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National Grid

First Half Results Presentation 2012/'13

National Grid - First Half Results Presentation 2012/'13

NATIONAL GRID

John Dawson, Head of Investor Relations

Steve Holliday, Chief Executive Officer

Andrew Bonfield, Chief Financial Officer

Nick Winser, Executive Director, UK

QUESTIONS FROM

Mark Freshney, Credit Suisse

Jonathan Constable, Nomura

Bobby Chada, Morgan Stanley

Dominic Ashley, Capital

Jamie Tunnicliffe, Redburn Partners

Iain Turner, Exane BNP Paribas

Analyst, CF Partners

John Musk, RBC

Peter Bisztyga, Barclays


Introduction

John Dawson, Head of Investor Relations

Good morning ladies and gentlemen, I am John Dawson, Head of Investor Relations at

National Grid and it's my pleasure to welcome you here today to National Grid's First

Half Results Presentation for 2012/'13.

Shortly I'll hand you over to Steve Holliday, who will kick off the presentation, but before

I do a few notices. Before we start can I please ask you as usual to turn off your mobile

phones? As usual we will have a question and answer session at the end, could I ask

you to use some microphones and please state your name and organisation.

In today's presentation Andrew and Steve will refer to various profit and other

measures, unless otherwise stated these will be adjusted for timing and storms and all

operating profit and interest costs are at constant currency.

Finally our presentation today may contain forward looking statements; I need to draw

your attention to the cautionary statements in the presentation and in your pack and at

the start of the online presentation for those dialling in. Please refer to these when you

consider our comments today.

Just a reminder, you will find all of the materials for today's presentation and additional

fact sheets on our website, and on our investor relations app. Without further ado let

me hand you over to Steve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Key Highlights


Thank you John and good morning everybody. The running order for today begins with

a few comments from me on the highlights from the first half, then Andrew will take you

through the details of our financial performance for the first six months and he'll share a

few thoughts about the general progress that we've made and the development of our

longer term financing strategy.

I'll then return to talk to about our progress against this year's priorities and the outlook

for the rest of this financial year. Nick Winser is with us today as usual, but Tom King is

not for a change, and I'm sure you'll all understand that Tom rightly has stayed in the

US this week.

We've delivered a good financial performance over the first six months, excluding last

year's impact from Hurricane Irene in the US and the normal swing in timing profits

before tax - up 15%. On a similar basis operating profit from the first six months is up

7%. As a result, after interest and tax, overall earnings increased by 14%. These are

pleasing results and while there's more we can do in the second half to build on this

progress, they clearly provide a strong platform for a good full year.


I'm pleased to announce that the board has approved a 4% increase in the dividend to

14.49 pence per share, in line with our policy for this year.

As we've previously said, we expect to announce a long term dividend policy at the latest

with our full year results in May, of course subject to the UK RIIO process having

concluded.

This is an important year for our businesses, in both the UK and the US. Securing

appropriate regulatory arrangements and bedding down significant organisational

changes are key actions on both sides of the Atlantic. These are about ensuring that we

deliver the needs of our customers, as well as delivering our targeted returns and

securing long term financing for the important investment programme.

Here in the UK we continue to work with Ofgem on the RIIO price controls. While it's fair

to say that we've been surprised over the last five months by some of the aspects of the

process we've been working hard and constructively with the Ofgem team to bottom out

the differences and important gaps in understanding before we can finalise a new long

term price control.

Nevertheless, RIIO sets out some major changes to incentives and the sharing

mechanisms in particular. As a consequence we've already been making changes to our

UK businesses, to ensure we're well positioned to deliver the maximum benefits of RIIO,

both for UK consumers and for other stakeholders and I'll share some more details on

those changes later.

In the US we've continued to make substantial progress, building on last year's

restructuring and the cost reduction programme the business has continued to embed

important organisational and process changes. One key recommendation from the 2011

Liberty Audit was the need to integrate our IT infrastructure and financial systems,

whilst at the same time improving and simplifying many of our accounting processes,

and Andrew will talk about some of our progress in this area.

Tom's leadership team have also made significant progress, both across the business,

but critically in our focus - jurisdiction by jurisdiction. The evidence of which is now

starting to be seen in both our regulatory and broader stakeholder engagement,

particularly in moments of crisis, as we've seen recently with Hurricane Sandy.

Although Hurricane Sandy, rightly termed Super Storm Sandy has clearly occurred after

the first half of the year it would be totally inappropriate of me not to mention such a

monumental event. I am immensely proud of what's been achieved and so quickly. I

cannot express to you how fortunate we are to have such an amazing team of people, of

dedicated people, despite enormous damage, unprecedented damage, particularly on

Long Island, the strength of our team and its combined resources, those that came to

help, has worked very effectively.

In Massachusetts, Rhode Island and Upstate New York we connected 98% of those

disrupted electricity customers within four days. That quickly enabled us to dispatch

even more teams down to Long Island. But for Long Island electricity customers it's

been a very different story. At its peak over 1.1 million customers of LIPA were without


power. Super Storm Sandy, followed up seven days later by the snow blizzard,

impacted just about their entire network, where we as you know are the contractor to

LIPA. And over the past two weeks we've mobilised 15,000 people, National Grid people

from all over our territories, contractors from across the US and from Canada on the

ground helping with restoration.

But the challenge, the combination of storm damage and flooding has made restoration

efforts very challenging. While service was restored to nearly 900,000 customers in the

first week, it's taken a lot longer to restore services in those areas with heavy flooding

and the most significant tree damage.

As of last night the LIPA distribution system was ready to supply energy to all but 8,000

homes and businesses which are in the very worst affected areas. But that only tells

part of the story, because there are another 30,000 homes and businesses that still

don't have power because it's not yet safe to turn that power on because of the flood

damage and the severe damage go those properties. And we have to work with local

officials and other services to make sure those customers can receive power as soon as

possible, but critically safely.

Our Down State gas business also sustained unprecedented damage from flooding.

We're fortunate, our employees who've worked for us for 45 years - some of them had

never seen flood damage in Brooklyn and on Long Island before. On the South Shores

of Long Island, Staten Island and Queens and Rockaway - while all those networks are

restored, that's little help to customers whose properties are severely damaged and in

some cases lost forever.

Clearly any service interruption is not good for customers, but our teams have made an

enormous contribution to limiting and mitigating the impact of this terrible disaster and

we'll continue to work with all the services to help so many people who are in desperate

need.

Turning to safety, as always a high priority for us at National Grid and very much at the

forefront during an event like Super Storm Sandy, but safety as I've said before, isn't

just about keeping our employees and contractors safe, we must also do the utmost to

ensure that no members of the public are impacted by our operations. After a

challenging 2011/'12 where we had a number of unacceptable safety incidents we

redoubled our efforts. And in this respect I'm pleased with our progress, in particular a

47% reduction in the severity of injuries to our employees in the first half of this year.

But as always there is more to do to delivering a best in class safety performance.

So overall a really good start to the year, solid performance and good progress towards

our strategic goals, let me hand over to Andrew to talk you through the financial results

in more detail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Financial Results


Thank you Steve and good morning everybody. I'm going to cover three areas today,

first to look back at our results for the first half of the year, and then I'll give you a brief

update on our technical guidance for the year, before finally giving you my perspectives

on some of our key finance priorities over the past couple of years.

First the results, we saw consistently strong performance from all of our main

businesses. Operating profit in our UK Transmission business was up £75m, or 12%.

This reflects increased revenue due to RPI and investment, partially offset by higher

depreciation and controllable costs.

Gas Distribution profits were up 6%, again reflecting RPI.

Profitability in our US operations grew by £79m or 19%, this was largely driven by

higher revenue, mostly including the deferral recoveries in Niagara Mohawk and lower

bad debts. These were partially offset by increases in controllable and other cost lines.

Other activities saw profits reduced by £63m as a result of the sale of Onstream and

costs related to our US systems and finance process changes which I'll talk about a little

more later on.

At a Group level operating profit increased to £1.6bn, which if you exclude timing and

the impact of last year's storms saw a healthy increase of around 7%.

So we've had another good six months of operating performance. We've grown

revenues, maintained really good controls over controllable costs and made selective

investments for the long term growth of the business.

Minimising controllable costs remains a priority. In the first half the absolute increase

was £33m or 1% in real terms. This movement is mostly due to the increased support

needed to support the capital investment programme here in the UK.

Depreciation was up as expected given the level of investment. Bad debts were down in

line with improved economic conditions in the US and lower commodity prices, whilst

pension costs increased ever so slightly. Other costs increased by £34m and profit in

our other businesses declined as I mentioned earlier.

Financing costs were down 6%, this improvement was down to continued lower interest

rates, which enabled us to finance at attractive coupons and lower interest accretions on

our RPI indexed debt. In the period we have raised about £1.2bn of new debt, taking

advantage of the competitive bond yields to prefund our investment programme.

Optimising our funding costs depends to a large degree on maintaining a stable A minus

credit ratings. This not only underpins our historic debt, but also improves our ability to

raise new debt needed to fund the investment programme.


It is essential we retain access to a variety of international debt markets for funding. An

example of this is the 750m dollar Canadian bond issue issued in September, the largest

corporate Maple bond issued to date.

Our effective tax rate for the first half of the year increased by 80 basis point to 27.5%

due to the mix of profits between the UK and the US. We would expect, as per normal

that the full year rate will be slightly higher reflecting a higher mix of US profits in the

second half. However our guidance for the full year is a slight reduction in the tax rate

to around 29%.

All this meant the reported earnings were up £139m to £836m. After removing the

impact of timing and storms earnings were up by 14%.

Investment was up 23% versus the same period last year. Nearly 95% of that

investment occurred within our regulator operations, growing our asset base on which

our allowed regulated returns will be applied. This fuels the engine that drives our future

growth.

We've invested over £800m in the first six months in UK Transmission, a 34% increase

over the prior year. This included completing the final pressure reduction station on our

Milford Haven pipeline in gas, and continued spend on the London tunnels and Western

Link in the electricity business.

We have also invested more in the US, there was some phasing impact, but the increase

was from higher transmission investment in Niagara Mohawk and the replacement of gas

mains in Massachusetts. We still expect UK investment to remain in the £1bn to £1.2bn

a year range.

Cash flow from operations was up to £1.9bn, slightly higher than the prior year. Growth

due to increased operating profit was partially offset by an increase in the working

capital outflow.

In the first half of last year we saw an inflow from working capital as a result of the

higher levels of receivables at the end of 2011. However this year, because there was a

lower opening balance on receivables there is a lower - there actually was a net outflow.

That lower balance was due to the impact of commodity and lower volumes as a result of

the milder winter. Whilst we have decoupled revenues, receivables are more sensitive to

weather because of the impact of passed through costs.

Net debt was up to £20.4bn reflecting the increased investment I spoke about earlier,

but partially offset by a lower cash dividend. In August we saw a 48% uptake in the

script dividend. This is more than double the 21% average over the prior three years.

So overall in summary this represents a strong start to the year and a solid base for

another good year of financial and operating performance.

Now to our guidance for the year which is mostly unchanged, aside from some updates

regarding timing and storms. We returned about £90m of timing balances, mostly in the


US in the first half, which is driven by weather and commodity pricing. We do expect a

partial recovery of this in the second half of the year.

Obviously Hurricane Sandy will have an impact on our IFRS earnings on EPS. Costs

associated with customer restorations in our own service territories are not expected to

exceed £100m on operating profit.

Finally on guidance I'd like to look forward to the impact of IAS 19 on pensions

accounting which will impact from 2013 and '14. This revision essentially equalises the

return on plan assets and the interest rate on plan liabilities that flow through the

financing charge in the income statement.

The impact of applying the standard in the current year would be to increase the interest

charge by around about £180m or decreased earnings by £130m. It's important to

remember this is a non-cash item and has no economic impact on the Group. We will

restate our results when we introduce the change, but it will not change any of our

guidance on the financing capacity of the group, nor will it change any of our credit

metrics.

I would now like to spend a couple of minutes on our key finance priorities. When I

joined Grid which was - now two years ago, Steve and I agreed a number of key

priorities for me around communication, the finance function effectiveness and long term

financial strategy. Since May 2011 I think we have made significant progress as a team,

providing better disclosure around our regulatory assets and returns, about the portfolio

and the benefits that we get from each of our businesses and the relative performance of

our operations in the UK and the US particularly in terms of comparative returns on

capital employed.

We do need to use these measures consistently and for a number of years, but based on

the feedback I have received I think we've made a good start.

In terms of improving the finance function effectiveness I am pleased with our

achievements, despite the significant external pressures on our workload. For example

in 2010 and 2011 our US finance teams struggled with the request for information

required to support the needs of the business. The resulting rate case outcomes and the

Liberty Audit set out some clear opportunities for improvement.

Since then we've made some significant investments to support our people and

processes. And earlier this month we actually went live with a new SAP system which is

the latest milestone in that journey. At the same time we continue to enhance

underlying finance processes, in part to meet the outcomes of Liberty.

Strong evidence of our progress has been the ability to support the rate filings in both

Rhode Island and New York this year, responding effectively to the myriad and number

of information requests we have received.

I'm really pleased with the progress the team has made and though we have not

completed our journey I am confident that we have a thriving finance team in the US

which will be better placed to drive the business forward.


In the UK the finance function has been heavily involved in supporting the RIIO business

plan process. As we move forward they will also have a very important role to play in

helping the business deliver the efficiencies required under RIIO.

The third and probably the most important for you - priority was our longer term

financing strategy, which will be occupying a lot of mine and Steve's time and others on

the Exec Committee over the next few months. Particularly as we continue to work

through the final stages of RIIO, we evaluate our investment opportunities and make

appropriate decisions around financing and dividend policy.

As before we expect to provide a full update on this by at the latest - our full year results

in May next year. We still have a lot of work to do, not least finalising RIIO, but our

overall position is unchanged. It will be key to sustain the right balance between

financing at the single A rating I mentioned earlier, maintaining and appropriate dividend

policy and delivering growth in the equity value of our shares.

All three are critical to supporting our regulatory commitments and to delivering long

term shareholder value. With that I'll hand back to Steve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Strategic Priorities and Outlook


Thanks Andrew. During the first half of this year our focus has been centred around, as

you'd expect, the main priorities that I laid out in May, each of which have important

implications, not only on the next six months, but on creating the platform for the future

and I just want to take you through each of those in turn.

On the UK regulatory process I've already shared a few thoughts about the process and

our progress to date and the approach we've been taking as we work towards an

appropriate conclusion early next year. The next key date is the publication of Ofgem's

final proposals on Monday the 17th of December.

Given the complexity of these covering six large regulated businesses, with current

assets in excess of £20bn we will need to study these very carefully, particularly against

the context of our extensive and thorough response in early October. And you shouldn't

expect to hear our conclusions until we've not only full assessed all of those details, but

we've also make ourselves comfortable with the significant amendments that are being

made to the licences. This will take some time.

In the US, our focus in the last six months has been to take our Niagara Mohawk and

Narragansett businesses through the rate filings, with the objective of securing outcomes

with a suitable focus on efficiency and customer service and allowing us to deliver

market tested returns. If we achieve this we'll be able to make further good progress

towards raising the overall returns across our US business.

With the Narragansett gas and electric case I'm pleased that we've reached a settlement

agreement, in fact hearings start today with the Commission, there are scheduled


hearings today and tomorrow. Assuming a smooth process, this will result in a decision

in January with the new terms coming into effect on February the 1st 2013.

The agreement proposes a 9.5% return on a 49% equity portion, with the necessary

increases in cost allowances. They've even provided a scope for us to invest, invest in

improving infrastructure and service levels for the benefits of our customers on Rhode

Island, while permitting us to earn an allowed return, providing we manage that

operation efficiently, clearly getting that fairness, the balance right between consumers

and investors.

Turning to New York, Niagara Mohawk's electric and gas businesses constitute the

largest portion of US regulated activities, together they make up almost a third of our

revenues, a very important building block to delivering on our commitment to improve

overall US returns.

Similar to Rhode Island we've reached an important milestone with a tentative

agreement with the Commission staff on a settlement. A joint proposal from the staff

and ourselves will be filed early in December, they'll be hearings scheduled in January

and the final order we expect in time to put into effect the new rates from the 1st of

April 2013.

The agreement includes a 9.3% return on equity on a 48% equity portion. Various

inflation adjustments and property taxes have facilitated a three year deal. The deal

also allows for $1.6bn of important capital investment, investment in new infrastructure,

again with improving reliability and customer service.

The impact of this structure I'm pleased to say will keep the customer bills broadly

unchanged throughout the three years of the plan. If we perform well - what do I mean

by that? If we deliver the right customer service and do it efficiently we have a good

opportunity to earn those targeted returns that are set out in the settlement.

So overall those four settlements proposed would bring our allowed average return in

the US to around 9.8%. But critically they should enable us to make further

improvements on the actual returns we achieve.

Turning now to investment and efficiency, as Andrew has said we have just invested a

record amount in the first six months of this year, £1.825bn reflecting the expected

increase in our UK electricity transmission programme and as a result very much on

track to deliver an expected investment of £3.5bn to £3.8bn this year.

But in the UK the RIIO outcome will have a significant impact on our longer term capital

investment programme. And our focus will increasingly be on delivering the required

outputs at the lowest cash cost. That is capital and operating cost together, totex.

This enhanced focus, rightly enhanced focus, on totex means that the financial drivers in

the UK business are dramatically changing. Our focus needs to be on ensuring that

those outputs, connections, reliability and service standards are delivered at the lowest

cash cost. If we achieve that and we reduce our capex, it benefits customers, but

ultimately it will benefit investors through the achievement of higher returns.


One thing in this process is certain, by April next year, we need to have an organisation

that's well positioned to deliver a good performance under RIIO, whatever the ultimate

deal is. And this will have to be achieved through a combination of financial discipline as

Andrew has just described and efficient execution. In order to drive that focus on

execution in the UK we've asked John Pettigrew to take on the role of UK Chief

Operating Officer. John reports to Nick Winser in this role. John had a record of

leadership in National Grid and has joined my Executive Team, that reflects that

importance on this role.

Our investments in the US are expected, as Andrew mentioned, to remain at a

reasonably steady level. They're aimed at replacing aging assets and growing our

transmission activities where appropriate.

We continue to look for opportunities where we can leverage those skills and capabilities.

Our US business continues to benefit from the annualised effect of the 2011 reductions

in costs and as I mentioned earlier the new model focused on jurisdictions.

The new systems investments and process changes that Andrew has talked about will

cement these benefits in future periods and importantly help us to identify more

opportunities.

Turning to the outlook for the full year, as Andrew said, notwithstanding the impacts of

Super Storm Sandy, our expectations for the full year are unchanged from those we

shared in May. We have made a good start to the year and combined with the benefits

of further revenue growth and the efficiency incentives and initiatives we're well

positioned to deliver a year of good operational and good financial performance.

Now with that Andrew and I will be very happy to take any questions you may have. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Questions and Answers


I just have two questions, firstly I have a question on - within the other activities line,

there seems to be a lot of spend on IT systems, could you please talk through the

process of actually recovering those costs from the individual regulated businesses, or is

it a Group cost?

And secondly when you talk about the long term financing strategy, would that also

include looking at ownership of the businesses, or potentially new ownership structures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


I'll take a piece of that and then pass a piece on to Andrew because it is a good question

about these costs. The capital cost of the SAP system are in the US and indeed are

apportioned across rate base by rate base and the ongoing operating costs of that


system are in those entities as well and they are part of our filings that we've been going

through during the course of this year.

The somewhat exceptional one off costs associated with all the training activity is the

cost that Andrew referred to that we've kept out, that is a one off cost to put in place the

processes that we as a company have decided we want in place.

Your second question on financing, you can pick it up Andrew but there isn't anything

that's changed here Mark about - you know the various different opportunities we have

to think about and consider on how we can finance the combination of continuing to

deliver yield for investors and grow the business. We've been pretty clear about - you

know we really need to understand RIIO, we've been through that and all the rate

processes, before we can be crystal clear about that strategy in May next year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


I mean just on the IT systems costs that's about half of the £63m reduction in other.

That is principally training costs there are about 20,000 employees we're training, under

the accounting rules that is an expense rather than can be capitalised and the reason

why we put it in the corporate centre charge is because that won't be recoverable from

regulators as we move forward.

The regulated element as Steve said - or the recoverable element is in the regulated

business. So these are one off charges, you should expect the costs to be lower in the

second half and actually not to recur in future years, so they will almost disappear.

The second item - in the other items there obviously is Onstream, it's about £12m was

about there last year and not there this year, there was a small reduction in metering

and property which is lumpy as you can expect because it's dependent on transactions

and was down year on year.

As regards the financing strategy, as I said, I mean I think the thing we have to

maintain is the balance between the ratings, dividend policy and knowing how important

the dividend is to shareholders, obviously that is critical from a shareholder value

perspective. And growth - we will look at that in the context of options around value and

the best way we can actually finance it, be it from the debt markets, be it other financial

instruments, be it from ownership of entities and so forth. So that is all part of that

review.

At this point in time the portfolio actually benefits us by actually having the right mix

between cash consuming assets, such as our UK Transmission business and cash

generating businesses like our distribution businesses in the UK and the US. That

balance is important if we are going to maintain the right level of yield going forward.

So that's all part of the mix but we'll update you again as we said, probably no later than

May next year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Okay thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jonathan Constable, Nomura

Two questions, firstly on the storm costs relating to Long Island, please could you give

us a bit more of a steer on how we should think the scale of these costs and what would

the process look like to recover those costs, what kind of timescales might we be talking

about? If you could give us any insight into how that maybe breaks down into the

different ways that you recover those costs, or expect to recover the costs?

Secondly, just coming back onto the financing policy and just zooming in on the bit of

your statement about an appropriate dividend policy, I was just wondering if you might -

I know we're going to have to wait for the financial strategy, but it would be great if you

could give us a bit more of - I don't know maybe your guiding principles and how you

think about what an appropriate dividend would look like? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


No Johnny. And I'm not being facetious here, I think we've given more than enough

guidance and Andrew has just reiterated it in terms of - you know we know who are

investor base is, we understand how important the dividend is for an equity investor in

this business.

This is about getting the balance right between how much the dividend should move in

the future and how much opportunity we've got to invest in very attractive businesses,

of course to grow the equity value of the business and how those things are financed.

That's all post RIIO, we'll come back and make that very, very clear in May at the latest,

as I said. That's providing that the RIIO process of course is complete by then.

In terms of the storms, I mean I want to be very clear this morning, what we've been

worried about and the reason why Tom's not here again today is making sure that we're

helping people. And we are going way beyond helping people get the electric system

up; you know we have employees of ours whose homes are destroyed. We have over

40 of our employees whose homes are destroyed, and you know they're coming to work;

they've been working 16, 18 hour days helping with the storm response. So the

absolutely focus has been rightly and continues to be on restoration.

Now actually we're moving from restoration into repair now, because as you restore

power - some of those restorations are temporary. So now under LIPA's guidance we

will go back and put repairs in place. And there's a difference to what Andrew was

talking about earlier, of course, we own - our investors own the assets in Massachusetts,

Rhode Island, Upstate New York and those gas business down state, they are our

businesses and they are our costs and they get actually recovered through regulation as

you know.

We are a contractor on Long Island, the assets are owned by the Long Island Power

Authority LIPA and we're contracted to provide a service to LIPA and of course we lost


that contract. So our focus is very much on a couple of things right now. First of all

getting from restoration to repair and doing more than our job, helping people who are

in serious trouble, who've lost of their possessions, all their homes, and that's working

with lots of other authorities.

And then we've got to get back to the day job as well of helping transfer that contract

during the course of 2013, because it actually ends as far as we're concerned at the end

of next year. And we've got to do a really good job during the course of next year in

transferring the contract so the ball is not dropped between us and PSEG who pick up

the contract.

Even your people Andrew have been involved. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Yeah, I mean at this stage it is far too early for us to put an estimate together. We are

still actually working out and through the process of restoration, we have people out in

the field, even the finance staff, so it's hard for us to do an estimate, we don't have

enough clarity around that to be able to give you a number today, or any confidence that

that number would be right. We've given you an indication in the release, the number of

crews onsite and the length of time, which indicates it will be a multiple of what we

incurred as a result of Hurricane Irene last year.

As far as recovery is concerned and those are mechanisms which we have in place with

LIPA and we don't expect any difference from prior periods relating to those. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


This is not the focus, the focus just has to be right now doing everything we can. It's

very hard, we're in London right now, you know this is a warzone almost on the South

Coast of Long Island and on the Jersey Shore as well, you know peoples' homes are

gone.

The stories that are going to come out over the coming weeks are just going to be heroic

stories actually of what many of our employees have been involved in, many of the

contractors who've been working for us, people who came down from Nova Scotia and

have been sleeping in tents on Long Island for two weeks and working 18 hour days, you

know it's just an incredible event it really is. And I'm very proud of what all the people

who've been helping us have been doing. 15,000 people on the Island, that's where the

focus is and needs to be at the moment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


I have a couple of questions, the first one - I appreciate you don't want to get into this

cost issue in Long Island, but just so I understand the mechanism, clearly - you have a

contract with LIPA and therefore there are clear contractual clauses and mechanisms to

pass costs onto the owner of LIPA is that the right way we should understand it?


. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


We are the contractor for LIPA, very clear; you know there was Hurricane Irene last year

you can see how those mechanisms work. But we just shouldn't be talking about this

right now frankly, I'm not trying to be awkward, I think it's important you know when

people have lost their homes and we've still got today - we've still got 8,000 who haven’t

got power back, we've got 30,000 homes and business that power's there and we've got

to work with lots of authorities, have people dry their homes out, dry their businesses

out so they can get back to normal and that's what we really need to think about today

Bobby I think. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Okay, so swapping back to the UK then. Can you talk us through in a bit more detail the

operational changes that the reorganisation is seeking to put in place and some of the

benefits that we should expect from that? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


I'm looking forward enormously to doing that and I think you know that is going to be

the subject of a seminar next year. What I wanted to do today was flag two things I

think. One is clearly this RIIO process is not finished, until we have the final proposals

there is still a lot of uncertainty. But the structure of RIIO the incentives and the way

that totex is treated is very clear, you know that principle is laid down and is clear. So

we've already begun to make some adjustments about how think about that in the

future, how the alignment of the organisation is on the future.

There's another piece in here, of course, is that our role as the system operator has

been evolving over recent years considerably, we no longer just operate the system for

England, Wales and Scotland, we operate the offshore as well and we have a design

authority role in terms of thinking about long term transmission strategy. So we've got

to think about how we get our focus organisationally on that. And then of course there's

EMR and we ensure that all the separate is appropriate in EMR.

So there are lots of threads that have come together to cause us to adjust the UK

organisation and we will come back, I assure you, during the course of early 2013 and

run people through a lot of detail about that. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


So maybe I can try for a third time lucky then. If you get the settlements that you're

discussing in Rhode Island and New York the difference between your position and the

staffs' position in all of these cases does not appear to be anything like the difference

that we've seen in prior rate cases, you know where we were talking about hundreds of

millions of dollars of different on opex for example. So that means that if these

settlements were agreed and I appreciate that they haven't been agreed yet, you're


more confident - or you are either confident or more confident that you can deliver those

allowed returns? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


I think that's what I said in my remarks you know this is a settlement agreement that I

believe and Tom and the team believe has got the balance right between what we need

to invest for customers, the costs of running those businesses for customers and our

ability to deliver those allowed returns. So if we do all those things well you're exactly

right, that is what we expect. But they are settlement agreements at this stage; they

still have to go through the process of getting final approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Two questions please, firstly on RIIO, what would you like to see changed from the

interim proposals to the final proposals? And secondly on the debt rate on the £1.2bn

you raised this year what was the marginal cost of debt and is that a trend that we could

see continuing in the medium term as you refinance your existing debt and add new

debt in? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


I'll obviously let Andrew pick up the second part of that, although there's a very

important part of that of course that feeds into your first question. RIIO is eight years,

there's a huge implicit risk in eight years clearly about the ability anyone has to have a

crystal ball. So I'm not going to go through our October the 1st submission to the

consultation of the initial proposals. That would keep us here for the bulk of today

because there's an enormous amount of detail in there frankly, because there were a

number of areas that we felt very strongly we needed to ensure that Ofgem - we think

they've misinterpreted or perhaps we hadn't done as clear a job. And we drew out from

our - these were big complex plans weren't they, huge complexity on a number of areas

yet again on the 1st of October.

But they come under three big headings really, the first of those if financeability, so

that's the linkage in here. You know we need to finance these businesses so they can

deliver for customers and we can invest for customers.

Andrew's remark on the Maple bond was very important; you know that bond could not

be issued if those businesses weren't single A. So the financial strength of these

businesses through this eight year period is a huge part of our consultation response on

the 1st of October. There's a lot around the financing.

The second area is around some cost allowances that as we said in July and we said in

our response we found very hard to understand. We have been building gas

transmission pipe in the UK, we've build the Milford Haven pipeline, we've build the

pipeline across the Pennines; we know what it costs to build pipe in the UK. We know

where steel prices are, we know labour costs, etc, etc. And the complexity of some of

the requirements in the UK as well that are very stringent.


The allowance that Ofgem came back with in those initial proposals was 47% below our

experience. So there's a lot in the consultation therefore about evidence around the

world about the cost of building pipe. And there's a similar story actually around

compressor costs, to replace gas compressors on the system. So there's a particularly

area around the cost allowances. And then there are a whole bunch of things around

efficiency. In our original plans we proposed a series of initiatives and delivering

efficiency for customers, taking costs out of our businesses. And we believe - you know

we had some gaps in understanding I think of what was embedded in the base plan.

So those are the three major areas, I'm sure you've read our consultation, it was very

fulsome, there's a lot in there. We've been engaged with Ofgem, we now need to wait

for the final proposals. Financing Andrew? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Financing, I mean obviously financing; I mean the index that we're going to be given

under RIIO is broadly a ten year index. So it depends where you are on the curve

against that. So if you're issuing short term money today and you look on the spot on

that index you should do slightly better. But obviously you are then taking the risk that

over the ten year period, or the 12 year period you're going to have some catch up later

on and it's going to hurt you on the longer end.

We do a mix of financing so it's not comparable, but we do measure ourselves against a

spot and that's a focus for Malcolm and the treasury team to make sure that we're not in

a situation as we balance out the financing where we're above the spot on the index,

'cos that's obviously the critical strike point against the allowance. So that's the focus

we do. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


And the absolute rate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


The absolute rate, the Canadian bond was an attractive - at the lower end of the scale

but that's a five year money so therefore it’s not directly comparable. So you know

we’re not comparing like for like. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jamie Tunnicliffe, Redburn Partners

I was interested in the comment about the surprises that you had seen during the RIIO

process. I think you said that Steve. Is that mainly related to those sort of cost

allowances where you’re just saying it doesn’t match up with your experience on the gas

pipeline costs and compressor costs and on efficiency? I was just interested in sort of

what those surprises during the RIIO experience have been for you? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Yeah I think we were quite clear - weren’t we at the end of July. You know we were

surprised with the initial proposals. We recognise they were initial proposals but there

had been a dialogue. We were challenged by Ofgem with this expression well justified

business plan which I think is a great expression actually. And that required us to

consult extensively with consumers about what they wanted from the networks as well

the customers who directly pay the bills to us, you know or the other energy companies.

And we built our plan around their requirements and around a scenario of investment in

the UK. And Ofgem said very early on they were very good plans. So there was a

mismatch in some ways then with some of the differences in the initial proposals. So

that's why we were surprised.

I've touched on a couple of those areas and they’re good examples, there appeared to

be quite a gap there. That's clearly why we responded in the consultation in the way

that we did. And we’ve been working with Ofgem over recent months to try and bridge

those understandings and make sure we get to an answer that works.

This is about both of us getting to an answer that works isn’t it, it’s a long time eight

years, the investments we need to make are very important investments for all of us in

the UK. We have to finance this big investment programme as well and we’ve got to get

the balance right. And that's I think a duty that Ofgem and us share and take very

seriously. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Iain Turner, Exane BNP Paribas

You've more or less broken the back of the regulatory process I guess in as much - by

that I mean you've nearly finished it in New York and Rhode Island. And I just

wondered what’s on the regulatory agenda in the US after those two deals are

concluded? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


That's a great question. It’s a lovely expression because I don’t think we’ll ever have

broken the back actually and rightly so. We’ve got 14 entities in the US and I think

we’ve talked before haven’t we about getting ourselves onto a drumbeat almost where

there will inevitably be filings year on year on year on year. We had clearly a lot of

filings at the same time because we’d enter into ten year plans that all ended up ending

around the same 18 month period.

As Andrew says you know the challenge on his team, the challenge on the organisation

to go through those filings, is just enormous. So we want to get ourselves into a

position where we do have a couple each year when you've got 14.

Exactly what we do next is subject to our thinking during the course of the next six

months and subject to, you know, some pressures from the outside as well or some

challenges from the outside. Where do we feel people want to invest more? Particularly


in the gas businesses. You know there's a - we have clearly, got with low gas prices, a

lot of people who want to burn natural gas in their boilers at home today.

So one of the things that was announced yesterday actually was permission to build an

interconnector between Brooklyn and Queens which had to get federal authority, it

actually went through the Senate yesterday, put through by Senator Schumer, got its

final approval. That's a big investment to increase the capacity of gas to get into

Brooklyn and Queens. So when do we need to think about upping the investment level

in those businesses? It’s those sorts of things that will drive the priorities on filing in. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Part of the drive of the capex in the UK is renewables build out and also new nuclear I

believe. At the moment it looks like renewables build out is a bit of question mark

because of planning permission, I've heard some comments recently. Also new nuclear

is not really sure if it comes because there's a big discussion about the prices the

companies get. Could that influence your capex and how do you look at it and how do

you deal with this uncertainty? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Yeah you’re absolutely right in your comments. And of course it influences our capex.

But this is something that we’ve known about from the very beginning of RIIO which is

why the principles of RIIO, the principles when they were originally set out, were and

remain very good principles because it creates a base scenario around investment and

then the mechanisms to flex capital up and down, i.e. customers don’t pay for things

that they don’t need. Likewise if more capital is required to connect more in a short

time then investors also have the opportunity to make sure that they collect returns and

revenues for that. So those mechanisms that are part of RIIO, which will be detailed in

the licences actually so that's one of the things although we’ve looked at the principles of

those and agree with them, the detail will be in the licences, will work.

It is very clear if you sit here today and look at the scenario that we submitted in our

original plan that some of the investment in the early years has gone back a couple of

years, exactly right. But it will move again probably as well, you know this is a very

moving feast around when, and of course it goes back to EMR, when do people have the

incentives and build the nuclear, how much wind is onshore, how much wind is offshore.

What we do know is the government targets are very, very clear. We know what

shutting in this timeframe so we know there will be an enormous investment in

generation. We know we have to connect all of those. And we’re very clear through the

big transmission planning where the big pieces of reinforcement are required.

And as Andrew mentioned in his remarks the Western Link is one of those, the offshore

Western Link already. There's an Eastern Link in our plan as well and there are other

reinforcements that we will have to do in this timeframe, but RIIO does have the

mechanism there to protect everyone in terms of the flexibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



So is there something like a minimum or maximum capex per annum that you can

envisage under different scenarios? Like you know if everything comes on stream that

needs a lot of investment and if a lot of the stuff is coming very late or it’s not coming in

at all. What’s the range of capex we can think about? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


That's actually on our website. We had, you know, the base scenario and we had a very

slow scenario and we had an accelerated scenario. I think the accelerated scenario looks

unlikely today but somewhere between our base and the slow is where we will be. And

we need to flex our capex on things like replacement as well.

You can’t work in a business like this with the supply chain in particular by taking it up

and down, up and down. That will increase the prices for customers over time. So we

need to make sure that we manage a programme here and we’re not smoothing things

literally but trying to make sure that we don’t get huge jumps up and jumps down.

That's the job that we already do and we’ll continue to do that in the future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

John Musk, RBC

Good morning. It’s just a very simple one. You signalled you’re going to take your time

on the RIIO response; can you just let me know the timetable and what the deadlines

are for when you have to respond? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Yeah sure, which is a good question because I'm not sure everyone might be aware. We

tend to think don’t we, and I put myself as I'm saying that in that bracket as well, about

the old process, RPI minus X, the way the price control process worked.

Of course RIIO is very different, the process is fundamentally different. One of the

differences actually is at the end of the process. Both the time and also the appeal

mechanisms have changed as well. So in the old world 30 days, in the new world it’s 75

days. That's the precise answer to your question. And there's a reason for that quite

clearly and I think I've outlined why. You know there is a lot to us to look at, we’re

confident about before the board can be happy with those proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Peter Bisztyga, Barclays

There's going to be a lot of new incentive mechanisms under RIIO for you to sort of

either outperform or underperform on. Can you give us some indication of how different


layers of management within your business will be themselves incentivised to make sure

that you hit each of those metrics as best you can? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


You are getting way ahead of yourself here. But you’re right in terms of the things that

we will be thinking about and putting in place. You know as we think about how we

reward people inside the organisation like any business, those rewards need to be totally

aligned to things that are valued by the businesses' customers and indeed its investors.

And there will be some tweaks around those things and there are more incentives in

here. But the incentives are around outputs, it’s one of the good things about this

process. There are issues around the financing as I said, there are issues around some

details and some efficiency. But the philosophy of rewarding outputs that customers

value; reliability, connection, service and so on and so forth, are crystal clear. And so

they are already aligned in many of our plans but there is no question they’ll be even

more crystal clear in the future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Jamie Tunicliffe, Redburn

Just a question on US capex. You mentioned how - you sort of repeated the 1.1 to 1.2

billion per annum, but when I hear the comments about the impact of lower gas prices

and what that does for demand, and also there's clearly a debate about serviceability of

these assets given everything that's going on and the shocks and what sort of level of, I

suppose, endurance and stability in the system do you want? So just is it right to still

talk about 1.1 to 1.2 or is it more likely that we’re going to have a debate do you think

in the US where sees that number going up from where we are? Is the risk more on the

upside from here? Just any sort of thoughts on that are interesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


It is right to talk about 1.1 to 1.2 today. That's what we’ve signed up for, if you will,

through our rate plans. So the number that Andrew was referring to encompasses the

capital that's enshrined in the Narragansettt agreements and the Niagara Mohawk

agreements, which is a lot more capital than we used to invest in those businesses by

the way.

In the first half of this year US capex as Andrew said, is up 24%. That's all part of the

regulatory arrangements. We’re placing more gas pipe investing in those assets. And

there's nothing more than that today. You know you’re sort of into - do we believe that

in the future there is a need to invest more in those assets? I think National Grid has

been saying ever since it’s been in the US that there is a need to step up investment in

replacing assets.

We have been doing that progressively, but if you look at the engineering sense of the

lifecycle times and the investment, you know there is a period of investment in networks

across a lot of the older US, not so much the south but certainly in the northeast, to

replace assets. And that is a conversation we’ll continue to have with our customers and


our regulators and when that becomes part of a plan then that number will change. But

until that's part of a plan Jamie then 1.1 to 1.2 is what we can see for the next few

years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


And just to add a comment, actually from a financeability perspective US capex is more

financeable than UK capex today because it’s nominal so therefore and you get a higher

cash return straight away than you do in the UK. So marginal investment in the US

actually will not be harmful to overall financeability and actually will be better than what

we’re currently seeing under the RIIO proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Have you given any input either from a regulatory perspective or a financing or treasury

perspective to the CPAC Committee and your views on the change in formula for RPI and

kind of try and narrow the RPI, CPI wedge? I'm just interested in generally how you

approach it because it could affect you in sort of many different ways. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Well first of all obviously one of the good things that Ofgem are doing is they are

consulting about the potential impact of any RPI index change and the impact on

revenues in particular. We obviously also have put in about what the implications are for

our RPI index bonds because in their financeability metrics they have used obviously the

assumption around the bonds and how those, obviously the accretions on those, how

that works, and if that changes as a result how does that impact our overall

financeability. So that's open.

As far as consulting, I think obviously we are a relatively small player in this area. We

are considering a response but to be honest with you Bobby I think there are other

people, like major holders of gilts, who are far in advance in the queue than we are. But

we will consider putting in something. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Okay any remaining questions? Good okay. Thank you very much for joining us this

morning. Appreciate your time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

END

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