National Grid plc (NG) Earnings Call Transcript & 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. [Operator Instructions] I will now hand over to your host today, Nick Ashworth, to begin. 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 if you have 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 and 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 has had a profound impact on demand levels among the way in which we work, I'm proud to say that we've maintained excellent levels of reliability across our networks, and we continued to deliver on our significant capital program. As the crisis evolved, we took action to change working practices quickly and safely. In particular, we've risk assessed all of our operational and construction projects, issued new working guidance to our field force and collaborated across the industry, showing best practices and finding innovative new ways of working. And despite these changes, we 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 has been not only to keep the electricity and gas flowing, but also to help those customers who may be in financial difficulty. In the U.S., recognizing the economic environment, 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 or if we can offer them flexible payment plans. In the U.K., we'll continue to work with other network companies in Ofgem to help suppliers address financial challenges that 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 U.S. upgraded supplies in record time to help turn a college gym into a 1,000 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 value 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 detail shortly. But to summarize, we expect to see a GBP 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're 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 GBP 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 of an additional provision for U.S. bad debts. Consequently, underlying earnings per share was down slightly by 1% to 58.2p. Underpinning this performance was a record year of investment in critical infrastructure, with CapEx up 19% to GBP 5.4 billion. This was driven predominantly by increased spend in our UK Electricity Transmission business as we progressed major projects like Hinkley. Higher U.S. CapEx, much of it mandated on safety spend and higher CapEx in Nation Grid Ventures from continued interconnector 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 32p per share. This takes the total dividend for the year to 48.57p per share, an increase of 2.6%, in line with U.K. 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 U.K. and National Grid Venture businesses have delivered good performance with their lost time injury frequency rates falling to red low levels. In the U.S., 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. Performances will remain excellent across our U.K. and U.S. regulated networks as well as our interconnectors. As you know, on the 9th of August, we experienced a rare power outage event in the U.K., which caused huge disruption to many people. In January, reporting the incident from the Energy Emergencies Executive Committee and Ofgem for no link between Nations Grid actions and the power cut. Since the reports were published, we worked with the industry, Ofgem and BSIS, and all the actions proposed are progressing to time. And in the U.S., despite another year with a 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 U.S., 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 3 years and takes over a business that's seen 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 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, and means we're now halfway through the long-term replacement program. We've also made good progress on the regulatory front. In October, we agreed new rates for Massachusetts Electric with a 5-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're aware, we also experienced some challenges with gas constraints in Dunstan, 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 state, we further 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 supplemental 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 and anticipate an outcome this summer. Turning now to the U.K. It's been an important year as we head towards the end of RIIO-T1. Operationally, both our electricity and gas transition businesses continued 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 investment of GBP 1.3 billion, which was up 5% from the prior year, giving asset growth of 3.8%. This takes our total investment in RIIO-1 to little over GBP 11 billion, delivering world-class reliability, enabling the connection of 4.6 gigawatts of renewable energy, and generating over GBP 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 and 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, and we welcome 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 U.K.'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 groups. And finally, during the year, we remained focused on our efficiency programs, exceeded our savings target of GBP 50 million. This achievement has been driven by cost and process improvements such as 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 U.S., in April, we announced that Jon Butterworth, which stepped up to be the new Managing Director of National Grid Ventures. Jon has spent many years with National Grid and bring a wealth of experience to the role, and it's been another year of significant progress. Investment was up substantially to GBP 815 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 to report that '19/'20 was a strong year of 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 to 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 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 GBP 3.5 billion, mainly reflecting the impact of revenue increases in the U.S. driven by new rate cases, lower controllable costs across both the U.K. and U.S. businesses, higher U.K. profit with nonrecurrence of the return of Avonmouth revenues in UK Gas Transmission, which together were offset by the expectation of additional COVID related bad debts, higher levels of U.S. depreciation on increasing levels of CapEx spend and the impact of lower profits from the nonrecurrence of the Fulham sale and the legal settlement last year. EPS was down 1% at 58.2p, reflecting improved regulated business performance, offset by a 2.5p 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 58.9p, down slightly compared to last year. Our asset base grew strongly by 9%, reflecting significantly higher capital investment of GBP 5.4 billion, including over GBP 200 million of investment in Geronimo. The full year dividend of 48.5p 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 low 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 GBP 1.2 billion was up 8%, largely due to lower operating costs and depreciation. The U.K. efficiency program that we launched in FY '19 delivered GBP 54 million of savings for the year. Capital investment of GBP 1 billion was 13% higher than last year, primarily due to spend on the second phase of the London Power Tunnels Project and Hinkley-Seabank project. This investment, along with the inflation-linked growth in the RAV, increased year-end regulated asset value by 4.4% to GBP 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 higher cost of delivering key compressor projects and our new data centers. Other incentive performance at 110 basis points was strong, resulting from improved customer satisfaction and constraint management. Underlying operating profit of GBP 402 million was up GBP 61 million or 18% compared to FY '19. This is primarily due to the nonrecurrence of return of Avonmouth allowances and additional revenue for cybersecurity following the reopeners agreed in 2018. Our U.K. cost efficiency program delivered GBP 19 million of savings. And together with the GBP 54 million of Electricity Transmission savings, we exceeded the total U.K. target of GBP 50 million announced last year. Capital investment was GBP 249 million, GBP 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 GBP 6.3 billion. Turning now to our U.S. business, where the return on equity is 9.3%, 99% of the allowed. Underlying operating profit increased 1% to GBP 1.6 billion at constant currency. Net revenues were up GBP 257 million, reflecting rate increases. Controllable costs decreased 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 GBP 83 million, reflecting the additional COVID related provision of GBP 117 million, partly offset by a 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 U.S. networks to GBP 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 relates to capital work in progress. National Grid Ventures contributed GBP 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 GBP 815 million, mainly driven by the acquisition of Geronimo and higher investments in our North Sea Link, Viking and IFA2 interconnector projects. Our other activities had a small net charge of GBP 27 million, reflecting the nonrecurrence of the Fulham property sale, higher insurance costs and the nonrecurrence of U.S. legal settlements. We sold another 2 sites into the St William joint venture, and we've also exchanged on a further 4 sites, which will transfer in due course. Our Venture Capital business, National Grid partners, invested GBP 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 GBP 1 billion, primarily due to higher net debt in our U.S. business and hybrid buyback costs, partly offset by lower U.K. RPI. The effective interest rate 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. The underlying earnings were broadly flat at GBP 2 billion and underlying earnings per share decreased 1% to 58.2p. Operating cash flow was GBP 4.9 billion, GBP 450 million higher than last year. This was driven by higher regulated business income, lower year-end weather-related U.S. receivables, lower U.S. pension costs and reduced exceptional cash costs. During the year, we raised GBP 2.9 billion of senior debt and refinanced GBP 1.1 billion of our hybrid debt. Closing net debt was GBP 28.6 billion, an underlying increase of GBP 2.7 billion after allowing for an GBP 800 million adverse movements in exchange rates. The impact of adopting IFRS 16 and receipt to 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 payment. 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 the 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 U.S. 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 greater stability for our credit metrics. As a result, our U.S. dollar-denominated debt balance now stands at $20 billion compared to $21 billion last year. Group capital investments in FY '20 was GBP 5.4 billion. Of this, approximately GBP 4.5 billion relates to our investment in critical infrastructure across our regulated U.K. and U.S. businesses, with a large proportion focused on meeting mandated safety and reliability targets. A further GBP 500 million was invested in our interconnector program. With IFA2 set to commission this year, we have now passed a peak investment for this overall program. Finally, we've also invested over GBP 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 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're 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 do 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 GBP 400 million. Whilst we'd expect to see some initial costs arising in the U.K. and a limited impact in our National Grid Ventures business, the majority of GBP 400 million impact is forecast to come from our U.S. business, driven by 3 broadly similar impacts: The deferral of rate increases across New York; the incremental COVID related costs; and higher bad debt charges. Taking these in turn. Firstly, we currently expect rates to be held broadly flat across 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'll have seen this morning, for FY '20, we've taken an additional GBP 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 recovering 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 GBP 1 billion. This will ultimately depend on levels of demand across our networks, cash collection from our U.S. customers and timing of collections of network charges and system costs in the U.K. 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 GBP 28.6 billion to around GBP 31.5 billion. Together, these headwinds will impact our credit metrics in the near term, but we expect this impact 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 U.S., 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 GBP 100 million higher, given higher levels of investments in rate base. In the U.K., 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 profit. National Grid Ventures operating profits are expected 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 GBP 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 remains 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 effect a buy back the scrip issued during FY '21. To summarize, we've delivered a strong returns performance in FY '20. We have delivered a record GBP 5.4 billion of investments in critical infrastructure. The balance sheet remains robust, enabling the funding of attractive asset growth in 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 impact on the group. Now John will take you through the priorities and outlook for the coming year.

Thank you, Andy. So let me now 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 4 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 U.S., we have 2 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 U.K., our 2 focus areas will be to agree the RIIO-T2 regulatory framework and to drive innovation and efficiencies for our customers. And in our National Grid Ventures business, we'll 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 U.S. 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 impact from COVID in the near term. This means that our immediate focus will be 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 settlement negotiations with the PSC in the interest of agreeing a multiyear rate plan that will achieve 4 things: to mitigate bill impact 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 1 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 extending to 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 multiyear. 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're 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 deliver investment plans efficiently, whilst minimizing bill impacts for customers. Turning to the U.K., 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're 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 engaging constructively with Ofgem to address the points raised by the challenge group, which were then published in January. I was pleased that our greater level of stakeholder engagement was recognized by the challenge group, but I also recognize 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 center of the price control, enables to 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 GBP 100 million for 2021. This year, our efficiency focus will be on 3 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 2 new digital platforms. These will help customers connect to 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 a reduced connection costs, but it will also reduce the time it takes to connect to our network. We recognize 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 3 new interconnectors, North Sea Link, IFA2 and Viking. So by the end of this year, we'll have completed IFA2, be 85% through our construction program on North Sea Link, and be 1/3 of the way through delivering Viking. With investment of just over GBP 1 billion to date, we have around GBP 1 billion left to invest through 2023. And when all online, we expect these interconnectors, together with Nemo, to contribute GBP 250 million of EBITDA from the mid-2020s. With regards to our U.S. 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 500 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 keep one eye on the future. Which is why today the 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 and 90% reduction by 2040. In the U.K., in our RIIO-T2 business plans, we've 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 U.S., we've also made commitments to decarbonize our internal fleet, and we continue to reduce emissions by replacing leak prone pipes. I'm also pleased to announce that we'll be hosting an investor event in October on our 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 U.S. to attend at the same time. The event will allow us to talk in more detail about how we'll 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 2 examples. On powering the U.K., 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 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 build-out, and our engineers are working hard on developing options and proposals. And on transport in the U.S., we're working across all our jurisdictions to deliver a number of initiatives around EVs. These will include customized support for our fleet operators, educational programs that 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 propose comprehensive filing 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 2 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 has had a strong year, and I'm pleased with the progress we've made across all 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 costs 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 U.S. and the U.K. and our interconnected delivery in National Grid Ventures, whilst looking to advance the energy transition. We expect another strong year of capital deployment, investing around GBP 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 a 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.

Just a few quick questions, hopefully. 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 nonprogrammable 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 of a [indiscernible] 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 initial services in that mix? The second question relates to the GBP 1 billion cash flow impact from COVID-19. Obviously, we've got the GBP 400 million underlying operating income that you've talked about. I guess, there's probably about GBP 100 million or so on volume timing differences in the U.K. Is the balance coming from the possibility of deferring to [indiscernible] and the [indiscernible] charges beyond the year end? And then my third question, you've alluded to the fact that there's 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 U.S. of the cost and revenue impact that you are undoubtedly going to experience in FY '21?

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 at 17% to 20% below what you 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 deals ], but also develop 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 operator set at an ambition to be able to operate the system on the basis of zero carbon generation by 2025. And 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. And so ultimately, we feel very comfortable that we can develop those tools. Whatever the makeup is, I think, fundamentally, there are capacity auctions that run on a regular basis that are facilitated by the government. And who bids into those capacity auctions is, obviously, a matter for the market. From our perspective, we need to ensure that we have the tools to be able to balance the system 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.

Sure. No. Thanks, John. So Martin, as you said at the start, so if you'll stand back a moment. So within the GBP 400 million, you've got the 3 broad buckets in the U.S. that I described in my presentation. And obviously, we do see a smaller impact in the U.K. within that as well. So that is then part of as we build up towards the GBP 1 billion. And being clear, we've guided up to GBP 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 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 GBP 400 million. As you -- the underlying cash impacts and working capital impacts of the delays in collecting those U.S. receivables and estimate what will still be on the balance sheet as at 31st of March '21. So there's a bigger cash impact of GBP 1 billion, even though the bad debt impact is included within the GBP 400 million. And finally, as you said, there remains some uncertainty about the final sort of industry support schemes that you referenced in the U.K. around both network charges to also the balancing costs as well, where we're very much a waiting for Ofgem's final conclusion on that consultation. So those are absolutely the elements that build up towards the GBP 1 billion.

And towards your final question, Martin. 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 the 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 parts will also be in bluntly the duration of any rate agreement that we have with each of the individual states. But there is plenty of precedent and mechanism in the place, which give us the confidence to articulate why we think it's a short-term impact and not a long-term economic impact for National Grid. Should we -- I've just got a list in front of me. Should we take Rob from Morgan Stanley next?

I think Martin beat me to the first 2 questions there. So I will ask a couple of different ones. The first one is, do you have any views on the future U.S. 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. 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 it back?

Okay. Thanks, Rob. Let me do the first one and I'll ask Andy to 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 discussed 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?

Yes. So -- and Rob, just on the scrip points, 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 we'll continue to look at that as part of our normal annual review. And that will depend on, as we've always said, the levels of growth, the levels of performance across the business, we'll guide further at that point.

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

Yes. 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 3 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 decarbonization and supporting that. Those fundamentals 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 U.S. It might be slightly off, and that because we are seeing some impact on COVID, particularly, with the interface with our customers where you can get access, obviously, with social separation. So -- but fundamentally, we're expecting -- I think we're at GBP 3.2 billion this year for CapEx for the U.S. It's going to be a similar order magnitude next year. But the fundamentals are changing, so we continue to expect to see strong growth going forward. Should we -- I see John Musk has got a question. Should we go to John?

Probably, 3 questions from me as well, actually. I just would come back to the GBP 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 1, 2, 3, 4 years? Roughly, what sort of time frame should we think about for those 3 buckets? Secondly, on the balance sheet, with the guidance on the GBP 31.5 billion, with the lower earnings and lower cash flow, as you indicated, that's going to put further pressure on the on the credit metric. 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 do 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 time and recovery, I think it's fair to state, it is a difficult question to answer at this point because it will be unique to which 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 2 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 those 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're aware, the most recent announcements in terms of rollout of smart meters was that 85% of all customers should have a smart meter by the 2024. So we're expecting that the sort of the 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?

Yes. So on the net debt credit metrics question, John. So as you said, guided to GBP 31.5 billion, that includes obviously GBP 1 billion that we referred 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 to fall below threshold. I think the critical thing though is as always, and we're in regular dialogue with all 3 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 taking a one-off view of any particular point in time. I think I'd also say that just in terms of the reported metrics, we report those all in, so the 9.2% and the 12.3%. If you add back some of the adverse timing 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 play, too.

I can see the Dominic has got a question from Barclays.

2 questions for me, please. First one, ROEs in the U.S. and I think going to Page 58 of your presentation, you caught with a U.S. 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 GBP 400 million COVID operating profit is not going to be in there? 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 talked 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 U.K., please?

Yes. Sure. 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 that decarbonization of gas and heat, in particular, is probably the most challenging elements of the net 0 target by 2050. Clearly, if you look at the U.K., 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% of the current gas volumes to persist even in the net zero world with an expectation, probably less gas going in buildings, but more being used for things like hydrogen. I think at this point, Dominic, we're of the view the solution to decarbonization of gas is likely to be a mosaic solutions. So there is the potential for increased biogas that could potentially provide up to 10% or 15% of the U.K. 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 0 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 our carbon emissions back into old cabins 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% and what impact that will have on the network. So we're 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, 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 0 over the next few years. Andy?

Yes. So Dominic, on U.S. ROEs, as you know, this year, 9.3%, 99% of allowed. And if you relate that through to the 18% increase in U.S. net income, the referenced, 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 2, I guess, to around to the 18% increase in U.S. net income or U.S. 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 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 allowed return is next year.

Deepa. I can see that Deepa has got a question.

I have 3 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 build-out 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 U.S. GAAP numbers. The -- could you clarify how -- whether you included the bad debt adjustment in that, or is that pre bad debt that you've booked on those U.S. GAAP earnings?

Okay. Let me take the first, and I'll ask Andy to pick up the third -- second and third. So in terms of expectations for the draft determination, I mean we remain hopeful that Ofgem will recognize some of 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 at 6.5%. Ofgem in their initially, was at 4.3% to 4.8%. So we've continued 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've said several times, as you know, fundamentally, it's 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 they 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 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, Ofgem 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 the investment to meet net zero could potentially create 400,000 jobs in the U.K. and 100,000 more in the next decade. So I think there is a real opportunity to think about post COVID, how you stimulate the economy, and what's that mean for investment towards net zero? And I would be hopeful that Ofgem would be thinking about that as part of their draft determination. Clearly, once we get through that, there's still a fair way to go. Obviously, there's some important milestones, including the water companies have got there 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 we are hopeful that some of the opportunities that I think the green agenda presents will be reflected in the draft determination. Andy?

Yes. So Deepa, on -- 2 points. I mean, in terms of the balance sheet, I think as alluded to in one of the earlier questions. As I look forward, 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 we will always, therefore, focus on sort of the breadth of our regulatory arrangements, the diversification of those, the performance that we're able 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 being referenced. Clearly, as we've said consistently, we always look at our portfolio. We always look at the relative contribution of all elements of the portfolio. We'll continue to do that. But we don't have anything in mind. The third one, sorry, on the bad debt. 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 U.S. GAAP earnings and in the 9. 3%?

Well, it assumes recovery of it, yes.

I can see Fraser from Bank of America is on.

3 questions from me as well, please. So back in April, I recall, you were worried about not being able to recover additional costs and a lot of revenues in the U.S. 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 U.K. 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 interconnectors, how dependent is that GBP 250 million EBITDA on the outcome of the U.K.'s deliberations on the carbon price, particularly the [ GBP 18 ] upon tax.

So I'll let Andy do the first 2, and then I'll do the interconnectors. Andy?

Yes. So Fraser, I think you're referring to on the first one, back to our pre-close statement, where 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, a lot of uncertainty around the impact of COVID. 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 has said, 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 U.K. So obviously, if RPI does move around. It'll move the actual growth rate, but that 5% to 7% is driven by that long term assumption. I think in terms of 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 1/4 of our debt book, which is index-linked to providing still a very good natural hedge for us. So like every utility, 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.

Yes. And in terms of interconnectors, I mean we took -- we've taken a central view in terms of the GBP 250 million 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 U.K. and in Mainland Europe. And what we see as the sort of potential sort of view on the arbitrage between the 2 markets. So it's a central view that we're reasonably comfortable with. I'm going to move on to a quite a few questions to still get through. Olivier.

This is Olivier from Exane. I just have 3 also follow-up questions, if I may. I hope -- 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 like 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 U.K. 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 U.K. and then also for the U.S. Should the ambition be over the long run to switch fully to 200% hydrogen network? Would you require a lot of replacement? Or would your pipeline be officially able to capture that? The second one is on the discussions around KEDLY and KEDNI rate case in New York, I think, in the press release, you mentioned that potentially this may be actually a more legal and courts route. I just wonder if you could give us a bit more color on effectively the more decisions between you and local authorities, and to what extent, you think you will get an agreement this year or if it has to be through the courts. Do you have any precedent to see how long this might actually take before, if an outcome might be reached? And then the final question is on the tax rate. You guided a 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 will be for you for your company.

Yes. Thank you. I'll take the first 2, and then I'll ask 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 U.S. or by the government in the U.K. 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 at all to be able to support hydrogen. That's exactly the pilot projects that are being developed and are being run at the moment 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 network. So that's the work that's going to go on over the next few years, both in the work that we're doing in the U.S. and in the U.K. to really understand what that road map will look like, what the investment around it will be. In terms of KEDLI and KEDNY, so we -- generally, in New York, there are 2 mechanisms by which you agree a rate filing. One is through litigation, where you ultimately end up with a 1 year rate case. And the other is through settlement. And through settlement, there is always the opportunity to do a multiyear settlement. I was quite pleased that actually, the PSC reinitiated discussions with National Grid at the beginning of this month. To see if we could find a settlement for KEDLI and KEDNY. They have 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 it for 1 year. In the event that we do that, we would probably put another filing in relatively quickly to cover the fact that it's only a 1-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 -- a couple of settlements across our jurisdictions. So I think 22% probably reflects a more normal rate based on the profit mix. But obviously, as U.S. and U.K. profits vary in the years ahead, there will be subject to that change as well. But that's the driver for the increase next year.

Okay. So we go to James from Deutsche.

I have the 2 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 review in the U.K. under, obviously, not necessarily all scenarios, but under most scenarios? It's question number one. And then second question is just to get -- it's a 2-parter, but just to check on a couple of areas of recovery. You booked about GBP 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 it's the U.K. or the U.S. side, I guess, it's probably the U.K., whether that's recoverable or not? And secondly, you've, on Slide 18, highlighted that you've moved U.S. IT investment into the regulated segment, which I think you said is GBP 90 million last year. Can I check whether that's recoverable?

Okay. So I'm starting with the dividend policy. So yes, today, we reaffirmed our dividend. So the dividend policy has been in place since 2013, which is to -- we aim to increase the dividend by at least U.K. inflation for the foreseeable future. And quite rightly, James, as you said, that's something that, as you'd expect, the Board reviews on a regular basis, taking into current 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 term. And whilst we're still in discussions with regards to RIIO-T2. So -- and 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 U.S. under canal called Gowanus Canal in Brooklyn. This is the cost of a cleanup operation on that canal, which is -- 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. Should I go to Mark? Mark Freshney, Credit.

Hello, can you hear me?

Come up.

Perfect. So I have 3 questions. Firstly, a question for Andy on taking off some of the U.S. dollar swaps. I think the strategy a couple of years ago under your previous Finance Director was to only take the goodwill off. Now we go, I think you mentioned you've only got the U.S. 70% hedged. So I was just wondering what's behind that and basically closing out U.S. dollar swaps at the bottom. My second question is -- my second question was on EV, was on funding and the policy set you've got there or the government policy, whether you see much movement and whether you'd be able to get your [indiscernible] charges by the motorway. And just thirdly, can we expect you to reaffirm the dividend policy or lay out a new dividend policy that post RIIO-2 outcome, which would hopefully come early next year?

Okay. Let me deal with the second and third, but I'll ask Andy to deal with the dollar swap. You broke up slightly Mark. But I think the question was around EV charging and our proposal that we've been discussing with the industry and government around the ultra-fast charging network. So I think at hindsight level, we were pleased to see the announcement of the budget that the government has set aside GBP 500 million to actually start to build out that ultra-fast 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 6,000 of the plus charging by 2035. So at the moment, we're working with OLEV and with others in the industry about exactly how that GBP 500 million will be used to support the connections that are going to be needed and the connection infrastructure investment is going to be needed to put the capacity into those strategic service stations. In terms of dividend policy, as I said Mark, the dividend policy remains the same. It remains the same as it's been since 2013. And as I said earlier, it is underpinned by Central Board 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, the dividend policy remains exactly the same.

Yes. And Mark, on the U.S. hedge question. And it's actually something we've looked at each year, and we do that periodically anyway. So we've probably been moving it quite regularly for the last few years. But the shift this year was, again, we look at it against this impact on all of our metrics, not just from a total asset perspective, but impact on earnings, but particularly impact 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 from 1.30 to around 1.24 at close. The net impact on our earnings was about $11 million -- GBP 11 million, I'm sorry. So...

I can see that Verity from HSBC's got a question.

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 of the U.K. water companies that said they benefited from very favorable discount rates on the 31st of March. And perhaps you could remind us when your next trial valuation is? And then just secondly, a question on CWIP, actually. You've had a big rate, well 1% rate base increase because of the transfer of assets. Could you just talk us through how that profile continues for the next couple of years in terms of regulation is the U.S?

Andy.

Yes. Thanks. So Verity, yes, I'm going to take pensions first. So it's very much a U.K., U.S. split this time. So as you compare us to other U.K. utilities and in our U.K. teams, we have actually seen a small improvement. It's not as large as some. You may remember earlier in the year, we executed the 2 buy-ins, partial buy-ins for our gas scheme, which sort of has held back the improvement. But otherwise, we have actually seen a slightly large pension asset under IFRS. The downside is in the U.S., where because of a big drop in the nominal discount rate. We've increased the U.S. pension and health care liability by about GBP 1 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. 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 good levels of funding for the U.K. schemes. And apologies, the second question?

CWIP.

Sorry, CWIP, yes. So 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 their different longevities, different scales. I suspect next year, we wouldn't expect to see such a large movement from CWIP through to rate base, but that's encompassed in our sort of overall guidance that overall asset growth will be back within the 5% to 7% range this year.

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

Andy, one question, if I may, and that is with regards to the potential impact of COVID on the current year. And my question really revolves around the potential disparity between such impact on the U.K. versus the U.S. Now clearly, I understand the factors -- that the 3 factors you alluded to. But I would have thought 2 of those factors should more or less, to be equally applied to both jurisdictions. So therefore, is the forecast a greater impact in the U.S. principally as a result of the absence of new filings within New York?

Thanks, Gus. I mean I think the vast majority of the $400 million is in the U.S. and predominantly, it's because in the U.S. as well as being the network provider, we are the supplier as well. And therefore, we faced the bad debts directly that consumers can't pay. And that's why that's in there. Let's add to that the direct cost associated with COVID. Again, we do see some of those in the U.K. But in the U.K., we're a B2B business. And therefore, we have relatively less people in the U.K. than we do in the U.S. and therefore, the cost of things like providing an appropriate working place to be able to deliver capital and operational projects is lower -- has a lower impact in the U.K. than the U.S. And of course, we're a distribution company in the U.S. as well. So we're much more directly linked to where people are living, and therefore, we have to isolate in a different way. So it's more about the difference in the businesses than anything else. The one thing there is common at the headline is that we are seeing lower demands in the U.S., we are seeing lower demand in the U.K., and that does impact on the headline figure and on the cash implication. So in the U.K., we would expect to see potentially lower revenue recovery this year because the demands are lower than they typically would expect when we set the tariffs.

Great. Any we got a couple more questions to go, so -- and we've got a couple more minutes. So Sam from UBS.

Yes, you said, then, I'm kind of way down the betting order today. And I think a lot of topics that we want to think about have been touched on already. But do you mind if I trying to ask you at a high-level question that may give you just to bring a few of these different points together. And I think what I want to ask is how do we square this exciting, I mean, confident, very positive view of the business that you gave, and you talked a lot about the potential contribution to the energy transition and so on. With 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 asked that question, I sort of break it into 2 parts. I think the first part is, is there anything you could do to sort of cheer up the earnings outlook this year and next? So we're basically stick with that view for 2 years. I mean I know we've got this mini budget from the Chancellor of in July, and that said to include a massive infra plan and there's a U.S. infra plan that's 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 straightaway on in the next couple of years. So then my -- sort of the second part of the question is coming back to the portfolio, and I know Deepa asked the question about disposals earlier. 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 was more than 100%, they wouldn't mind taking a credit downgrade in even several states in those power networks, as long as they can keep paying out and growing the dividend. So I guess some of those thoughts must have been crossing your minds as well, and you've dispose gas distribution in the past, and you still got GBP 6 billion of RAV in the Gas Transmission business. And I'm just interested in generally, you think disposal is going to be a feature of things going forward. Do you think it's a good time for disposal? How would you feel about that kind of strategy where basically disposing stakes and paying a dividend out at the proceeds? Those are my -- I have a long question, but really interested if you could tie that together for us.

I'll try and give you a relatively [indiscernible] 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 U.K., you would have seen that we submitted our draft business plans that sets out the investment that we believe is necessary over the next 5 years. And in the U.S., we've continued to submit rate filings on a regular drum beat to support the capital investment that's needed. Ultimately, those investments through those regulatory mechanisms will drive the 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 out, we don't see that having any 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 asset health and resilience, but also in involving ourselves in the opportunities for the green agenda and decarbonization. And ultimately, as long as you got 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?

Yes. So Sam, I guess, firstly, I'm not going to comment on what SSE said or why they may say, but I will give you our view and how I think about the balance sheet and credit and the dividend. And I think as we've said consistently, why the 5% to 7% is a growth rate that we believe sits well with our balance sheet strength, the A- credit rating across the group. And also we're continuing to underpin the progressive dividend policy, at least in line with U.K. 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're very much viewing the impact of COVID. As we said today, as a short-term timing challenge for us. Where we're not having significant economic impact in the medium to long term, as John has described a few times. So we're comfortable and I'm comfortable with where the balance sheet is, where the ratings are and the medium-term robustness of the group.

I've got 2 quick questions left in about 2 minutes to go. So why don't we take Ahmed from Jefferies.

Yes. So just a few from my side, 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 revenue. 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 put that in the context of what's assumed in the GBP 400 million? And then I guess second question is, I mean it does seem, obviously, you're quite confident about this recovering most of or all the parts of EUR 400 million impact that you have highlighted. Could you maybe provide us some context as to how long such effects or the 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 GBP 400 million and GBP 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. So I think you mentioned timing differences related to volume and then differences sort of between bill deferrals and bad debt.

So Ahmed, I'll do the first 2, and I'll hand to Andy to do the last one. So in terms of bad debt, I mean, typically, I think, across our business, bad debt will run it 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 GBP 117 million is nearly probably doubling of what that is. And then as we -- as you've heard today, with regards to the GBP 400 million, we'd expect to be taking another charge of a 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 of the impact that we're considering as part of bad debt 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, whether they want to do a separate order, whether they want to do the right filings and where you are in your rate filing cycle, if it's chosen to go down the rate filings. So it's difficult to say. But typically, we'll be over 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, on this point, which is if you understand the buckets within the GBP 400 million, which is what will flow through our underlying earnings, you've really got the 3 extra area, which will be cash and potentially headline earnings. But 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 the following year or the subsequent year to that. It's very hard to be precise about the scale of these buckets because demand is clearly something that's very hard to forecast, particularly when those peaks and troughs are. The second element of the GBP 1 billion is U.S. customer collections. So the amount that ultimately, we make an assessment of what will finally be uncollectible, which feeds into the bad debt. But assuming that as of the 31st of March next year, we will still have high levels of receivables. Doesn't necessarily mean all those receivables won't be ultimately collective, and that's how we make our bad debt assessment. And then third one is, as we mentioned, I think, right at the start and as we work with the history, particularly in the U.K., 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. So it's again, very hard to be specific, but those are the 3 broad buckets.

Last but no means least. Thank you for your patient Elchin from Bloomberg.

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, it's very hard to predict. But if I had to try a haircut, how confident are you getting, I don't know, 80% or 90% of the recoverable, COVID related cost and bad debt and whatnot. So that's all for me.

Okay. I'll take the first and give Andy the second. So in terms of demand and certainly, I mean, it's incredibly difficult question to answer. There are 2 factors that are really influencing the rate at which we'll see demand come it back to normal levels: one is just the depth of the economic impact that COVID will have. And that will in itself theory between states and between the U.K. and the U.S., I'm sure; and the other is the speed at which the individual states and the U.K. lifts restrictions. Those 2 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 U.K. as an example, is demand as low as 17% lower than we would have typically expected during this time of the 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 at 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'll get back to normal, it's very difficult to forecast. Andy?

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

So let me just close within. Thank you, ladies and gentlemen, for all your questions. What you hear this morning is the performance in '19/'20 and [ line ] performance was 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 a result of COVID, but we expect there not to be a significant economic impact on the business longer term. And we remain well placed to continue to create 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.