adminNational Grid plc (NYSE:NGG) Q4 2024 Earnings Conference Call May 23, 2024 4:15 AM ET
Company Participants
Nicholas Ashworth – Director, IR
John Pettigrew – CEO
Andy Agg – CFO
Conference Call Participants
Dominic Nash – Barclays
Pavan Mahbubani – JPMorgan
Deepa Venkateswaran – Bernstein
Harry Wyburd – BNP Paribas Exane
Ahmed Farman – Jefferies
Alexander Wheeler – RBC Capital Markets
Rob Pulleyn – Morgan Stanley
Mark Freshney – UBS
Charles Swabey – HSBC
Marcin Wojtal – Bank of America
Ajay Patel – Goldman Sachs
John Pettigrew
Well. Thank you, Nick and good morning, everyone. It’s great to see so many of you here this morning with others joining virtually. Today, we’ve made several important announcements which launched a new phase of growth for National Grid. Alongside strong full-year results, we are also setting out a significant step-up in growth for the new five year financial framework. Around GBP60 billion of capital investment between now and 2029, that’s nearly double over the past five years and driving annual group asset growth of around 10%. And a 6% to 8% EPS CAGR from an FY ’25 baseline. All of which will be supported by a comprehensive financing plan that puts on a range of levers, including a GBP7 billion equity raise.
And as we enter this new phase of growth, we are updating our strategy to make National Grid the preeminent pure-play networks business. So there is quite a bit for Andy and I to cover this morning. And as soon as we’ve done that, of course, we’ll be happy to take your questions. So personally, this is the most exciting period I’ve seen not just in our industry but for National Grid since I started over 33 years ago. Let me just set the context. The energy transition is accelerating at pace. On the supply side, coal’s annual contribution of generation in the UK has reduced from 40% to 1% over the last 10 years with significant reductions also seen in the U.S. Nearly half the electricity used last year in the UK and the US Northeast was from zero carbon sources.
And on the demand side, we’re starting to see increased load due to the acceleration of artificial intelligence and the data centers needed to support it. These mega trends are at the forefront of every politician, regulator and consumers’ mind. They are driving this incredible journey of change that we are only just starting. Governments on both sides of the Atlantic recognize a need to accelerate the transition, and they are acting with greater urgency to incentivize increased levels of renewable generation, evolve regulatory frameworks to unlock the investment needed to transform networks, increase energy security and ultimately reduce consumer bills.
Our pivot towards electricity over the last three years has cemented our position as a major player in the energy transition, and we are ready to take advantage of the significant growth opportunities ahead. Now you will recall, last November, Andy and I talked about three areas where we wanted to see progress and increased clarity before setting out a new functional frame; the scale and the investment ahead of us, the profile of its delivery and the regulatory frameworks that sit around it. And I’m pleased to say, we’ve seen significant progress in each of these areas giving us the confidence today to set out our plans for the next five years.
So starting with the scale of investment. In the UK, as you know, we’ve been awarded 17 major projects as part of Ofgem’s Accelerated Strategic Transmission Investment program, or ASTI with the time scales and delivery now embedded within our license obligations. At half year, we said that this required investment and is expected to be in the mid-to-high teens billions. Last month, the system operator published its Beyond 2030 report, which starts to provide more clarity on projects that will be largely delivered in the 2030s, giving us sufficient confidence on the scope of large-scale transmission investments for the rest of this decade.
Since November, we’ve continued to develop our business plan for RIIO-T3, which has given us further clarity on the levels of investment needed. We’re due to submit the store Ofgem later this year. We also have much better visibility in New York, where we agreed a joint proposal and our new three year rate plan for our KEDLI and KEDNY gas businesses, and will soon be filing for new rates in our Niagara Mohawk business. And in New England, we filed new rates in our electric business in November. And in January, we filed for a further $2 billion of clean energy investment through our Electric Sector Monetization Plan, or ESMP.
So there’s been substantial development since our last update, strengthening our confidence in the levels of CapEx required as we look to the next five years. Turning now to the profile of that investment, where we’ve seen improved transparency both in supply chain capacity and planning. In the UK, we now have better clarity around the time lines on our large projects. We signed GBP1.8 billion in contracts for cable and converter stations for Eastern Green Link 1 in December, as well as the contracts on the GBP4.4 billion Eastern Green Link 2 project in February.
We have also selected seven suppliers as part of our new GBP9 billion enterprise partnership model to enable delivery of onshore projects. We made progress on planning with consent orders approved for four ASTI as projects and several others moving through the wider consultation process as we expected. On the policy front, the updated National Policy Statements have given transmission infrastructure critical national priority status. And the Transmission Acceleration Action Plan aims to significantly shorten the time sales of the planning and delivery of major projects to seven years.
And we’ve seen a similar trend in the US alongside rate filings, we have began awarding and engineering contracts with $2.9 billion Climate Leadership and Community Protection Act, or CLCPA transmission projects. With increased visibility on supply chain and planning, we have more certainty on the scale and timing of spend as we develop our delivery models. And finally, we’ve also seen progress in regulatory frameworks, which are clearly key to how we finance and step up the investment required. In the UK, Ofgem indicated its intent to create an investable proposition for future regulation in its recent sector methodology consultation. We were pleased to see enabling infrastructure for net zero at pace, include as one of the five pillars in its recent strategy update. And most importantly, the government have given Ofgem two new duties of growth in net zero. This all supports the need to agree a regulatory framework that can attract the step-up in investment required.
And these positive developments are in addition to the decisive regulatory actions that we’ve seen to-date on the early ASTI projects. Moving to the US, we’ve agreed a joint proposal for new rates for our Downstate New York KEDNY and KEDLI gas distribution businesses, with an increase in CapEx around 30% and a step-up in allowed returns from 8.8% in to 9.35%, and final preparations to file for new rates in our Niagara Mohawk business. And in Massachusetts, we’ve had productive conversations with the DPU and our electric ESMP filings. All of this gives us increased confidence that the regulatory frameworks are evolving to attract the investment required and the pace needed for delivery.
So it’s against that context of greater clarity and confidence that we are announcing our new five-year financial framework today and the financing plan that sits behind it that will enable us to deliver a step-up in investment whilst maintaining our strong investment-grade balance sheet. We expect to deliver around GBP60 billion of CapEx, that’s near double our investment over the prior five years. It will be split broadly 50-50 between the UK and the US, and 85% will be green investment aligned to the EU taxonomy, making National Grid one of the biggest investors in decarbonizing energy in the FTSE. This investment will drive Group asset growth of around 10% per annum, which will see the Group’s regulated asset base reached almost GBP100 billion by 2029.
And it will also deliver a 6% to 8% EPS CAGR from an FY ’25 baseline and an inflation-protected dividend from a rebased level, representing ongoing attractive investor proposition of growth and yield. And this combination of growth and yield that has enabled National Grid to sustain strong total shareholder returns where we’ve delivered over 30 percentage points more TSR than the FTSE 100 over the past decade.
A track record of delivering large-scale structure projects on time and on budget speaks for itself, with recent examples including the GBP1 billion on Hinkley Point C connection, the GBP1 billion London Power Tunnels project and our strong progress on the $4 billion Electricity Transmission Program in New York, or the Upstate Upgrade as we call it. We’ve developed the capability to deliver large scale projects offshore as well. With the recent completion of Viking Link, our interconnector portfolio is now nearly 8 gigawatts, which represents around 80% of these interconnector market.
In the UK, we’ve implemented an organizational structure to deliver with a strategic infrastructure business unit set up a year ago and now employing over 375 people. And the strong progress we made in creating innovative new supply chain frameworks for the ASTI projects. And we’ve proven track record of outperformance in delivery against our regulatory contracts. So as we look to the future, our networks will be a key enabler to economic growth and job creation, as we help to enable decarbonization of energy.
As we progress on this path, it is clear to me that not only we will continue to growth in energy networks, we will also see the blurring of the boundaries between transmission and distribution, onshore and offshore networks and what is awarded directly by regulators and what goes out to competition. National Grid has built the capabilities to win across all of these areas. And whilst the focus of the new five-year plan is very much growth in our regulated networks, National Grid Ventures will continue to play an important role.
Going forward, we’ll focus this business on interconnectors, including offshore hybrid assets in the UK and competitive electricity transmission projects in the US. To support this, we’ve made the decision to sell our National Grid Renewables, our US onshore renewables business, as well as our Isle of Grain LNG terminal in the UK. And in doing so, we expect to continue our record of crystallizing good value. So we have an incredibly exciting few years to look forward to as we look to make National Grid the pre-eminent pure-play networks business, delivering a big step-up in investment and continuing along the path of delivering decarbonized energy networks across our jurisdictions.
So with that, I want to share some of the key headlines from our full year results before Andy takes you through the detail. We’ve delivered another year of strong financial performance demonstrated by underlying operating profit of GBP4.8 billion and underlying earnings per share of 78 pence, both [up] (ph) 6% on the prior year at constant currency. Our regulated businesses delivered a record GBP7.6 billion of investment, up 17% year-on-year again at constant currency.
Reliabilities remain strong across our transmission and distribution networks despite severe weather in most jurisdictions, and we achieved a lost time injury frequency rate of 0.08, which compares to our group target of 0.1. However, this good performance was overshadowed by the tragic incidents in which two of our colleagues lost their lives. Both tragedies have been acutely felt across the group and have led to further reinforcement of safety protocols. Moving to our operating performance, where there is been a number of highlights. Firstly, in UK Electricity Transmission, we delivered a 47% increase in capital investment, reflecting early progress on our ASTI projects.
We also reached important milestones in installation of the new T-pylons on the Hinkley Connection Point project alongside completing tunneling on the London Power Tunnels project. It was also an impressive year of firsts as we connected the world’s largest wind farm, Dogger Bank, and the Lark Green Solar Project, first of its kind to be connected directly to the UK transmission network. Secondly, in New York, where investment increase of GBP300 million to GBP2.7 billion, we made strong progress on the $4 billion Upstate Upgrade program which includes 70 projects all enabling clean energy over the next decade.
In Massachusetts, we filed for $2 billion of ESMP funding, an important milestone in setting up the investment required over the next five years to help the state meet its clean energy goals. In National Grid Ventures, our sixth interconnected the Viking Link to Denmark came online in December within budget and earlier than planned. At 765 kilometers, it’s the world’s longest onshore and subsea HVDC cable, and it’s a great example of world-class capabilities within National Grid.
And finally, the team has made great progress on the separation of the electricity system operator and we expect to complete the sale and transfer to the government later this year. So it is been a year of strong progress, both financially and operationally, and we have taken the necessary steps that will set up the group for success over the long-term. I’ll stop there, and I’ll hand over to Andy, who will discuss this year’s results, our new five-year framework and financing plan in more detail, and then I will come back and talk about the priorities for the coming 12 months. Thank you.
Andy Agg
Thank you John and good morning, everyone. I’ll start by going through the financial performance for the past year, before turning to the details around our comprehensive financing plan. I would like to highlight this as usual, we are presenting our underlying results excluding timing, major storms and exceptional items, and the results are provided at constant exchange rates.
As announced in our pre-close update, we are now reporting underlying earnings excluding the impact of deferred tax in our UK Electricity Transmission and Distribution businesses, and we report our 20% remaining stake within National Gas as a discontinued operation with this business therefore, excluded from the underlying earnings of the continuing group.
So turning to our numbers. I’m pleased to be reporting another year of strong results. Underlying operating profit on a continuing basis increased by GBP255 million to GBP4.8 billion, up 6% on the prior year. This was mainly driven by good performance across our regulated businesses, including higher rates and strong cost efficiency delivery. Higher operating profit has consequently led to an underlying earnings per share increase of 6% to 78 pence per share.
We delivered a further GBP139 million of efficiency savings, significantly exceeding our three year GBP400 million target, and we aim to maintain broadly flat controllable costs going forward, even as we target asset growth of nearly 60% over our new 5-year plan. Group return on equity at 8.9% is in-line with expectations following the reset in Electricity Distribution for the first year of RIIO-ED2 and higher UK revs. And in-line with our policy, the Board has recommended a final dividend of 39.12 pence, taking the full year dividend to 58.52 pence per share, representing a 5.55% increase compared to the prior year, reflecting 2024 average CPIH inflation.
We continue to deliver record levels of investment with capital investment from continuing operations increasing 11% to GBP8.2 billion. This increase was principally driven by early ASTI investment in the UK, and increased spend on our new transmission projects in New York, partially offset by lower investment in National Grid Ventures compared to the prior period, as we near completion on a number of projects. Now let me take you through the performance of each business segments.
Starting with the UK Electricity Distribution. Underlying operating profit was GBP1.15 billion, GBP78 million lower than prior year, reflecting the shift from RIIO-ED1 to E2, alongside lower incentives in the first year of the price control. Capital investment was GBP1.2 billion, slightly higher than last year with increased investment in overhead line work. We are on track to deliver our GBP100 million group synergies target by 2026, having achieved GBP28 million in the year from areas such as procurement and operations. This will continue to help partly underpin ROE outperformance in UK Electricity Distribution and performance more widely across the group.
We achieved an ROE of 8.5% in the year, outperforming our allowance by 110 basis points in line with our 100 to 125 basis point outperformance guidance for RIIO-ED2. Moving to Electricity Transmission, where underlying operating profit was GBP1.31 billion, 19% higher than last year. This was helped by indexation and higher allowed returns, as well as the non-recurrence of the Western Link return in the prior year. Capital investment of GBP1.9 billion was up 47% versus the prior year. This included early work at Eastern Green Links 1 and 2 as well as a number of onshore projects, and construction activities on new connections projects, partly offset by lower spend on London Power Tunnels 2 and the Hinkley Connection as we near completion.
We’ve achieved an 8% return on equity, 100 basis points ahead of baseline allowance, and we remain on track to achieve 100 basis points of average annual outperformance throughout RIIO-T2. Finally, in the UK, the electricity system operator saw underlying operating profit of GBP80 million and RAV growth of 20% to GBP425 million. Moving now to the US, our New York business achieved an 8.5% return on equity, 96% of its allowance. Underlying operating profit was GBP1.02 billion, 21% higher than the prior year. This reflects rate increases as well as early recovery on Smart Path Connect investment.
Capital investment was GBP2.7 billion, 12% up on the prior year. This was driven by higher electric investment where we’re on track to energize our Smart Path Connect transmission project in December 2025, as well as higher gas investment with investment in mains upgrades as we continue our work to reduce emissions from the system. In New England, the return on equity was 9.2%, 90 basis points improved on the prior year and 40 basis points higher after adjusting for a one-off property tax recovery.
Underlying operating profit was GBP802 million, up 9%, excluding the contribution from Rhode Island in the prior year. This was driven by higher rates in our electricity and gas businesses, partly offset by higher depreciation and other costs. Capital investment was GBP1.7 billion 14% higher driven by electric investment growth equally weighted across transmission and distribution projects, and continued investment in our gas networks, including replacement of 130 miles of leak-prone pipe.
Moving to National Grid Ventures. Underlying operating profit including joint ventures was GBP571 million, GBP120 million lower than the prior year. Higher profitability as our NSL interconnector, following a post-construction review cap increase was more than offset by lower profitability at our BritNed interconnector, given lower auction revenues and lower business interruption recoveries at IFA1 following its rebuild.
Capital investment decreased to GBP662 million as we successfully completed the majority of work at our Isle of Grain expansion project and Viking Link interconnector, and completed the rebuild work at IFA1. We recorded an operating loss for other activities of GBP60 million given the nonrecurrence of property sales from the prior year. Net finance costs were GBP1.48 billion, GBP13 million lower than the prior year, with the higher cost of new issuances more than offset by lower inflation movements on index-linked debt costs and repayment of the bridge loan facility during the prior year.
For the full year, the underlying effective tax rate, excluding the share of joint ventures, was 15.6%, 170 basis points lower than the prior year. This reflects higher levels of capital expenditure qualifying for full expensing in FY ’24 compared to levels in FY ’23. Underlying earnings were GBP2.9 billion, with EPS at 78 pence, up 6% on the prior year. Moving now to cash flow. Cash generated from continuing operations was GBP7.3 billion up 13% compared to the prior year largely driven by timing items in our UK regulated businesses.
Net cash outflow at GBP3.7 billion was nearly GBP600 million higher than the prior year, reflecting higher levels of capital investment. Net debt at the full year was GBP43.6 billion, in-line with the guidance we gave at the half year after adjusting for foreign exchange movements. And we expect net debt to be around GBP500 million lower by year-end at a US dollar exchange rate of $1.25 to the pound, taken into consideration proceeds from the rights issue.
Turning now to the announcements we’ve made this morning. And starting with the new five year capital program. With greater visibility around quantum and pace of this investment, we expect to deliver around GBP60 billion of investment through to 2029. This will be split broadly 50-50 across the UK and US Northeast, with around 80% of the investment expected to be in Electricity Networks over the five years, continuing the group shift towards electric, with nearly 80% of group assets expected to be electric by 2029.
At GBP23 billion UK Electric Transmission has the largest share, including the 17 ASTI projects. And you’ll also see a major step-up in the US and New York in particular, given the supportive backdrop that we see there, with more transmission investment coming forward through the CLCPA program, which forms part of our Upstate Upgrade work. Just over 10% of our investment is expected to be offshore as ASTI projects move into the North Sea, demonstrating the blurring of onshore and offshore that John referenced earlier.
With visibility of our committed capital program, we also recognize the need to provide the market clarity around how it will be financed and have announced a comprehensive financing plan, including a GBP7 billion fully underwritten rights issue. This plan will support our investment program, whilst allowing us to maintain a resilient balance sheet and our strong investment-grade credit rating. This plan pulls on many levers including the ongoing use of senior debt, crystallizing value through asset sales and redeploying that capital, future expected use of hybrids, the continuing use of the scrip, given the high level of growth that we are delivering, raising equity, as well as action on the dividend, where we will continue to grow the overall dividend. But UK CPIH inflation growth for the FY ’25 dividend per share will come from a rebased FY ’24 DPS taking into account the new shares issued.
Moving to the terms and timing of the rights issue. We have announced a GBP7 billion fully underwritten rights issue with just under 1.1 billion new shares to be issued on the basis of 7 new shares for every 24 shares currently in issue. The new shares will be issued at GBP6.45 per share, which is a 34.7% discount to the dividend adjusted theoretical ex-rights price, or TERP. The no-paid rights will start trading tomorrow, the 24th of May, and a subscription period will end on the 10 of June, and the results of the rights issue will be announced on the 12th of June. The prospectus, which has all the terms and details of the transaction will be published later today. The outstanding ordinary shares trading today will go ex-dividend on the 6th of June, with the 7th of June being the record date for the final dividend.
Turning to our full year 2025 guidance, where as usual full business unit guidance has been provided in our results statement. We continue to expect strong operational performance across the group. However, this will not be fully reflected in underlying EPS following the rights issue. Under IFRS rules, we adjust the FY ’24 underlying EPS at 78 pence by the bonus element of the rights issue, which is an adjustment factor of 1.1 as of last night’s close. This leads to an adjusted FY ’24 EPS of 70.8 pence per share.
With FY ’25 underlying EPS, taking into account all of the new shares issued on a pro rata basis, we expect to deliver broadly flat underlying EPS for FY ’25. From an FY ’25 baseline, we expect to deliver 6% to 8% EPS CAGR for the remaining four years of our new financial framework out to FY ’29. So to bring this all together, our new five year financial framework will deliver a near doubling of capital investment to around GBP60 billion. This is expected to drive group asset growth CAGR of around 10%, a strong step-up in real terms growth compared with the past five years, translating into a strong underlying EPS CAGR of 6% to 8% from full year 2025, once adjusting for the new issue of shares, and dividend per share growth to continue in line with UK CPIH inflation once adjusted for the share issue.
We continue to be committed to our strong investment-grade credit rating. And this plan will enable us to maintain credit metrics above our thresholds to at least the end of the RIIO-T3 period. With S&P’s FFO to debt threshold above 10% and Moody’s RCF to debt threshold above 7%. The package of financing measures we have announced this morning brings clarity of funding, which will enable us to deliver this step change in investment. And we believe our new five year financial framework achieves an optimal balance of growth and yield, enabling us to continue to deliver attractive shareholder returns as we have done over the past decade.
So with that, I’ll hand you back to John to talk about the outlook.
John Pettigrew
Okay. Thank you Andy. Let me now briefly take you through our priorities for the year ahead and the detail on the medium-term growth drivers we’re seeing across all of our regulated businesses. So starting with the US, where we are investing nearly half of the GBP60 billion of capital investment, that’s a 60% increase compared to the last five years and demonstrates our commitment to the ambitious decarbonization targets that the New York and Massachusetts governments have set. In New York, we are increasing our investments over the next five years by 60%, with expected CapEx of GBP17 billion. This is driven by our $4 billion Upstate Upgrade investment I mentioned earlier. This program will transform the network and improve reliability and resilience and represents the largest investment in the New York’s Electricity transmission network in over a century.
We also plan to invest $5 billion over the next three years in our downstate gas business as part of the new rate plans for KEDLI and KEDNY. Looking at the priorities of the year ahead, downstate, alongside stepping up the levels of investment, will be focused on earning our new higher allowed returns of 9.35%. Upstate, we are focused on finalizing the submission of our next rate case for Niagara Mohawk, which in addition to transmission projects I’ve already mentioned, will include significant investment to support the connection of EVs, heat pumps and distributed generation.
As part of the filing, we are also working with customers to progress large demand-side projects, including the connection for the first phase of Micron’s $100 billion investment in microchip manufacturing in New York. To put the scale of this into context, Micron’s own plans in the state could have the same power demand as 850,000 homes. And on the policy front, we will continue to advocate for our clean energy vision and the work that we are doing to support a balanced and affordable energy transition. This includes the need for integrated energy planning on how electric and gas networks interact on the path to decarbonization.
Moving to New England, where today, we’ve set out our expected investment of GBP11 billion over the next five years. This 60% increase includes and expected $2 billion in incremental investment as part of our Massachusetts ESMP, ongoing investments in advanced metering, remodernization, storm hardening and asset health work, alongside our continued investment in leak-prone pipe replacement. With another 10 years to 15 years to go on the program, we have a good line of sight to the investment needed well into the next decade.
A key priority this year is to agree on new rates in our Massachusetts Electric business. We expect to reach a settlement this autumn. And alongside this, we will advance discussions with the DPU on our ESMT filing. In December, the DPU issued an order on the role of local gas networks in achieving the state’s 2050 climate goals. Alongside providing guidance on evaluating non-pipeline alternatives, we are pleased to see support for increased energy efficiency measures and targeted network geothermal — and the clarity that the existing investments will not be impacted. And as in New York, we’ll continue to advocate for further reforms consistent with our Clean Energy Vision.
Turning to the UK, where the next five years, we’ll see us invest over GBP30 billion and connect more renewable energy to the system more quickly than ever before. This investment is creating green jobs right now supporting significant economic growth and will decrease consumers’ bills in the long-term whilst bolstering the nation’s energy security. Focusing on our UK Electricity Transmission business, where we’ll invest around GBP23 billion over the next five years, as we look to enable the government’s target for a decarbonized power sector. This investment is underway already and our priorities are focused on ensure we make significant progress this year.
As you heard already, our ASTI projects are moving ahead at pace. And over the next 12 months, we’ll commence construction on the Eastern Green Links 1 and 2 offshore bootstraps, the latter being the largest ever investment in electricity transmission in Great Britain as well as for further onshore projects across England. We’ll also make progress on several other ASTI projects, including progressing planning and consent on [further 6] (ph).
Another of our key priorities is to ensure we have the right supply chain to support our capital program. We’ve already announced seven supply chain partners as part of our GBP9 billion enterprise delivery model for our onshore projects. Our next step is to put in place the GBP57 billion HVDC framework contract, and with this secure the crystal equipment for the Eastern Green Links 3 and 4 and Sellinge projects. But it’s not just our ASTI projects where we’re moving forward. This year we also expect to connect over 4 gigawatts, including the Green Link interconnector and the Dogger Bank Sofia wind farm, energized the northern section of our Hinkley project and commissioned the Hearst to Crayford circuit on the London Power Tunnels project.
On the policy front, we’ll continue to work with government on the implementation of the Transmission Acceleration Action Plan, and we’ll also work to continue to support the delivery of the Connections Action Plan to reprioritize the Connections queue. And finally, on the regulatory front, Ofgem is due to publish its methodology decision document for RIIO-T3, which will form the basis of negotiations with Ofgem. With a comprehensive financing plan we’ve announced today, we’ll be submitting a fully funded business plan at the end of this year, ahead of the new price control beginning in 2026.
Moving next to UK Electricity Distribution, where we expect to invest GBP8 billion over the next five years. With four years remaining on our ED2 price control, we have a high degree of confidence and visibility around the investment levels, where 95% of our cap is agreed within baseline allowances. This represents a more than 30% increase in annual investment versus ED1, driven by an expected 60% increase in the volume of new connections and more than 70% increase in network reinforcements to meet growing electricity demand due to the increase in connections of low-carbon technologies, such as solar and EVs, and another 15% increase in asset health and maintenance.
In the year ahead, a key priority to continue to deliver the capital program efficiently, with a focus on delivering a target of 100 to 125 basis points of outperformance and synergies of GBP100 million over three years. We’ll also continue to progress connections reform at the distribution level, and we are making good headway. Following the announcement a few months ago of plans to release 10 gigawatts of capacity, we’ve already signed contracts to accelerate nearly 1 gigawatt of projects. And last, we are building out our distribution system operator function, helping to deliver smarter two way networks. As the largest flexibility provider amongst the UK DNOs, we are focusing on creating further offerings for our customers.
And finally, National Grid Ventures’ key priority this year is to progress the sales processes for our Isle of Grain LNG terminal and National Grid Renewables business. In both of these businesses, we delivered impressive growth in value and believe there will be significant interest in these assets. So in summary, this is a defining moment for National Grid as we enter into a new and exciting phase of growth to deliver network investment of unprecedented magnitude.
I believe National Grid has a unique investor proposition with low risk, high-quality asset growth, strong earnings growth and an inflation-protected dividend. Today, we set out unmatched visibility of GBP60 billion of investment through to 2029, and we are already taking action to deliver this. We’re also giving the certainty around the financing of those plans. The business is increasingly weighted towards electricity, ensuring that we can continue to access attractive growth for the years to come. This will be supported by governments and regulators on both sides of the Atlantic who are urgently looking for more ways to attract the level of investment required to meet the decarbonization targets.
National Grid is at the heart of this change, enabling the digital, electrified and decarbonized economies of the future. This is opening up opportunities for us today over the next five years and for decades to come, ensuring that we can drive long-term value growth and returns for our shareholders and enable Net Zero across the communities we serve.
So with that, Andy and I would love to take your questions.
Question-and-Answer Session
A – John Pettigrew
Okay. So in terms of the questions, we’re going to take questions from within the room. [Operator Instructions] And I’ll start with questions in the room. Dominic.
Dominic Nash
Thank you and thank you for your presentation. Just – it’s Dominic Nash here from Barclays. Two questions from me. Firstly, we’ve always known that your CapEx was going to go up a lot and you used to always sit and kind of explain other options of financing that you had available to you. Is it possible just to explain to us what other options that you have and what you’ve examined for you since selling minority stakes, raising hybrids trimming your dividend, and why you’ve chosen this particular route? So that’s question one.
And question two is on the divergence between asset growth and earnings growth which has kind of been there for a little while. Could you give color as to why your earnings growth is always kind of a couple of percentage points below that of your asset growth when — all things being equal, you would kind of expect them to be kind of matching what’s kind of going? Is that accounting issue or why? Because you will be re-leveraging up even as the years go by. So I just want to color on that one as well.
John Pettigrew
Okay. Well, I’ll take question one and then Andy, question two. I mean I’ll take you back to November when we said the three questions we wanted to get clarity on. One was the scale of the CapEx, the second is the shape of it and the third was the regulatory framework. And what we’ve set out today is the development for the last six months has given us a very clear view of what scale of that CapEx is, and it is a significant step up to GBP60 billion over the next five years.
And I haven’t got clarity on what the scale of that CapEx was, we then very carefully as a board around the pros and cons of all the tools that are available to us. And we’ve talked about many of those tools before in terms of — as well as equity, which we are talking about today. We talked about dividend rebates. We talked about hybrids. We talked about crystallizing a lot of the assets. And you’ll see today that actually we are using many of those tools in that toolbox. To the specifics of your question, we did consider things like should we bring in equity into one of our existing regulated businesses. But when we stood back from that and we looked right across all of our jurisdictions, we’ve got strong growth in all of those businesses in an area where National Grid has got world-class capabilities.
We’ve got regulatory support. We’ve got policy support, and it’s driving growth and earnings, which supports the investor proposition. So from our perspective, that didn’t make sense. And then given the size of the capital raise of GBP60 billion, you quite quickly get to equities going to be needed, which is why we’ve led the GBP7 billion equity raise. But it comes as one of many elements that we’ll be taking forward. including as Andy mentioned in his speech, that hybrids will be part of that solution we get later into the period as well. Andy?
Andy Agg
Yes, Dominic, in terms of your second question on the delta between the 10% asset growth and 6% to 8% earnings CAGR, I think there is a couple of main drivers in there. There’s a particular thing within Electricity Distribution, whereas part of ED2 asset lives are lengthening, so that is part of the delta. And then also as higher interest rates feed through the holdco debt book, again, that will cause a slight drag on earnings. And then there will be the ongoing small dilution from the [scrip] (ph) as that runs in the years ahead as well. But what I would say, of course, is all that asset growth ultimately does turn up in earnings in the long run.
John Pettigrew
So we’re going to Pavan next.
Pavan Mahbubani
Thank you. Good morning and thank you for taking my questions. It’s Pavan from JPMorgan. My first question is you’ve guided to March 2029 which is clearly three years into the expected RIIO-T3 period. Can you lay out or give some visibility on what assumptions you’ve made on things like the allowed return, asset lives, fast versus slow money to give us a steer on how we should see certainly your view of the earnings evolution?
And second question is on clarification on some of the assumptions. Can you give more color on when you assume hybrids to be issued? And I assume that’s factored into your EPS guidance. And similarly on disposal proceeds or assumptions for dilution, if you can give some more clarity on the timing or quantum there, that would be helpful. Thank you.
John Pettigrew
Yes. So in terms of the — so I’ll let Andy take the second question. In terms of the assumptions that we’ve included in our projections, I think what I’d say is at the macro level, we’ve taken sensible prudent and conservative assumptions. It would be lovely to be able to say for the whole period that we’ve crossed every T and dotted every I and every regulatory frame across every jurisdiction, but that’s not the reality of where we are. Electricity Transmission forms a big part of the GBP60 billion. So as you heard, it is GBP23 billion. We are in the midst of the regulatory process. One of the things that was important to us as we laid out the financial the package today was that it was a financial package that provides a support to the balance sheet to at least 2031.
And the reason we think that’s important is that when we submit the business plan to Ofgem later this year, it is a fully financed plan. And I think Ofgem will look at that in a very positive way. In terms of things like returns and speed of money, well Ofgem have obviously just recently published their sector-specific consultation document, you would have seen National Grid’s response to that. We have said amongst other things, that it’s really important that we set the right unit costs in the context of the new supply chain.
As always, we do believe there is an opportunity for incentives that will drive value for consumers and for National Grid. And then we’ve talked about the financial package, which in the context of the fundamentals, we believe should be higher than RIIO-T2. But it is not just the ROE. It’s also about the speed of cash and things like depreciation. So as always, it’s about the overall finance package. We’ll expect to see the decision document from Ofgem relatively soon in terms of the sector-specific methodology. But as you all know, it will be a long time, actually back end of 2025, beginning of 2026 before we get the final decision. So we’ve taken a very sensible, prudent and conservative view in the numbers that we’ve set out today. Andy?
Andy Agg
Yes. So just in terms of the 2 points I think you raised Pavan on the second part. So in terms of hybrids, as a reminder we’ve got around GBP2 billion of issued hybrid in the stack today, and we have today around capacity of GBP8 billion to GBP9 billion further. So what we said very clearly is the plan overall assumes some issuance towards the latter part of the five years. We’re not being specific about how much that is. That will obviously depend on a lot of factors, but that would also leave some element of contingency in our hybrid capacity as well for unexpected things. So definitely, some hybrid issuance assumed towards the back end.
In terms of asset disposals, the clarity that we will give – we are not going to guide specifically on timing. We are announcing an intention to sell not a process today. the CAGR that we have announced assumes that they are all gone by FY ’29. So therefore they’re out of the endpoint of the CAGR. And in terms of impact on sort of financing, because they are Isle of Grain, in particular, is a cash-generative asset, it’s relatively neutral in terms of impact on credit metrics over that time frame.
John Pettigrew
Should we go along the lines, so just make it easier.
Deepa Venkateswaran
Thank you. This is Deepa from Bernstein. I have three questions. Firstly, on the disposals, how much have you penciled in your plan? And is there any indication of the timing? Is it next year or a couple of years? I think the second question is, I mean, right now, your FFO debt is 13% this year. Presumably after the rights issue, you’re going to have a massive headroom, which comes down. Could you tell us where your FFO to net debt lands by end of ’29 and ’31, just to know how much you’ve kind of prefunded this growth, because I think the $7 billion did sound a bit higher? So I think that was my second question.
And the third one is, is there any upside to your growth numbers? Because if I just look at it simply from ’27 — sorry, the ’24 reported numbers, your growth CAGR is in 6% to 8%, obviously, because of dilution, the CAGR would actually be 3% to 4%, right, when we take the share count into account. Therefore are you assuming — I mean, so I was wondering whether that is good enough, 3% to 4%. And therefore, are you being very conservative on what you’re assuming on fast money or returns? Or is there any leeway to kind of see any improvement from the regulators just to get a grip on how conservative you are on your numbers? Thanks.
John Pettigrew
Okay. Deepa, I’ll take the first, and I’ll leave you the second and third, Andy. I mean in terms of the disposals, as Andy said, we’re announcing the intent today. We’re not going to put a number out there because obviously we want to maximize the value for our shareholders and will, in due course, start a process. Our intent is to start approach in the not-too-distant future. So again, we’ll make sure we do the timing to reflect that we want to maximize value for shareholders. But as I said in my speech, I think these will be attractive assets and there will be a lot of interest given what we’ve done with them over the last few years. Andy?
Andy Agg
Yes. Thanks. So Deepa on the metrics. So first of all, just to note that the reported numbers that we’ve set out today for the current year, they are actually slightly higher because of some timing issues I mentioned in my presentation in terms of the timing inflows we have seen in the UK transmission and the system operator. So the underlying numbers are not quite as high as the ones that are reported.
In terms of what we are assuming or what we’re planning through to 2031. I think we’ve scaled the GBP7 billion appropriately around the GBP60 billion of CapEx, but also to ensure that, as we always do we want to maintain an appropriate level of buffer against the key credit metrics, the S&P limit of 10% and the Moody’s 7% on RCF, and have a buffer against those by the time we get to [‘31] (ph). So no different from what we’ve always looked to do against those credit metrics. You’re absolutely right that there will be a pickup in the near term as a result of the upfront equity raise, but then we would expect metrics to trend back towards that level by the end of the time frame.
In terms of your growth point, I think we all see the math you’re doing I’m assuming is ignoring the bonus element for example, which is effectively a free number of shares which comes alongside as part of the mechanics of the rights issue. So I wouldn’t — I don’t think your 3 to 4 is a sensible number to work from. And I think remember that — that’s why we’ve sort of ignored the noise, if you like of FY ’24, rebasing and the full dilution that comes in ’25 and guided on the growth from there. And as we said, ultimately, yes we recognize there will always be a degree of dilution from the rights issue of this size, and that’s why we are focused on the clarity of the growth that we have. And not just for a year or two but for the long term point onwards.
John Pettigrew
Should we take the next one.
Harry Wyburd
Hi, thanks. It’s Harry Wyburd from Exane. So it’s just one question but with a few clauses. I think big picture here and getting away from the detail, you’ve raised a lot of money, probably a bit more than people expected for what’s ultimately the same EPS CAGR as you had before. So what do you think, in your view, you’ve gained here? Do you feel like you’ve gained more headroom, which might give you more optionality later if CapEx goes up or even to expand in ways we have out of yet? Do you think you’ve gained more headroom and do you sleep easier because of this? And therefore, your margins are safety much bigger and therefore investing in your equity is a much calmer proposition now?
Or do you feel that you’ve now financed yourself for longer than you might otherwise have done, and therefore we should be — I guess it’s some way valuing the fact that you don’t have to come back to the market later in the decade and you’ve now fully cleared an overhang for nearly a decade? So what — in your view, have we sort of got here beyond, I guess, just the headline, which is a similar EPS CAGR that we had before, but with perhaps a bit more dilution than we expected? Thank you.
John Pettigrew
Why don’t I start and then Andy can pick up. I mean, first of all, I’ll just pick up the second point you made around longer or duration. So we were very clear when we sort of fought through this that we wanted to give guidance to the market, which is something market has been asking for, for a very long time in terms of the CapEx over the next five years, which we’ve done. But we also want to make — that we had a balance sheet that would support us right out to the end of Q3. So the financing package we put together takes us right out to at least 2031, so that when we submit our business plan to Ofgem we can do that, showing that it’s fully financeable. So that is sort of what sort of helped scale the size of the GBP7 billion rights issue.
In terms of what you gain, I mean I think it’s probably worth just starting thinking about the investor proposition. So it is clear that what we are setting out today is a tilt away from yield and towards growth. But this is a GBP60 billion capital investment program, so it’s near double what we’ve been investing over the last five years. That investment obviously goes into a regulated asset base that’s going to grow at double-digit levels of 10% over the next five years, which gives a lot of certainty to the market in terms of what that growth looks like.
And in terms of the growth, if you just compare it with the last five years where we were sort of 8% to 10%, with at higher inflation rates, the real growth that you’re going to see over the next five years, our assumption in terms of the 10% is a CPIH number of around 2.5%. So when you compare the real growth that you’re going to be getting over the next five years relative to what you’ve seen over the last five years, then you’re getting something real, as well as being supported by 6% to 8% earnings growth, as Andy set out and the reasons for that, and an index-linked dividend, albeit from a rebased level. So that’s what this package provides and gives you over and above the sort of what you’ve in the past. Andy, I don’t know if you want to add anything.
Andy Agg
Not really. I think that’s a pretty good summary. so…
Harry Wyburd
And sorry, just to follow-up one thing. Can you give us any kind of quantification of the additional hundreds — of maybe basis points, hopefully of additional credit metric headroom that this gives you? Any — I know Deepa asked as well, but could you put any numbers around where you are aiming for by 2031 and where we might be by FY ’26 in terms of RCF to debt and FFO to debt?
Andy Agg
I mean we — as I said, what we’ve said today and the guidance we gave is we do always look to maintain a sensible buffer against our thresholds, the 7% of the 10%. We’re not explicit about what that buffer is, but you can imagine that that’s designed to ensure that we can withstand a shops. As I mentioned earlier, the actual reported numbers today are slightly elevated in terms of what we’d expect to underline because of the timing inflows we’ve seen in the — but I’m not going to sort of estimate what we’ll see those metrics bump up to in the short term.
Harry Wyburd
Okay, thank you.
Ahmed Farman
It’s Ahmed from Jefferies, a couple of questions from my side. Could you give us a sense of the overall — so you talked about GBP7 billion equity raise, hybrid plus some disposals. Is there a — can you give us a sense of the overall size of the proceed that you’re looking to raise to sort of fund the plan? That’s the first question. Then secondly, you talked about — and in your sort of presentation, you referenced the 71 pence EPS for — as a baseline for ’25. And I sort of think, that comes alongside a 4.7 billion share count, so it implies almost GBP3.3 billion net income, which is a couple of hundred million better than consensus expectations for next year. So just any thoughts on where that upgrade on earnings is coming out from? And what are the assumptions behind deferred taxes and full expensing in that number? And just finally, in terms of the profile of the EPS growth, could you give us some color on how you expect the EPS growth to come through during the five year plan?
John Pettigrew
I’ll leave them all with you, Andy.
Andy Agg
Okay. So on the first, in terms of the overall framework. As we said, I think a couple of times in the presentation this morning, we’ve looked at all the different tools and we tried to put together a package that delivers both the GBP60 billion and then maintaining the metrics in the right place, and obviously anchored around the GBP7 billion. If you touched on a couple of things. The disposals, as we said, I think, in answer to one of the previous questions, while we will want to achieve optimal equity proceeds from those transactions as we can, it’s actually relatively neutral in term credit metrics because you’re disposing of what is a cash-generative asset. So that’s much more of a strategic move. It doesn’t — I don’t think it’s appropriate to consider that as part of the total funding requirements.
Obviously, hybrids, we’ve touched on it as well. That is an element of that, but we will deploy this further out in the frame. And then of course, I’d point back to operating cash flows and debt. And remembering that ultimately this is delivering an asset base that will grow to around a [GBP100 billion] (ph) by 2029. Of course, leverage will continue at around a sensible level, and therefore our net debt will grow.
So we will continue to raise a significant amount of debt in the markets over the five years as well. So it’s very hard to put a precise number on the total package, but those are sort of the key elements that we think about. In terms of the guidance point, I think the two key things I’d point to, as a reminder, you’ve — in the way the FY ’24 rebase happens, that is effectively what’s described as the bonus element flowing through that.
When you look at FY ’25, you’ve got the full number of shares issued but of course, just on a sort of a 10-month pro rata-ing. So it’s not quite the full share count that feeds through the reported EPS for FY ’25. Underneath that, we will absolutely be looking to deliver a strong operational performance. But obviously because of that additional dilution, that doesn’t get reflected in the reported numbers. You mentioned deferred tax as an example. I think what we’ve said previously is we would anticipate that number, the impact of that growing gradually over time, as the level of capital investment also grows. But that’s just one of the drivers. But overall, we expect a strong operational performance next year. But as I say, our guidance is broadly flat to EPS because of the dilution.
John Pettigrew
Where are you going? You’ve got the mic, sorry.
Alexander Wheeler
It’s Alex Wheeler, RBC. Just one from me, please. Just on the CapEx. Can you give an indication of the expected phasing of that GBP60 billion over the five year period? And then also just adding to that, is there an element of variability based on the outcome of RIIO-T3 for the transmission CapEx? Thanks.
John Pettigrew
Yes. So in terms of the shape of the CapEx, I think we’re guiding next year to GBP10 billion, so the GBP60 billion over the 5-year period probably gets up to a peak of around GBP12 billion or GBP13 billion as you gradually move through that period, stepping up in a relatively uniform way actually as we go forward. In terms of T3, we’re in pretty good shape in terms of the work that we needed to do to prepare our business plan for T3. Obviously, we’ve been doing a huge amount of work on the 17 ASTI projects, so we’ve got a good sense of them. They’re now in our license with an obligation to deliver in certain time sales. Alice and the team have been working on the remaining part of T3.
So we feel relatively confident that we’ve got good articulation of what that CapEx will be, which will be a makeup of the usual sort of asset health, reliability, resilience type CapEx, but also there’s a lot of onshore transmission investment within ET, to support the energy transition as well. So we’re expecting to be a step-up from where we were in RIIO-T2. But we think that the rationale for it will be supported by Ofgem, given a lot of it is driven by that energy transition.
Rob Pulleyn
Thank you. Rob Pulleyn from Morgan Stanley. This is unbelievable, there’s a few left. So first of all, you talked about the cadence of the balance sheet. And obviously, you’re going to have a lot more cash initially this year. Does that mean your finance costs in the near years could be a bit lower, and that supports the — shall we say, net income that I think everyone is calculating? And there was a previous question on just to understand how we should think about that.
Secondly, you talked about keeping the scrip, I was interested in why given you just issued a lot of equity. And again, there are some questions on EPS CAGR. And of course, not having a scrip would help the EPS CAGR. And lastly, I don’t think this has been asked yet. But I assume, almost assuredly, you spoke with the credit rating agencies before embarking upon this, if there is any feedback around their input to this funding plan that you can share, that would be wonderful. Thank you very much.
John Pettigrew
Come then to you, Andy.
Andy Agg
Okay. Thank you. No, you are right. In terms of financing costs, I think a couple of things. We have guided to this morning, net debt being expected to be around GBP500 million lower by the end of FY ’25 as a result of the rights issue. And that will — because of that flow through, as you say to a slight impact probably on what was out there in consensus on expectations around financing cost for the year ahead. What we will do just in terms of the proceeds, obviously, as you’d expect us to we will look to optimize how we utilize that in the near term in terms of sort of investment in cash instruments. Again, we’ve just for clarity, we’ve announced this morning that we would expect to use around GBP750 million of the proceeds in the very near term to redeem the equity portion of a couple of our hybrid instruments, which have a very near-term maturity.
That’s just an efficient use of proceeds in the very near-term. Actually, because of where investment rates are, the cost of carry is relatively small at the moment, but we’ll take all of that into account as we think about how we manage the proceeds in the near-term. On the second point on scrip yes, as John said earlier, the Board thought very hard about all the different elements of this. And we’ve had a scrip arrangement in place for a long time, and it’s been a very useful tool as we’ve gone through high [parity] (ph) growth. And I think we see that as a valuable tool going forward as well.
And we see, on average, around a 25% take up. It obviously fluctuates year-on-year, but that’s what it works out. And we decided that it’s appropriate to allow that to continue. And then on rating agencies, yes, as you’d expect, we’re in dialogue with the rating agencies throughout the year. I think we would expect them to look at this in the same way that we do what is the long-term impact on metrics. Hopefully, we’ve been very clear about our views on where we want to deliver those metrics over the time frame. So I’m sure that is what they’ll take into account when they — I’m sure they’ll be updating reasonably quickly.
John Pettigrew
We go back. You got a mic. Excellent.
Mark Freshney
It’s Mark Freshney from UBS. Two questions. Firstly, Andy, and apologies for keeping on digging up this point. But previously, in the new financial – well in the post the strategic pivot, you were talking about 70 to low 70s net debt to RAV, and the holding structure or the holding company debt was clearly a key part of that. Do you envisage on the same basis at the end of the GBP60 billion 5-year frame being below on that 70% to 73%? And is there any — further to the last question, is there any scope to actually go up a notch on the credit ratings?
And just secondly, John, just on timing, I mean it’s almost unfair just to talk about ET given it is only 25% of the business. But clearly it is the one with [ST] (ph) in it. The returns for that business as they stand, in my view inadequate one. The base allowed returns are just not appropriate for the bond yield environment we are in at the moment. And clearly Ofgem has signaled investability. But can I ask why you’ve actually moved ahead raising capital ahead of Ofgem, taking a decision on this topic in the methodology document and why you haven’t kept the pressure on them to come after? Because it is clear from your own consultation response, you need a sizable increase in returns that CMI may be ready to let them do.
John Pettigrew
Yes. So why don’t I take the second question and Andy can take the first. So in terms of the timing, we thought very carefully. As I said earlier, One of the things we’ve heard from the market repeatedly over the last 12 months is give us transparency in terms of what the capital investment plans look like as soon as you’ve got it, and that’s exactly what we now have. So we’re sharing the GBP60 billion of capital investment out end of the decade. In doing that, given that actually the outcome of RIIO-T3 wouldn’t actually be until the end of 2025 — beginning of 2026. That’s an incredibly long time to have uncertainty in the market about — you can see the level of CapEx, we can’t see how it’s being funded. So that’s why we’re announcing the package today.
Also, as I mentioned earlier, it is really important when we make our submission to Ofgem for RIIO-T3 that we can also show that the business plan we’re submitting is financeable, which is why, as I mentioned earlier the plan that we set out takes us to at least the end of 2031. So those are the reasons why now, is because of that uncertainty, together with what we want to do with Ofgem and we have the clarity on what is a significant step-up in investment. Ofgem over the last period, as you know, has indicated publicly and through its consultation documents that it recognizes that we’re entering into a different phase.
So the sector-specific consultation talked about the need for a regulatory framework that was attractive to investors and was investable. We saw more recently the Ofgem published their strategy document and their five pillars. One of their pillars is to accelerate the infrastructure to support the energy transition. They’ve got the new duties, which I do think are shifted their mindset that came on to the Energy Bill last year, where the duty now to help to deliver net zero in the energy transition as well as to facilitate growth.
And the actions they’ve taken as well in the early ASTI projects, they have been decisive. So we have had to change the way that we procure for equipment. We’re having to make upfront payments into the supply chain to lock in that capacity. Ofgem has supported that and allowed us to put that on the regulated asset base, which we will get return on. So they administratively understand that it’s a different world we’re operating in.
Having said all that, we can’t cross every T and dot every I at this point, but we take some confidence from that. And often house talk to investors and set an expectation, they understand that it is important to have a framework that’s investable. So that’s the reason why we are doing it today. We have that uncertainty we have heard from Ofgem. We have responded to the consultation very clearly that we think return should go up against RIIO-T2, both for fundamental reasons in terms of shifts in interest rates, but also if you want to attract a regulatory framework where people want to invest in and then you need to be at the upper end of any capital asset pricing model range, to demonstrate to investors that it is an attractive proposition. So we’ve made those plans as part of the consultation, and we will discuss that with Ofgem over the next 18 months. Andy?
Andy Agg
Yes. In terms of the gearing part of your question Mark. So again in our detailed guidance this morning in terms of the five years, what we are indicating is we would expect leverage to go down to the low 60s — around 60 in the very near term, immediately post the issue. And then over the time frame, we expect it to go up back up gradually to the high 60s over that time. Yes, so — and to be clear, we previously guided on the old frame to the low 70s. The difference — the reality of the difference is we are going into phase now of even faster growth. As John said a moment ago, the 10% is a high level of real growth, and you compare sort of indexation that goes within that. And therefore, we’re very comfortable with the low 70s under the previous frame. This will take us to a marginally lower level of the high 60s just as we go into an even higher growth phase.
John Pettigrew
Okay. Can we get the mic over to this side of the room, please?
Charles Swabey
Hi, thank you. Charles Swabey from HSBC. There was speculation last year that you might sell some US gas assets. Could you explain your thinking behind opting not to go down that route? That’s my first question. And second one what is a good outcome from the sector Pacific methodology consultation like for you?
John Pettigrew
I mean in terms of the gas business, the way the Board at National Grid thinks about all of its businesses is to think about how it’s contributing to the investor proposition of yield and growth and that’s sustainable. And when it comes to our gas business in the US, we’ve just done the KEDLI and KEDNY rate case. We will have double-digit growth in that business. It’s supported by our regulators in New York. They have just increased the returns from 8.8% to 9.35%. As nominal regulation in the context of the group, it’s actually — it’s got good cash characteristics as well. So it fits very squarely into the investor proposition that we have.
And we’ve set out our views on how we see that gas business evolving in New York. So as we went through the pros and cons of all the tools available to us, it didn’t seem sensible that we should look to sell that business to support investments elsewhere, which is why we’ve ended up the proposition we have. In terms of the sector specific consultation, so National Grid has sort of highlighted four areas to Ofgem that we would like to see them progress as part of the response to the decision document.
The first is, given the size and scale of the CapEx and where the supply chain is, we’d like to see an earlier indication of need case and that they want National Grid to do that work, much earlier than they’ve done historically. Secondly, as I mentioned earlier, the supply chain has changed significantly. So as thinking about setting unit costs, we want them to take a forward-looking view rather than a very historical looking view. Thirdly, we do think there is an opportunity to create value for customers in terms of incentives. And we proposed my ideas there. And then finally, it’s the financial package. So as we’ve said, we’ve set out that given the fundamentals, given the scale of the CapEx relative to the regulated asset base, given the need in needs to investable proposition, we would expect to see higher returns and we would hope to see good cash characteristics around things like speed of money and depreciation.
So that is our hopes and aspirations. I’ll remind people who have been in the industry a long time, usually the decision at this stage in the process is usually the low point and then there is a long process of 18 months before you get to a final decision. And quite often those things are different as you work through the different sort of characteristics and understandings between the two-parties. So those are some of the things we’d hope to see. But it is a very long process till we get the final decision.
I think there’s a question behind.
Marcin Wojtal
Thank you so much. It’s Marcin Wojtal from Bank of America. On your dividend, I mean, you reiterated the formula, you revised your DPS. But how attractive do you think your dividend policy is to investors? We are probably entering an environment of lower inflation. And could you remind us what would happen in the event of deflation? Is there a floor at zero for inflation indexation?
John Pettigrew
Andy?
Andy Agg
Yes, I think what I’d say in terms of the overall attractiveness, I think, again it links back to something John said earlier around the overall proposition for National Grid is that combination of growth and yield. So we absolutely recognize and we’ll continue to focus on the importance of the dividend as part of that. And what we aim to do as part of the package this morning is achieve that optimal balance of continuing to grow the total dividend, but obviously taking into account the rebate because of the increased share count. And the Board believes that that’s achieved the right balance, and still continue to deliver that yield while alongside enabling us to fund the CapEx and growth in front of us.
So when you look at it as part of the overall TSR, yes slightly more tilted to growth. But still, I think if you look at the level of dividend, we believe it’s an attractive proposition. And I think the — giving the clarity of indexation and not changing that, I think was an important part of our thinking. It’s well understood and well received by investors, and we think it is the right thing to continue with that.
I don’t think we’ve ever had a year of deflation in terms of the average for the year. I’m not sure. But I would expect that we would honor the dividend rather than reduce it, but that’s me speaking off the top of my head. So — but I don’t think we’ve ever had a year that works like that.
John Pettigrew
There are no questions in the room. I’m going to look to Nick if we’ve got any — sorry, Dominic?
Dominic Nash
Hi, there. Sorry, can’t skip by easily. It’s Dominic Nash from Barclays again. A couple of questions. Firstly, I think we’ve got a general election turning up, and I’d be interested in your thoughts on what you expect from the sort of the [labor or] (ph) announcements to date about what impact that would actually have on sort of medium-term targets and the massive increase potential in renewables, GB, Energy?
And I think the sovereign wealth fund that the thinking about like are these opportunities or threats? And the second one is [indiscernible]. You say that you are going to have something done this year on the ESO, how advanced are your negotiations? And do — when I look at it, I think you’ve got like GBP877 million of receivables sitting on it. I presume that, that will be part of the negotiations. So we could end up with some funny looking numbers, is that a fair assumption?
John Pettigrew
So in terms of the general election, I won’t be a surprised for you to hear that given the position National Grid has in the UK, we spent a lot of time talking to the government, but we also talk to all the other parties as well. A significant degree of alignment around the energy transition and probably more importantly for us, the need for infrastructure investment to enable the energy transition and to connect renewables.
We’ve always had all the targets, whichever one you want to pick, are ambitious and it requires action from government to put the right policy in place and to implement it regulates the right regulatory framework make in place, the supply chain to increase their capacity in terms of things like building equipment, and the industry to put the right skills in place.
National Grid is doing its part, and that’s what we’re setting out today in terms of what we can do to contribute to the energy transition. But in terms of a change in government, I don’t see it impacting significantly in what we’ve laid out today in terms of our GBP60 billion capital investment plan. And similarly just to be complete in the US, we’ve got election going on there this year as well. The vast majority of the investment that we do in the Northeast US is driven at the state level. We operate in progressive states. They’ve got ambitious targets as well. And our CapEx spends in the same way as the UK, contributing to what we can do to support targets in the same way.
In terms of the GB, Andy is just going to pick up on that. So we do spend some time talking to the Labor party about that. I mean they talk to me about it wanting to complement the private investment that’s going on in the networks and the areas that they are looking at are things like new technologies that are not yet ready for the market, all providing a convening role to see if there is more that can be coordinated across GB level and things like supply chain. And in terms of the ESO, we are well through the process, I’d say, Dominic.
First of all, there was a huge amount of work to do to separate out the ESO from the rest of the National Grid, particularly around things like IT. The team, Ofgem government has done a fantastic job actually supporting and working together to get to a position where we would be ready to do that pretty soon. And in terms of the discussions with the government in terms of the final transaction, as I said earlier, we’re expecting that later this year.
As the election may delay by six weeks in terms of some of the discussions that go along, but I don’t see it being delayed materially. And actually, there is a very strong alignment about the role of the future system operator between the conservatives labor party and other parties as well. So I don’t see it impacting in the long-term in terms of what the election outcome could be. In terms of the receivables and the accounting, and I’m going to put that to Andy, and you can answer that.
Andy Agg
Yes. I mean, Dominic as you’ll be aware, the ESO is a slightly different part of the business. It’s relatively asset light. And therefore as we look at the balances involved and the dialogue with the government, obviously is taking account of both the assets and the working capital associated. What you will have seen, as I mentioned earlier, in terms of the flows we see with the timing of recoveries, which is part of what is showing up in — when the working capital associated, you’ll see in the detail of what we’ve announced this morning, we’ve taken a charge within our statutory numbers to recognize that some of that timing will still be due back by the time the disposal is expected to complete. That’s an estimate.
Just recognizing that rather than that flow through its timing next year, it will then get crystallized as part of the transaction. So we now that by the time we get to the transaction, we wouldn’t expect any unusual items as you described them.
John Pettigrew
Okay. I’m going to go to you next. And if there are more questions and I’ll come back to it, but have you got any questions?
Nicholas Ashworth
I do. So I’ve got one written one, and I’ve got AJ from Goldman Sachs, who I think is going to speak into the room. But firstly, just from Michel Debs, hopefully, an easy one. Will CapEx remain at similar levels post 2029?
John Pettigrew
I mean it always amused me actually, Nick, when people say, well, what’s your CapEx forecast beyond the next seven years, eight years, which we’ve given certainty on today. I mean the serious point is you would have seen just over a month ago that the [outreach] (ph) system operator published the Beyond 2030 report, which really is a very useful document is starting to articulate what the infrastructure investment might look like as we get into 2030 and beyond. Some of the investments in that are quite clear. And actually, we’re doing quite a work on the engineering front already just in about that.
Some of it needs a huge amount of work. And actually, we probably won’t get transparency into the second half of this decade. So we said right back when we did the Investor Day 18 months, two years ago that we would expect to see waves of investment. But exactly what the shape of that investment is here in the UK, and across all our jurisdictions, obviously, we’ve got a bit of time to get to that. Today, what we set out is pretty much five years of clarity, which is pretty [indiscernible] against most of the other companies in the sector.
Nicholas Ashworth
And thank you. And I think we have AJ from Goldman on the conference line.
Ajay Patel
Good morning and thank you very much for the presentation. I’ve got a couple of questions. One is more just the shape of the portfolio. Now you emphasized in the announcement of the 80-20 split, electricity versus gas. And I’m just wondering, given the size of the equity issuance here, it feels to me that maybe you could reduce that, that gas business is going to be there. It’s not — it wasn’t — when you are looking at the wallet of merit here for funding, I just wanted to — what was the merits of keeping that asset versus maybe using it to fund the CapEx program that you have ahead of you?
Now typically, in the past, you’ve made asset sales taken advantage of the valuations of private markets maybe offered that you can’t necessarily get to an equity market to fund new investment. I’m just wondering if we can deduce anything from that statement and the picture that you’re highlighting by the end of the plan?
And then the second one is, if you go back to this timing point. You’re ahead of elections. You haven’t concluded a transmission review, which is quite a long — still a decent amount of timing. There’s a bit of unclarity sort of in returns. Your CapEx is back-end loaded. Why now? I still — I don’t think even after the answers that we’ve been given I could fully appreciate it. So any more color there would be really helpful. Thank you.
John Pettigrew
I think I’ve got that. The line wasn’t great. But let me have to go both of those questions. I mean in terms of the shape of the group, and I think you’re asking about US gas. As I said earlier, the Board when we consider the tools available to us to support that GBP60 billion of CapEx, considered things like bringing financing into the regulated utilities, including gas in the US But given the growth that we see across those businesses, given their contribution in terms of growth and yield, we didn’t think it made sense for us to change the shape of the portfolio and to exit the gas business or bring in a partner into one of our other regulated businesses.
I mean, by the end of 2029, I think we’re going to be broadly, I think from an asset base perspective, about 45% US, 55% UK. And that mix of real regulation and nominal regulation and the diversity of regulation that we have as well is a really important part and a big contributor to the stability proposition that we’ve delivered over the last 10 years. And I think Andy mentioned, we’ve outperformed the FTSE 100 in TSR, by 30% over the last 10 years. Our proposition going forward has that lovely mix of nominal and real and geographical diversity on regulation. So that’s quite important to us as we consider these things.
In terms of the timing and why now, it is really what we’ve already talked about. And just to reiterate, we’ve always said to the market that when we’ve got clarity on the CapEx, and we do that with the market. So that is the first step and it is a significant step up. Having articulated what that CapEx is, we felt it was really important not to leave the uncertainty in the market. And as I said, it is also important that when we submit the business plan to Ofgem, which is one element of the GBP60 billion, but an important element that we were able to demonstrate that it was financeable so that they look on that business plan with a positive intent.
So for those reasons, we did think it was important we did it now, rather than wait 18 months before we get clarity on T3, which — just remind us just one element of the GBP60 billion. I mean the other point I’d make as well is that every price controller rate case is giving you clarity for three years or five years. These are investments and assets that we invest in for 40, 50, 60 years. And therefore fundamentally, it’s a question about have you got confidence in the UK regulatory and policy environment and the US Northeast environment. And our view is that we do have confidence, we will work through those price controls and rate cases as and when they come along.
Nicholas Ashworth
No more questions in line.
John Pettigrew
Okay. In which case, I’m going to say thank you, so much for joining us today. Hope you got a sense that this is a moment for National Grid, but I also think it is in a moment in terms of the energy transition for the UK and for the Northeast of the US. I’m hoping you’re walking away with a sense that we have a very clear plan, and we’re providing transparency that is probably unprecedented for right out to the end of the decade, And with that, a very compelling proposition going forward, as Andy said, you know, tilting more towards growth, but also with an important yield, which is an inflation protected dividend as well. So hope you found that session very, very useful, and thank you for joining us.
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