Earnings Labs

National Grid plc (NGG)

Q4 2018 Earnings Call· Thu, May 17, 2018

$87.45

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Transcript

Aarti Singhal

Management

Good morning, everyone, and welcome to the National Grid full year results presentation. As always, we are going to start with safety. There are no planned fire alarm tests this morning, so if you hear an alarm, you do need to leave the building and gather outside at Paternoster Square. Second important thing is the cautionary statement. I would like to draw your attention to that, which is included in your packs. And warm welcome also to those of you who are watching online. All the material is available on our website. And as usual, there will be Q&A after this presentation by John and Andrew. So with that, I'd now like to hand you over to John Pettigrew. Thank you.

John Pettigrew

Management

So thank you, Aarti. And good morning, everyone. So as usual, Andrew and I are joined this morning with Nicola Shaw and Dean Seavers, who'll be on hand to assist us with any questions. So let's start with a review of our performance in '17/'18. It's been a busy time for the group, and I'm pleased to report we've had a good year. Let me start with our financial highlights, where we've included Cadent on a like-for-like basis to help the comparisons with the prior year. On an underlying basis, that is excluding the impact of timing and major storms, operating profit increased by 6% at constant currency to £3.5 billion, mainly reflecting the strong performance of our U.S. business. During the year, we made significant investment of £4.3 billion in critical infrastructure, representing an increase of 14% at constant currency. When combined with year-end inflation, this capital spend drove core asset growth of 6%, in the middle of our stated range of 5% to 7%. And importantly, we achieved that whilst delivering strong returns on equity at 12.3% for the group. Finally, in line with our dividend policy, the board has recommended a final dividend of 30.44 pence per share, bringing the proposed full-year dividend to 45.93 pence. This represents an increase of 3.75%, reflecting last year's average U.K. inflation. So as you can see, it's been a good year of financial performance with strong organic growth. Turning now to our safety and reliability performance. Last year, we continued our relentless focus on safety with our ambition to ensure that all our employees and contractors go home safely at the end of each day. To achieve this, I believe the most important thing is to have a culture where safety underpins everything that we do not just at the…

Andrew Bonfield

Management

Thank you, John. And good morning, everybody. As John has highlighted, our financial performance was strong. All of our key metrics showed progression. At constant currency, underlying operating profit was up 6%, and pro forma earnings per share up 4%. Our strong operational performance was reflected in the 12% growth in value added and a 60 basis point improvement in return on equity. Asset growth is now at the middle of the range, driven by increased capital investment and the reshaping of the portfolio. The dividend of 45.93p per share is 3.75% higher, in line with our policy. Now let me walk you through each of the segments. UK Electricity Transmission delivered another year of strong operational performance, achieving a 13.1% return on equity. We continued to focus on innovation and efficiency to deliver totex outperformance of 180 basis points, which was broadly consistent with the prior year. Other incentive performance of 40 basis points was lower, mostly driven by the reduced BSIS incentive opportunity under the arrangements for 2017/'18. Additional allowances added 70 basis points of performance. Underlying operating profit of £1.1 billion was down 15% largely due to higher MOD adjustments, increased depreciation and lower BSIS income. Capital investment was £1 billion, which was broadly in line with the prior year. This investment, along with inflation-linked growth in RAV, increased the year-end regulated asset value by 4.5% to £13 billion. Moving to Gas Transmission, which delivered a return on equity of 10%. As I highlighted at the half year, returns were lower. This reflects the increased spend on asset health, which is required to deliver our RIIO-T1 outputs; and the end of legacy allowances. Other incentive performance remained strong as a result of the investment we have made to ensure the reliability and integrity of the network. Operating…

John Pettigrew

Management

So thank you, Andrew. As I said at the start, we got a full agenda in the last year, so let me now turn to our priorities for the year ahead and also the steps that we're taking for the longer term. As we just highlighted, we see significant capital investment and growth over the medium term. And I believe that, by focusing on four drivers that I've spoken about previously, we'll deliver this growth efficiently and earn attractive returns. To remind you, these drivers are putting our customer first, optimizing the performance of our core business, seeking out growth opportunities in a disciplined way and evolving the business for the future. And as I look to the year ahead, these will continue to guide our overarching strategic focus. So starting with our customers, whose needs continue to evolve and they expect more from us. Affordability remains top in the agenda, but we need to go beyond this to ensure that customers are receiving a world-class experience. In the year ahead, our teams in the U.S. and in U.K. will be undertaking new initiatives to enhance customer engagement; and drive a stronger, customer-centric culture in National Grid. For example, in the coming year, we'll be integrating our contact centers and customer portals into a single platform for a seamless experience no matter how customers contact us. In the U.K. we'll be seeing different customer types such as a storage operators, so we're making changes in how we interact with them. A recent example of this is the connections process, with re-listening to feedback and eliminating process inefficiency will reduce the time it takes to provide connections by 30%. Turning now to performance optimization, where the starting point as always is a strong focus on maximizing the performance of our core…

A - John Pettigrew

Management

So we'll have Mark first.

Mark Freshney

Management

Just two -- Mark Freshney from Crédit Suisse. Just two questions. Firstly, on the U.S. tax reform, what is the impact expected to be on operating cash flows? Because that's where the real adverse benefit is. And on the other side, what is the impact on overall asset base growth? Because that's where the value generation is.

Andrew Bonfield

Management

Yes. So Mark, on the inflows, cash flows effectively, at the moment it's about $180 million, we highlighted, which is the bill reduction because effectively there's no offset. There are other filings that are still to come through, so we need to wait and see what those are. And then there's also to deal with the $2 billion because none of that has been dealt with yet. At the moment, that $180 million is about 50 bps on the RCF-to-debt metric, which as we said was 10.6%, so still comfortably above that. And then as far as actually rate base growth, the bonus depreciation over the years has probably reduced, I think we've had this conversation before, by about 0.5% a year on U.S. rate base growth by buildup of deferred tax liabilities. So it could add about 50 bps to the U.S. growth rate.

Mark Freshney

Management

And just to be clear: That's included within your slightly above 7% guidance for rate base growth for the group.

Andrew Bonfield

Management

Yes. Yes, it is, yes.

Iain Turner

Management

It's Iain Turner from Exane. Does that make you think again about how you finance the U.S. business and about -- because obviously you've -- you do it all with debts at the moment and you don't pay much tax.

Andrew Bonfield

Management

Yes. I mean, Iain, the -- there's a couple of things. I mean obviously one which is around holdco interest deductibility, there is a question mark in the U.S., and that's still to be determined again about that. Ultimately, at the end of the day, we tend to look at debt as a whole; and so what you tend to look at is across the group and the gearing at the group level. Where it sits within the individual entities is dependent on what optimizes and also where you actually get the best financing rates. We may see over time more funding move more to a group level because that may be a more attractive place for us to fund, but that -- nothing has been determined on that yet.

Deepa Venkateswaran

Management

This is Deepa Venkateswaran from Bernstein. I have three questions. So on the U.S., I think, a year back, you had said that the IFRS EBIT growth from '17 was around 7% to 2021. Could you clarify maybe from 2018 what you expect the EBIT growth to be taking into account the tax changes? Second question is on the decision to discontinue the scrip dilution through buybacks. I was wondering are there any factors which might lead you to reconsider it? I don't know, FID decisions on interconnectors or otherwise, which might mean that you have more balance sheet capacity. So just any movements around that? And the third question is are you thinking of doing utility-scale renewables in the U.S. even when it's not part of the rate base. So are you thinking about solar or onshore wind, for instance? And are you slightly late to the game, at least on onshore wind, if that's the case?

Andrew Bonfield

Management

Okay, so do you want me to do the first two?

John Pettigrew

Management

Do the first two.

Andrew Bonfield

Management

Yes. So first of all, on operating profit growth, I mean, the underlying operating profit growth will remain in line with the 7% we talked about before. The impact of tax reform is just a bit -- this is a bit of a wild card at the moment because, although we've already done some reduction, effectively we don't know where it's going to end up through the rest of the rate filings, Deepa. So it's going be -- if we could just ask, actually probably by November, we'll probably be in a better position to indicate what those individual growth rates are. But the problem is, because we haven't done all the filings, it's a little bit early. And it -- we'll need those rate filings to be put in place to indicate where it is. Effectively, excluding rate -- excluding tax reform, the growth rate will remain at the 7% level. So that's that doesn't change. The fundamentals don't change. It's just, and don't forget, any reduction in billing is offset by a reduction in the tax rate, so effectively it's a one-for-one in the P&L. Secondly, on scrip, as we said, effectively given the level of growth and given the funding particularly of things like interconnectors, we are in a position where -- and if -- we are at the top, high end of that growth rate; and expect to be actually above the 7% for the next couple of years. That probably means that we are in a situation where the scrip is needed. We've always said consistently the 5% to 7% asset growth, you’d need the scrip at the top end. The last few years, we've actually been at the real -- bottom end. That's given us the capacity. So a couple of things would need to happen. One, growth rate would need to be lower. I don't think that's going to happen. And actually the growth we're investing in on things like interconnectors is really positive for the long term. I'll remind you that the interconnectors start to produce EBITDA in the 2020s onwards, which is at the point of time where we're coming through RIIO-2. So effectively that will help mitigate the -- any reduction in returns in the U.K. at that time. And then it's about performance. And it's really about do we generate the incremental performance over the next couple of years, which then gives us incremental cash flow opportunities. So those will be the biggest factors.

John Pettigrew

Management

Yes. And in terms of renewables, if you look at the last couple of years, we've been increasingly involved in investment both on a regulatory perspective and a nonregulatory perspective. So we're talking about 35 megawatts of solar in Massachusetts that we'll do at the end of the year, which is connected to the network. We've been doing some joint ventures for next year on Long Island for network-connected solar. And we're also looking at batteries as well on, as I said, Block Island but also in Long Island. So we've been looking at those types of investments. From our perspective, what we look to do is to invest in assets that have got a strong regulatory underpinning or regulatory characteristics that allow us to take advantage of capabilities, as I mentioned in the speech, around project management, engineering, financing and so on. And we think large-scale renewables have a lot of those characteristics. When you look at the U.S. market, it looks like a very large-scale market over the next few years. I don't think we're late to the game, but if there is the right opportunity, then we will certainly look at it very carefully but with the discipline in terms of investment that we always apply to all our investments.

Dominic Nash

Management

It's Dominic Nash from Macquarie. Two questions, please. Firstly, on the Hinkley Point-Seabank decision, you say you're exploring all options. Am I correct in believing it's really you've only got three options, which you -- either you accept it, you go down a judicial review or you go down a CMA referral? Or are there any others? And can you just give us what the pros and cons would be of the CMA versus the judicial review or others? And secondly, I'm sorry. I'm kind of bouncing a bit, but U.S. GAAP numbers: You've alluded in the past that you might be prepared to come up with a group U.S. GAAP EPS number to write the other EPS numbers. And either for the group or maybe as a stand-alone U.S. division, is that something you still have plans to do later this year?

John Pettigrew

Management

Okay, so let me start with Hinkley-Seabank. So you will have seen in the response, because it's been published, that we felt very strongly that the returns that we've been proposed through what Ofgem calls proxy competition were not commensurate with the level of risk associated with a significant transmission project connecting a nuclear power station. So we've responded quite strongly to that. I think it's quite interesting that other parties in the industry, including supply chain, have also responded quite strongly to that. So we're now in the process of, as usual, the consultation with Ofgem in dialogue and discussions. We are hopeful that Ofgem will shift their view in terms of what's an appropriate return. Fundamentally given where we are with the project, I think we feel that strategic wider works is the right route. We received planning consent for Hinkley back in January 2016, so the project is under construction. So from our perspective, we're hoping that Ofgem will shift in terms of where their opt-in position was with consultation. And if they don't, you're right, there are three options. And we will consider those options depending where we get to in terms of discussions and the consultation. At the moment, we're in that dialogue, so we're not at the point where we've made a decision, but the options there available to us is to progress. We have a license obligation to do that, but we do have the option of going to the CMA and the -- and taking judicial review. I'm not going to get into the pros and cons of that because I don't think that we're at that point yet. That's way down the line, but those will be the options available to us.

Andrew Bonfield

Management

Yes. On the U.S. GAAP numbers, I mean I think, first of all, my team would probably lynch me if I promise that today and particularly given that I won't be here to have to deliver it. So yes. I promise it, Dominic, but I think the challenge there is actually around timing. And the problem, as I think I've indicated to you before, is if we do produce the EPS number at the same time as we're trying to do the audit of the group accounts that just is a little bit complex. We are looking still about how we can actually give you more transparency into the U.S. I think Andy and the team will be looking at that, and hopefully, they'll be coming back to you, giving you some more indications later this year.

Nicholas Ashworth

Management

It's Nick Ashworth at Morgan Stanley. Two from me. Firstly, just on the U.S., it's been a good year. ROEs have gone up, 95% of your allowances, which was I think a little bit ahead of the 90% that you were guiding for or hoping for. Is there any reason why going forward that number should change? And why shouldn't it get even a little bit better given that we seem to be now in a process where all cases are being filed? You have new plans in place, and presumably you can keep refiling as and when you want. So can you just -- a little bit more color around that and why -- what we should be really thinking about for ROEs in the U.S. in the medium term? And then just your comment on the U.K., and I don't know if this is something new or not: You were talking about the outperformance in the U.K. and looking at operating costs and what you're doing there to drive further outperformance. Is this something new? Is this something that was already baked in? I just want to dig out a bit more color around that as well, please.

John Pettigrew

Management

Yes. I'll start with the U.S. So you're right. We've had a good, strong year. I think it reflects really the strategy we put in place a few years ago to start to do the -- what I call the drumbeat of regulatory filings. Through those filings, we've been able to get agreement in terms of an appropriate cost base as well as the strong investment that's been agreed with regulators. So on that side that regulatory drumbeat is working for us. We've still got another couple of rate filings to complete this year in Massachusetts and Rhode Island, but on the other side of the coin, I guess it's been driving the operational performance of the business as well. So as you hear, we've established a capital delivery function. So we're spending $3.3 billion of CapEx in the U.S. And we need to make sure that we're delivering as efficiently as possible, so it's really about having the right regulatory framework together with driving the efficiency. That will allow us to win those returns, to get them as close to the allowed as possible. We're delighted to get to 95% this year. It was ahead of our expectations. Our focus now is to get it as close to the allowed returns as possible, so we will continue to make sure we got the right drumbeat of regulatory filings. And that will continue at the end of the year with Massachusetts Electric. So we'll see the benefits this year of the filings we did last year and partial benefit from Massachusetts Gas and Rhode Island, but some of the other ones will start to tail off. So you've always got that challenge of how can you drive the efficiency to maintain those overall returns. And that will be the focus for us going forward.

Nicholas Ashworth

Management

But there's no issues with going back and refiling. You're happy with how the processes have been for this first situation you're at.

John Pettigrew

Management

Yes, we're very happy with the way the process has gone. And as I said in the speech, our aim is to drive the efficiency of the business. That allows you to then get as close to the allowed returns for as long as possible, but the point of which we feel we need to increase investment or the cost base is not being covered. We'll then go back in and do a rate filing. And that's the drumbeat that we now have in the U.S. And we have all the mechanics and processes to be able to do that. In terms of the U.K., the point I was making was we do want to -- we are looking at our operating costs. And we are looking at our processes and how we can use innovation to drive some of those system changes to drive efficiency. We're very conscious in the U.K. that affordability remains right at the top of the agenda from a political perspective, so everything that we can do to drive cost down for customers is helpful. And it also helps to deliver that 200 to 300 basis points in the first five years of RIIO. We've delivered on that 200 to 300 basis points, and we want to make sure we continue to do that right out to the end of RIIO-T1.

Christopher Laybutt

Management

Chris Laybutt from JPMorgan. Just one quick follow-on from Nick's question. Is 95% the new 90% in terms of the aspirational target? And Viking, Andrew, just a question in terms of the assumptions that you mentioned earlier. Is that CapEx included in the CapEx projections that you've already got internally? If that project goes ahead, will that be incremental to the growth that you've set out today? And just some more color around that, please.

Andrew Bonfield

Management

Yes. So as far as actually the £13 billion I mentioned, it will be incremental to spend over the period of time over the next three years. What we do incur over that period of time will be incremental.

John Pettigrew

Management

And in terms of the percentage to allowed, I'm going to make Dean smile here. So the challenge is to get as close, if not at, the allowed. We're not going to -- not satisfied by 95% or 90%. Our goal is to be as close to the allowed as possible.

James Brand

Management

James Brand from Deutsche Bank. Three questions, please. The first is just on the achieved ROE number you've given for the U.S., whether that includes a tax reform benefit in that, or not; and if so, what it is. Secondly, on the guidance that you've given for outperformance for the U.K. business or that you've reiterated at 2% to 3%. You've given that for a long time as a range looking through the period and looking at your portfolio of assets in the U.K., but obviously the Gas Distribution business is being sold off. You're averaging closer to 2% for the transmission business in the U.K. at the moment, so should we still see that range as it used to be as an average over the period and across the whole portfolio? Or should we see it as something more saying that you can at least achieve that 2% for the business that's remaining over the remaining years of the price control? And then thirdly, gearing is up to about 64% net debt-to-asset base here, and obviously you're flagging the scrip and retaining some of the proceeds from the remaining stake sale in Cadent. Should we see this kind of level of gearing of mid 60s as being a ceiling or close to a ceiling for you? And are there other metrics you look at as well other than gearing? But any comments on that will be of interest.

John Pettigrew

Management

So we'll let Andrew deal with the first and the third. Let me take the middle one. So in terms of outperformance, our focus is to continue to deliver 200 to 300 basis points of outperformance. That's always been irrespective of when we sold the Gas Distribution business. We set out, when we did, that we will continue with our commitment of 200 to 300 basis points. Within any particular year, you're always going to see variations on that. The opportunity to deliver that outperformance comes from delivering projects as efficiently as possible. There are more opportunities you see in some projects than others, depending on the engineering solutions, and therefore you're always going to get volatility within a year. But the commitment remains exactly the same: to focus on 200 to 300 basis points.

Andrew Bonfield

Management

Okay, on the first point, around the achieved ROE in the U.S. No, there is no benefit from tax reform, tax -- any tax changes or deferral. So it's actually just put up into regulatory assets and liability IOUs so therefore has no impact on the achieved return. So the reduction in the tax rate will actually be then hung up on the balance sheet as a reg liability. So in U.S. GAAP will have no impact. Secondly, on gearing, probably as we've always said, sort of mid-60s sort of percent gearing is probably the sort of high end of the gearing ratio range that sort of fits our credit metrics but also depends on what the metrics are and the cash flows associated with that. So the one we look at, as we always talk about, is RCF-to-debt. That's the most constrained metric that we normally have, which is the Moody's metric. So that's the one which will be the primary one. Gearing is secondary, but it does indicate whether there is balance sheet capacity as well. As far as, again, just to reiterate, when we're looking at the balance sheet and the balance sheet capacity, this is about making sure that we have sufficient ability to fund the growth that we're going to see over the next few years. And just to remind you again: The interconnector -- value of the interconnector returns. They are very good, high-returning businesses, but they don't have the cash flows associated with them, so unlike regulatory investment which has some of the immediate cash return, there is the lag. That is the bit that puts the pressure on the metrics over the next couple of years, but it's good investment.

James Brand

Management

So there's no benefit from the fact that the tax rate has come down, but there's a lag in terms of revenue...

Andrew Bonfield

Management

It impacts our IFRS accounts but has no impact on U.S. GAAP at all because it straight goes into a reg asset and liability account.

Fraser McLaren

Management

Fraser McLaren from Merrill's. Just three questions, please. The first is about your relationship with Ofgem and specifically if you think that a constructive dialogue on RIIO-2 might be hampered by the strong views which you both have on Hinkley. Secondly, on the disposal of the remainder of gas D, you've arguably struck the deal at a point of maximum uncertainty both from a regulatory and a political perspective. Do you think you might have achieved a better price by waiting? And then lastly, thinking about funding for growth, are you open to other disposals? I mean Isle of Grain has been mentioned in the past as one thing you might look at.

John Pettigrew

Management

Okay. So I'll start with the relationship with Ofgem. So as we always have had and we continue to have, we have a very conservative relationship with Ofgem. And I've directly had conversations with them at around making sure that actually they understand the rationale for why we're having a disagreement on Hinkley but we need to continue to have constructive dialogue on RIIO-T2. And that's exactly how it's playing out, so we feel very comfortable. You can't compartmentalize these things. So we're having a strong discussion on Hinkley, but actually I think it is a very constructive conversation we're having on RIIO-T2. Our response, which will be published in the next few weeks, will show that we're very supportive of large -- a large number of the elements that are in the framework. So we are very pleased to see that they're building on a lot of the good things from RIIO-T1. We're very pleased and in fact we're advocating for much more involvement from customers and consumers in the building of the business plans, so that aligns very much with our own thinking. There are, of course, areas that we disagree in terms of the ROE range, for example. So I'm very comfortable with the relationship. It's one thing which we can continue to have a constructive relationship on RIIO-T2 whilst we're having a challenging discussion on Hinkley. Second question was disposal struck at the right time. Do you want to take that one, Andrew?

Andrew Bonfield

Management

Yes. I mean I think there's always a -- that's a billion dollar question. I mean, with the benefit of hindsight, next week you can find something very different, but I think generally we are very pleased with the outcome. We think it's comparable to what we saw in the initial deal. There is -- there was a slight reduction relating to expectations of returns, but that is actually -- and a lot of control premium, but actually when we look at the outcome, we're very pleased with it. And it's very comparable to the round one.

John Pettigrew

Management

And in terms of the portfolio, our investment proposition is to grow the asset base by 5% to 7%. And our policy on dividend is to then to grow it by at least RPI for the foreseeable future. That's our investment proposition. We look at each business in the group to see how it's supporting, contributing to that. That was part of the rationale why we took the decision to sell the Gas Distribution business, but at this point in time we're very comfortable with the portfolio mix that we've got. It's obviously something the board will review on a regular basis, but it's always against that context of the investment proposition that we have.

Maurice Choy

Management

This is Maurice Choy from Royal Bank of Canada. Two questions. The first is just the guidance of at least 7% asset growth. Does that include, a, Viking? And b, in Slide 34 you've mentioned USD 10 billion of CapEx for the U.S., but only 90% of that is in rate plans. Does that include, I guess, the remaining 10% in your at least 7% guidance? And second question is just on messaging for, I guess, the capital that you're retaining from the scrip dividend. You mentioned this is only for the next couple of years. And I'm wondering why wouldn't you just go beyond those two years, especially given that, number one, you have most likely returns coming down FY '22? You've got U.S. tax reform, cash flow coming down once you assess all the other jurisdictions. And number three, obviously I assume you have more growth coming, especially on National Grid Ventures, so why just two years and not just go beyond?

John Pettigrew

Management

Yes, we'll let Andrew pick up the third. In terms of the first, I think Andrew referenced already. So it's not including Viking at the moment, so that will be incremental. In terms of the 90% of rate base, it's just really reflecting the fact that we've still got two rate filings going on this year. And as we look over a three-year period, actually we've only got two years left of our KEDLI and KEDNY rate filing as well. Our expectation is the investment will be similar level at the time we get to year three. And we may well have to do another rate filing for that. So it really reflects just the rhythm and the timing of all the rate filings that we've got in the U.S.

Andrew Bonfield

Management

Yes, and as regards why only for the next couple of years, we've highlighted for the next couple of years, firstly, because actually that's where we have the peak CapEx, over the next two years, and will -- above the top end of that 5% to 7% range. Obviously, we will need to look out, as we get closer to that time, if there is incremental investment in NGV. That may make decisions, but at this stage that's not part of our commitment from an asset growth perspective. So it's very trying to make that as clear as possible. Secondly, we also have obviously RIIO-2 coming through. We have no idea of what that will be and what that means from a cash flow perspective, so at this stage, to say we need to retain scrip for that, we don't know yet. So I think that will be wrong for us to say definitely no buyback because again it depends on resourcing and resources we have and the cash flows associated with the core business.

John Pettigrew

Management

Verity?

Verity Mitchell

Management

Verity Mitchell, HSBC. I've just got two questions. One is about Gas Transmission in the U.K. We continue to see totex overspend, and I just wonder what your thoughts were compared with the much more stellar performance in Electricity Transmission. And just secondly, on -- sorry, back to the U.S. and the debt situation. You've got negative outlook on three areas: NiMo, KEDLI and KEDNY's. How do you think about it from a bottom-up, top-down basis? And will you be looking at the rate filings to try and fix the tax-related downgrade that you had from Moody's in KEDLI and KEDNY? And how should we think about that?

John Pettigrew

Management

Great. So I'll take the first one, give Andrew the second. So in terms of Gas Transmission, I think we've said consistently actually that, when we entered into RIIO-T1, we knew it was a tighter price control in terms of the work that we would need to do from an asset health perspective. So we've always undertaken the investment that we believe will deliver the regulatory outcomes in terms of the norms but also ensuring that we are maintaining the integrity and the reliability of the networks. So that has required us to invest more than was the original allowances, which is why it's dragging down the returns. On the flip side, actually the incentives in Gas Transmission outside of totex have performed very strongly, which is offsetting some of that overspend in asset health. Clearly as we go into RIIO-T2, we will be working quite hard to make sure that we get the right capital investment plans approved by our customers and with Ofgem to make sure we've got the right levels of investment for asset health going forward.

Andrew Bonfield

Management

And Verity, on the impact on the individual opcos, firstly, KEDLI and KEDNY will -- downgraded one notch actually brings them in line with the other companies, so effectively that's brings them in line with all the other group companies. As far as actually negative watch, that slightly is helpful in your regulatory conversations because what it does mean is you can go into the regulator and say actually some of the headroom from the tax reform actually can be reinvested in the business and deal with some of the other regulatory assets and liabilities which may be on the balance sheet. The reason why in NiMo we gave it back straightaway is we actually were in an over-collected position. In KEDLI and KEDNY we have some significant reg assets sitting on the balance sheet which we can't have a discussion about. So that's part of that regulatory conversation.