National Grid Half Year Results Presentation 21 November...
Transcript of National Grid Half Year Results Presentation 21 November...
National Grid - Half Year Results Presentation - 21 November 2013
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NATIONAL GRID John Dawson, Head of Investor Relations Steve Holliday, Chief Executive Andrew Bonfield, Finance Director Nick Winser, Executive Director, UK John Pettigrew, Chief Operating Officer, UK Tom King, President of US Businesses QUESTIONS FROM Mark Freshney, Credit Suisse Dominic Nash, Macquarie John Musk, RBC Edmund Reid, JP Morgan Peter Atherton, Liberum Capital Bobby Chada, Morgan Stanley Lakis Athanasiou, Agency Partners Martin Brough, Deutsche Bank Peter Bisztyga, Barclays Iain Turner, Exane BNP Paribas
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Introduction
John Dawson, Head of Investor Relations
Good morning welcome to King Edward Hall for the Half Year Results for National Grid for 2013/14
and thank you for joining online for those of you who are joining us. My name's John Dawson, Head
of Investor Relations for National Grid, and with us today of course are Steve and Andrew who will
go through our results presentation in a minute.
Before we start a couple of notices, please could you ensure you turn off all your mobile phones and
other electronic devices that would be very helpful. We will have a full Q&A session at the end,
please wait for a microphone before asking a question just so we can get it recorded and your
question can be heard online.
We may include forward looking statements in our presentation today, so of course please read our
cautionary statement in full which you can see here behind me now.
With that let me hand over to Steve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
Thank you John, good morning everybody. The running order for today begins with a few remarks
from me on the highlights of the first half. Then Andrew will take you through the details of our
financial performance for the first six months together with some comments on the financing of the
Group and the reporting implications of RIIO, some of which of course we introduced at our seminar
back in August.
I'll then return to talk about the investment environment and the implications for us at National Grid
as we see it today and of course our progress against this year's priorities and the outlook for the
rest of the year.
We've got with us this morning as usual, Nick Winser and Tom King; we're also joined by John
Pettigrew, who's our COO for the UK businesses.
We've made a solid start to the year as we begin our new regulatory arrangements in both the UK
and the US. And we finalised the important foundations in the US that are critical for future filings
and performance improvements. I'd summarise the year as we're very much on track.
In the UK we've made good progress managing our costs and outputs against the regulatory targets
in all of our businesses. We're close to completion now of a thorough reorganisation of the UK
business, providing costs and operating efficiencies. And in addition we've started to see the
benefits of cost and service improvements resulting from negotiations with suppliers and long term
partners, more on that in a moment.
In the US we're on track towards a robust and satisfactory full year outturn. The new rate planes in
Rhode Island and New York are providing a secure framework for key parts of the businesses. And
we're continuing to invest in network improvements and asset replacement required by customers
but driving growth.
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In addition to the normal activities a significant amount of work is being undertaken to ensure
smooth handover of a LIPA contracting business to PSEG at the end of 2013. And I'd certainly like to
take this opportunity to thank all of our staff who are involved in that activity.
While that's going on we remain focused on finalising the important building blocks that will support
further improvements in our business, of which of course the SAP implementation remains key.
You'll recall that this system went live just over a year ago and presented us with major challenges.
In May we had expected to address these during the first half of this financial year. Frustratingly,
despite a significant amount of focus, this now coincides and overlaps with the LIPA separation and
it will not be fully completed until the middle of 2014.
But it remains an area where we can't be distracted, our legacy systems were complicated and un-
integrated and as such they were a major barrier to developing our business. These new systems
are essential, they'll maintain and underpin the health of our regulatory discussions and improve our
ability to manage the business efficiently.
Despite that extra work that's been caused by this our US operations have nonetheless made good
progress towards their Elevate 2015 targets, which I talked about briefly at our full year results. As a
result we're on track to deliver a strong performance on network reliability, emergency response
and other important measures of performance.
Looking at the first half financial results we're on plan, we've delivered a solid start to the year,
operating profits £1.57bn in line with our expectations. Profits before tax £970m [correction:
£979m], reflecting the temporary costs of pre-financing our growth at attractive interest rates.
Overall earnings at £761m, earnings per share at 20.4p, both down 1% on this period last year. A
satisfactory performance and a platform on which we can build in the second half of the year.
And I'm pleased to confirm that the Board have confirmed the dividend at 14.49 pence per share,
unchanged at the half year, in line with the policy that we announced back in March.
We've also taken the decision to suspend the scrip dividend alternative with this year's interim, a
decision that reflects strong underlying discipline around financing our growth and the high take up
last August. Andrew will talk about this in more detail, but before I hand over to him, let me just
cover a few important operational highlights.
Firstly safety - always at the heart of the way we operate and as you know over the last few years
we've sustained good standards. But we refocused our efforts, set ourselves a higher level of
performance as an ambition and in the UK we've delivered a significant improvement.
In October our benchmark employee lots time injury frequency rate improved again and is now
below 0.1 injuries per 100,000 man hours worked compared to an average of 0.12 over the last
three years. We've proven we can deliver performances up with the very best in comparable
industries. That benchmark should set the motivation to achieve even more.
In the US our safety performance is not yet seeing the same results, but we've redoubled our efforts,
particularly in the areas of training and safety communications and we're determined that we'll
bring the level of performance there to a similar high standard.
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Our RIIO price controls provide a great opportunity for us to drive efficiencies in our UK businesses
and sharing those with customers and investors alike. Measurement of the progress at the full year
will focus very much on the returns that we're delivering. But let me try at the half year to give you
a little bit of a sense of the progress in the meantime.
In Transmission we've made excellent progress, transforming the gas and electric businesses to
perform optimally under RIIO. Last year's restructuring in gas distribution involved an 11% reduction
in headcount, with a further 5% expected as the full benefits of our new structure kick in.
In the Transmission businesses by the end of this year we will likewise have reduced the headcount
by a similar 11%.
Improvements are being made in many areas, not least of course in the area of total expenditure, in
totex. For example major contract renegotiations are - have already delivered cost benefits,
particularly in some of our alliance arrangements. Let me try and give you just one small example
but typical of hundreds of projects that we do every year.
An original estimate for a package of new connections was approximately £40m, through improved
scoping of that, making sure the scope was absolutely only what was required and then smarter
design and a different way of tendering that project we reduced the cost to £26m, a 30% reduction
on the original estimate. And we have hundreds of projects like that across the UK. And of course
we share those efficiencies with customers, as well as investors, helping to keep bills down in the
UK.
In gas distribution we've been able to lock in a number of benefits in the period, supported by our
previous investment in IT systems, the reorganisation of our field force and last year's renegotiations
with a number of our suppliers.
From a field operations perspective, with the support of our people and their unions we're
introducing changes to working practices which overtime will have a major impact on customer
service, responsiveness and efficiency. And again under RIIO we'll share the benefit of those
changes, helping to keep bills low, but also driving up higher returns for investors.
In addition our new repex, the replacement programmes - strategic partnership arrangements have
got off to a really good start. We're well on track to deliver over 1,000 miles of replaced mains this
year, the benefits of rationalising our supply base and resetting those contracts have locked in unit
efficiencies on cost and a much stronger alignment to all of the incentives under RIIO.
And one of the most significant incentives in that business is the removal of risk from the gas system.
And at the half year stage we've already delivered over 70% of that risk forecast for the whole of the
year, so well ahead of our target.
As a result when we get to the full year, we expect to be able to report meaningful savings and
service improvements that will markedly approve versus the allowed returns.
Of course we're continuing to invest at significant levels in all of our regulated businesses, important
investment for customers, but growing our asset base that will underpin future earnings growth.
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The current UK debate around the future cost of energy, while totally understandable is creating
uncertainty for potential investors, particularly in new generation. And I'll talk a little bit more about
that when I return and how we currently see that and our perspective on certainly how it affects our
own investment plans over the next few years.
Overall, we're made a solid start and we've laid the foundations for a good overall performance for
the full year. And with that I'll hand over to you Andrew. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business Review
Andrew Bonfield, Finance Director
Thank you Steve and good morning everybody. Steve has highlighted that our results reflect the
steady progress we've made for the first half towards meeting our full year expectations.
But before I start I'd like to discuss how financial reporting and performance measures will be
impacted by RIIO. In the new world of totex measuring the performance of our UK business requires
additional information which is only produced on an annual basis. Analysis of IFRS operating profit
movements without this context doesn't give the full picture of the value we are creating.
At the full year you should expect additional more detailed disclosures around regulatory returns,
regulatory revenue movements and IOUs, and regulatory asset values. All of the items our UK CFO
Andy Agg discussed with you in August.
In the meantime operating profit remains the focus of our interim reporting, but as this does not
include the capital efficiency and incentive benefits that will be discussed at the full year results
we've reduced the amount of commentary in the interim statement.
You will have noticed a change in that we've split our UK Transmission businesses into two segments
reflecting the increased difference in the two price controls and you should expect to see that going
forward as well.
Let's look at our financial performance in the first half of the year and unless stated quoted numbers
will reflect business performance.
Electricity Transmission operating profit was up 12%, due to higher revenues from increase
regulatory allowances, including the link to RPI and increased profitability of the French
interconnector which performed very well in the first half of the year.
Gas Transmission operating profit decreased by 18% compared to the same period last year, this was
due to a change in the timing of permanent revenues and a reduction in the allowed return and the
higher gearing ratio required under RIIO.
Gas Distribution profits were up 12% reflecting increased regulatory allowances.
As expected profitability in our US operations was impacted by the loss of deferral income in Niagara
Mohawk, which reduced revenues by around £60m for the first half. As a reminder this has no
impact on our US GAAP returns.
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We also had a significant timing effect as we under recovered revenues by £57m. This is seasonal
and we expect to reverse this by the end of the year.
These headwinds in the US were partially offset by revenue increases from new rate agreements,
storm recoveries in Massachusetts, and lower bad debts.
In the other activities segment our UK businesses were broadly unchanged from the comparable
period last year. Profitability in the segment as a whole though was impacted by the US system
improvement costs which Steve mentioned earlier and I'll speak more about in a moment.
At the Group level reported operating profit was slightly lower than the same period last year, driven
by the lower contribution from the US and US system costs.
Across all of our regulated activities in the UK and US we did see some pressure on controllable
costs. Our objective remains to keep these costs flat or lower in real terms but there were a number
of one off charges in the first half which impacted the results. Depreciation also increased as we
continue to grow the asset base.
Overall performance of the Group was slightly better than our internal expectations and as I
mentioned we remain on track for the full year.
Returning to US systems costs, the increased workload resulting from issues during the initial
implementation of our SAP system has continued for longer than we anticipated. This has been a
very complicated project touching around 90 different systems across the whole business. Resolving
the knock on impact of each of the issues we have identified is a complex process which is being
exacerbated by the need to separate the activities of LIPA. This means that the final changes to the
system are not now expected to occur until the first half of 2014/'15.
We are confident that the project plan we have in place will deliver the changes we need and we
expect costs in the second half to be lower than the £90m incurred in this period.
Reported financing costs were 9% higher than last year after adjusting for exchange rates. The
increase was driven by the higher cost of carry on our gross debt associated with pre-financing most
of our annual investment programme.
Now let me just talk a little about our outlook for interest costs and our strategies for managing
these probably very topical after last night's minutes. Over the last six months, long term interest
rates have increased by around about 100 basis points. This increase only brings us back to 2011
rates and they are still a long way from where the levels where they were before the 2008 financial
crisis.
Despite the increase in interest rates we still expect to be able to outperform against our cost of
debt allowances.
In the US around 80% of our operating company debt is fixed. This reflects the way allowances are
set as these typically reflect the embedded fixed cost. So maintaining fixed operating company debt
matches the allowance and manages risk.
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The majority of this US debt matures post 2015, so we have limited exposure to rising rates in the
short term. If interest rates continue to increase and are higher when we refinance, we have the
option to re-file these rate cases and request more appropriate allowances.
In the UK our regulated debt allowances for our operating companies are now reset annually using
the 10 year iBoxx tracker. Over the last year the index yield has averaged a real rate of around 1.5%.
As we’ve explained before we are able to issue at rates below that level.
As the tracker rolls forward it uses today’s lower rates to replace higher rates from 10 years ago. So
this year’s average real rate of 1.5% replaces the 2003 rate of 3.5%. As a result, the 10 year tracker
allowance for next year will be 2.7% as I have shown on the pink line. This remains higher than the
average real cost of our existing UK debt.
Much of the debt that matures over the next few years reflects the rates that existed before the
financial crisis. So if interest rates stay where they are, when we come to refinance we will do so at
a lower cost.
As interest rates move, both the tracker and our average cost will move to reflect the new market
conditions. Because of this we do expect to outperform our cost of debt allowance.
The tax rate for the half year was 400 basis points lower than last year, an effective rate of 23%. This
movement reflects the lower portion of US profits in the half year and the 1% lower UK corporation
tax rate. Reported earnings were down £5m and earnings per share decreased by 1%.
Our new dividend policy is to grow the dividend at least in line with RPI inflation for the foreseeable
future. As we advised in March when we announced the new policy, we will hold the interim
dividend flat at 14.49 pence.
The full effect of the new dividend policy on this year’s total dividend will be seen in the final
payment for the year which is due next August. In future we intend interim dividends to be set at
35% of the previous year’s total payment.
Our scrip programme has been a popular option for many of our shareholders and the take up for
the final dividend was over 45%.
In May, I set out our approach to financing our organic growth programme. Doing this successfully
should enable us to deliver attractive total shareholder returns. An important part of that is
maintaining our A- credit rating.
As we go through the first few years of the investment programme, the transition measures on
depreciation impact our revenues and cash flows. As I mentioned in May, the benefit of the scrip on
our retained cash flow to debt metric is an important underpin of the rating. However, if elections
are higher than expected, the additional capital provides little value.
We are suspending the scrip at the interim due to the strong take up at the final. This will limit this
year’s overall scrip uptake to around 30% of total dividends. However, you should expect us to offer
a scrip alternative with the final dividend payable next summer.
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Looking to the cash flow, our operating cash flows of just under £2bn were around 5% higher than
the prior year. This was partly driven by year on year weather impacts on working capital and
recovery of last year’s US storm costs.
Net debt remained unchanged at £21.4bn, reflecting a net cash outflow of around £700m offset by
around £800m of favourable foreign exchange movement on our US dollar denominated debt.
Finally our technical guidance for the year, which remains largely unchanged. We updated our
guidance in July for additional US system costs and a number of positives including the French
interconnector.
The French interconnector has performed very well in the first half of the year. We expect this to
continue, but not to the extent seen in the last six months.
As I mentioned earlier, US system implementation costs will continue, albeit at a lower rate in the
second half.
And we are now expecting a lower full year tax rate of between 26 and 27%.
At the Group level we expect capex to be lower than previously guided at around £3.5bn. And we
also expect net debt to increase slightly less than our original forecast, and are now guiding to an
increase of £1bn, excluding foreign exchange.
So overall I'm pleased with the progress we've made and there are no material changes for our full
year outlook. With that I'll hand you back to Steve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategy, Growth and Returns
Steve Holliday, Chief Executive Officer
Thank you Andrew. Now while we have been focused on execution and delivering the benefits of
our new regulatory arrangements, the news flow in the UK, in terms of energy policy, generation
margins and potential price caps, has created a huge amount of uncertainty; all of which I'm sure
you're very aware - and in particular around the timing of new power generation.
This is in contrast to the US, where, interestingly, the focus seems to have moved the other way. All
three states in which we operate are focusing on customers’ needs for future investment.
Net net, we still see plenty of opportunity for organic investment, in other words - where we can
invest at 100% of RAV or rate base on both sides of the Atlantic and drive sustainable value.
Let me take you through these in more detail starting here in the UK. To remind you of our thinking
only last year when we were in the process of agreeing our forecast expenditure allowances for the
RIIO period with Ofgem. The headline allowances for totex were set based on our Gone Green
scenario with a number of agreed overlaid adjustments.
Broadly, this meant that over a ten year period, the eight years of RIIO and a further two years
34,000 megawatts of new generation would connect. With 2,000 megawatts a year expected for the
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first three to four years of that period. And the headline allowances for those early years reflected a
growing amount of load related expenditure and a relatively flat profile for non-load related
investments; together of course with the previously agreed large strategic reinforcement projects.
Since then, unsurprisingly, we've seen a slowdown in the start of new generation construction.
Currently, just under 2,500 megawatts of new generation will require connecting to the transmission
system over the course of the next two years. We've always known from experience that not all of
the contracts that we have for generators to connect ultimately leads to a connection, but compared
to this time last year we've seen a substantial change to this profile of contracted generation.
This means that as things stand today the currently low level of connection is likely in our view to
continue for the next few years as many projects are potentially delayed.
But while that's going on, interestingly our total contracted generation out to 2023 list has grown,
showing that customers are still looking to invest but are waiting and looking to do so when they
have certainty and certainly later than we previously expected. So it's not unreasonable for us now
to plan for the scenario where our connection investments are low for the next few years.
Nevertheless we'll still be investing significantly in load related and strategic projects. We'll be doing
extensive pre-works, continuing to invest to reduce constraints and finishing our major
reinforcement project like the Western High Voltage DC link from Scotland to England and of course
the huge investment in power tunnels under London.
At the same time our non-load capex continues at a material level, reflecting the underlying age of
the grid and the need to replace critical infrastructure. Non-load related capex last year was around
£500m and is expected to be broadly the same this year. And this of course is appropriate at a much
higher level than at the start of the previous price control period.
In Gas the agenda has been different for some time. Our plans for Gas Transmission always had our
major investment loaded towards the end of the eight year period and this still looks like a
reasonable assumption.
In Gas Distribution the focus remains on the repex agenda, replacing or lining aging metallic pipes
and removing risk from the system. In this respect the RIIO base plan should remain unchanged,
adjustments only arising from changes to the Health and Safety Executive in the prioritisation of
these activities.
And of course we clearly don't have a crystal ball so some things could even accelerate investment,
what might they be? Possibly the new strike prices when they're finalised, or could it be when the
secondary legislation for EMR is actually enacted in 2014 and firm contracts are signed?
To summarise our view though the overall eight year UK investment programme still feels about
right, but it's clear it's going to be phased more towards the latter years.
Importantly when certain outputs are required the totex allowance will flex, so RIIO was designed to
handle exactly this sort of uncertainty. That ensures importantly that customers do not fund
outputs that have not been delivered yet, helping to minimise any increase in bills, despite what
some might suggest.
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And we've built even further flexibility into our financing, our supplier arrangements and indeed into
our own management and engineering capabilities. So regardless of these current uncertainties, we
expect us to invest a significant amount in essential assets over the next two to three years. And this
will afford our business the opportunity to outperform our regulatory contracts, driving growth and
generating good returns for shareholders.
If I look out to the medium and the longer term growth expectations remain strong. The chart I
showed earlier demonstrated there's a strong pipeline of generation projects that have signed a
connection agreement. Even in the event the UK electricity transmission capex remains at this level,
right through to 2015, we'd still expect the RAV growth in that business to be between 8 and 10%
per year and overall for the UK to be at 6%.
Turning to the US where longer term growth opportunities continue to expand. Six years ago we
were investing $750m a year. Since then we've more than doubled that to $1.8bn and enshrined in
the existing agreed rate plans this grows further to $2bn next year. And we now expect with future
filings and requirements that will progressively increase over time to around $2.5bn a year.
What's causing that? What's behind that? Firstly shale gas, it continues to drive the desire for
network expansion to meet the demands of many customers who want to convert from oil to gas.
Secondly, again partly related to shale - significant changes in the mix of generation, more gas
generation being built, and a significant drive towards renewables, all requiring the build out of new
transmission.
And lastly and thankfully we're not talking about a major storm today, although as I say that I worry
I'm tempting fate, it's the first year for a while that we've not had a huge storm in the first half of the
year. But the last few years of recent extreme weather have undoubtedly put a real focus and a
right focus on the resilience of network and the modernisation of infrastructure that has become
old.
In part those drivers will be reflected in increased investment allowances in the rate bases of our
electricity and gas network businesses. But in addition our business development pipeline continues
to grow. Generation in Long Island is now well positioned to move forward with repowering. It's
been talked about for a number of years. We're now in advanced discussions around a possible
investment of up to $1.5bn in the Barrett facility with a decision to proceed expected sometime
during the course of 2014.
Staying in New York State for a moment the New York Transmission Consortium has been working
on a super highway to connect Downstate demand with Upstate generation, particularly renewable
energy. And it's progressing well. This is a $1.3bn project of which we represent a 21% share. It's
currently expected to be finalised with state support in early 2014.
And finally the Clean Line projects, in which last year we purchased an option to invest. They've
made good progress, just this past month the state of Kansas granted planning permission for one
project, known as the Grain Belt Express Clean Line, construction work on that $2bn project is
targeted to start in 2016 with commissioning in 2018.
All in all an exciting range of opportunities - decisions yet to be taken, but potential for attractive
secure long term returns. So together with our UK investments our programme of organic growth
options remains strong.
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But let's turn back to this year and this year's priorities - unchanged. This year is and continues to be
all about execution. In the UK we've made good progress, streamlining the organisation the focus
now is on making sure we get the benefits from that. Delivering the outputs and driving
outperformance.
In the US, as I said earlier, while ensuring we perform under our new rate plans, we must maintain
this focus on completing the SAP implementation. Getting that system in place was the foundation
for further performance improvements, it's going to drive both customer service and importantly it
will generate opportunities for efficiencies to drive higher returns.
As Andrew said our expectations for the full year are unchanged with that we shared with you in
May. First off is a solid start, we're confident of delivering the returns and the growth that are
necessary to underpin our longer term ambitions. And with that we'd be delighted to take your
questions. And I think there are, as John said, some microphones that will be available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Questions and Answers
Mark Freshney, Credit Suisse
Just two questions, for you Steve, if a future UK government were to impose a price cap on retail
and business bills, and you were asked to contribute towards that, what kind of legal redress would
you have and how can you be sure that your revenues really are firm?
And for you Andrew I have a question on the one off costs relating to restructuring and I think the
gas holder provisions, will those be included within the ROE estimates that you put out at the year
end? Thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
Let's, if I may Mark, just use your question just to talk about this issue for a second, shall we?
Affordability is a real issue, it's not a joke it's a serious issue, but it's only one of the issues that we
clearly have to address. Reliable energy supply is an equally very important issue, not just for the
consumers, but also for the economy. And of course we've got our desire to ever progressively
clean up the mix of energy. I mean that trilemma exists in the UK, it exists all over the world.
Getting the debate and getting the balance and the trade off right is something that needs to
happen and happen pretty quickly.
Our business of course has just been through, as you know all know, a really rigorous review by
Ofgem and by stakeholders of the costs of running our business, providing reliable safe networks day
in day out, as well as stress testing the £26bn of investment that we need to make. So we've just
been through that two year review period. And that's contributed an £11 increase to the increase in
bills this year; so for the hundred odd pounds that we're all paying as consumers extra this year if
we're average bill payer, £11 of that is associated with the beginning of the RIIO period.
For the next seven years that's an increase of £1 real per year for the next seven years. That's all it
is, which allows us to run these businesses in the way that we have in the past and equally invest
£26bn of critical investment that's required, so that's what we need people to actually focus on.
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But it's right there's a debate about the balance of - you know how quickly should we clean up our
energy mix, but we clearly need to make sure, as I was remarking that generation gets built in this
country. So pretty quickly getting back to what needs to happen, get this energy bill through
Parliament, that piece of legislation is crucial to give investors the clarity for the future.
And let's not forget just how stable the UK has been for such a long period of time. The World
Energy Council actually do a ranking you know on sustainable energy investment environments to do
with policy and regulation. The UK is in the top five, that's not surprising we're attracted a huge
amount of investment over the past. We're now entering a phase where we need more investment
than ever, so creating confidence, real stable environments, the right incentives and the confidence
that our regulatory environments that have worked so well for a long period of time, aren't
interfered with with short term initiatives is hugely important.
Andrew do you want to pick up? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Finance Director
Yes Mark on exceptionals we have never included exceptionals within ROE calculations that's never
been part of the calculation methodology.
On the gas holder costs part of the reason why they have been classified as exception is for the size
of them, it is a one timer because effectively now we are in a situation where we'll be demolishing
them over a period of time and we'll actually receive some return from Ofgem, but it will be spread
out. But because a decision has been taken to transfer them out of cash distribution into the
property company, effectively it triggers the charge, so effectively that's what's triggered it. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mark Freshney, Credit Suisse
Okay, thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dominic Nash, Macquarie
Two question as well please, the first one is a follow on from Mark's question - what proportion of
your revenues come from retail and if the credit ratings of UK retail gets cut is there any credit
impact on yourself or your ability to raise debt?
And secondly on interconnections as the carbon tax starts to really kick in and the UK power price
diverges from Europe, do you see further opportunities in building interconnectors and could this be
quite a major profit driver for you going forward? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
So let me pick up the second one and Nick you might actually pick up the complexity of the way the
retail charges flow through and the assurance that we have actually of who picks up those charges.
National Grid - Half Year Results Presentation - 21 November 2013
Page 14
But let me just take the second one first because it is an important point in the overall context of
securing the lowest possible cost reliable energy supply as we can in the UK. And it's been very clear
for a long time that the UK is under interconnected against the position that it would like to be and
there were a number of projects, as you well know that have been in my part on the drawing board
for a long time, a long time. And we need some of those to actually come to fruition. So certainty
around the regulatory regime is important.
We've just actually had a piece of independent work done by a consultancy to look at, if we were
more interconnected, if three extra gigawatts of interconnection was available what might the
benefit be to the UK? That analysis says a billion pounds a year potentially for 20 years. By
equalising prices and allowing customers in the UK access to lower cost electricity.
So we're very determined Dominic to try and find the right regimes around an opportunity to build
more interconnectors as soon as we can. They are challenging from a technical front, but we've
proven that we can do that. And I think it's a big piece of the mix and the jigsaw for the future,
ensuring we get reliable supplies, but likewise doing that at the lowest cost to customers.
Nick the way our retail charging works and others pick up if - by implication, somebody fails I guess is
your question Dominic? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nick Winser, Executive Director, UK
So the arrangements in the industry are designed to include provisions for the failure of say a DNO,
for a distribution company there are special administration powers in there, they are included in
there to give certainty that the industry will continue to function in that way.
So ultimately that the assurance that sits in the whole of the regulatory structure against - I mean I
think it's a remote possibility, but against the failure of a distribution company or a supply company
because of a price freeze of some form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John Musk, RBC
Two sort of numbers questions, firstly on the scrip dividend and I guess related to capex, which is yet
again coming in a bit lower than what you would have guided a few months back for this year and
for next year, how does that balance into decisions around the scrip dividend because it would
appear that the savings from capex are roughly equal to come of the savings on the scrip dividend?
So does that pay into your decision on maintaining the scrip dividend over the longer term?
And then secondly just a simple one on the SAP implementation costs, can you just update on what
the total costs are now for the SAP implementation and is there any way you can talk about a
payback period on those costs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
Andrew cost overall and I'll do payback. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Grid - Half Year Results Presentation - 21 November 2013
Page 15
Andrew Bonfield, Finance Director
Okay, on the scrip dividend first to start that, on the where we are on that is the RCF to debt metric
is not impacted by capex, so it's a pre capex measure, RCF to debt is probably the most important of
the credit metrics which scrip benefit is from. So to be honest with you the capex change has no
impact on decisions relating to that.
As regards SAP costs, we've capitalised about $240m of spend which is actually going into rates and
that will be recovered through other future rate filings, but it's already in for example Niagara
Mohawk and we will be recovering that.
Obviously the expenses last year was about £112m [correction: £117m] and the £90m [correction:
£92m] we've incurred this year to date, will actually just be - basically will not be recovered through
rates. The quickly we get things obviously running up and forward the quicker we can actually move
into a more regular rate filing process. So that will be the way we get the payback John, through SAP
as well as obviously efficiencies from running the business better. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John Musk, RBC
Sorry, so is the total cost the 240 and we can add on the 112 [correction: £117m] and the 90 [£92m]
as well?
[Note: see technical guidance in the press release re costs in H2 of 2013/14] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Finance Director
Yes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
And the important point in there you know is this is not our finest hour, you know the cost of
remediating this system are to our account, the investment in the system originally that will benefit
customers and replaces systems that had to be replaced were enshrined in lots of rate plans. But all
the remediation is to our cost actually.
And yes, when we're through it we'll get the benefits, but as I said, you know we had to replace
these whole systems, the new systems will deliver benefits, but they don't deliver any benefit until
we get these problems resolved and get the system working properly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Edmund Reid, JP Morgan
Two questions, the first one is on US Transmission, I believe there was a ruling earlier this year about
ROEs in US Transmission and I wanted to understand what the meant going forwards in terms of the
return? And then secondly I don't want you to go through the entire presentation you gave earlier
this year, but the impact of lower UK capex on your earnings under RIIO? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Grid - Half Year Results Presentation - 21 November 2013
Page 16
Steve Holliday, Chief Executive
Let's do the first one and make a remark and then Tom and pick it up. The challenge to ROEs is
continuing, you know that has not yet run its full course actually in terms of the decision. So Tom
can comment on exactly where that is, that's been going on now for 18 months plus.
In terms of future investments I talked about these things as opportunities intentionally, you know,
when those projects come to fruition and they go through a filing and we know the return then we
have a decision to make about whether that return we believe is adequate for us to invest, so you
know that's a decision that's pending for the future Ed obviously. But the challenge to ROEs in the
northeast that's been going on now for, as I said, at least 18 months and continues. Tom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tom King, President of US Businesses
Ed, it is a challenge in the northeast, I think now it's national. As you know there's been other
regional challenges to it. So ultimately where the US sits relative the ROE decision is really the
composition of FERC. We now have a chairman that is leaving, there was a chairman nominated,
that's been withdrawn.
So where the FERC finds itself is in basically a four commissioner chairmanship, excuse me -
commission, the expectation is this issue doesn't really move forward until we get a new
commissioner named and they get confirmed by the Senate and then this issue will pick back up and
be a large debate within the US.
Ultimately the debate gets to the broader issue of commission policy on incentives and returns to
attract investment in transmission. I think that will play out in 2014, and we really won't get a
decision until the second half of calendar 2014.
As to your term, the decision reached within our filing, that was only an administrative law judge
recommended decision. So it's basically been put aside waiting for the commissioners to be names
and the commission to move forward with the overall major policy issue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Finance Director
And the administrative law judge ruling would be less than $10m impact on revenues, so it's very,
very small. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peter Atherton, Liberum Capital
Three questions but they're all pretty simple you'll be pleased to know. Firstly on SAP obviously
there's cost implications of a difficult implementation, but are we going to have any secondary
implications around customer service levels or regulatory information flows that could lead to other
actions onto the company in the future?
On Labour's sort of proposals, one of their proposals is to abolish Ofgem and replace it with
something else. Now I'm sure you would hope and expect that Ofgem Mk 2 would just pick up the
current regulation and carry it forward, but have you had specific discussions with Labour yet about
that and have you received direct assurances from them that that wouldn’t be the case?
National Grid - Half Year Results Presentation - 21 November 2013
Page 17
And then thirdly on the sort of hiatus in new build generation in the UK, how long before you move
from sort of - I use my own words, but a sort of amber alert on security supply to red alert, in other
words how long can that pause go on for before you start to get particularly concerned? Thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
Good questions, I'm not sure they're short questions Peter either but nevertheless, short to ask. SAP
I mean the simple answer is no, you know we did have some serious issues at the beginning of last
year to do with payroll systems not working, we've worked through all of that and in the US they did
lead to some challenges from outside, in both New York and Massachusetts, all of those have been
fully resolved and that system is now working, it's just the rest of the system we've got to continue
to get implemented and then get into our rate filings.
And this will, as I said, I mean one of the benefits of this system ultimately is the amount of double,
treble checking we've done on our rate filings to make sure that data is absolutely accurate, that's
one of the things that when the SAP system is working it will relieve those costs in the future.
Ofgem, it's not for me to comment on the future of Ofgem that's clearly a political decision. I guess
the only observation I would make the fact that Ofgem do quite a lot of things don't thing and I don't
think that's widely understood. You know their focus on the regulation of monopoly networks,
which of course is our piece of the business, I think if you go round the world they're held in really
high esteem actually - for the way investment has flowed to the UK, their introduction of incentive
based regulation is something that many others have copied elsewhere in the world.
And RIIO already looks as if it looks quite sensible in terms of mechanisms of flexibility that have
been put in place, and not least the fact that everything we can do to drive down costs will benefit
bills in the future.
But their other duties around the operation of markets, the monitoring of markets and E-Serve and
things, you know there's a lot for others to decide and I don't think it's for us to really comment on.
Red alert to amber alert, you'll follow this as closely as anybody, the position we're in as we go into
this winter and Nick and add to it if he wants to, is the same next winter. So if we manage through
this winter, which is a 2008/'09 replica in terms of the margin. As you know we're consulting on two
new tools for use next year, one - to have incentives for mothball generation to make themselves
available in the peak of the winter. Two - for demand side response actually. And of course we're
always talking about the peak, you know, the worse day of the year, that few hour period around
the peak.
So we'll see how those go during winter '14/'15 I think before we speculate about - well what does
'15/'16 look like and you know how tight are things getting. Unquestionably it's tight for the next
few years, and in my view, and our view, you know getting EMR in and getting generation to begin to
be constructed clearly is something we urgently need to get on with, we really do.
Nick do you want to add a comment around next winter or anything? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Grid - Half Year Results Presentation - 21 November 2013
Page 18
Nick Winser, Executive Director, UK
The only thing I'd add over the five year period is it's sort of - it depends on GDP. And Ofgem ran a
good sensitivity actually in the Winter Outlook on GDP, I mean broadly at the projections that we did
at Winter Outlook that we picked up on the forecast economic growth then. You set up these sort of
tight, but you know, manageable margins right through, through to the end of the decade, as long as
all of the existing generation stays on, because basically you've got electricity demand gradually
easing away.
We need to keep an eye on that and see what's happening in terms of updating those GDP growth
figures and just see how that comes into play and we'll do that annually in the normal process. But I
think that's the additional thing to watch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
It is and just FYI, demand on the electricity transmission system in the UK first of the year on last
year on a weather normalised basis, down 0.7%; going in the right direction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bobby Chada, Morgan Stanley
I just wanted to follow up on some of these investment options that you've been talking about, or
have highlighted in the presentation. So there's the Long Island Generation - is that something that
you would expect to go into rate base?
The same for the transmission project, I assume that's going into rate base and will you have to file
and agree those with the state regulators in advance?
And then on Clean Line is it going to be a pure regulated transmission piece, or will there be a
merchant aspect to it? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
Rate base, rate base and some merchant, it will be a PPA on Clean Line where the capacity will be
bought by someone to transmit their renewable energy for a 20 year period, a bit like an
interconnector actually.
But no decision has been made on any of these yet, I just wanted to give you an update from - it's
quite interesting actually how some of these things are clearly accelerating in the course of the last
six months.
Our investment thesis is not changing, you know we like investing in regulated assets, we don't put
our cash to work until we totally understand the way in which we'll collect our revenues and that
those revenues are secured, that's exactly the way that we'll look at all three of those opportunities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bobby Chada, Morgan Stanley
And to follow up on Dominic's question about interconnectors and the carbon arbitrage if you like.
Do you see much demand from people to sign up because I assume you wouldn't do an
National Grid - Half Year Results Presentation - 21 November 2013
Page 19
interconnector unless you had committed effectively take or pay contracts, just like on some of the
Clean Line stuff? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
That's the whole debate that's going on to a certain extent about - you know do you wait for
customers to come, or is the benefit for the UK of interconnectors so much actually that we should
be investing as a society in that important infrastructure and underpinning that investment
somehow.
So Ofgem are out thinking about the different mechanisms. They're doing the right thing asking
what's the mechanism that ensures that we get these investments made and how do we make sure
that customers aren't paying too much for it. We do need a framework created pretty quickly
though because as I've said I think those are important. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lakis Athanasiou, Agency Partners
If I read what you're saying correctly on capex in the UK this year and next you seem to be on a
trajectory that is significantly below the base line by a few hundreds of millions of pounds, it looks to
be mainly in electricity transmission. Could you give a flavour of what that's coming from? Is it in
terms of outputs, in terms of short term re-phasing and in terms of efficiency? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
There are two things going on here so we'll talk about efficiencies at the full year, that's exactly what
we'll talk about at the full year because we're only half way through. So what will affect that
number overall as we signalled before is if we're successful it will be lower, that's what totex is all
about actually, these benefits will get shared to investors and customers.
But I'm identifying very clearly that the connections piece is reducing. Only last week we announced
the postponement of a project across Suffolk - Bramford to Twinstead, it's a hundred plus million
pound project. You know not huge in the context of things over many years, but that's indicative of
the fact that connections have gone back.
So the reduction in capex is purely associated with connections reduction, but then our savings and
we'll cover that off very fully in the full year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lakis Athanasiou, Agency Partners
So there hasn't really been any short term re-phasing stuff, it's a mixture of connections and
efficiency? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
Yes it is. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Grid - Half Year Results Presentation - 21 November 2013
Page 20
Martin Brough, Deutsche Bank
A couple of questions, one on smart meters and the rollout of the timetable got pushed back a year,
now obviously it's good for the legacy gas meters, but in terms of the gas distribution obligations to
facilitate some of the rollout and the costs that might be incurred, could you just talk about those
costs over the next few years and whether you'll have to sort of go back and ask for some of that to
be recovered?
And then the second question was Boris and his island, the Isle of Grain, have you spoken to him
about that? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
Well on the first question we have no costs associated with the smart meter rollout at all, we're not
in that business. The business - it doesn't affect our regulated business at all, clearly the run down
on meters as you rightly identified the retirement of the old gas metres continues to - every year you
look at it and it seems to go back slightly. But we will not be investing in anything that's associated
with the implementation of smart meters. The business we had that might have been on stream we
sold two years ago. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Martin Brough, Deutsche Bank
As I understand it - or some of the other gas distribution networks seem to think that they'll have
more callouts and more costs and that there isn't a mechanism in the control … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
Well if you're assuming that a contractor who does a smart meter then doesn't install it properly and
there's a gas leak we might get more callouts I agree. It's not something that we've looked at at all
frankly. We expect the supply companies that are responsible for the rollout to ensure that the
metres are correctly and safely installed.
Your second point, the Isle of Grain, we have done a lot of communication for a number of years
now to explain that airport actually is close to the Isle of Grain LNG terminal in which we've invested
just shy of a billion pounds, it potentially inputs 24% of the UK's gas.
So if you're thinking of building an airport there you just have to have a broader thought process
about that’s going to need moving somewhere and it's going to cost rather a lot of money. I think
some of the publicity recently has come through to sort of identify that to a few more people than
perhaps had realised it before. And it's not just our facility, there are a lot of other industrial
facilities as you know on the Isle of Grain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peter Bisztyga, Barclays
Two questions, firstly about the US, as you see demand for new gas connections grow over time, is
there a risk - is there going to be a growing risk of a mismatch between when you spend the money
National Grid - Half Year Results Presentation - 21 November 2013
Page 21
and when you get the returns for it, or do you expect the regulation to evolve in the US in a similar
way to that which it has done in the UK?
And then secondly, just going back to the UK politics has the Labour Party engaged with National
Grid at all on any of their sort of proposed policies and what the implications of delayed generation
investment might be? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
On the second one no is the answer, I don't think they've come up with a fully thought through
policy yet actually, that's what I understand they're working on, so we've not been in debate on that.
On Gas in the US we're working with two of regulators in particular, in fact all three in reality, but
certainly in New York at the moment and in Massachusetts about how can these investments to
expand that gas system get made in a strategic sense. Because it needs - these aren't about
connections, the simple, easy connections are the ones that are being done. But there are still just
under a million consumers in our franchise areas who today are heating their homes with oil who
can use gas. But to capture them the networks need some pretty big expansions.
Of course this happened in the UK a very long time ago, you know how to you socialise the funding
of those big expansions? Those discussions are alive at this very moment, to put in place the
regulatory arrangements so that we are incentivised to get on with those investments. And they'll
certainly be a big part of what's called Kedli the old Key Span business on Long Island where there's a
huge chunk of customers there, almost 450,000 who want to get at gas and can't today. So it will be
at the heart of that rate plan, which we're expecting to file in the second half of 2014. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iain Turner, Exane BNP Paribas
Can I just ask a couple of questions, firstly what does half a billion dollars of SAP expenditure actually
look like on the ground, it seems an amazing amount of money for new IT systems and putting them
right?
And then secondly on the capex and the kind of slippage, you've talked about how you think over
the eight year period you'll catch up with it and I just wonder to what extent that's a little bit of
wishful thinking. Because if you look at things like gas storage, the government is not going to
support that now with the subsidy and I from memory and it is a slightly hazy memory, there was
about 800 million of capex in your GT1 business plan for connecting up storage?
And then things on the generation side of things, like new nuclear that seems to be slipping back to
the right hand side of the screen as well. And again there was a lot of money in your plans for things
like in East Anglia for Bradwell and Sizewell, connecting those up, and those all seem to be shifting to
the right. So I just wonder to what extent that's wishful thinking that the capex programme will end
up around about the same number as you thought it was going to be for the eight year period? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
National Grid - Half Year Results Presentation - 21 November 2013
Page 22
If you look at that chart that I showed, where it's dipped and it goes back up again, because we've
actually got today, would you believe it 101 gigawatts of connection agreements out to 2026. I don't
think we've ever had that in our history actually. The question is how much of that is going to come
forward.
I think we need to be very careful about knee jerking on six months information. As I said, you
know, things can change very quickly and I hope they do actually, I hope EMR really does put an
impetus into the generation market, back to Peter's question earlier.
On the gas stuff we actually had a number of these things that weren't in our baseline plans actually,
although we did apply for them, you're quite right. So our gas allowances as I said feel about right to
us at the moment, they do. You know there were some things that might be in, some things that
might not be. And awful lot of our capex is to do with compression replacements and
reinforcements around there.
So it's still - it's just too early to tell Iain, I mean your points are well made, I don't have a huge
defence, are you right, are we right, I don't know, we need to handle this as we go forward. The
important thing is this what RIIO was designed to do though actually, to flex, to make sure that
customers aren't paying for things they don't need and our revenues will flex when all of a sudden
we're investing an awful lot more in 2015 than was originally forecast, etc.
But our job for investors is to just keep giving you the best information we've got today I think
without any question.
On SAP? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Finance Director
I mean SAP as we said, tried to say is incredibly complex, this is not just a financial systems SAP that's
been implemented. It goes beyond that, it goes into things like storm management systems and
front office systems, how we do accounting for revenue versus capex and opex and so forth. So it's a
hugely complex system which is one of the challenges.
So when you had the knock on impact of the storm and the issues around the payroll a lot of work
has had to be done about remediating, actually getting data back and corrected. So a lot of the cost
actually associated, particularly on the remediation side is unfortunately very expensive consultants
who are coming in to actually do work for us, because effectively everybody was out actually on
storm duty at the time last year.
So that's one of our challenges, which has been to get them out and get internal resource available
to do that work. And that's part of the process, which has continued, it's on going.
As we say it's slightly exacerbated by LIPA because at the time we did - in May when we actually
announced the results were weren't expecting LIPA to take over the SAP, or PSEG to take over the
LIPA - our version of SAP for LIPA. They've actually elected to do that, so it shows that the base
system is good, it's just unfortunately not in the situation yet where we've actually got it stable and
operating 100%. But that's delayed some of the final fixes, because then you get into the year end
National Grid - Half Year Results Presentation - 21 November 2013
Page 23
and stocks reporting and so forth. So that's all been part of the challenge we've been trying to deal
with. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
We've just got to see this thing through and get it finished. Last question, Ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Edmund Reid, JP Morgan
Two questions, one of which is exceedingly boring so I apologise in advance; you changed your tax
guidance to 26 to 27% I believe, what's driving that and would you expect it to continue into next
year?
And then my second question is sort of re-asking my second question from last time, which is the
lower capex and when it feeds into your earnings numbers? So from memory I think there's a two
year lag, so it would feed into the '15, '16 revenue numbers, but I was just wondering if you can go
through that in a bit more detail? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Finance Director
On the tax guidance the principal driver is the mixed profits, UK/US, UK tax rate has continued to
reduce, obviously that's benefitted slightly this year, although we were aware of that at the time
when we did the May. But most of it really relates to purely just the mix of profits, UK versus US and
that's a big driver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
And on your other question, I'm going to be slightly cheeky Ed if I may, you're right about the two
year lag, so the allowances or fixed, we'll pay back, and one of the things that Andrew alluded to in
the seminar, we can't do it at the half year, it doesn't make any sense at all.
But at the full year we will do a reconciliation in line with the seminar, in terms of these IOUs. So
how much - back to Lakis' question, how much have we actually saved that are savings that we'll
benefit from and customers will benefit from versus delays and how much is therefore going to go
back to customers in two years' time. So we'll true all those things up with our full year results.
If you'd like to go through the seminar again, my cheeky remark is I know Andy Agg is here, he
carries those charts with him at all times, he'd be delighted to run you through them again
afterwards, I'm sure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Edmund Reid, JP Morgan
A very good punishment thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive
National Grid - Half Year Results Presentation - 21 November 2013
Page 24
Thank you everybody, thanks for joining us this morning, we appreciate it.
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END
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