnight. And since November, 2 months have passed, and in the context of those long-term projects, there isn't a lot more news. But they do remain as very interesting investment opportunities. And the same applies in the U.K. when we look at the potential for further interconnected development, particularly to France, as we've talked about in the context of a second interconnector there and also potentially to Belgium, et cetera. So the investments remain a key part of our program. You spread them over a long period of time, they're not going to add much more than 10%, 15%, 20% to our total investment agenda in any 1 year. So you shouldn't look at these things as being game-changing but they are additional good, attractive investment opportunities, which we think should be considered and thought about in the context of the development of National Grid into the medium term. On the U.K. political environment, we -- our position is pretty clear in all honesty. We are operating under a regulatory framework, which if we do our job well, should see us create efficiencies for the consumer, and through the mechanisms that Andy touched on in terms of the IOUs and the revenue paybacks, will impact beneficially, hopefully, future recoveries of our costs for the -- from the consumers. So the net impact we are likely to have against the predicted allowances that we have under our RIIO framework is positive for consumers. And therefore, I don't think it's an area where politicians and other stakeholders have looked and said, "This is an area we should be focusing on." The dynamic that's much more directly associated with the larger component of customer bills is obviously those related to green energy policy and energy generation and that's where they might be focused in the medium term.

Andy Mead

Can I -- sorry, if I can just add to that. I think -- I mean, I think this is exactly right. And coming back to Harry's question, some parts of when we're reporting about regulatory IOUs. So when we talk to May, there may well be an element there that we can point to that says, well, because we've managed to deliver more efficiently, there is an amount here by which bills will be lower because those were -- the part of the new concepts under RIIO is that those get adjusted for within the period. So in a couple of years' time, those will go back straight to the benefit of customers, which is really very much aligning the interest of customers with ourselves, which is, yes. . .

Jonathan D. S. Dawson

That's a good thing, absolutely.

Operator

We currently have no questions. [Operator Instructions] We have no further questions coming through from the telephone. So I'll hand the call back over to our host for any concluding comments.

Jonathan D. S. Dawson

Thank you, Sarah. Well, look, it's always intended to be a brief call, if necessary, or a long call, if necessary. So very happy to have taken the questions. If there's anything else people want to talk to the team about, we're here in the office. The contact details are in the press statement. We're also out and about on the road over the next few weeks and months. So if you want to touch base with us at any of the key events that we've circulated an update on, we'll be delighted to see you at those as well. With that in mind, why don't I hand you back to the operator to finish the call. Thank you very much.

Operator

Thank you. Ladies and gentlemen, thank you for attending today's conference. You may now replace your handsets.

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