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Name of Interviewee or Programme
WORLD TELEVISION
National Grid
Investor Seminar - 6th August 2013
National Grid - Investor Seminar - 6th August 2013
NATIONAL GRID
John Dawson, Head of Investor Relations
Steve Holliday, Chief Executive Officer
Nick Winser, Executive Director, UK
John Pettigrew, Chief Operating Officer, UK
Andy Agg, UK Chief Financial Officer
Andrew Bonfield, Finance Director
QUESTIONS FROM
Fraser McLaren, Bank of America Merrill Lynch
Mark Freshney, Credit Suisse
Andrew Mead, Goldman Sachs
Bobby Chada, Morgan Stanley
PeterBisztyga, Barclays
Dominic Nash, Macquarie
Edmund Reid, JP Morgan
MartinBrough, Deutsche Bank
Mathias Meitner, Allianz
Verity Mitchell, HSBC
Introduction
John Dawson, Head of Investor Relations
Good morning ladies and gentlemen and welcome to National Grid's Investor Seminar. Today is designed to be an opportunity to meet the UK team responsible for delivering RIIO over the next eight years; hopefully a period of further good outperformance, as we've delivered in the past. And you'll hear a lot more about the different initiatives that we're undertaking to deliver that.
We'll start with a few seasons altogether here in this room until around 10.45 and then we'll have a break for coffee. After that we'll split you up into five groups and take you to meet some of our operational managers from the UK. They are going to talk about their work to drive efficiencies and outperformance in our UK business and you'll get a chance to ask them questions as you go.
For those of you watching online we've prepared some videos of the breakout sessions which will provide you with some of the insights into what they're going to be hearing today. We've encouraged our people to be as open as possible on what they're doing and I know you'll find them a very engaging and thoughtful group.
As always people are experts in their own field and dig into what they know and what they are going to want to tell you and you'll learn an awful lot about RIIO, but at the same time be mindful of the fact that they're experts in their field and if you've got big group picture questions please don't hesitate to raise those with Steve, Andrew or the members of the IR team. It's our job to ensure that you have the right context for those sorts of remarks.
After the breakouts we'll come back to this room where we'll have lunch and then Steve will host a Q&A session to round off the day. And we're looking to finish around 2.30.
As I said this day is very much focused on RIIO and our people, we're not aiming for a PowerPoint heavy presentation, however there are slides for some of the sessions and of course you've got a pack on the table in front of you, all of the materials of which are available online.
That pack also contains our cautionary statement, which I would ask you to review, particularly as we may be making a number of forward looking statements today. And while you're doing that I'll hand you over to Steve Holliday our Chief Executive.
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Steve Holliday, Chief Executive Officer
Thank you John, good morning everybody. As John says today's very much a focus on the UK, UK Operations and RIIO.
Three things I hope you're going to get out of today, back to many of the comments that we've made since we accepted RIIO in our full year results. Exactly what have we been doing and what will we be doing to make sure that we perform and perform well under RIIO. As John said, so who's the team, who are the real team in the UK that are going to be the key players in delivery?
And a real better understanding I hope about the key of RIIO, which is that outputs matter under RIIO and if you can deliver those outputs at a lower cost there's a huge opportunity to generate very attractive returns. And we're also going to try and give you an insight into how does that flow into our accounts, not just for the UK, but also for the Plc. what does that do to earnings and growth in the future.
If I just go back to the remarks that we made with our full year results, we talked about, in the course of the last 12 months, just how much regulatory certainty we've achieved, with obviously RIIO covering all of our regulated businesses here in the UK. And of course we reset 55% of our regulatory arrangements in the US last year, so for the Plc. we've got 85% of our business under new contracts.
Of course that gives us an amazing amount of clarity and here unprecedented clarity, with an eight year period to really drive performance and returns. Financing, an enormous concern over recent years with the financing we've put in place, with the outcomes of RIIO, the hybrid we issued. Clarity around how we can finance the huge investments that we'll be making in the next eight years. And beginning to set, rightly, expectations and an understanding, in my words, that really for myself and my team, many of whom you'll meet here today, it's about execution, a real laser focus on execution, what we call inside National Grid, performance excellence, a real drive around that performance.
But I'm often caused to reflect on RIIO, it seems to have been going on a long time, some faces around here I know have been talking about it with us for a long time. It's over three years ago that I had the pleasure of sitting in a steering group with Alistair and many others at Ofgem that was in those days actually titled RPI -X at 20 and raising the question about is that form of regulation fit for the future, fit for the challenges that we know that the energy scene and the networks in particular are going to be facing from 2013 onwards. And we were very supportive all the way through that that the answer to that question was no. But that didn't need wholesale change either, it just needed some adjustments.
I also remember two and a half years ago when Ofgem issued their first strategy document. And I remember the sense of blood draining out of my face at that moment too when, as many around this room will remember, a range for returns on equity that started at the bottom end with the number four and being pretty horrified about that.
But even at that stage, two and a half years ago, some of the things that are just so important to us and our investors, number one; the linkage to RPI, number two; the sense of a regulated asset value that is secure for the future, and number three; what's been so important in the UK, world leading, I'd argue in the UK, the sense of incentives that match what customers value in these businesses with what investors can then actually benefit from. And a sense under RIIO - a desire to want to increase overall the impact of those incentives.
It was a strange process at times; it felt a little bit in the middle if you remember, like in our old price control. And yet ultimately after some initial proposals in July, that in one of or two of the businesses we were concerned about, there were adequate changes between those and the final proposals and with our own internal work, for the Board of National Grid to be very comfortable in accepting the proposals, the electricity transmission business, the gas transmission business and all four of our gas distribution networks.
We've ended up with a position, the deal I've talked about before, we were we believe we can invest in essential infrastructure, we can deliver attractive returns for investors, we've got the cost allowances that we needed to do that and particularly with some of the new opportunities that we'll talk about today, a real opportunity to deliver very attractive returns.
So we've got a lot of certainty. That's with all the cash coming into the business, because of the way the deal has been structured by Ofgem allowed us to talk about a dividend for investors for a long time to come, and the linkage of that dividend to UK RPI.
What today is not going to be about, just to be clear, is anything other than the UK businesses. We're not intending to talk about the US today. We've clearly made a lot of progress in the US in the last four years, but we're not done yet either, there's still more to do to deliver our allowed returns and we'll, I'm sure, come back to that in an Investor Day towards the end of this year.
And of course we'll talk again about financing, there's always more financing to do for our business. We've attractively financed today the assets we have and the assets we're talking about building. But we know with the new trailing index of debt there are many questions around how we continue to outperform. We'll touch on that a little bit today but not in great detail, again, we'll come back and talk about the financing future for the Plc. at a different time.
It's really about UK, the value proposition here and how we're going to drive these returns. And that's why you're going to be spending the day with the UK team.
John Pettigrew who is the Chief Operating Officer in the UK is responsible for driving all of those assets, the gas distribution and the transmission assets. John's been with National Grid almost all of his career, he made a slight mistake going somewhere else for a short period of time, but then saw the light and joined National Grid and has spent time across many parts of our business actually; in our system operations, he ran the control centre for electricity some years ago, he ran the operations of transmission, he was the COO in the US for our distribution businesses in the US, before going to Harvard and then coming back into the UK to run the gas distribution businesses and is now responsible for the operations of the UK.
So John will lead today and through today will introduce you to a number of his team, not all of whom are long standing National Grid. I'm very pleased that we've hired in, during the course of today you'll meet three people who've come in from the outside; where we've identified we needed to bring in some real world class special talent to help drive this business. And you'll get the chance to meet some of those individuals today, as well as a number people who have spent their career with National Grid and a great stalwarts as well.
So a really high quality team, I always think one of the things on the Investor Days that should be so important to you all is to get a real sense of the strength and depth. I know many chief executives talk about that, I know when I do that though I can do it with huge amounts of credibility. This is a quality team. And I hope by 2.30 you'll completely agree with me.
But before I hand over to John to lead today first of all Nick Winser is just going to talk a little bit about the energy markets. It's not an EMR big session today, I'm sure that just, Nick senses he's so close to - so what's going on with the electricity market reform here in the UK and in particular, just again to reemphasise the very special role that National Grid is playing in that. So Nick.
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Nick Winser, Executive Director, UK
Thank you Steve, good morning everybody, very nice to see you all. My job is to spend just about 15 minutes talking through, if you like the broad context for our operational management of the transmission systems really, it relates to distribution a little bit. But the broad context is of course energy policy.
The transmission networks are in many senses an instrument of UK energy policy and certainly the actual structure of energy policy is a major driver in terms of the investment that will go into those transmission systems. It's also fair to say that this is a moment where National Grid is increasingly providing input to the formulation of energy policy, but of course carefully standing back from determining the direction of energy policy itself.
So let's have a look at the drivers of investment. There are five I think to put it simply. First of all the carbon emission targets and legislation, so emission targets to reduce CO₂ by 20%, to get 15% of our energy - of our total energy from renewables by 2020. Large Combustion Plant Directive, IED, the Integrated Emissions Directive, which will drive the closure of a substantial amount of the oil and coal fired generation.
Secondly the decline of UK Continental Shelf gas, which is unremarked quite often, but is nevertheless certainly remarkable to see us move from self-sufficiency for this gas hungry nation in 2003, through to only 40% of our gas coming from the North Sea today, or this year, through to probably that declining to 20% by 2020. That's driven major changes to the gas transmission system, particularly around 2007 andwill continue to drive changes to the structure of the gas transmission system.
Aging plant on the system, aging generating plant, we're starting to see the closure of gas fired plant that was not subject to either of the environmental directives and that's plant that was built around the beginning of the '90s, so we're starting to see age come into play there.
And fourthly the transmission system itself, the electricity transmission and the above ground installations on the gas transmission system are starting to reach the end of their lives, peak year for construction of the 400KV was I think 1967, so as a measure of that that system is well over 40 years old and really well into an asset replacement cycle.
And finally, Europe, development of a single European energy market, particularly thinking about interconnection; you know when you think about the difference between gas and electricity this immediately pops out. If you regard the North Sea as sort of indigenous then you could say on gas we're able to import you know more than 75% of our needs. On electricity on a peak day that's 5%. So this is an amazingly low level of interconnection for a single market and I'll come back to that.
So energy policy and regulation is all about addressing those issues, so energy policy is quite often described in terms of the trilema and you're very well aware of that I know, affordability, security of supply and environmental targets. And the IR team thought you'd be very keen to see a worked example of the trilema. I can't say it's a particularly likely one in my mind, but we can discuss some variances to it. So this worked example talks about those three things in the context of us getting a substantial amount of US shale gas come in this direction at broadly the prices that it's available in the US, or perhaps a bit higher.
So what does that do in terms of the trilema? Well first of all in terms of affordability it's going to drive down prices. In terms of security of supply it would result in not only the very substantial amount of our energy system that now rests on gas for space heating, but also a lot more electricity generation being on world gas markets and dependent on the proper functioning of those markets. So the UK becomes heavily reliant, even more heavily reliant on gas, probably in excess of 50% of our total energy needs would come from gas in that scenario.
And of course in terms of decarbonisation, it's positive. As we've seen in the US decarbonisation can be driven by the replacement of burning coal with burning gas and in this case it would drive down our emission profile. It would not however get the profile down to the 100 grams per kilowatt hour or below that most observers say is necessary for the post 2030 transition of heat and transport onto a decarbonised electricity system. It would probably get us no lower than about 300 or so.
Of course an interesting variant on that which the politicians would be very keen on today would be to talk about a lot of shale gas in the UK and how would that change this picture. Of course it would help the security of supply corner by giving us more of our energy resources met from indigenous sources. So that's to show you how the trilema works through.
Of course the strongest sign of the development of energy policy is currently the Energy Bill which is going through Parliament and having a reasonably sensible progress through Parliament. That means three things for us in National Grid; it means a responsibility to provide advice and analysis to the Secretary of State, primarily on strike prices for CfDs. And that absolutely relates to the trilema, that analysis will talk about the cost of providing in different scenarios different strike prices, their impact on security of supply and their impact on hitting those environmental targets.