National Grid plc (NGG) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the National Grid 2019, 2020 Full Year Results Call. My name is Felicia and I'll be coordinating your call today. At the end of this presentation, you will have the opportunity to ask a question. [Operator Instructions] I will now hand over to your host today Nick Ashworth. Please go ahead, Nick.

Thank you, Felicia. Good morning and welcome to our full year results presentation. Thank you for joining us remotely. I hope you're all safe and well. Firstly, I would just like to draw your attention to the cautionary statement, that you'll find at the front of the presentation. Secondly, after the presentation as usual the IR team will be available by phone to help you with any further questions. So with that, I'd like to hand it over to our CEO, John Pettigrew. John?

Thank you, Nick. And good morning, everyone. Welcome to our full year results call. As usual, I'm joined today by Andy Agg, our CFO. We have plenty of time for the call today, so Andy I will be able to answer any questions you may have after the presentations. Clearly, everyone's safety and well-being are at the forefront of our minds at this time. Whilst dealing with the disruption that COVID-19 is causing, National Grid's greatest priority has been our people, as well as the safety and well-being of our customers and communities. Before we turn to our results for ’19, ’20, I want to start today's presentation by taking you through how we've been reacting to COVID-19 and how well our business continues to deliver despite this major new challenge. At the end of March as the crisis unfolded, we successfully implemented our business continuity plans. Although COVID just had a profound impact on demand levels and on the way in which we work, I'm proud to say that we've maintained excellent levels of reliability across our networks and we continue to deliver on our significant capital program. As the crisis evolves, we took action to change working practices quickly and safely. In particular, we risk assessed all our operational and construction projects, issued new working guidance to our field force and collaborated across the industry, sharing best practices and finding innovative new ways of working. And despite these changes, we’ve continue to deliver strong operational performance. A great example of this was our team's rapid restoration of power to 142,000 customers following significant storm in Massachusetts on the 13th of April. We were able to restore power within 29 hours to 95% of impacted customers. Away from the field, our dedicated control room staff have been working tirelessly, sequestered away from their families to ensure they're protected and can maintain our real time operational systems. So as you can see, we've adapted extremely well to the challenges, and I'm proud of how our employees have responded. Turning now to our customers, our focus is being not only to keep the electricity and gas flowing, but also to help those customers who may be in financial difficulty. In the US, recognizing the economic environments, we've not pursued debt collections or disconnecting customers at the present time. And as you're aware, we've also deferred proposed rate increases in New York. We're also helping customers to ascertain whether they're eligible for a discount on their bill, if they qualify for home energy assistance grants, if we can offer them flexible payment plans. In the UK, we'll continue to work with other network companies and Ofgem to help suppliers address financial challenges the COVID has brought, without imposing additional burden on consumers. A good example is the deferral of network charges for eligible suppliers. This will help the most vulnerable suppliers with a regulatory mechanism which allows us to recover these charges within our financial year. We're also working with Ofgem to see how we can help our customers bear the increased balancing costs associated with managing the system through COVID. In addition, we're supporting our communities. There are many examples from across the business, including financial donations to help the most vulnerable, support by individual employees in their local communities and direct actions taken by our businesses. For example, our gas teams in the US have created supplies in record time to help turn a college gym into a thousand bed hospital on Long Island. I won't go into further detail on other examples here, but I can say that National Grid is acting in a responsible way and living our values of doing the right thing. Of course, as well as ensuring the support of our staff, customers and communities, we also need to manage the financial impact of COVID. Andy, will provide more details shortly. But to summarize, we expect to see a £400 million impact on underlying operating profit in 2021, primarily driven by higher costs and lower revenues in the U.S. However, with the regulatory mechanisms and precedents, we expect to recover these over the medium term and we are also maintaining our focus on efficiency plans. So whilst we see a financial impact in the near term, we currently don't expect to see a significant economic impact on the business longer term. So, having provided that context, I'd now like to turn to the strong results we've delivered in the past year. On an underlying basis, that is excluding the impact of timing, major storms and exceptional items, operating profit of £3.5 billion was broadly in line with the prior year. This reflects the expected increase in revenues from new rate cases in the U.S. and lower operating costs, as our efficiency programs have started to deliver, but offset by the impact on additional provision for US bad debts. Consequently, underlying earnings per share was down slightly by 1% to 58.2 pence. Underpinning this performance was a record year of investment in critical infrastructure with the CapEx up 19% to £5.4 billion. This was driven predominantly by increased spend in our UK Electricity Transmission business, as we progressed major projects like Hinkley. Higher US CapEx much of it mandated on safety spend and higher CapEx in National Grid Ventures from continued interconnect investment, as well as the acquisition of Geronimo. This delivered organic asset growth of 9% above our stated target of 5% to 7%. We've achieved a group return on equity of 11.7% in line with the prior year, delivering ongoing sustainable returns for our shareholders and in accordance with our policy, the Board has proposed a final dividend of 32 pence share. This takes the total dividend for the year to 48.57 per share, an increase of 2.6% in line with UK inflation. So as you can see, it's been a strong year for financial performance across the group. As you know, our safety and reliability performance remain the key to our success. On safety, our UK and National Grid Ventures businesses have delivered good performance with their lost time injury frequency rates falling to record low levels. In the US, we've seen an increase in the number of safety incidents. However, we've conducted a thorough review of all our working practices and in the coming year we'll be implementing programs to further reinforce positive safety behaviors. Turning to reliability, performance remain excellent across our UK and US regulated networks, as well as our interconnectors. As you know on the 9th of August we experienced a rare power outage event in the UK which caused [ph] huge disruptions to many people. In January reports into the incident from the Energy Emergencies Executive Committee and Ofgem found no link between National Grid’s actions and the power cut. Since the reports were published, we worked with the industry Ofgem and based [ph] and all the actions proposed are progressing to time. And in the US, despite another year with significant number of storms, we've delivered excellent reliability in line with levels from the prior year. I'll now turn to the progress on our operational priorities last year. Starting with the US, I'm delighted that the Board has confirmed that Badar Khan as the new President of our U.S. business. Badar has been with the group for three years and takes over a business that's in strong operational performance. During the year, we achieved a return on equity of 9.3%, an increase of 50 basis points, representing 99% of our allowed return. We achieved strong rate base growth of 12%, up from 9.2% last year, as we invested over $4 billion in critical infrastructure and as a number of projects under construction were added to the rate base. This investment was mainly driven by mandated [ph] spend to maintain the safety and reliability of our networks. An example of this is the 458 miles of leak prone pipe we replaced across our jurisdictions. This brings the total we've replaced to date to more than 10,500 miles [ph] that means we are now halfway through the long term replacement program. We've also made good progress on the regulatory fronts. In October, we agreed new rates for Massachusetts Electric with a five year agreement that gives us long term visibility for our investment, greater protection against cost pressures and more incentives to innovate and create value for our customers. And we've made good progress on our cost efficiency program where we met our target to deliver $30 million of savings this year and remain on course to deliver $50 million in 2021. However, as you are aware, we also experienced some challenges with gas constraints in downstate New York. Addressing this has been a major priority of mine this year. As you know in November, we agreed to lift the moratorium on all new connections until September 2021. Since then and in line with the terms of the agreement with the states, we filed a report outlining options for meeting long term customer demand. This was followed by a series of public and virtual meetings that were attended by over 800 people. From these meetings, feedback was included in a supplementary report that was filed with the regulator. We're continuing to work proactively with New York State, the regulator and our customers to find a long term solution, unanticipated [ph] outcome this summer. Turning now to the UK. It's been an important year as we head towards the end of RIIO-T1. Operationally both our Electricity and Gas Transmission businesses continue to deliver good levels of performance. Let me talk you through a few of the key highlights. During the year, we achieved a return on equity of 12.4% within our target range of 200 to 300 basis points of outperformance and we continued our capital program with investments of £1.3 billion, which is up 5% in the prior year giving asset growth of 3.8%. This takes our total investment in RIIO-1 to over £11 billion, delivering world-class reliability, enabling the connection of 4.6 gigawatts of renewable energy and generating over £700 million of savings for customers. During the year, we've made progress across a number of our large projects, including completing the Feeder 9 tunnel tunnel under the Humber, our largest gas project in over a decade and driving forward the second phase of our London Power Tunnels project. We've also made good progress on our investment at Hinkley Ofgem's decision on allowances and the use of Strategic Wider Works as the delivery model for this project. And of course, we've made significant focus on RIIO-T2 with draft business plans submitted in December. Our plans cover a crucial period when rapid change is expected in the energy system to reduce carbon emissions and help achieve the UK's environmental goals. In delivering the plans, we've engaged with over 25,000 stakeholders and we're the first company to set up the independent stakeholder user group's. And finally, during the year, we remain focused on our efficiency programs and exceeded our savings target of £50 million. This achievement has been driven by cost and process improvements, such as the overhaul of our IT contracts and optimization of control and field teams. Driving cost efficiencies, whilst keeping our workforce engaged will be the key to delivering continued benefits to our customers as we move into the RIIO-T2 period. Moving now to National Grid Ventures and our other businesses. With Badar’s appointment in the US, in April we announced that John Butterworth would step up to be the new Managing Director of National Grid Ventures. John has spent many years at National Grid and brings a wealth of experience to the role. And it's been another year of significant progress, investment was up substantially to £850 million, mainly driven by higher interconnector spend, together with our investment in Geronimo. Progress on our new interconnectors remains on track. On IFA2, the subsea cable connection has been completed and successfully tested and commissioning the link is on course for the end of the year. On our North Sea Link and Viking interconnectors, we've managed the disruption caused by COVID and commissioning remains on track. And last year, we completed the acquisition of Geronimo Energy and have since announced the start of commercial operations of our 200 megawatt wind farm in South Dakota. Finally it's been another busy year in our property business where we continue to sell sites into the St. William joint venture. And I'm pleased to say that it was also the first year where the joint venture contributed net profit through the sale of homes from customers. So in summary, I'm pleased report that ’19, ‘20 was a strong year for National Grid and good strategic progress was made despite the challenging backdrop at the year end. And I've been incredibly proud to see some of the amazing things our people have done to help our customers and communities get through this COVID crisis. I’ll review shortly our priorities for the coming year. But first let me hand over to Andy to discuss our financial performance in more detail.

Thank you, John. And good morning, everybody. I'll start with reviewing our financial performance over the last year, before covering the impact of COVID on our business in detail. Overall, the group delivered a strong financial performance last year. As John has mentioned, underlying operating profit was £3.5 billion, mainly reflecting the impact of revenue increases in the US, driven by new rate cases, lower controllable costs across both the UK and US businesses, higher UK profit with the with nonrecurrence of the return of Avonmouth revenues in K Gas Transmission, which together were offset by the expectation of additional COVID related bad debts, high levels of US depreciation on increasing levels of CapEx spend and the impact of lower profits from the nonrecurrence of the Fulham sale and the legal settlements last year. EPS was down 1% at 58.2 pence, reflecting improved regulated business performance, offset by a 2.5 pence impact of the COVID related bad debt provision, an increase in finance costs, increased share count and a slightly higher effective tax rate. Our robust operational performance was also reflected in the 11.7% group return on equity and our value added per share was 58.9 pence, down slightly compared to last year. Our asset base grew strongly by 9%, reflecting significantly higher capital investment of £5.4 billion, including over £200 million of investment in Geronimo. The full year dividend of 48.5 pence per share is up 2.6% in line with our policy. Let's look at the performance of each of our segments. UK Electricity Transmission delivered another year of strong operational performance achieving a 13.5% return on equity, 330 basis points above the allowed. Totex incentives contributed over 250 basis points from efficiency savings across our asset health programs and high performing load related schemes. This outperformance was driven by process improvement and contract management savings. Additional allowances contributed 70 basis points, slightly above last year. Underlying operating profit of £1.2 billion was up 8%, largely due to lower operating costs and depreciation. The UK efficiency program that we launched in FY ‘19 delivered £54 million of savings for the year. Capital investment of £1 pounds was 13% higher than last year, primarily due to spend on the second phase of the London power tunnels project and the Hinkley Seabank project. This investments, along with the inflation linked growth in the RAV increased year end regulated asset value by 4.4% to £14.1 billion. UK Gas Transmission delivered a return on equity of 9.8%, 30 basis points higher than last year, but marginally lower than the allowed level. This slight underperformance reflects the high costs of delivering key compressor projects and on new data centres. Other incentive performance at 110 basis points was strong, resulting from improved customer satisfaction and constraint management. Underlying operating profit of £402 million was up £61 million or 18% compared to FY ’19. This is primarily due to the nonrecurrence or return of Avonmouth allowances and additional revenue for cybersecurity, following the reopeners as agreed in 2018. Our UK cost efficiency programme delivered £19 million of savings, and together with the £54 million of electricity transmission savings, we exceeded the total UK target of £50 million announced last year. Capital investments was £249 million, £59 million lower than last year due to lower spend on Feeder 9 and our compressor projects. And including inflation, the regulated asset value grew by 2.3% to £6.3 billion. Turning now to our US business, where the return on equity was 9.3%, 99% to be allowed. Underlying operating profit increased 1% to £1.6 billion at constant currency. Net revenues were up £257 million, reflecting rate increases. Controllable costs decreased [ph] due to the nonrecurrence of last year's Rhode Island gas interruption, and we also exceeded our target of $30 million of savings from the first year of our cost efficiency program. Bad debts increased £83 million, reflecting the additional COVID related provision of £117 million, partly offset by lower receivables balance. Depreciation increased due to growth in the rate base and other costs increased largely due to deferrable storm costs. We've increased investment in our US networks to £3.2 billion or $4.2 billion. This together with a $380 million increase in construction work in progress coming into service, drove strong rate base growth of 12% to $25.6 billion. Assets outside rate base were $2.7 billion and these largely relate to capital work in progress. National Grid Ventures contributed £336 million. This is an increase of 6% on last year, including a full year’s operation of Nemo Link to Belgium. Grain LNG and interconnector profits were consistent with last year and metering profits were broadly flat, reflecting a more gradual decline than expected in our legacy meter population, as the mandated smart meter rollout continues. Capital investment increased significantly to £815 million, mainly driven by the acquisition of Geronimo and higher investments in our North Sea Link, Viking and IFA2 interconnect projects. Our other activities had a small net charge of £27 million, reflecting the nonrecurrence of the Fulham property sale, higher insurance costs and the nonrecurrence of US legal settlements. We sold in other two sites into the St. William joint venture and we've also exchanged on a further four sites, which will transfer in due course. Our Venture Capital business, National Grid partners invested £61 million in FY ‘20 and continues to make investments in innovative technology startups, such as Copperleaf and Smart Wires. Financing costs increased by 6% to £1 billion, primarily due to high net debt in our US business and hybrid buyback costs, partly offset by lower UK RPI. The effective interest rates decreased from 4.3% to 4.1%. The underlying effective tax rate was 19.9%, 30 basis points higher than FY ’19, primarily as a result of lower value property sales in FY ’20. Underlying earnings were broadly flat at £2 billion and underlying earnings per share decreased 1% to 58.2 pence. Operating cash flow was £4.9 billion, £450 million higher than last year. This was driven by higher regulated business income, lower year end weather related US receivables, lower US pension costs and reduced exceptional cash costs. During the year, we raised £2.9 billion of senior debt and refinanced £1.1 billion of our hybrid debt. Closing net debt was £28.6 billion, an underlying increase of £2.7 billion after allowing for an £800 million adverse movements in exchange rates. The impact of adopting IFRS 16 and receive the final cadence proceeds. Turning to our credit metrics, where Moody's RCF debt ratio was 9.2% and S&P’s FFO to debt metric was at 12.3%. These both reflect higher tax and pension costs and adverse timing, partly offset by lower exceptional cash payments and in the case of the RCF ratio a higher scrip uptake. We've also guided previously for our regulatory gearing levels to remain around 65%. At year end, this stood at 63%, which remains consistent with the group's credit rating. During the year, we further reduced the level of the balance sheet hedge of our US assets to around 70%. This followed our periodic review of its effectiveness, and we now see that the slightly lower hedge range will give a great - greater stability for our credit metrics. As a result, our US dollar denominated debt balance now stands at $20 billion compared to $21 billion last year. Group capital investment in FY ’20 was £5.4 billion of this approximately £4.5 billion related to our investment in critical infrastructure across our regulated UK and US businesses, with a large proportion focused on meeting mandated safety and reliability targets. A further £500 million was invested in our interconnector program. With IFA2 set to commissioned this year, we have now passed peak investment for this overall program. Finally, we also invested over £200 million in the acquisition of our large scale renewable energy business Geronimo during the year. Our ongoing funding for the group investment program remains robust, with strong internal cash generation, supported by the scrip dividend which we continue to utilize given current high levels of investments, as we have said previously. And I'm proud to have used our Green Financing Framework to issue our inaugural green bond in January and for an ECA backed loan to fund our Viking and interconnector. Together with regular bond issuance at attractive rates, this highlights global debt investor confidence in National Grid. Having reviewed last year's performance, I'd like to spend a few minutes walking you through the impact COVID is having on the business. Like all companies, National Grid is not immune to COVID. However, as a regulated utility for the most part there are either mechanisms in place or regulatory precedents for recovering additional costs arising from COVID. In addition to regulatory recovery, we're also maintaining our focus on cost efficiency to help offset additional costs wherever we can. Whilst this means that we did not expect a material economic impact on the group in the medium term, we will see an earnings and cash flow impact in the near term. So for FY ’21, working with our assumption of a gradual easing of lockdown, we currently forecast the impact of COVID on underlying operating profit to be around £400 million. Whilst we'd expect to see some additional costs arriving in - rising in the UK and the limited impact in our National Grid Ventures business, the majority of the £400 million impact is forecast to come from our US business, driven by three broadly similar impacts. The deferral of rate increases across New York, incremental COVID related costs and higher bad debt charges. Taking these in turn. Firstly, we currently expect rates to be held broadly flat to our New York businesses this year, as we've deferred rate increases in our Niagara Mohawk business and with rates held flat in our KEDNY and KEDLI businesses, as we discuss a new rate agreement. As is normal, we'll work with our regulators to agree the appropriate frameworks for recovery. Secondly, we're also seeing higher levels of COVID related costs such as sequestering critical staff on site, increased IT costs, as well as higher OpEx from lower capitalization of our own workforce costs, given changes to our capital programs. Again, we're working with our regulators on ways of recovering these incremental costs. With a weaker economic backdrop, we're likely to see levels of bad debt increase. As you all have seen this morning for FY ’20 we've taken an additional £117 million provision for bad debts over and above our normal run rate, against our receivables balance as at year end. Looking forward to FY ’21, we'd again expect to see a similar elevated level of bad debt expense, although the final bad debt level will ultimately depend on how each of the states we operate in exits the COVID crisis. As is usual practice, we would anticipate recovery in bad debt above our regulatory allowances through future rate plans. Turning to cash flow. Overall, we currently estimate the impact of COVID to be up to £1 billion. This will ultimately depend on levels of demand across our networks, cash collection from our US customers and timing of the collections of network charges and system costs in the UK. This will therefore also have an impact on net debt, taking into account these assumed cash flow impacts of COVID and excluding the impact of foreign exchange, net debt is expected to increase from £28.6 billion to around £31.5 billion. Together these headwinds will impact our credit metrics in the near term, but we expect this impacts to unwind as we recover these costs through our regulatory mechanisms. With this context in mind, I'd like to discuss our outlook for FY ’21. In the US, we expect to see net revenue increases more than offset by bad debts and higher COVID related costs as described previously. We forecast depreciation to be around £100 million higher, given higher levels investments in rate base. In the UK, additional COVID related costs will lead to a small year-on-year reduction in underlying operating profit expectations for electricity transmission. In gas transmission with limited COVID costs, we still expect to see an increase in underlying operating profits. National Grid Ventures operating profits are expect to decrease by around 5% year-on-year, due to lower interconnector arbitrage and the contribution from our other activities will also be lower due to lower property profits. Our profits from St. William are also expected to decrease, given macroeconomic headwinds for our joint venture property sales. Our interest charge is expected to be a little below FY ’20, reflecting lower RPI and lower interest rates. We expect a tax rate of around 22%. Overall, group capital investment is expected to be around £5 billion, leading to asset growth within our 5% to 7% target range. Whilst COVID will bring near-term earnings and cash flow headwinds, the underlying operations of the company remain strong. This has enabled the board to confirm the dividend policy. And as previously announced, due to the current levels of investment, we did not expect to buy back the scrip issued during FY ’21. To summarize, we’ve delivered strong returns performance in FY ‘20. We've delivered a record £5.4 billion of investments in critical infrastructure. The balance sheet remains robust, enabling the funding of attractive asset growth in the medium term. And whilst COVID will have a near-term financial impact, we expect the majority of these additional costs to be recoverable, limiting the longer term economic impacts on the group. Now, John will take you through the priorities and outlook for the coming year.

Thank you, Andy. So let me now to turn to our longer term objectives and priorities for the year ahead. National Grid has a critical role to play in enabling the energy transition. This is why our vision is to be at the heart of a clean, fair and affordable energy future. Supporting that vision, our four strategic priorities are to enable the energy transition for all to deliver for our customers efficiently, to grow our organizational capabilities and to empower our people for great performance, and these strategic priorities will underpin where we focus this year. In the US, we have two focus areas, to ensure we have the right rate plans in place for a post-COVID world and the efficient delivery of our significant investment program. In the UK, our two focus areas will be to agree the RIIO-T2 regulatory framework and to drive innovation and efficiencies for our customers. And our National Grid Ventures business we will continue to focus on our interconnector program and delivering our Geronimo investment pipeline. Let me talk you through each of these in more detail, before I come back to our clean energy ambitions. I'll start with our US rate plans. Whilst the long term investment requirements across our jurisdictions have not changed, the current backdrop means we'll have to adjust our short term priorities. As Andy has set out, we'll see revenue and cost impacts from COVID in the near term. This means that our immediate focus will be on working with our regulators to agree the appropriate rate plans for the medium term and to achieve the time and recovery of increased costs. These must recognize both the need for critical infrastructure investments and the economic environment that we're likely to be operating within. So with that context in mind, let me now take you through our rate filing plans for the rest of the year. Let me start with our downstate New York gas businesses, KEDNY and KEDLI, where we filed the new rates in April 2019. At the beginning of this month, we resumed supplement negotiations with the PSC in the interests of agreeing a multi-year rate plan that would achieve four things, to mitigate bill impacts for our customers, allow us to maintain safe and reliable service, advance our clean energy goals and earn a reasonable return. Whether we agree a one year or a multiyear deal this summer, we expect rates to remain flat for our customers this year. And at the same time in Dunstan, New York, as I mentioned earlier, we'll continue to work on delivering the solutions required to address gas supply constraints. In our upstate business Niagara Mohawk, we were due to file for new rates this spring for the period starting April 2021. However, we've delayed the filing and are exploring options including an extension of the current rate plan or rate case filing later this summer. With regards to Massachusetts gas, our current intention is to file towards the end of the year. As with previous filings, our aim will be to ensure that rates are increasingly forward looking, incentive-based and multi-year. This will give us good visibility on the funding of our investment plan and allow for annual inflationary cost increases, offset by efficiency savings. Our second area of focus is efficient investment. The vast majority of our work is needed to improve the safety, reliability and resilience of our networks. Our top priority will be delivering this work efficiently. And this is particularly true in the context of COVID. This includes finding new streamlined processes and digital solutions. For example, in our gas business, we are rolling out our Gas Business Enablement program, which will help firstly to standardize and simplify our operational processes. Secondly, to consolidate our support tools onto a modern digital platform and finally to enable the efficient scheduling and optimization of our field force. And on digitization, we've recently launched a new system that automated our dispatch processes for our electricity distribution workforce. These examples, together with others will help us to deliver investment plans efficiently, whilst minimizing bill impacts for customers. Turning to the UK, I'll start with regulation. As you know at the end of the last calendar year, we submitted our final business plans for Electricity and Gas businesses that reflected the wealth of stakeholder engagement we've undertaken. Simply put, we are proposing investments to maintain reliable and resilient networks that can support a changing energy system, whilst keeping bills as low as possible. In the past few months, we've been engaged constructively with Ofgem to address the points raised by the challenge group, which will be published in January. I was pleased that our greater level of stakeholder engagement was recognised by the challenge group, but I also recognise that we've got work to do to provide more evidence around our asset health investment plans. The next key milestones in the process will be Ofgem’s draft determination expected in early July and final determination which is expected at the end of this calendar year. As we progress through the year, we'll continue to work constructively with Ofgem to agree a framework that puts customers at the centre of the price control, enables the energy networks of the future and provides a financial package that allows a fair return for our investors. On delivering innovation and efficiency for our customers, we're on track to meet our cost reduction target of £100 million for 2021. This year, our efficiency focus will be on three key areas, streamlining our maintenance operating procedures, further digital innovations to increase the productivity of our field force and making step change improvements in our back office processes. And we're innovating for our customers. As an example, we've recently launched and are continuing to develop two new digital platforms. These will help customers connect to our network more efficiently by giving them access to the right data, standardizing connection design and providing a smoother, easier customer journey. Not only will it help customers with reduced connection costs, but it will also reduce the time it takes to connect to our network. We recognise that more efficient outcomes and improve customer relationships will be critical as we head into the new price control period. Finally, on National Grid Ventures, the major focus will be the continued investment in the three new interconnectors, North Sea Link, IFA2 and Viking. So with the end of this year, we'll have completed IFA2, be 85% through our construction program on North Sea Link and be one third of the way through delivering Viking. With investment of just over a £1 billion to date, we have around £1 billion left to invest through to 2023. And when all online, we expect these interconnectors, together with Nemo, to contribute £250 million of EBITDA from the mid 2020s. With regards to our US Renewable business, it has been a successful first year after our acquisition of Geronimo Energy, and looking forward, our pipeline of future investment opportunities continues to strengthen. In recent months, we signed power purchase agreements that will underpin nearly 400 megawatts of solar projects. Spanning across South Dakota, Illinois and Kentucky, these projects will commence operations between 2021 and 2023 and we expect further announcements like these in the months ahead. I'll now return to our clean energy ambition, which sits at the heart of our vision for National Grid. Whilst, like all companies, we're working through the impacts of COVID. We need to ensure we keep one eye on the future, which is why today we're strengthening the commitment we made in November to reach net zero for our own emissions by 2050, by setting ourselves a more ambitious interim target. That target is to achieve 80% carbon reduction on our 1990 baseline by 2030, a 90% reduction by 2040. In the UK in our RIIO-T2 business plans, we're committed to replace over 50% of our internal fleet with alternative fuel vehicles by 2026. And we're continuing to lead in developing alternatives, the insulating gas, SS6, so that from 2026, we'll no longer install any new equipment that uses this greenhouse gas. And in the US, we've also made commitments to decarbonise our internal fleet and we continue to reduce emissions or replacing leak from pipes. I'm also pleased to announce that we'll be hosting an Investor Event in October on environmental, social and governance objectives. The event will take place on the afternoon of the 5th of October in London, most likely by video conference which will enable those in the US to attend at the same time. The event will allow us to talk in more detail about how we will achieve our own targets, but also perhaps most importantly, how we're playing a key role in enabling the wide transition to a low carbon future. To give you just two examples. On power in the UK, we're working to enable government's target of 40 gigawatts of offshore wind by 2030. We recently took part in BSIS first coordination stakeholder meeting, looking at the potential East Coast connections needed to unlock the increased offshore capacity. Given our capabilities and understanding complex transmission networks both onshore and offshore, we believe we're well-placed to be part of this infrastructure buildout. And our engineers are working hard and developing options and proposals. And on transport in the US, we're working across all our jurisdictions to deliver a number of initiatives around EVs. These will include customised support for fleet operator’s, educational programs to provide customers with information to alleviate their concerns, as well as a number of pilot projects, such as municipal partnerships to deploy electric school buses. We'll be following up from these initiatives with more substantive filings across all our jurisdictions. For example next year, we proposed comprehensive filings in New York and Massachusetts to include funding for over 30,000 new charging ports, as well as targeted residential fleet and transit programs. These are just two examples of the many ways that we're working to drive forward the energy transition. And I look forward to sharing our progress with you in more detail in October. So in summary, National Grid had a strong year and I'm pleased with the progress that we've made across all of our businesses. We've managed the challenges that the COVID has brought and helped our most vulnerable customers whilst maintaining network reliability. We’ll see higher cost in the near term due to COVID. But given our regulatory mechanisms, we currently don't expect to see significant economic impact in the longer term. In the coming year, we'll continue to focus on our up and coming regulatory negotiations in both the US and the UK and our interconnector delivery in National Grid Ventures, whilst looking to advance the energy transition. We expect another strong year of capital deployment, investing around £5 billion in critical infrastructure, which will help to continue to grow our asset base within our 5% to 7% target range. I believe our disciplined approach, coupled with our focus on delivering efficiently for our customers will enable us to continue to create long term value for our shareholders. So thank you for listening ladies and gentlemen. Andy and I will be happy to take any questions you may have.

[Operator Instructions] The first question comes from Martin Young from Investec. Please go ahead, Martin. Your line is open.

Thank you and good morning to everybody. Just a few quick questions. Hopefully and the first one relates to the ESO, obviously they've done an absolutely fantastic job adjusting to the current demand and supply balance that we have in the country at the moment. That's got a considerably higher proportion of non-programmable renewables in the mix. And you could argue that we are currently in a sort of generation mix situation that we didn't expect for a number of years. Now given what you've learned from that, do you think the ESO should be more vociferous [ph] around what the longer term generation mix in this country should be. And if so, should we be thinking about moving away from new nuclear builds and making sure that we had more responsive generation that can provide flexibility and inertia [ph] services in that mix? The second question relates to the £1 billion cash flow impact from COVID-19. Obviously, we've got the £400 million underlying operating income capacity – that you've talked about. I guess there's probably about £100 million or so on volume timing differences in the UK. Is the balance coming from the possibility of deferring to new ops and the sewer [ph] ops charges beyond the year end? And then my third question, you've alluded to the fact that there's a regulatory precedent in terms of recovering these costs. That's a lot different from actually getting it over the line. What's your sort of best estimate on recovery in the US of the cost and revenue impact that you are undoubtedly going to experience in FY ’21? Thank you.

Okay. Thank you, Martin. Why don't I take the first, I'll ask Andy to do the second, and then I'll do the third. So in terms of the Electricity System Operator, I mean, you're absolutely right, it's been a unique set of circumstances this summer. We've seen demand levels of 17% to 20% below what you'd typically expect during the summer. And as a result of that, the system operators had to take significant action to be able to balance the network. I have to say, we're incredibly proud of the way that they've responded to that. They've developed new tools, which you would have seen, including a contract with sizeable d [ph] but also developed new contracts for downward flexibility with about 3.5 gigawatts of providers who typically wouldn't be providing those services, the Electricity System Operator. So in terms of your forward looking part of the question, you would have seen hopefully recently the system operators set out an ambition to be able to operate the system on the basis of zero carbon generation by 2025. So we've seen some of the challenges that will give rise to during this COVID crisis, but actually we have a very clear plan in place to be able to be in a position to do that by 2025. So ultimately, we feel very comfortable that we can develop those two. Whatever the makeup is, I think fundamentally there are capacity auctions that run on a regular basis that are facilitated by the governments and who bids into those capacity auctions is obviously a market for the market. From our perspective, we need to ensure that we have the tools to be able to balance the system you know, minute-by-minute, second-by-second and we're comfortable we have them today and we're comfortable we can develop them going forward for 2025. I’ll ask Andy just to pick up on the second question around the cash inflection.

Thanks, John. So Martin, as you said at the start, so if you’ll stand back a moment. So within the 400, you've got the three broad buckets in the US, that I described in my presentation and obviously we do see a smaller impact in the UK within that as well. So that is then part of as we build up towards the £1 billion and you know, being clear we've guided up to a £1 billion. And I think that reflects that there is some uncertainty, ultimately in what makeup of that. I think you touched on some of the key elements, so yes. So we see demand impacts on both sides of the Atlantic. So cook [ph] flowing through our normal timing mechanisms. As you know, if we under collect, allowed revenues in any period that feeds straight through into the normal mechanisms and gets collected again 1 to 2 years out. There's also elements of while we've recorded the bad debt expense within the 400, as the underlying cash impacts and working capital impacts of the delays in collecting those US receivables and estimating what will still be on the balance sheet as at 31st of March ‘21. So there's a bigger cash impact of the £1 billion, even though the bad debt impact is included within the 400. And then finally, as you said, there remains some uncertainty about the final sort of industry support schemes that you referenced in the UK, around both network charges to also the balancing costs as well, where we're very much still waiting for Ofgem's and final conclusion on that consultation. So those are absolutely the elements that build up towards the billing.

And to your final question, Martin. You know, historically there have been circumstances in the past where there have been issues around higher bad debts against the allowances that have been allowed through rate filings and other costs as well. And typically there are processes in place for either recovering those costs directly or recovering them through our rate filings. So each of the states in the last few weeks has already raised in order to understand what those costs are associated with COVID and that will be an ongoing discussion about how exactly they will be recovered going forward. Some of them will be through rate filings and the timing of that will then be influenced by when we're due to do another rate filing and the recovery of those costs will also be influenced by the duration of any rate agreement that we have with each of the individual states. But there is plenty of precedent and mechanisms in place which give us the confidence to articulate why we think it's a short term impact and not a long term economic impact to National Grid.

Okay.

Should we – I’ve just got a list in front of me. Should we take Rob from Morgan Stanley next.

Rob. Your line is open. Please go ahead.

Thank you. Thank you, gentlemen. I think Martin beat me to the first two questions. So I will ask a couple of different ones. The first one is, do you have any views on the future US storm risk. Do you see it increasing and therefore do you expect there will be a change in mechanisms for recovery as this becomes sort of more regular and more dramatic? A second question if I may, I was just on the scrip buyback. I noticed, obviously, you mentioned that you won't be buying back any scrip dilution this year. Can we assume that that will resume the year after or is this sort of ongoing situation that you won't be buying back? Thank you very much.

Thanks, Rob. Let me do the first, and I’ll ask Andy do the second. So in terms of storm cost recovery, I mean, we have different mechanisms in different states, quite a few of our regulatory rate cases allow for the recovery of some costs on an ongoing basis. And then quiet often, there's a logging up mechanism for any excess cost. It is something that we discuss with the regulators on a regular basis when we do rate filings. And I do anticipate it will form part of that discussion going forward to make sure we've got the right allowances upfront, but then we've got the right recovery mechanisms going forward. So as we see more storms over recent years, it is part of the discussion that we have with each of our regulators. But again, the economics of it are pretty straightforward as we either get upfront recovery or we're able to log it up and then get recovery as part of the future rate filing. Andy?

Yeah. And Rob, just on a scrip point, you may remember that a year ago we guided to not looking to buy back the scrip, so FY ’20 and FY ’21, so we reaffirm that message for the remainder FY ‘21. We haven't guided beyond that and you know, we'll continue to look at that as part of our normal annual review and that will depend on as we've always said you know, the levels of growth, the levels of performance across the business, and we'll guide further at that point.

Marvellous. Thank you very much. And if I can just ask one quick extra one just on RAV growth, obviously, noting the step down year-over-year, but still very impressive rate. Could you just maybe talk about the visibility on the US side to this RAV growth, is there - sort of very simply is it a capital constraint issue or an opportunity constraint? It seems like it's a high quality problem to have, but just seeing sort of how long this RAV growth in the US you think could continue? Thank you.

Yeah. Thanks, Rob. I mean, over the last few years what we've been focused on doing is making sure that we've got rate cases in place that support the capital investment. The three drivers of the capital investment fundamentally are on the electricity side, it is all around resilience and asset health. On the gas side, it's predominantly around safety with our leak prone pipe program. And then, of course, there is incremental investment needed as we move into the energy transition with decarbonisation and supporting that. Those fundamentalists aren't changing. And therefore it is driving the CapEx that you've seen over the last few years and the rate base growth with it. We're expecting in the coming year to see similar levels of CapEx that we've seen this year in the US, it might be slightly off, and that's because we are seeing some impact on COVID, particularly with the interface with our customers where you can't get access obviously with social separation. So - but fundamentally we're expecting, I think we're at £3.2 billion this year for CapEx for the US. It is going to be a similar order magnitude next year. But the fundamentals aren’t [ph] changing, so we continue to expect to see strong growth going forward.

Excellent. Thank you. Well, I’ll turn it over.

Okay, thank you. Should we - I see John Musk [RBC Capital Markets] has got a question. So we go to John.

John, your line is open.

Sorry. Thank you, everyone. Probably three questions from me as well. Actually, I just want to come back to the £400 million and the timing of the recovery, probably an impossible question. But how quickly would you expect to see that coming back. Are we talking one, two, three, four years roughly what sort of timeframe should we think about before those three buckets? Secondly, on the balance sheet with the guidance on the £31.5 billion, with the lower earnings and lower cash flow, as you indicated that's going to put further pressure on the credit metrics. I haven't done the sums, but I assume you may well drop below the 9% threshold on the RCF to net debt. How much of a worry is that for you, particularly as we're coming into a RIIO-2 reset, which you could also see a further fall in cash flows? And then finally slightly separate. On the legacy gas meters, can you just remind me how many meters you still manage there? And how long you expect that tail to continue to be delivering a sizable EBIT number?

Okay. Thanks, John. I'll do the first and the third, and then I'll hand over to Andy to do the second on the balance sheet. So in terms of the timing recovery, I think it's fair to say, it's a difficult question to answer at this point because it will be unique to each state and potentially unique to what the timing of the rate filings are. So what we have seen as I said is, we've seen each of our states put an order out to make sure that they can capture what those costs are. So that is the start of the dialogue that we will have with the regulators. But then ultimately it could be a separate mechanism for recovery or it could be part of the rate filings. So it is likely to be different in each state and it may be over a year or two or a bit longer if we've got a long outstanding rate filing rate case. So it is a difficult one to answer. As I said, what we do have is those precedents and there's mechanisms to be able to have those discussions with the regulator. In terms of the legacy gas meters, we have 8.9 million meters at the current time at the end of the last fiscal year. In terms of the rollout, as you are aware, the most recent announcements it terms of the rollout of smart meters was that 85% of all customers should have a smart meter by 2024. So we're expecting that the sort of displacement of our meters will be over that time period, which is a much longer period than, of course, originally anticipated when I think the original target was 2020. Andy?

Yeah, thanks. So on the net debt credit metrics question, John. So as you said, guided to 31.5 that includes, you know, obviously the £1 billion that we refer to in the previous question. And yes, in the coming year, given the sort of reduced underlying profits and higher cash short term impact, we would expect reported metrics still to fall below threshold. I think the critical thing though is as always and we're in regular dialogue with all three agencies. We would expect the agencies to take a longer term view, as they usually do on issues like this and understand the route to recovery as John has just mentioned, rather than sort of taken a one-off view of any particular point in time. I think I'd also say, just in terms of the reported metrics, we report those all in, so the 9.2 and 12.3 if you add back some of the adverse timing that we've seen in some of the other exceptionals and the bad debt sort of RCF is right in the 10.5 range. So I think as we go into the COVID situation, we're in a robust place too.

Thanks, John.

Okay. Thank you.

I could see that Dominic [Nash] has got a question from Barclays.

Yeah, good morning. Two questions for me please. First one ROEs Oro is in the US and I think going to page 58 of your presentation, you come up with a US GAAP net income, which is up 18% year-on-year, which is obviously impressive. But what the expectations have you got for the growth or north of that next year as you start to move into the COVID world, and I presume that the £400 million COVID operating profit is not going to be in that. And where do you think the ROE of – we should sort of like model that one in our numbers going forward? And secondly, on your energy strategy, you talk about the energy transition, story of power, heat and transport. But what are your thoughts on your gas business overall on, what the threat, opportunities we see? Is it going to be a move to hydrogen or we're going to move more electrification or biogas or even CCS? Where do you see particular Gas Transmission opportunities there in the UK please?

Yeah. So if I start with the second, then I’ll ask Andy to talk about the ROEs. So I think in terms of gas, I think everybody recognizes is that decarbonisation of gas and heat in particular is probably the most challenging element of the net zero targets by 2050. Clearly, if you look at the UK, then over 80% of all heat comes from natural gas. And if you look at what the Committee on Climate Change that recently - they're still expecting around 68% [ph] of the current gas volumes to persist even in the net zero world, with an expectation probably less gas going into buildings, but more being used for things like hydrogen. I think at this point Dominic, we're of the view that, the solution to decarbonisation of gas is likely to be mosaic solutions. So there is the potential for increased bio gas that could potentially provide up to 10% or 15% of the UK needs for example. But clearly things like hydrogen have a role to play, as does CCUS. So you would have seen that National Grid is partnering with Drax and Equinor, looking at the development of a zero carbon cluster in the Humber side, which is effectively taking natural gas, taking the CO2 out of it, using it for industry and potentially generation and then taking that carbon emissions back into old carbons in the North Sea. And similarly, we are exploring working with the industry, a number of projects looking at the role that a gas transmission network could use, could be with hydrogen. So we're looking at options with 20% blending, 40% and up to 100% on what impact that will have on the network. So we currently developing a piece of work to use some transmission pipeline to test that to see what the impact would be. And then ultimately to link that to some of the work that's going on in the northwest with the distribution gas companies to test out hydrogen from beach to meter. So that's work that's going to go on over the next few years, you know, ultimately to try and develop what that road map will look like. But we remain very positive. The gas has got a really important role to play in the transition to net zero over the next few years. Andy?

Yeah. So Dominic, on US ROEs, as you know, this year 9.3%, 99% of allowed. And if you relate that through to the 18% increase in US net income you referenced you know, that that's really driven by the 12% increase in rate base and the 50 basis points improvement in achieved return. So the combination of those two gets you know to around to the 18% increase in US net income or US-GAAP net income. I think as I look forward, as you say, we haven't guided specifically. We've indicated and as John mentioned, just in the answer to a couple of previous questions, as we work through the recovery mechanisms and the timing of those, obviously, that will feed through. And also, as you know, we're particularly in New York with the downstate rate cases still under discussion, obviously, that will be a driver of the outturn in terms of ROE as well. I think what I would say though is having delivered 99% of the allowed, this year we see no reason why we shouldn't be able to deliver a strong performance on an underlying basis, against whatever that allow return is next year.

Thanks, Dominic. Deepa Venkateswaran [Sanford], I can see that Deepa has got a question.

Hi. Thank you. I have three questions. First, starting with what are your expectations from Ofgem for the July 9 draft determinations? I think in the past you've said that the 4.3% cost of equity was low and then you have proposed 6.5% in your business plan. So just your thoughts, particularly given the acceleration of investment needed for net zero. And then also the impact of COVID and the uncertainty that's created in the capital markets? So that's the first question. I think second one, just on the balance sheet. Just wanted to check, if things got tight, would you be open to, for instance, looking at divestments some of your interconnectors? I mean that buildout program is now quite advanced. So would you be looking - I mean, if it came to it would you be open to looking at some changes in the portfolio, maybe minority stakes, et cetera, if it came to it? And lastly, just a clarification to your previous answer to Dominic’s question on the US-GAAP numbers the - could you clarify whether you've included the bad debt adjustment in that or is that pre-bad debt that you've booked on those US-GAAP earnings? Thank you.

Okay, let me take the first and then I’ll ask Andy to take us through the second, third. So in terms of expectations for the draft determination, I mean, we remain hopeful that Ofgem will recognize some the arguments that we've made Deepa in terms of the overall financial package. As you know, in our draft business plans we set out a proposal, including a return on equity of 6.5%. OFGEM in their initial, was at 4.3% to 4.8%. So we continue the dialogue with Ofgem on that and we're hopeful that we will see some progress to get to what we believe is a reasonable return. As I said several times, as you know, fundamentally its the overall financial package that’s going to be really important. So returns clearly are important, but we also want to see what the overall package looks like, including what incentives there are going to be to innovate and to drive efficiency and how that's going to be shared between customers and ourselves going forward. I actually think that you know, the implications of COVID and the impact it's having on the economy, aligned to the fact that there is a real opportunity I think to use the green agenda and green investment to really stimulate the economy. So that is something that I hope often will be bearing in mind as they think about their draft determination. National Grid did a report earlier in the year you may have seen it that showed that investment to meet net zero could potentially create 400,000 jobs in the UK and 100,000 in the next decade. So I think there is a real opportunity to think about post-COVID, how you stimulate the economy and what does that mean for investment towards net zero. And I would be hopeful that Ofgem would be thinking about that as part of the draft determination. Clearly once we get through that there's still a fair way to go. Obviously, this is important milestones, including the water companies have got the initial outcome from the CMA in September. I'm sure Ofgem will be mindful of that as well. And then ultimately the final decision in December. But I think you know, we're hopeful that some of the opportunities that I think the green agenda presents will be reflected in the draft determination. Andy?

Thanks. So Deepa on - two points. I mean, in terms of the balance sheet, I think as alluded to in one of the earlier questions, as we look forward, you know, very much seeing COVID as a timing issue with the - sort of the regulatory recovery routes that we have. We don't see it as a significant sort of economic impact. And I think then you know, we will always therefore focus on sort of the breadth of our regulatory arrangements, the diversification of those, the performance that would enable to drive against those, which we've done consistently. And as you probably heard us say, as we look at the RIIO-2 outcome, in particular, looking for the broader financial package and not just the headline return that’s been reference. And clearly, as we've said consistently you know, we always look at our portfolio. We also look at the relative contribution of all elements of the portfolio, we'll continue to do that. But you know, we don't have anything in mind. The third point, sorry on the bad debts. So the 9.3 that we're reporting that does assume recovery ultimately of the bad debt charge, yes.

Okay. So it excludes basically the bad debt both in the US-GAAP earnings and in the 9.3?

Well, it assumes recovery of it, yes.

Okay.

Thanks, Deepa. I could see Fraser [McLaren] from Bank of America is on. So, Fraser.

Three questions from me as well please. So back in April I recall you were worried about not being able to recover additional costs and lost revenues in the US and that I think was part of your remarks around dividend. What has changed to make you feel happier about recovery now? Number two is on inflation. And do you see pressure on the UK business in the event of a period of low inflation. And do you plan to move the asset base growth targets and the actual dividend benchmarks to CPIH at some point? And then lastly on into connectors and how dependent is that £250 million EBITDA on the outcome of the UKs deliberations on the carbon price, particularly the £18 a tonne tax? Thanks.

So I'll let Andy do the first two and then I’ll do the interconnectors. Andy?

So Fraser, I think you're referring to on the first one, back to our pre-close statement where you know, understandably right at the end of March, beginning of April, we - I think we said actually at the time that it was appropriate the Board will take into account everything included in its normal considerations of business performance, regulatory arrangements, but particularly the impact of COVID. And at that point you know, a lot of uncertainty around the impacts of COVID. And as you'll have seen this morning, I think we've got a lot more clarity where and how that's impacting us. And as John said you know, the regulatory arrangements that we expect to be able to pursue recovery through. So that's why we're able to give the messages we have this morning. In terms of inflation, just a quick reminder, so the 5 to 7 which has been our medium term growth guidance, that's always assuming 3% indexation or RPI in the UK. So obviously, if RPI does move around, it will move the actual growth rate, but that 5 to 7 it is driven by that long term assumption. And I think in terms of you know, the broader risks around inflation, yes, of course, with still half our group linked to RPI, potentially CPI, obviously under T2. But remember that today we have around a quarter of our debt book which is index linked providing you know, still a very good natural hedge for us. So yeah, like every utility you know, many years of sustained levels of negative inflation would be something we would look carefully at. But at the moment we don't see it as a significant risk in the short term.

Yeah, in terms of interconnector. I mean, we've taken a central view in terms of the 250 EBITDA. So both in terms of expectations in terms of carbon pricing and how that might evolve in whether we have a hard exit from Brexit or not, but also how we see the market developing both in the UK and in Mainland Europe and what we see as the potential sort of view on the arbitrage between the two markets. So its a central view that we're reasonably comfortable with. Okay. Thanks, Fraser. I'm going to move on to a quite a few questions to still get through. Olivier.

Good morning. This is Olivier from Exane. Thank you for taking our questions this morning. I just have three also follow up questions, if I may. Can you hear me?

Yes.

Okay, perfect. So one is the follow up question on hydrogen actually, you already touched on that one. It seems that you are working at a fairly early stage. Now I'm thinking of what the possibility might be for hydrogen for your business. But we are clearly seeing some political momentum rising quite a lot at the European level and potentially also at the UK level. On the topic of hydrogen, I was just wondering if you could already give us a feel in terms of how hydrogen - your gas network is for the UK and maybe also for the US. Should the ambition be over the long run to switch fully to 100% hydrogen networks? Would you require another replacement or would your pipeline be officially able to capture that? The second one is on the discussions around KEDLY and KEDNI rate cases. In New York, I think in a press release you mentioned that potentially this may be actually a more legal and courts route. I just wonder if you would give us a bit more color on effectively I guess, the more discussion between you and local authorities and to what extent you think you will get an agreement this year or is it has to be through the courts. Do you have any precedents to see how long this might actually take before if an outcome might be reached? And then the final question is on the on the tax rate, so guided 22% tax rate for the coming year. In the last couple of years we were more at around 20%. So I wonder if you could give us an indication on what you see the more medium term tax rate exactly to be for your company? Thank you.

Yes. So thank you. I'll take the first two and then I'll Andy to talk about the tax rate. So in terms of hydrogen, I mean there's a huge amount of work going on across the industry, much of it coordinated by either the states in the US or by the government in the UK to make sure that the industry is exploring the potential for hydrogen in a sort of coordinated way. I mean, at this point it is unclear what exactly will be required to the existing network in order to modify it or whether it needs to be modified to tools be able to support hydrogen. That's exactly the pilot projects that are being developed and are being run at the moment, it is to really understand what it would take to either increase the amount of hydrogen that sits within a blended solution in the network or actually potentially moving to clusters of full hydrogen networks. So that's the work that's going to go on over the next few years, both in the work we're doing in the US and in the UK to really understand what that road map will look like and what the investment around it will be. In terms of KEDLY and KEDNI. So we - generally in New York there are two mechanisms by which you agree a rate filing. One is through litigation where you ultimately end up with a one year rate case and the other is through settlement and through settlement there is always the opportunity to do a multi-year settlement. I was quite pleased actually the PSC reinitiated discussions with National Grid beginning this month to see if we could find a settlement for KEDLY and KEDNI. They've extended the period by which we can have those discussions by 90 days. So we will know the outcome in the next quarter. In the event that you can't agree a settlement then the natural default is to litigate for one year. In the event that we do that, we would probably put another filing in relatively quickly to cover the fact that its only a one year rate case, but we remain hopeful that we can find a settlement over the next 90 days.

And just on your third question on the tax rate as you say, 19.9 this year we’re guiding to around 22 next. Over the last couple of years we've had the benefit of some one-offs and some couple of settlements across our jurisdictions. So I think 22 probably reflects a more normal rate based on the profit mix. But we don’t see as US and UK profits vary in the years ahead. They'll be subject to that change as well, but that's the driver for the increase next year.

Should we go to James [Brand] from Deutsche.

Hi. I have two questions. First is on the dividend. And you obviously come out with quite clear reiteration of your dividend policy and that - although, it's reviewed from time to time. This is the policy, you think, is sustainable over the medium term. Should we judge from that, that you see the dividend sustainable through the RIIO-2 regulatory in the UK under obviously not necessarily all scenarios, but under most scenarios? Question number one. And then second question is just to get as a two parter, but just to check on a couple of areas of recovery, you booked about £400 million increase in environmental provisions, including a new provision related to gas legacy, kind of gas plant facilities. Can I just check whether you think that will be recoverable under - not sure with the UK or the US, I guess is probably the UK, whether that's recoverable or not? And secondly, you've on Slide 18 highlighted that you've moved to US IT investments into the regulated segment, which I think you said is £90 million last year. Can I check whether that's recoverable? Thanks.

Okay. Starting with the dividend policy, so yesterday we reaffirmed the dividend - that the dividend policy has been in place since 2013, which is to - we aim to increase the dividend by at least UK inflation foreseeable future and quite rightly James as you say said, that’s something as you'd expect the board reviews on a regular basis taking into account business performance, as well as regulatory outcomes. So we understand the importance of sustainability of dividend to our shareholders and that dividend policy of course is underpinned by sensible regulatory outcomes. Today what we talked about is COVID, which as you've seen has got an impact in the short term, but actually doesn't change the fundamental economics of the business in the medium. And whilst we're still in discussions with regards to RIIO-T2, so we're still hopeful that we can get to a sensible regulatory outcome on that. So that's why the board has reaffirmed the policy today. In terms of the environmental charge that you saw, it predominantly relates to the US under canal called Gowanus Canal in Brooklyn. This is the cost of a cleanup operation on that canal which is – it goes back actually over 100 years. But we are one of several companies who are the legacy companies that are responsible for that cleanup operation. Those costs are typically recovered as part of our rate filings with the PSC in New York. They have been done historically and our expectation is they will continue to be recovered. And similarly with regards to IT investment, IT investment is no different to any other investment that we make on the network and therefore it is part of our rate filings and is recovered through our rate cases.

Great. Thank you.

Thanks, James. Should I go to Mark. Mark Freshney, Credit Suisse.

Hi. Hello, can you hear me?

Yeah, Mark.

Perfect. So I have three questions. Firstly, a question for Andy on taking off some of the US dollar swaps. I think the strategy a couple of years ago under your previous finance director was to only take the goodwill off. Now if you – I think you've mentioned you've only got the US 70% hedged, so I was just wondering what's behind that and basically closing out your…

Mark, we lost you.

My second question was on EV charging [ph] and the policy is that you've got there or the [Technical Difficulty] charges by the motorway. And just thirdly, can we expect you to reaffirm that dividend policy will lay out in your dividend policy post RIIO-2 outcome, which would hopefully come next year?

Okay. So let me deal with the second and third. But I’ll ask Andy to do with the dollar swap. You broke up slightly Mark. But I think the question was around EV charging and our proposals that we've been discussing with industry and government around an ultrafast charging network. So I think at the highest level, we were pleased to see the announcement of the budget that the government has set aside £500 million to actually start to build out the ultrafast charging network. At the current time, the task was put to OLEV to work out how exactly that would be used. My understanding is their aspiration is to have around 650 kilowatt plus charges at each of the strategic service stations by 2025, increasing to a total I think of around 6000 of plus charging by 2035. So at the moment, we're working with OLEV, with others in the industry about exactly how that £500 million will be used to support the connections that are going to be needed and the connection infrastructure investments going to be needed to put the capacity into a strategic service stations. In terms of dividend policy, as I said Mark, dividend policy remains the same. It remains the same as it's been since 2013. And as I said earlier, it is underpinned by sensible regulatory outcomes. And the board reviews it on a regular basis taking into account things like business performance and regulatory developments. But as of today, but the dividend policy remains exactly the same.

And Mark, on the US hedge question, it's actually something we've looked at each year and we do that periodically anyway. So we've probably been moving it quite readily for the last few years. But the shift this year was - again we looked at it against this impact on all our metrics, not just from a total asset perspective, but impact on earnings, but particularly impacts on cash and credit as part of that and the view was that bringing it down more closely matched dollar cash flows and provides a closer hedge for us in terms of the impact on credit metrics in particular. And I think you'll see that if you look at our overall FX impact this year with the dollar rate moving 130 to around 124 at close, the net impact on our earnings was about $11 million – sorry, £11 million, I am sorry.

Thanks, Mark. I can see Verity [Mitchell] from HSBC has got a question.

Hey, everybody. I just got a couple of questions. I think first one is on the pension with deficit which has gone up quite a bit in the current year, which is a slightly different story from say some UK water companies that said they benefited from very favourable discount rates on the 31st of March. And perhaps if you could remind us when your next triennial [ph] valuation is? And then just secondly a question on CWIP, actually, you've had a big rate where 1% rate base increased because the transfer of assets. Can you just talk us through how that profile continues for the next couple of years in terms of regulation in the US? Thanks.

Thanks, Verity. So Verity yes, I am going to take pensions first, so it's very much a UK, US split this time, so as you compare us to other UK utilities and on our UK schemes we have actually seen a small improvement. It's not as large as some, as you may remember earlier in the year we executed the two buy-ins, partial buy-ins for our gas scheme, which has held back the improvement, but otherwise we have actually seen a slightly larger pension asset under IFRS. The downside is in the US where because of a big drop in the nominal discount rate we've increased the US pension and healthcare liability by about a billion year on year. So that's why we're seeing a net worsening across the group. I think the important thing is those are IFRS numbers, but as always we look at the underlying fundamental valuations. The triennial was as of March 2019. We're just in the final stages of that, but we expect that to continue to show sort of very, very good levels of funding for this UK schemes. And apologies, the second question? Sorry, CWIP, yes. So you've seen this morning, this year, we've seen $380 million move from CWIP into rate base. There's a variety of projects that go through CWIP. And it's hard to forecast precisely because of the different longevities and different scales. I suspect next year we wouldn't expect to see such a large movement from CWIP wet through to rate base. But that's encompassed in our sort of overall guidance - the overall asset growth will be backward in the 5% to 7% range this year.

Okay.

Thanks, Verity. Gus. I can see you've got a question.

John, Andy, great many thanks. One question if I may and that is with regards to the potential impact of COIVD on the current year. And my question really revolves around the potential of this [Technical Difficulty]

… is common at the headline is that we are seeing low demands in the US, we are seeing lower demand in the UK and that does impact on the headline figure and on the cash implications. So in the UK we would expect to see essentially a lower revenue recovery this year because the demands are lower than they typically would expect when we set the tariffs.

Great. Great many, thanks.

Thanks, Gus. We got a couple more questions to go and we've got a couple more minutes. So Sam from UBS.

Hi. Good morning, John, Andy and everyone. Thank you for the presentation today and all your answers so far. Yes, you said, then, I'm kind of way down the betting order today. And I think a lot of the companies that we want to think about have been touched on already. But do you mind if I try not here to the high level question that may give you a chance to bring a few of these different - different points together. And I think what I want to ask is, how do we how do we square this exciting, I mean, confident, very positive view of the business that you gave and you talked about the potential contribution to the energy transition and so on. What's the outlook for earnings, which if you look at consensus before today is already sort of flattish for the next few years and probably maybe now that is down slightly after your guidance today. And I think if I ask I guess, that sort of break it into two parts. I think the first part is, there anything you could do to sort of cheer up the earnings outlook this year and next, so we're basically stuck with that view for two years. I mean, I know we've got the mini budget from the Chancellor in July and that includes a massive input plan and that the US input plan is in the pipe and I'm certainly very interested in your thoughts on both of those, but I assume that they wouldn't really impact earnings or CapEx you know, straight away or in the next couple of years. So then my for the second part of the question it's kind of like a portfolio and I know Deepa asked the question about disposals early. And I think Andy you said you don't have anything in mind right now. But that SSE yesterday announced a new round of disposal plans, including power network and I think they basically said they wouldn't mind running a payout ratio that is more than 100% percent, they wouldn't mind taking a credit downgrade and even selling stakes in those [indiscernible] as long as they keep paying out and growing the dividend. So I guess I guess some of those thoughts must have been crossing your minds as well and you've proposed gas distribution in the past and you still got £6billion of RAV in the Gas Transmission business. And I'm just interested in generally you think disposals is going to be a feature of things going forward. Do you think its good time for disposals. How would you - how would you feel about that kind of strategy where you're basically disposing stakes and paying a dividend that's at the proceeds. Those were my three part very, very long question, really interested if you could tie that together for us? Thank you.

Thanks, Sam. I'll try and give you [indiscernible] because they are quite big questions. I'll ask Andy to pick up on the second. In terms of the first, I do think we are in an exciting time for National Grid and in the energy sector. So in the UK you would have seen that we submitted our draft business plans that sets out the investment that we believe is necessary over the next five years. And in the US we've continued to submit rate filings on a regular drumbeat to support the capital investment that's needed. Ultimately those investments through those regulatory mechanisms will drive earnings and we have seen that in our U.S. business most recently over the last few years, as we've invested more. You would have seen earnings on a GAAP basis increase in line with our asset growth. In the short term as we set out today, we are expecting a short term impact, as a result of COVID, but as we've also set up we don't see that having a long term economic impact on the business. So it is an opportunity for us in terms of both maintaining the networks that we have in terms of assets health and resilience, but also in involving ourselves in the opportunities for the green agenda and decarbonisation. And ultimately as long as you get the regulatory mechanisms right, the earnings will flow through from those investments. In terms of the overall portfolio and the sort of credit and so on. Andy?

Yeah. So Sam, thanks. Thanks for the question. I guess firstly I'm not going to comment on what SSE said or why they may have said it. But I will give you our view and how I think about the balance sheet and credit in the dividend. And I think as you can said consistently why the 5% to 7% is a growth rate that we believe sits well with our balance sheet strength, the A minus credit rating across the group and also we are continuing to underpin the progressive dividend policy, at least in line with UK RPI. So I think your question sort of implies why we don't we need to go and do other things to do that and at the moment we be very much viewing the impact of COVID as we said today, as a short term timing challenge for us. We're not having significant economic impact in the medium to long term as John has described a few times. So you know we're comfortable and uncomfortable with where the balance sheet is, where the ratings are the medium term robustness of the group.

Thanks, Sam. I've got two quick questions left in about two minutes to go. So why don’t we take Ahmed [Farman] from Jefferies.

Hi and thank you. Thanks for taking my question and thanks for the presentation. Just a few from my side, and mainly follow up questions. I was just hoping if you could provide us a little bit of context for bad debt if possible both in sort of in terms of absolute numbers and maybe percentage of revenues, so what's been the typical historical run rate. What have you seen in the fiscal year that you just reported? And then what are you sort of - as you've put that into context or what's assumed in the £400 million. And then I guess second question is I mean, it does seem obvious you sort of quite confident about this recovering most or all of the parts of the £400 million impact that you've highlighted. Could you maybe provide us some context as to how long such effects or recovery period was after the sort of financial crisis. I know it's very different, but I thought maybe that sort of context could be helpful for us. And just my final question is the difference between the £400 million and £1 billion, I think you mentioned a couple of buckets there. I was hoping if you could sort of give us more granularity around how significant each of those effects, I think you mentioned timing differences related to volume and then differences between bill deferrals and bad debts? So thank you.

I will go through the first two and I’ll hand to Andy to the last one. So in terms of bad debt, I mean typically I think across our business, but that's we're running about 1% to 1.5% of our total revenues, our total revenues in the U.S. probably about $13 billion. So the additional provision that we took in ‘19/‘20 of 117 million is nearly or probably doubling of what that is. And then as we - as you hear today with regard to the 400 million, we'd expect to be taking another charge of similar magnitude of what we took if not slightly higher than what we took at the end of ‘19/ ‘20, so hopefully that gives you a sense of the impact that we're considering as part of bad debts relative to the sort of normal run rate. In terms of recovery, as I said earlier on I mean, it is very difficult to determine because it is directly influenced by how the states want to approach it, where they wanted separate order, where they want to do the rate filings and where you are in your rate defining cycle if it's chosen to go down the rate filing. So it's difficult to say. But typically would be over a 2 or 3 years I guess, if I look back historically, but it will depend on when you're doing your rate filings and how the state wants to approach it. And with regards to the third question Andy?

Yes. So I'm probably going to refer some of the answers I gave earlier on this point which is if you understand the buckets within the 400 million, which is what will flow through underlying earnings, you've really got that three extra areas which will be cash and potentially headline earnings because of the mechanisms we have from a timing perspective. So one is demand, where we expect lower demand on both sides of the Atlantic to flow through some of our collections and where we collect less than our allowed revenue in a year, that goes through our headline earnings and we automatically get to recover that either in the following year or the subsequent year to that. And it's very hard to be precise about the scale of these buckets because demand is clearly something that is very hard to forecast, particularly when those peaks and troughs are. The second element of the billion is the U.S. customer collections. So the amount that ultimately we make an assessment of what will finally be uncollectible which feeds into the bad debts. But assuming that as of 31st of March next year we will still have higher levels of receivables, doesn't necessarily mean that all those receivables won't be ultimately collectible and that's how we make our bad debt assessment. And the third one is as we've mentioned I think right at the start and as we work with the industry particularly in the UK around extending credit and whether some of that may ultimately fall outside of collection this year as well. Once those schemes are fully in place there is again very hard to be specific but those are the three broad buckets.

Last but no means least. Thank you for your patience Elchin from Bloomberg. We take the last question.

Hello, everyone. Yeah, I have a couple of questions. The first one is on demand. I know it's very - a lot of uncertainty and hard to predict. But how long do you reckon it's going to take for the demand to recover to pre-COVID levels both in Britain and in the U.S. And the second question is on cost recovery. Again very hard to predict, but if I had to play a haircut how confident are you getting either not 80% or 90% of the recoverable COVID related costs and bad debt and what not. So that's all for me. Thank you.

Okay I'll take the first and give Andy the second. So in terms of demand and certainly is incredibly difficult question to answer. There are two factors that are really influencing you know, the rate at which we'll see demand recover back to normal levels. One is just the depth of the economic impact that COVID will have and that will in itself vary between states and between the UK and the U.S. I'm sure. And the other is the speed at which each of individual states in the UK lifts restrictions. Those two things directly will impact on the levels of demand that we see on our network. What we have seen in COVID if I use the UK as an example is demand's as low as 17% lower than we would have typically expected during this time of year. I would also say that we are just seeing perhaps the early signs of demand recovering as we're seeing some of the restrictions in terms of movement lifting, it is still very early, but demands are not quite as low as they were in the early days of COVID. So, we are starting to see that recovery, but exactly when it will get back to normal, it's you know it's very difficult to forecast. Andy?

Yeah. And I think as we said a couple times you know, the route to recovery - these extra costs varied and they vary by state in terms of existing mechanisms, future filings and using precedent in terms of other sort of crisis where we've had significant spend. And so you know we're confident as we said several times this morning that we expect to get the vast majority back. But we’re not able at this point to be precise about exactly a percentage of that but we remain confident that it won't have a significant impact on us.

So let me just close with you. Thank you, ladies gentlemen for all your questions. What you hear this morning is the performance in 1920, underlying performance is very strong, there was a small impact of COVID at the back end. The business continues to deliver despite that new challenge. We have - we are seeing a short-term impact as results COVID, but we expect there not to be a significant economic impact on the business longer term. We remain well-placed, continues great long-term value for our shareholders and to meet the needs of our customers. So thank you everybody for joining the call and I hope to see you all very soon in more normal circumstances.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect your lines.