National Grid PLC

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Earnings Call Transcript 2023-Q4

[Nicholas Ashworth, Director of Investor Relations]

Good to go. So good morning, everyone, and welcome to National Grid's Full-Year Results Presentation. So, I am Nicholas Ashworth, Head of Investor Relations, and I'm really pleased to see so many of you here at the Stock Exchange this morning. And I know we also got a good number of people listening and watching online as well.

So, look, as always, we'll start with safety, we're not expecting a plan for alarm test this morning, but if there is one, please vacate the building and we'll meet out in Paternoster Square and maybe carry on it out there. The second important thing to retention to is the cautionary statement, which is at the front of the presentation. All of today's materials are available on the website. And as usual, there will be a Q&A with John and Andy after the presentation. If you need more info, then please do feel free to reach out to me or the IR team later in the day.

And so, with that all said, let's start the presentation.

[Video Presentation]

[John Pettigrew, Chief Executive]

So good morning, everyone. It's great to see so many of you here today and have so many others joining online. As usual, I'm joined with Andy Agg, our CFO, and following the presentation, we'll both be happy to take your questions.

So, it's been another good year of performance for National Grid. Our significant progress is demonstrated by the positive impact of record levels of investment in both earnings growth and the energy transition. Our portfolio is now repositioned to capture attractive growth for many years ahead. And the continued support we are providing to our customers and communities during these challenging times.

Last year, energy was in the spotlight for many different reasons, not least due to the affordability issues caused by much higher commodity prices. We've seen this galvanize, governments and regulators resolve to accelerate the energy transition as they look to bring an end to expensive and unpredictable fossil fuel costs, increase the level renewable generation and deliver greater levels of domestic energy security.

National Grid is at the heart of this push, empowering change through investment in critical energy infrastructure. And we're doing this across all areas of our business such as in our U.K. Electricity Transmission business, where Ofgem have recently awarded us 17 major onshore transmission projects to enable greater levels of offshore wind connection. And in our U.S. businesses, where we've had approval for $3.8 billion outside of rate cases to drive greater investment in the connection and delivery of clean energy.

But the energy transition isn't just about the future, we're delivering it today with another record year of investment across the U.K. and U.S. Northeast. You'll have seen in the opening video, we've energized the world's first T-Pylons as part of the Hinkley Connection project, which will connect 6 million homes and businesses to low-carbon electricity. We’re Rewiring London with 90% of tunnel boring complete, at the 33-kilometer London Power Tunnel project. Across our U.K. Electricity Distribution business, we've enabled twice as many EV connections in the past two years, than all previous years put together.

And National Grid Ventures, we continue to make great progress on Viking Link, a 1.4-gigawatt clean energy interconnector to Denmark. Across our U.S. gas businesses, we've replaced over 360 miles of leak-prone pipe taking the cumulative total to over 4,200 miles and avoiding annually 134,000 metric tons of CO2 equivalent. And in New York, we broke ground on our $600 million Smart Path Connect transmission project, which will bring clean energy from upstate New York to demand centers downstate.

The investments that we're making right now are driven by our vision to be at the heart of a clean fair and affordable energy future. And our key focus is to capture future growth opportunities by delivering the critical infrastructure required as safely and as efficiently as possible. National Grid has never been as well-positioned to do that as we are today. The strategic pivot we announced just over two years ago is now complete. Our U.K. Electricity Distribution business formerly Western Power Distribution is now well embedded within National Grid with new leadership in place.

As part of the pivot, we've completed the sale of our Rhode Island business to PPL in May 2022. In January, we also completed the sale of a 60% stake in our U.K. Gas Transmission business two of Macquarie-led consortium. And as a reminder, the consortium has the option to acquire the remaining 40%. We continue our work to set up the future Electricity System Operator as an independent separate body ahead of Green [Indiscernible] timeline for separation with the U.K. government.

And finally, following Ofgem's decision in December to award us the 17 major onshore transmission projects, we've created a new Strategic Infrastructure Business Unit. This will oversee and efficiently deliver the significant increase in transmission infrastructure needed in the U.K. over the next decade and beyond. So it's been a very busy time for National Grid. Today, our geographic and regulatory diversity with a portfolio that's broadly 70% Electricity and 30% gas and shows we're in a strong position to capture the considerable opportunities the energy transition brings.

And I'm also proud of the way we've stepped up as a company in the past 12 months, helping our people, customers, and communities through an incredibly tough economic environment. Today, we're announcing the early return GBP100 million of interconnector income where we have collected revenues above our cap. This comes on top of the GBP200 million revenues we've already committed to return early. In the U.K. this winter, we allocated nearly GBP24 million, GBP50 million British pounds energy support fund to help 30,000 households through the energy crisis.

And in the U.S., we launched our customer assistance program contributing $6 million so far to help support vulnerable households. We also continue to play our role within our communities. September saw the second day of service for our Project C initiative with over 2,000 colleagues dedicating 11,000 hours across more than 200 locations, double last year's achievement. As a responsible business, we'll continue to do what we can to support our customers in easing bill pressures as we move through this challenging period. But it's clear to me, this isn't a quick fix, only significant investment in clean energy will bring customer bills down in the long-term.

So turning now to our financial performance. On an underlying basis, that is excluding the impact of timing major storms and exceptional items. Underlying operating profit was up 15% or 10% on a constant-currency basis, to GBP4.6 billion. This reflects a full-year of earnings for U.K. Electricity Distribution, good operational performance across all of our regulated networks, and a strong performance in National Grid Ventures. This was partly offset by the sale of our Rhode Island business and the energy support fund we launched to help vulnerable customers this winter.

Underlying earnings per share was 69.7 pence, up 7%, compared with the prior year. Capital investment from our continuing operations was a record GBP7.7 billion, 8% above the prior year at a constant currency. We've also made great strides with our cost-efficiency program, delivering a further GBP236 million of savings on top of GBP137 million previously announced and within close reach of our GBP400 million target. And in accordance with our policy to grow the dividend in-line with U.K. CPIH, the Board has declared a final dividend of 37.6 pence per share. This takes the total dividend for the year to 55.44 pence, an increase of 8.77%.

Turning next to our safety and reliability performance. Last year was another year of good safety performance with a small improvement in our lost time injury frequency rate. However, following the tragic events in Massachusetts last May, when an employee lost his life, we've been focused on ensuring the lessons learned are being shared across the whole organization. Safety continues to be an area of close attention for us to ensure that we continue to improve our performance.

Moving to reliability. We've had another excellent year of reliability with over 99.9% availability across our regulated networks. I'm particularly pleased with this outcome, given some of the challenging weather we experienced this year. I'm proud of the role we've been playing in safeguarding security of supply. In the U.S., Winter Storm Elliott saw historic levels of snow, wind, and low temperatures. We're the largest fuel force in Western New York's history, helped to restore power to over 200,000 customers.

In the U.K., July saw the hottest temperatures on record, while Electricity Transmission teams took extra measures to ensure our network continues to operate efficiently, including continuous monitoring for overheating and guarding against wildfire hazards close to our overhead lines. And our electricity system operator developed one of the most comprehensive winter preparedness plans we've ever had, ensuring that we successfully navigated what could have been a very difficult winter.

So let me now turn to our operational performance. Starting with New York, where we achieved a return on equity of 8.6%, 96% of the allowed level. During the year, our capital investment increased by GBP340 million to $3 billion, resulting a strong rate base growth of 9.9%. And it's been a busy period for policy and regulation in New York. In July, we received approval to proceed with $691 million of transmission investment projects to support the Climate Leadership and Community Protection Act or CLCPA.

In February, we received an additional $2.1 billion of funding to enable over 2 gigawatts renewable generation in upstate New York. In December, New York's Climate Action Council approved the scoping plan which outlines recommended policies to help meet the goals of the CLCPA. Within this, we were particularly pleased to see recognition for the importance of a decarbonized gas network in the state, as well as the role alternative fuels, such as hydrogen and RNG can play in this decarbonization pathway. The plan also made the case for continued investment in the replacement of leak-prone pipes, which will improve network safety, whilst continuing to reduce emissions.

Moving to New England, where we've seen similar momentum in regulatory approvals for clean infrastructure investment. Our achieved return on equity was 8.3%, a 30 basis points improvement on last year. I'm confident the programs underway to streamline and modernize our systems in Massachusetts will be a significant contributor to getting closer to the allowed level. During the year we delivered capital investment of $2 billion, which excluding Rhode Island was $276 million higher than last year with a rate base growth of 6.3%.

As I noted earlier, over the last few months, we received funding outside of rate cases for new clean-energy investments. This includes nearly $340 million for grid modernization projects, $487 million for the rollout of the Advanced Metering Infrastructure Program, and $206 million for EV infrastructure, which will provide over 30,000 charging points. In the U.K., our electricity transmission business continues to perform well, with Capital investment increasing by 9% to GBP1.3 billion. The business delivered a return on equity of 7.5%, 120 basis points above the allowed return of 6.3%.

Ofgem published its Accelerated Strategic Transmission Investment decision document in December. This confirms they award of 17 projects to National Grid with much in investment expected to be in the second-half of a decade. However, included in the GBP9 billion of CapEx in our five-year outlook, is around GBP1 billion of early investment in these projects. Getting the certainty was one of the key priorities that I talked about back in November and it's just one of several positive developments in the past six months.

The establishment of the new Department for Energy Security and Net zero should bring increased prominence to the clean energy transition within government. In March, the Department announced its Powering Up Britain package, highlighting networks as a key enabler of the transition. As part of this, Government restated its intention to streamline planning processes to accelerate the delivery of transmission upgrades. And we are pleased to see that, the community benefits framework that we've been advocating for help to address planning barriers is now out for consultation. With this all -- whilst all this is encouraging progress, in order to meet the governance climate ambitions we still need to see faster development of policy. I'll come on to talk more about this later.

Turning now to U.K. Electricity Distribution. In the final year of ED1, the business continued to perform well, delivering return on equity of 13.2%, including a 360 basis points of outperformance and customer satisfaction scores of 8.99 out of 10. Capital investment grew by 10% to GBP1.2 billion, driven by increased customer connections for renewable generation and electric vehicle charging infrastructure.

In March, we announced our acceptance of the five year RIIO-ED2 price control, which started on the first of 1st of April. Whilst the final determination is stretching, we believe there is a strong position to deliver the outcomes customers require, as well as our regulatory commitments.

And lastly, moving to Nash Grid Ventures, where capital investment was GBP906 million. We're making good progress on the Viking Link to Denmark, we have now laid 75% of the cable, and expect to commission the project by the end of the calendar year. Our North Sea Link to Norway has completed its first full-year of operation and I was delighted that resumed full service of our Eiffel into France in January. Grain LNG had a record year of utilization with 102 ships offloaded, supporting energy resilience in the U.K. and Europe. And we remain on track to deliver the Phase 4 project with the outer walls and roof for the main tank now completed. In the U.S., our offshore wind joint venture with RWE submitted proposals to NYSERDA and we expect them to announce the winning bid in the coming months.

So as you can see, it's been a great year of progress right across the Group. And following Andy's presentation on the financials, I'll come back and share with you our key priorities for the coming year. Andy.

[Andy Agg, Chief Financial Officer]

Thank you, John, and good morning, everyone. I'd like to highlight this, as usual, we're presenting our underlying results excluding timing, major storms, exceptional items, and that all results are provided at constant exchange rates. Furthermore, following the completion of the 60% stake sale of our U.K. Gas Transmission and Metering business in January, we continue to hold the remaining 40% as held for sale.

So turning to our numbers. I'm pleased to be reporting another good year of financial performance. Underlying operating profit on a continuing basis increased by GBP411 million to GBP4.6 billion. This was mainly driven by a full 12-months of earnings from U.K. Electricity Distribution following exact position in June 2021. Good performance across our regulated businesses, further supported by our efficiency program. And a higher contribution from National Grid Ventures coming from a first full-year contribution from our Norwegian Interconnector NSL. [Indiscernible] for business interruption recoveries relating to Sellindge fire in September 2021 and continuing good performance across the interconnector portfolio.

Higher operating profit, partially offset by a rise in interest costs helped underlying earnings per share increase by 3% to 69.7 pence per share, an increase of 7% at actual exchange rates. We have now delivered GBP370 million of enduring efficiency savings and within close reach of our GBP400 million target. And our robust operational performance was also reflected in the 11% Group return on equity.

In line with our policy, the Board has recommended a final dividend of 37.6 pence, taking the full-year dividend to 55.44 pence per share, representing an 8.77% increase, compared to the prior reflecting 2023 average CPIH inflation. We continued to deliver record levels of investment with capital programs to drive forward the energy transition on both sides of the Atlantic. Capital investment from continuing operations increased to GBP7.7 billion, 8% higher than the prior year.

Alongside a full 12-month inclusion of U.K. Electricity Distribution, this also reflected high New York investment on electricity system reinforcements, as well as across cyber, digital, and customer experience. Increased investments in U.K. Electricity Transmission as we make progress on our GBP1 billion London Power Tunnels project and in National Grid Ventures, given the rebuild at our IFA1 interconnector converter station at Sellindge following the fire, and investments at Grain as we advance the work on the Phase 4 project.

Now, let me take you through the performance of each of our business segments. Starting with U.K. Electricity Distribution, underlying operating profit was GBP1.23 billion, up GBP343 million from the prior year. Whilst this reflects a full-year of ownership, we saw a strong final year of delivery in the ED1 price control with an ROE of 13.2%, 360 basis points ahead of the allowed return.

Across the eight years, Electricity Distribution exceeded at 76, 81 Business Plan commitments. With delivery of 2% outperformance against totex allowances, all whilst keeping network reliability at 99.995%. Capital investments increased to GBP1.22 billion, an increase of GBP321 million, compared to the prior year, in part reflecting our first full year of ownership.

Moving to Electricity Transmission, the underlying operating profit was GBP1.1 billion, down GBP45 million, compared to last year. The underlying operating performance was offset by the near GBP150 million we've returned to customers in the year following the Western Link settlement. Capital investment was GBP1.3 billion in the period, as we delivered network reinforcements, asset health programs, and new connections, as well as made good progress on London Power tunnels, where the main tunneling is 90% complete and the installation duty pilots at our Hinkley connection project.

We’ve achieved a 7.5% return on equity, 120 basis points ahead of baseline allowance. And we remain on track to achieve 100 basis points of average annual outperformance throughout RIIO T2. Finally, in the U.K., the Electricity System Operator saw underlying operating profit of GBP31 million and the RAV end of the year at GBP360 million.

Moving now to the U.S., where 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. This reflects rate increases across our operating businesses, as well as strong efficiency delivery, partially offset by higher property taxes due to increased investments, as well as a higher bad debt accounting charge. This relates to agreed COVID bad debt relief arrangements in New York, where we now have certainty of COVID cost recovery in the coming years.

Capital investment was GBP2.5 billion, GBP280 million higher than the prior year. This was partly driven by higher investment across our electric business on reinforcement and Renewable connection projects such as through our CLCPA investment and Smart Path Connect project in upstate New York. It also recognizes non-cash capital leases of the Gowanus environmental sites and the Volney-Marcy transmission line.

In New England, the return-on-equity was 8.3%, 30 basis points improved on the prior year excluding Rhode Island. Underlying operating profit was GBP819 million, excluding the impact of the sale of our Rhode Island business in May last year, it was GBP104 million higher, reflecting the annual performance-based regulatory reset in our distribution businesses, as well as a continued focus on efficiency delivery, partially offset by higher spend on cyber and vegetation management.

Capital investment was GBP1.7 billion, an increase of GBP226 million, excluding Rhode Island. This was driven by higher electric investments on asset condition work, system capacity, and customer-requested work, and fewer COVID-related restrictions, leading to increased leak-prone gas pipeline replacement. We had another strong year in National Grid Ventures with underlying operating profit, including joint-ventures, up GBP278 million to GBP693 million for the year. This primarily reflects the first full-year from the North Sea Link interconnector to Norway.

Continued higher revenues across our interconnected portfolio. Insurance recoveries following the Sellindge fire as well as higher income through incentives of Grain LNG. Capital investment decreased by GBP62 million to GBP906 million for the year. With increased investment in IFA and Grain marginally offset by the non-recurrence of the seabed lease purchase at our New York Bight offshore wind projects in the prior year.

Operating profit for other activities for the full-year was GBP31 million, GBP9 million higher than last year. This increase was principally driven by property sales completing as part of the St. William transaction, mostly offset by fair value losses of National Grid Partners given adverse market conditions and our community support payments through this winter. Capital investment was GBP72 million, down year-over-year, due to lower investments by National Grid Partners.

Net finance costs were GBP1.5 billion, up GBP378 million with treasury-managed interests GBP493 million higher, driven primarily by inflation movements on index-linked debt costs and refinancing of the underlying portfolio. This was partly offset by higher non-treasury interest income from higher pension and capitalized interest.

For the full-year, the underlying effective tax rate, excluding the share of joint ventures was 23.1%, 120 basis points lower than the prior year. This reflects a lower remeasurement of state deferred taxes following the Rhode Island sale and U.K. property sales with a lower effective tax rate. Underlying earnings were GBP2.5 billion with EPS at GBP69.7, up 7% on the prior year at actual exchange rates.

Moving now to cash flow. Cash generated from continuing operations was GBP6.4 billion, up 11%, compared to the prior year. This primarily reflects stronger operating profit and the full-year impact of U.K. Electricity Distribution. Net cash outflow of GBP3.1 billion was nearly doubled to GBP1.6 billion outflow from the prior year, driven by high levels of capital investments and lower levels of scrip dividend uptake in the year.

Net debt of the full-year was GBP41 billion, 7% or GBP3.1 billion lower than the prior year at constant currency, as we received proceeds from the sale of Rhode Island Gas Transmission and the Millennium Pipeline through the year. Following the repayment of the acquisition bridge loan, our levels of floating rate debt are back in line with levels pre-transactions at around 10%. Around 70% of our debt sits within our regulated operating companies and has a high degree of regulatory protection with our overall debt book, having an average maturity of 11-years. The GBP7 billion of bond financing completed in the past year demonstrates our strong access to financial markets and we expect to issue between GBP5 billion and GBP6 billion in the coming year.

Lastly, I'll turn to our full-year 2024 guidance and longer-term outlook, starting with 2024. We expect another good year of underlying performance. However, following the U.K. Government's spring budget and changes to capital allowances, we now expect underlying EPS to be modestly lower year-over-year. Looking more closely at those changes to capital allowances, the U.K. Government has announced increased rates of relief for expenditure on qualifying plants and machinery running from the 1 April, 2023 to the 31 March, 2026.

For our U.K.-regulated businesses, the impact is economically neutral as we will receive lower revenue allowances through our system charges to reflect the lower amounts of cash tax that we will pay. For our electricity transmission business, we expect the impact on revenue to be around GBP200 million per annum and for Electricity Distribution around GBP100 million. However, this does have an IFRS accounting impact.

Our total accounting tax challenge will remain broadly unchanged as we will pay lower cash tax today, we recognize deferred tax liability to reflect higher future payments. Without this change in legislation, we would have seen underlying EPS growth in 2024 within our 6% to 8% CAGR range. But with the implementation of the capital allowance legislation, which as I've said is economically and cash-neutral to the Group, we now expect 6% to 7% -- 0.06 pence to 0.07 pence per share impact on our underlying EPS for full-year 2024. And this results in our 2024 EPS guidance being below our reported underlying 2023 EPS.

Furthermore, we expect the 0.06 pence to 0.07 pence per share impacts to grow modestly each year through to ’25, ‘26 as our capital investment grows. If the policy does end by March 2026, we would see a significant obstacle benefit to EPS in the following year as we receive higher allowed revenues given the increased cash taxes we would then pay.

Moving to our five-year outlook. We are reconfirming our financial framework from April ‘21 to March 2026. As a reminder, we expect to deliver capital investment for the Group of up to GBP40 billion, which will drive asset CAGR of 8% to 10%. And underlying EPS CAGR of 6% to 8% with the change in capital allowance legislation now moving our expectation towards the lower end of the range by 2026. And an aim to grow the dividend in-line with average CPIH. All of this, whilst maintaining credit metrics within the bands required consistent with our strong investment-grade credit rating and with net-debt to RAV to remain in the low 70s.

With that, I'll hand you back to John.

[John Pettigrew, Chief Executive]

Okay, thank you, Andy. I want to spend the next few minutes looking at the year ahead and the journey we're on to support all aspects of the energy transition. This is a hugely exciting period for our industry. I can't think of the time over the last 30-years, where we've seen so much opportunity for growth. As these opportunities become reality, National Grid can deliver a cleaner, more resilient, more flexible system that in turn will help to lower costs for consumers, create new supply chains and new jobs across the economies we invest in.

Whilst, I'm encouraged by the progress that's been made in the last six months and optimistic about the future, we need to see even greater urgency both in terms of action and mindset from governments and regulators, and other key stakeholders. In the U.K. and U.S., we played our part in helping to significantly improve understanding where it's most needed on the scale of the job ahead. But the development of policy and regulation still needs to move at a much faster pace and given the similar issues that we see on both sides of the Atlantic, National Grid is uniquely positioned to provide solutions.

In the U.K., one of our key priorities this year is to help drive forward the significant regulatory and policy changes needed to meet the government's clean energy ambitions with an affordable cost to consumers. This week we published a detailed Policy Statement where we've set out five priorities that require action by government and the regulator. First, the planning system needs to be reformed to provide the clarity and certainty required to support the delivery of net zero infrastructure along with a streamlined consenting process.

Second, governance frameworks need to be set up to enable new delivery models. It must include expanding Ofgem's mandate to support the delivery of net zero, regulation that enables anticipatory investment at scale. Competition legislation for major transmission projects given the significant levels of investment that will be required in the next decade and beyond and creating the new future system operator.

Third, the regulator must transform the connections process from today's first come first served model. So one that prioritizes strategically critical projects over those that aren't progressing. And we were pleased to see Ofgem's recognition of this earlier this week. Last year saw an incredible 60% increase in transmission connection requests. Today, the connection pipeline in England and Wales is about 170 gigawatts, nearly 3 times the current generation capacity. That's a lot more generation in the pipeline when is needed to meet the current targets.

Fourth, communities and consumers must be at the forefront of the transition. Government is consulting on a comprehensive community benefits framework for hosting local infrastructure. Getting this right will address many of the local concerning issues in today. And finally, for the U.K. to compete in the global race for resources supply-chain capacity and green skills need to be invested in right across the country. Regulatory support is required to provide the supply-chain, the clarity and certainty needed to really scale up. And whilst it's early days, these priorities seem to be resonating with politicians and stakeholders, and in the months ahead, we'll continue to drive these five areas forward.

But as you'd expect, we're not standing still. As I mentioned, we have established a new business unit, which will deliver the ASTI major transmission projects. This business unit will deliver the projects as one program of work rather than individually, whilst putting in place a new contractual framework to enable efficient delivery. And on connections, changes already underway to reduce waiting times. In Electricity Transmission we're optimizing the connection offer process and the Electricity System Operator has set out its own five-point plan, including an amnesty to exit the [queue] (ph) with our cost and a new commercial framework that requires progression against key milestones.

And finally, in the U.K., I just wanted to touch on Electricity Distribution. We will share more details on our future plans at our investor event in July. It will be hosted by Cordi O'Hara, who has recently taken over as its President. And without stealing too much of Cordi's thunder, it's fair to say that the business is laser-focused on a strong start to the new price control, stepping up investment in key areas, including distributed generation EVs and heat pumps. And now that U.K. Electricity Distribution is well-established within National Grid, we'll start to drive further value across the Group, particularly in transmission and our distribution businesses in the US.

So moving to our U.S. priorities and starting with our Gas Business. As regulators and policymakers work to define pathways to meet their aspirations, we're working alongside them to share our knowledge and experience, including setting out pragmatic options to achieve their goals. The pathway to net zero will be challenging, but our Clean Energy Vision sets out a plan that also balances the need for clean energy to be reliable and affordable. It marries the need for World-class energy efficiency, whilst accelerating the electrification of buildings and the use of fossil-free gas networks.

And whilst we are seeing increased recognition by policymakers, whether it's the Climate Action Council's recognition of the important role decarbonized gas networks will play in delivering net zero, all the significant exemptions in the recently passed All Electric Buildings Act, the debate continues around the pace and feasibility of delivering greater levels of electrification.

And therefore, our focus will be to continue engagement around the vital role of our gas networks will play in ensuring reliable and affordable options for customers alongside electrification. And we're taking action now to deliver this hybrid clean energy future through our ongoing program pipeline replacement with pipes that can handle decarbonized gas. Delivering the $1.2 billion in energy efficiency measures across New York and Massachusetts approved in our rate plans, as well as continue to progress the Northeast hydrogen hub proposals.

So turning to our electric businesses. At the federal level, the Inflation Reduction Act and Infrastructure Investment Jobs Act support the Clean Energy Vision and have the potential to dramatically accelerate the energy transition. However, like the U.K., this will only happen if a company by the significant permitting and siting reform needed to enable investment at pace. And as you'd expect, we are working at the federal and the state level to advocate for reforms to streamline these processes without compromising environmental protection and local input.

And whilst undertaking this advocacy work, we'll continue to develop our growing number of transmission projects, including the CLCPA Phase 1 and 2 projects I mentioned earlier. The New York Propel Project, enabling offshore wind to be brought into the stake, and the Twin State’s Clean Energy Link connecting Canadian hydropower through Vermont and New Hampshire.

On the regulatory front, last month, we filed for new rates in our downstate New York businesses KEDNY and KEDLI. These comprehensive proposals are aligned to the State's Clean Energy goals, whilst ensuring continued safe operation of the network and affordability for customers. Investment is driven by targeted replacement of leak-prone pipes, which support not only asset safety and reliability but also lower emissions.

And lastly, in Massachusetts Electric, we're preparing for our next rate case and expect to file -- and expect to file this October for new rates effective in October 2024. So in summary, it's been another year of exciting progress and strategic change for National Grid. We've acted against it -- we've executed against our key priorities, including completing our strategic pivot, whilst investing a record GBP7.7 billion, as we continue to build clean-energy infrastructure that is critical for the future.

Our positive collaboration with governments and regulators on both sides of the Atlantic has helped to improve the understanding of the scale of the task ahead. National Grid is delivering the energy transition today and we're uniquely positioned to meet the scale of the challenges ahead, drive forward a clean fair and affordable energy future for all.

So with that, I'll take any questions with Andy.

[Nicholas Ashworth, Director of Investor Relations]

Okay. So what we're going to do? We'll take questions from the room first and then we'll take questions online. [Operator Instructions]

[Jenny Ping, Citi]

Thanks very much. Jenny Ping from Citi. Two questions, please. Firstly, John, you talk very much about the strip -- the strategic pivot being completed. Can you -- can we take that as you're effectively happy with the mix of business and I'm specifically referring to the 30% of the gas that you still have in the U.S, -- you're happy with that as status quo?

And then second question for Andy on the EPS guidance, clearly, all the deferred tax noise is causing a bit of havoc in your guidance. So I just wondered given some of your peers actively give guidance ex deferred taxes, is that something that you've considered and will consider as we go-forward. Thanks.

[John Pettigrew, Chief Executive]

So thanks, Jenny. So in terms of the strategic pivot, I mean, just to remind people, when we set out on the strategic pivot, we said that what we were trying to achieve was to get the shape of the group to really reflect the energy transition. So the sale of a majority stake in gas transmission and Rhode Island business and the acquisition of WPD really achieve that. We still continue to believe that electricity has got the leading role in the energy transition but the gas has got a really important role to play. The strategic pivot leaves National Grid 70%, electric 30%, gas broadly 50:50 US, U.K, which we're very, very comfortable with. Andy?

[Andy Agg, Chief Financial Officer]

Yes. Thanks. On the tax point, look -- I think we've looked closely at it. We think it's a three-year transition arrangement. That's been announced runs through 2026. And we think that what we've chosen to do which is to reflect how that flows through our numbers in full is the right way to do it. That said, if it becomes an enduring change and it looks like it's going to stick around and it's going to continue to have a significant impact and then we will obviously continue to keep them on to review. The important thing is to reinforce that it's entirely uneconomic. It's neutral from an economics and cash perspective, but we'll obviously get that under review if it becomes a permanent and enduring change.

[Martin Young, Investec]

Good morning. It's Martin Young at Investec. And just one question, and I guess it's a bit of a follow-on from Jenny's in part. But if I look at everything that's being talked about this morning, there is quite clearly a considerable investment opportunity that goes way, way beyond this decade. When you allude to the way that you look at financing and your level of gearing, you only talk to March 2026. Now that date is approaching us very, very quickly. So when we then think about the financial structure of the Group beyond 2026 and the way that you will finance these investments, it does bring us back to how you might look at that portfolio, and clearly in the past you have made disposals of assets to finance -- to free-up the ability to move into other areas of investment.

So if I then look at the gas electricity splits particularly in the U.K., you have stepped away from the molecule in the U.K., both in terms of selling the gas transmission business, you've decided not to progress carbon capture, storage transport facilities in the north of the country. So where does Grain fetching to all of this? Because that is a gas asset in a country where you are principally electric. So I just wonder what your thoughts on that one, please.

[John Pettigrew, Chief Executive]

It's quite a lot in that. So let me just start with the frame that we set out to do. So, as you saw from Andy's presentation, what we set out is that our expectation remains over the period '21 to '26, that we'll invest up to GBP40 billion. You will remember that we updated that in November last year. And in updating that, that really reflects some of the more recent events that we've seen, particularly in terms of the acceptance of ED2 distribution price control. As well as it really reflects our understanding of the KEDNY and KEDLI rate filings that we've made recently as well, and it includes about GBP1 billion of investment for the ASTI projects that Ofgem confirmed that they want us to take forward by 17 projects take forward that they announced in December.

So beyond that, actually there's still work to be done in terms of getting clarity about exactly what we're being asked to do and actually what the profile investment is and what the regulatory framework is. As we get more transparency on that and you would have seen our policy document that we issued on Monday that sets out some of the areas that we need to see progress on to be able to do that. Then we'll be able to update the market about what beyond 2026 looks like. But we are reaffirming today up to GBP40 billion for 2026.

In terms of the overall mix of the business. I always think about the businesses in terms of its contribution to the investor proposition, both in terms of growth and in terms of yield. And also of those businesses and if they are not contributing to that, you've seen that National Grid has taken action in the past to address that. But at the moment, we're very comfortable with the portfolio.

With regards to Grain specifically, we're in the midst of a huge construction program to expand the capacity of it by 20%, but it contributed -- continues to contribute to our investment proposition and therefore, it's an important part of the portfolio as it sits today. Andy, do you want to pick on the sort of financing side?

[Andy Agg, Chief Financial Officer]

Yes. And I think just maybe to build on what John has set out and give out some of the comments in the presentation this morning. We're clearly in a place where there's a lot of work still to be done around things like ASTI and a number of the other, potentially U.K. investment opportunities around what is the regulatory framework and that will be critical in terms of determining not just the returns that come with those types of projects, but the other characteristics like asset lives, speed of money and so forth. And that's really the -- before you can start thinking about financing, strategies, and so forth beyond 2026, that's where we have to start and that's our focus today.

Beyond that, as you know, we have a number of opportunities as you said, you talked there about the portfolio, we've talked previously about the amount of additional hybrid capacity, we're relatively light in hybrids at this point. So a lot of untapped capacity there. So a number of other levers that we have, but the critical thing today is to make sure that we're focused on the right regulatory frameworks.

[Harry Wyburd, Exane]

Hi. Thanks for taking my questions. It's Harry Wyburd from Exane. So two from me. First just on gas transmission in the 40%, so that's held for sale, but have you made any assumptions on the sales proceeds, if it gets sold and the use of those proceeds? And could you give us an update on what your thinking is on the likelihood that you would end up disposing of that?

And then the second one is on Politics. It strikes me there are cross currency, you on the one hand sort of calling on government to make various changes that you walked us through earlier. On the other hand, you got John Penrose calling for a more aggressive stance from regulators on monopoly businesses?

So I wonder, it's -- how do you feel this is going to shake out? Should we fear that there is a looming crackdown on regulated businesses or moreover, on the regulators? Or is it the opposite actually that we might get more favorable regulatory and government policy for you given that obvious need to accelerate net zero and transmission capacity? Thank you.

[John Pettigrew, Chief Executive]

I want to pick up the politics. And Andy, if you want to pick up the gas transmission? So I think in terms of the energy sector, I think, there is an increasing recognition of the scale of the investment that's needed and how important it is, how to stable and predictable regulatory framework that supports that. And I think, when we listened to Jonathan really speak this week, I think you get a sense of his recognition that the regulatory framework needs to change going forward and Ofgem has an aspiration to be seen as an enabler in support of the energy transition.

So from our perspective, one of the reasons we put the policy document on Monday was that we wanted to be absolutely clear where we felt the focus needed to be over the next few months, and able to not just maintain the momentum of the energy transition, but actually to accelerate it, because of the scale of the infrastructure investments needed.

So from an energy perspective, I think, what I've seen and certainly the discussions I've had just that the regulators are recognizing that, there are broadly than that -- there are broader issues around the water companies and so on, which I'm not going to comment on. But I think for us in the conversations we're having, I think, what we're seeing is a sense that everybody needs to come together to get the right regulatory and policy framework to be able to deliver the transition over the next decade.

[Andy Agg, Chief Financial Officer]

And in terms of the 40% on Gas Transmission, you're absolutely right. So you have seen it's accounted as held for sale and that relates back to the existence of the option. The option window runs to the end of July, and it's entirely a call option for Macquarie-led consortium. So we're just in the first month of that option window, that's driving the accounting. In terms of the likelihood, I'm not going to comment on that. You'd have to ask the consortium in terms of -- but as I say, the option window runs the 31 July. And then in terms of the proceeds, given the quantum, we're looking to next year be investing, sort of, north of GBP8 billion of capital. So I'd say in terms of expected use of proceeds will be redeployment into funding that.

[John Pettigrew, Chief Executive]

We should go to the front first and then we'll go behind. [Indiscernible]

[Jingjie Yang, UBS]

Hi, thanks for taking my question. Jingjie Yang from UBS. So my first question is on ‘24 guidance. Could you clarify a little bit? So my understanding is your five-year framework, it's unchanged. So it's now going to be towards the lower end by 2026. And now you've delivered two very strong years result underlying EPS. And this year, nearly 0.70 pence already. So is my understanding correct that for the next three years, so to go from 0.70 pence to the lower end of 6% to 8% CAGR in 2026, you will be lending on something like 0.74 pence, 0.75 pence, and then that means for the next three years, you will have only 1% to 2% growth each year.

And if that's correct, then, you've mentioned that, if excluding the consideration of the capital allowance in the ‘24 guidance would have been between the 6% to 8% increase from the ‘23 numbers. And -- does it mean that if not for the tax change, you would have to upgrade your guidance allotted for ‘24. That's my first question.

And second one is on a -- the follow-up on the gas minority. So obviously we are still on the first months of the option window, but they already have sort of a long period of time to think about if they will take it or not and by this time they haven't really action on this yet. And what do you think the reason could be, is that the valuation and FX change that make them change their mind? Because if they made the decision, they would have act on the 1 May, we would think. Yes, that's my two questions.

[John Pettigrew, Chief Executive]

Okay on a -- I'll take the gas issue and then, Andy if you could talk about guidance. On the gas issue, as Andy said, they have a call option, that option is exercisable until the end of July. So it's for them to make that decision by that time scale. From our perspective, as Andy has also indicated, we have good governance in place for the 40% that we do. And ultimately, if the call option isn't exercised, then the Board will consider what action is appropriate. But actually, we can also hold onto the assets as well. So we'll take that decision as and when we get to the end-of-the-call option if it's not exercised. But as Andy also said, it's a decision from Macquarie as to what they want to do.

[Andy Agg, Chief Financial Officer]

In terms of the guidance, I think, yes, probably separate out the five-year frame that we've set out, and then what we said about next year, to be clear. So let me talk about the five years first. Absolutely. So we continued to -- we reaffirmed in November that the five-year frame is unchanged and that we've said that again this morning. And remember that the five-year CAGR, the 6% to 8% runs from FY ‘21 baseline and we said right from the start that there would be years of higher growth and years where the growth might be slightly lower than that. And you're right that we had some high years early on, particularly as we step through the transactions. We reaffirmed this morning that over the five years, we still expect to be in the 6% to 8% range, albeit now as you say, because of the tax towards the lower end of that range. That's absolutely right.

In terms of the one-year version for FY ‘24. Yes, we're right, we said, absent of tax, we expect it to be given the underlying performance across all businesses that we would have been in the 6% to 8% on a one-year basis. But we just -- that's not changing our guidance to say, we will always be in the 6% to 8% range. The 6% to 8% is the five-year frame. So now reminding you again that is economically neutral. But from an IFRS reported perspective, we do expect to be slightly down next year.

[Jingjie Yang, UBS]

And Sorry, a little bit of follow-up on the guidance. So, you said that's going to be -- So if not considering the tax effect, it's going to be 6% to 8% for '24 only for this -- for next year only and -- but the actual number would land on ‘23 is already nearly 0.70 pence. And then the next -- for the next three years, there will be a smaller range of growth to achieve the CAGR lower end 6% to 8%. And then to compare -- So it would be 1% to 2% for each year in the next three years, is that correct?

[Andy Agg, Chief Financial Officer]

You have to remember that effectively, as we've guided this morning, the tax impact is 0.06 pence to 0.07 pence in year one, and we expect that to grow slightly highest. We're delivering the 6% still over the five-year has taken accounts of that. So in terms of the underlying performance of the business against that 6% to 8%, I think if you do the math’s on what 6% to 8% is at the end of five years, it's a wide range, and that that sort of 0.06 pence to 0.07 pence per share, as it grows over the CapEx over the three years, the underlying performance would probably put you much higher in that range by the end. So I think you're doing your math, but you've got to remember, we will still have that tax drag in the final year.

[Jingjie Yang, UBS]

All right. Thank you very much.

[James Brand, Deutsche Bank]

James Brand from Deutsche Bank. Just on this 2025 and 2026 guidance point, is the right -- is there an explicit underlying upgrade really going on here for 2025 and 2026 guidance? Because if we take the low-end of your range, we add on 0.67 pence plus how much is growing, we actually get to the top end or maybe above your guidance range. So is that the right way to look at it?

And then secondly. John, you mentioned the need in your priorities for the U.K., a need for competition legislation, which was the only one that kind of jumped out at me as maybe being a bit more surprising. So I was just wondering whether you could just talk -- are you advocating for -- I guess, you advocating for competition legislation, what would you like to see? Because I guess most people's, kind of assumption would probably be that you wouldn't want more competition, you would want to stick with status quo. Thank you very much.

[John Pettigrew, Chief Executive]

Okay. So, I'll take the competition one Andy can talk about guidance. In terms of competition, actually, National Grid is consistently said for several years that actually we'd be supportive of competition. I guess, what we'd like to see is a decision made on that because actually, the energy transition is accelerating. There are still outstanding questions about which projects is going to be put out to competition. Legislation is going through, but we need to get to a position where we have clarity going forward and the scale of the scale of the investments needed in the U.K. and beyond is probably bigger than any single company or anything that -- the transmission companies that exist today. So we just advocating for, let's make a decision on it, so we can move forward.

[Andy Agg, Chief Financial Officer]

Yes. And then just on the guidance point. So we previously not guided specifically within the range for the -- at the end of the five years. We've said in November that we expect it to be in -- now in the 6% to 8% range. But as I said in the previous question, if you do -- if you look at what a 6% to 8% range over five years gets you, the range is close to 0.10 pence. So given we are now expected to be at the lower end of that range with the tax drag then I can't disagree that without the tax drag, you would have been towards the top end of that 6% to 8% by year-five.

And I'll remind you again, it's a three-year transitional change to the tax allowances regime at the moment. And if that doesn't get extended, we would expect the optical jump back up in EPS when get to FY ‘27, but we'll have to see where we get to.

[James Brand, Deutsche Bank]

Great. Thanks.

[Rob Pulleyn, Morgan Stanley]

Thank you. Rob Pulleyn from Morgan Stanley. I have one question and then an observation, if I may. And levers on guidance or accounting you'd be glad to hear. So, firstly, I think everyone can agree that the biggest bottleneck and it's on your priority slide is permitting. And one of the biggest issues on permitting is local opposition, which is remarkable at a time of affordability of crisis around living costs both in the U.K., Europe, and the U.S. So what do you and other energy transition companies need to do to make the argument stronger to get local support such that permitting can improve?

The observation, if I may, is regarding the political process. We -- and given the Fixed-term Parliaments Act, we are within sort of 12 months-ish slightly under of -- those in government may not be there for much longer. Do we need to see or will we not see a significant improvement in the framework until actually you get a new government in place with a mandate and the time horizon over five years to actually go and change things in a way that you wish? Thank you.

[John Pettigrew, Chief Executive]

Well, thanks for the question. I mean just to be clear, I mean National Grid has a very defined process that set out in the national policy statements as to how we assess what's the right infrastructure to connect things like offshore wind farms and therefore what are the options, and therefore, it means for local communities. And we work incredibly hard to engage with local communities over multiple years to set out what those options are and also to share with them the criteria on which we through legislation or obliged to assess those options.

So the economics, the engineering, the esthetics, the environmental impacts and also the local communities views. And we do that every single time that we're looking to build major infrastructure. But we're very sympathetic to not everybody will want a host infrastructure on behalf of the U.K. as part of the energy transition.

So one of the things that naturally has been advocating for quite strongly as part of the planning process as well as streamlining the process to make a quicker is that there should be community benefits for those local communities that do host infrastructure. And we were particularly pleased actually the government has actually launched a consultation on that.

And as part of their consultation, we've also been pleased that one of the options that they are considering is that actually what that community benefit looks like should actually be something that you engage with the local communities on. So rather than dictating it's something, it could be lower energy prices, it could be investment grade jobs, it could be investment in the local community, so that it's something that should be discussed with the local community so that they can agree what those benefits are.

So we're a big advocate that we've been pushing for that quite strongly. We're really pleased that the government is consulting on it. One of the reasons we -- our policy statement out on Monday is being bold and having pace are going to be really important, which is why we set out on Monday that, that is one of the key things that we see as part of the new planning regime going forward.

[Rob Pulleyn, Morgan Stanley]

Thank you.

[John Pettigrew, Chief Executive]

Can I just pass it back one, please? Thank you.

[Ruisi Liu, Bank of America]

Hi. Morning. Ruisi Liu from Bank of America. Can I ask you two on the U.S., if that's okay? So the first one is regarding the New York City gas plan, that's coming into place next year. What are your thoughts on that? And have you -- how that sort of impacts your guidance? I think in the testimony you filed you said that's going to impact KEDNY more than KEDLI. So if you can comment on that one?

The second one is on the 9.8% ROE I think you requested to the New York regulator. Can you give us an indication of how that conversation is going and maybe -- sorry for coming back to the guidance. Is that 9.8% what you used for the 6% to 8% EPS guidance? Because I think [Indiscernible] went in with a 10% request and came out with a 9.25%. So I'm just wondering if that's your base case or that's what you're using for your guidance. Thank you.

[John Pettigrew, Chief Executive]

So comes to for guidance, Andy. So in terms of gas, let me talk about U.S. gas. I mean, I think people will recall that National Grid set out a vision for how we see our roadmap for gas evolving as part of the energy transition in the U.S. in April last year. And actually, we have been very pleased with the way that people have leaned into that. And as you heard in my remarks this morning. We're also quite pleased that some of the documents that have been produced in the new -- in New York over the last year have recognized that gas networks have got an important role to play, albeit, it should be part of decarbonization agenda, so things like lending for hydrogen renewable natural gas has been recognized as a potential pathway for them.

So for all those reasons, I'm quite pleased that actually, those things are recognized. In terms of the building plan for, I think it's less than seven-story buildings in New York City. Actually when you look at all the exemptions, it has quite a small impact and actually for our gas business new connections is certainly not the driver for the growth that we've been seeing, actually our leak-prone pipe replacement program is the significant driver for our growth. So it's not going to have an impact -- a material impact on National Grid and its gas business.

But one of the things that we've always talked about in my remarks is that we need to continue to work on articulating how gas plays an important role in our jurisdictions in the Northeast and how it supports the electrification agenda as well and we do that by setting out pragmatic examples and also recognizing the affordability issue that customers are concerned about. So materially doesn't have a huge impact on the sort of the business underlying.

In terms of the 9.8%, so for New York for both KEDLI and KEDNY, we've been working very closely with stakeholders and with the regulators in preparation for making the filing for the rate cases. There is quite a well-defined methodology that we've used and regulators used for ROE and in the rate, case filing we've done that. It's at a very early stage. So, we will now start the discussions in detail with the regulator to make sure we get the balance right between what we need to do from a safety, reliability perspective, what we need to do as part of the energy transition and how we balance that with affordability and we'll see when we get to as part of those discussions. It's quite a long process. It can take 12 months to 16 months in New York to go from a filing to actually get an agreement, but we're just at the beginning of that.

[Andy Agg, Chief Financial Officer]

And in terms of the guidance point, when we put the five-year guidance out originally, we always aim to make the frame robust, so not subject to change for individual outcomes on individual rate cases. So I'm comfortable that any sort of sensible outcome on that rate case isn't going to move the guidance -- move us outside of the guidance that we put out this morning for the five years.

[Ruisi Liu, Bank of America]

Thank you.

[Mark Freshney, Credit Suisse]

Hello. It's Mark Freshney from Credit Suisse. Just Andy, looking holistically, we're in a different environment now to the one we were in 18-months ago in many levels, but particularly on interest rates. We've gone back to higher rates. You've got very quick trackers in the U.K., slower in the U.S., and you've got substantial net-debt at group level outside of the rate basis.

So if you put that together, how much lag do you think there is? When rates go up, how much lag do you think there is before you actually find that your EBIT and your returns actually go up? And also on the debt element, as I understand, a significant fraction of your debt is floating, which is fixed for shorter periods and if you could take that into account as well.

[Andy Agg, Chief Financial Officer]

Sure. So look, just quickly, in terms of the mix of the debt book today. So as I said this morning around 70% of our debt is within regulated entities. So around 30% is Holdco across the U.K. and U.S. In terms of fixed float, post the transactions with the repayment of the bridge, we're now very much back in line with where we were previously. So around 79% long-term fixed, 11% index-linked and 10% floating and that's a balance, I'm very comfortable with going forward, so it's only 10% of the total book is floating.

In terms of the linkage to regulation, I think here in the U.K., you're right, we have the tracker that trues up each year. And obviously, the risk free rate also flows through the cost of equity mechanism under both T and D. So I would anticipate that, that will get trued up very quickly. But in the U.S., I think your comment was it's much slower. I think I'd probably phrase out slightly differently, which is -- it depends on the cadence of rate cases because cost of debt allowances are set and reset when you file, but you will give an allowance for future filings as well. So as long as you issue with inside that, you do get that recovered in full.

And I think we've been very successful in making sure that our regulatory arrangements in the U.S. accommodate predicted debt files as well as past ones. So I don't see that there's a significant lag from a regulatory perspective in the U.S. either. So we're comfortable both side of the Atlantic. So as I said in previous presentations, the focus is therefore on the holdco debt. And there, as I said this morning, we have the average maturity of the whole group is around 11 years. So we've absolutely included the impact of interest rates in our five-year guidance for you as well.

[John Pettigrew, Chief Executive]

Well, in I think there's another question in the room, so I'm going to take that while we sort of that technical hedge.

[Pujarini Ghosh, Bernstein]

Hi, this is Pujarini from Bernstein. And thanks for taking my questions. So on offshore transmission, for some time, you've been talking about this holistic network design. And given that now you've created a new division, is something moving on the ground. Could you give us some more color on that? And then coming back to U.S. ROEs. In New York, I think there was a slight decline in your ROE this year. So should we read too much into that? And also, could you give us some more color on the Massachusetts upcoming REIT filing?

[John Pettigrew, Chief Executive]

Okay. Let me start with sort of the new business units, strategic infrastructure. So it was in December that Ofgem made the decision finally to award National Grid 17 Estee projects. So given the scale and the nature of those projects in terms of the vast majority of them are national critical infrastructure with the significant planning processes that we talked about earlier. We've taken the decision that actually separating that out and focusing on delivering that is the right thing to do. And we appointed a new person to lead that, which is Carl, hopefully you'll get a chance to meet soon.

The focus now is really in two areas. The first area is to work with the supply chain to put in place the right contractual frameworks to deliver that program of work. So you heard me say in my remarks, delivering that work as a project by project on an individual basis is not going to be the most effective way to do that. And given that the U.K. is competing globally with the supply chain, we need to put in place a program that give supply chain the visibility and the transparency of the work that we ask them to do over the next decade. So Carl and the team are very much focused on getting our contractual framework right.

The second step then is having got agreement from Ofgem that we're doing the work, we now need to put the regulatory framework in place to deliver that. And again, there are two aspects to that. The first is to make sure that we've got a regulatory framework that allows us to deliver this work as a program of work. So historically, for those who are close to the lofty projects tend to be individual projects, you have to go to the regulators to get approval individually but delivering this as a program of work means we need some changes to the regulatory framework.

And then ultimately, we also need to agree the financial frame, as Andy mentioned earlier, in terms of the returns and speed of cash and those sort of things that may not get done until Q3 because actually the vast majority of the CapEx is not going to be spent until Q3 and beyond. But actually, we will continue to encourage the regulator to give us clarity on that as well, and we'll continue to work on that. So that's the focus in those areas.

In terms of New York, I mean, we're very pleased actually 96% of the load is a good return. We've had some cost pressures in New York, which is just reflected in our book. But the underlying performance of the business continues to be strong as we go into the new rate filings for KEDLI and KEDNY. And in terms of Massachusetts, we're just currently putting together our plans on that. One of the things I've been very pleased about in Massachusetts is outside of the rate filings, we've been able to agree with the regulator some significant investments for smart metering and grid modernization and EVs. So the rate filing will focus very much on the core of the network in terms of making sure that we've got the investments for us replacement resilience, storm hardening, in those types of areas. But we will also be discussing with the regulator what is also needed for the energy transition as well and creating optionality around that.

[Pujarini Ghosh, Bernstein]

Thank you.

[Dominic Nash, Barclays]

[Technical Difficulty]

[John Pettigrew, Chief Executive]

Okay, so Dominic, are you on the line. Looks take your question.

[Operator]

Dominic, your line is open.

[Dominic Nash, Barclays]

Hello there. Yes, it’s Dominic Nash here from Barclays. I hope you can hear me or not?

[John Pettigrew, Chief Executive]

We can hear you, Dominic.

[Dominic Nash, Barclays]

Brilliant. Thanks you. Okay, couple of questions for me, please. The first one is on Rima. That's obviously trundling along on the sort of review of the power markets nodal pricing versus sort of one market, et cetera. But I just wanted to know what your thoughts were on this policy as to what you would like to see for the price signal to say for transition with transmission nodal pricing and/or will we also be looking at things like first come first served versus auctions for connections and other sort of policies that will affect the energy transition. We do you think we'll get a response from Ofgem on that?

And secondly, I just wanted to quickly ask a question on following up from Mark Freshney's question. What is your current cost of debt do you think? And what do you think the current cost of equity? Because I'm looking at cost your returns on U.K. Transmission is sort of 6.3% nominal. And that looks quite low to me. What do you think you actually do need to meet your cost of equity. Thank you.

[John Pettigrew, Chief Executive]

So I'll take the first Dominic. I was going to take the second. That in terms of the two areas that you referenced particularly locational marginal pricing and nodal pricing. I think the real debate we had certainly in my mind is, whether that is truly going to be effective in the U.K., given that to a large extent the locational decisions on where generation is set for the next several decades has been decided. We are going to be a network that's predominantly dominated by offshore wind, which is going to be located in the North Sea and in NERSC. And to the extent that there is a nuclear program, we know the nucleus will be as well so. I think there is a debate to be had around how effective that type of them mechanism would be for the U.K. given the key decisions have been made and we're fitting into that as part of the consultation process.

In terms of first come first serve on things like connections, one of the things that we set out in our policy document is actually, we do think there is a need for fundamental reform and one of the thoughts that we've had is actually as we move forward, the linking it with things like anticipatory investments, it may be more efficient for customers, it's actually you can create connections zones where done the investment you create capacity and rather than individuals deciding where they want to connect the transmission system you create capacity and let people know where the capacity issues and they connect into it.

And that potentially may be a much more efficient way of delivering the energy transition than the existing mechanism where. Any of you can choose to connect anywhere. And then you have to build-up the infrastructure to support it. So that's something that we sell-downs policy document and we're going to spend some time talking to Ofgem and others about in the months ahead.

[Andrew Agg]

Yes. Thanks. So Dominic, I mean on cost of debt, you're absolutely right that we have seen a tick up in our overall effective interest rate, partly driven by obviously higher inflation feeding through the index-linked portion of the debt book this year. So that's as you'd expect. I mean in terms of your point on cost of equity, I'm not going to give you a view on what National Grid's cost of equity is or so forth. But in terms of what are the -- how we see the regulatory returns, I think you mentioned 6%, 3%. That's what it has been for the past year. But as we look forward into FY '24, I think the base return, base allowed return for ED2 and T2 if you neutralize the gearing impact is 5.28%. -- you've then got CPIH on top of that. And as you heard this morning, we've reaffirmed our guidance aiming for outperformance of 100 basis points operational outperformance on top as well.

So that's how we see those regulatory frameworks building. And yes, I think the number you mentioned is slightly lower than that because of the gearing change on transmission, but if you allow for that, that's where we see sort of allowed returns going forward.

[John Pettigrew, Chief Executive]

Okay, thanks, Dominic.

[Dominic Nash, Barclays]

Thank you.

[John Pettigrew, Chief Executive]

So I think we got a question from Ajay from Goldman Sachs.

[Ajay Patel, Goldman Sachs]

Hi, can you hear me?

[John Pettigrew, Chief Executive]

Yes, we can.

[Ajay Patel, Goldman Sachs]

Good morning and thanks for the presentation. I had a couple of questions. Just on the renewables side. Is there any indication of the returns that you're making there and how they compare with the rest of the business? And if that was to be proven to be more successful, would you allocate more capital in that direction?

And then I'm just looking at the overall business, the reviews, the opportunity and CapEx that you highlighted, I'm just wondering like what are the key sort of obstacles here? What keeps you up at night? Feels like things are very clear in terms of the direction you're having. Just wanted to know what may be considerations that maybe I haven't looked at.

[John Pettigrew, Chief Executive]

Okay. Thanks, Ajay. In terms of renewables, I mean, our position has always been very consistent in that we see our renewables businesses adjacent to our core networks business, and we look in a disciplined way to invest in projects where we think we'll get a return, which is above what we see in our sort of onshore Networks business. That has always been the case. Within National Grid Renewables, I think we've got about 1,000 megawatts now in operation and about 800 megawatts as part of a joint venture with Washington State Investment Board, that we're taking forward, which will be delivered over the next couple of years.

So we continue to see opportunities in National Grid Renewables with good returns. And on top of that, of course, we also progressed on the offshore wind project with our joint venture with RWE. In terms of the second question, I didn't catch the beginning of it. Sorry, if you could just repeat it.

[Ajay Patel, Goldman Sachs]

Yes, it was a very high level, but I'm just trying to understand like what keeps you awake at night here in like it feels like the story in terms of the CapEx opportunities are there. [Indiscernible] is just driving that even more so on the U.K. electricity side. I just wonder what are the obstacles in delivering this plan? Or what are the things that effectively keep you up at night when you look at the business as it currently stands. Just it all feels like everything is just running very smoothly.

[John Pettigrew, Chief Executive]

Well, I'm pleased to hear that Ajay, that what you attended the presentation, which was. I mean, genuinely, I think we're in a very good position. We've spent the last two years executing on the strategic pivot, and we've come out of that. We've done that while it's performing very well. So we do see significant opportunities ahead of us. And we think that National Grid is very well placed to take advantage of opportunities. And one of the key message is we're acting now, which is you've seen that we just established a new business, you need to deliver those at projects because we think that is the most efficient and effective way of doing that.

In terms of obstacles, I guess, the policy document that I put out on Monday is really setting out from our perspective, we recognize that networks are a key enabler to the energy transition that those are the things that we believe regulators and government should now be really focusing on, and they need to do, as I said, to be paced and to be bold, if we're going to continue and increase the momentum in the energy transition. So I'm not sure I'm losing sleep, I'm a pretty good sleeper, but those are certainly the things that are on my mind as we look forward to the opportunities ahead of us.

[Ajay Patel, Goldman Sachs]

Okay. Thank you very much.

[John Pettigrew, Chief Executive]

Nick has a question. I assume this is for online.

[Nicholas Ashworth, Director of Investor Relations]

Yes, I've got two questions from biotech and from SocGen. So the first one is, what ROE outperformance do you expect for ED2 during where ED2. And secondly, how to reconcile your cost savings with the fact the controllable costs have increased across all divisions. Thank you.,

[John Pettigrew, Chief Executive]

Do you want to take the second Andy? I mean in terms of the REO performance Ed, what I'd say, I mentioned in my remarks is to come to our Investor Day in July. So I mentioned that I'm really pleased actually with the progress we have made in integrating [Indiscernible] distribution and international Grid. We've appointed a new leadership team now that we've got the outcome of ED2, we're very focused on looking at how we deliver both the regulatory commitments, the customer needs, but also how we deliver financially against that. So Cordi O’Hara is looking forward to actually meeting you all and sharing her plans with you at the beginning of July. So I look forward to seeing you all there.

Andy, do you want to talk about the cost.

[Andrew Agg]

Yes. So as we said this morning, we've had a good year in terms of delivering our cost reduction initiatives up to GBP370 million. But as you said, in terms of the total cost base and as we guided last year, this is very much now they're helping us offset both the headwinds that inflation is bringing as every business is facing and also offsetting the growth of the business. We're growing at 8% to 7% per annum. That brings with an additional cost of maintaining and managing that asset base. And therefore, the efficiency program is making sure that we're offsetting some of those cross pressures as well. So we're very pleased with how it's delivering, and that's where it's working for us.

[John Pettigrew, Chief Executive]

No more questions? Okay, in which case, I'm going to thank everybody for joining us this morning. I guess in summary, I think it's been a good year for National Grid. We're really pleased to complete on the strategic pivot. I do think it positions us well for the future and we're really looking forward to seeing many of you at the July event on electricity distribution. Thanks for seeing you.