National Grid plc (NG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the National Grid's response to Ofgem's final determination. My name is Abby, and I'll be coordinating your call today. [Operator Instructions] I will now hand over to Nick Ashford -- Ashworth, Head of Investor Relations, to begin. Nick, please go ahead.

Thank you, Abby, and good morning, everybody, and welcome to our call to discuss our response to Ofgem's final determination. Thank you for joining us remotely, and I hope everybody is safe and well. As always, I would like to draw your attention to the cautionary statement that you'll find at the front of our presentation. And after the presentation, as usual, the IR team will be available by phone to help if you have any further questions. And so with that, I'd like to hand over to our CEO, John Pettigrew. John?

Thank you, Nick, and good morning, everyone. As usual, I'm here with our CFO, Andy Agg. We will spend a few minutes discussing the announcement we made this morning before leaving plenty of time to answer any questions you may have. There are 4 areas of the announcement that we'd like to touch on. First, our overall view of Ofgem's final determinations for our electricity and gas transmission businesses. Second, the basis of our decision to make an appeal to the CMA regarding the cost of equity and outperformance wedge. Third, how we see the credit metrics for the group over the next few years. And then finally, our dividend policy. Given we're confirming acceptance in full for the electricity system operator price control, my RIIO-T2 comments will be focused solely on our electricity and gas transmission businesses. So I'll take the 4 points in turn, beginning with RIIO-T2. I'd like to start by recognizing the huge effort the team has put into the RIIO-T2 process. It started 3 years with the framework discussions before moving into the widest consultation we've ever carried out, where we listen to the views of over 25,000 stakeholders. I'm pleased to say that all of this work has resulted in our acceptance of a large part of the final determinations. As I've said throughout this process, there have been 3 core objectives that we've been looking to achieve. Investment levels that enable us to maintain the world-class reliability and resilience of the U.K.'s energy networks. A flexible framework that will enable investment to deliver the NG networks of the future and a financial package that allows a fair return for our investors, all whilst keeping customers at the center of the price control with limited impact on builds. Having now had time to review the package in detail, we believe it allows for the investment required to maintain asset health levels, while also providing the flexibility to deliver investment for the green recovery and NG transition. As we look ahead into the next 5 years, we expect to invest around GBP 10 billion in our U.K. electricity and gas transmission networks, an average of just under GBP 2 billion a year, substantially higher than the investment levels in the RIIO-T1 price control. With nearly 60% of this investment focused on asset health, we'll continue to deliver world-class network operations in areas such as our London Power Tunnels 2 project from Woodland on to Crayford, our asset replacement program to reduce our reliance on SF6 as well as our compressor investment to reduce greenhouse gas emissions. On top of this, we'll continue the work we progressed in RIIO-T1 to enable a cleaner energy system with investments in areas such as the Hinkley Seabank connection, new O head line routes to facilitate the government's 2030 offshore wind target as well as continuing to help customers connect new sources of renewable generation as efficiently as possible. However, whilst we're pleased with the improved package around investment levels, the Board has decided our technical appeal to the CMA, focused on the cost of equity and outperformance wedge. Whilst the cost of equity has improved from the draft determination, we still believe there are strong technical arguments that should lead to a higher overall level. In particular, we believe that the methodology Ofgem used to set the cost of equity ignores evidence for higher total market return and risk-free rate levels. We also believe Ofgem's cross checking methodology used 2 narrow peer group and that the beta estimate does not fully take into account the risk of a transmission business when compared to the water sector. We, therefore, believe it's appropriate that the CMA as an independent regulator should have the final say on this decision as it's doing currently for a number of the water companies. Alongside this, we also maintain the view that the outperformance wedge remains unjustified. We said all along that the outperformance wedge is conceptually and practically flawed. Reducing allow returns and expectation of future outperformance, the wedge undermined productivity incentives, discouraging companies from innovating, which will ultimately lead to consumers paying more. With the final determinations already challenging efficient companies to outperform, we believe the outperformance wedge is wrong in principle, not required and should be removed from the framework. We'll submit this technical appeal to the CMA tomorrow and expect confirmation of the appeal by early April. The process should take 6 months from that point, concluding by early October. But to be clear, this process will not stop us from being ready to deliver on our commitments from day 1 of the new price control when it starts on April 1. And we remain ready to help the government deliver a green recovery as we set ourselves on the road to net 0. I'll now hand over to Andy to talk about how we're funding this growth. Andy?

Thanks, John, and good morning, everybody. So I'd like to take a few minutes to talk through how we see the credit metrics for the group over the next few years and where we now expect to outturn. Firstly, as you know, like many companies, we've seen a financial impact from COVID. As of today, our guidance of a GBP 400 million headwind to underlying operating profit in this financial year, with a cash impact of up to GBP 1 billion remains unchanged. We also remain confident that most of these COVID impacts will ultimately be recoverable, either through the usual updating of rates for timing impacts, particularly in the U.K., or through filings in the U.S. either through our regular rate negotiations or separate targeted filings. However, with the economic impact of COVID being particularly acute across parts of the U.S., recovery of these costs may take longer than we first expected as we work closely with our U.S. regulators to manage the impact on customer bills. This is likely to lead to lower revenue increases in the near-term than would have been the case before COVID. This has come as we also start the RIIO-T2 price control. Whilst we're pleased with the improvement in the overall package from draft determination to final, lower returns in this price control, coupled with high levels of investment will impact our financial metrics. As you know, Moody's has traditionally targeted a threshold of 9% RCF to net debt for our current VAA1 National Grid plc debt rating. In addition, S&P targets a 13% FFO to debt threshold for our current group A- issuer credit rating. Our recent results have delivered ratios close to these thresholds as we've seen the impact of U.S. tax reform and higher levels of investment flow through into the cash flow metrics. And so whilst as a result of the impacts I've outlined, we expect to remain below the threshold for the 3 agencies in the medium term. In reality, we don't expect a significant change in long run FFO's debt metrics from the levels we reported in FY '20. Overall, this leaves a strong possibility that we'll see a one notch rating downgrade of National Grid plc and the majority of its rated subsidiaries from one or more of the rating agencies. We recognize the importance of our lenders and bondholders and realize this will be disappointing to them, but we don't believe that a downgrade represents a material increase in risk for those investors. Importantly, we expect our rating metrics to remain stable looking forward with sufficient long run headroom above the next thresholds as we continue to fund our value-accretive asset growth program. And we expect to continue to be able to access large liquid debt markets going forward. I believe this decision is the right one when considering all of our stakeholders and that the group balance sheet remains appropriately positioned. With the right flexibility to fund the large potential growth opportunities that we see through senior debt as we deliver investment to progress the NG transition. Overall, the Board remains committed to maintaining a strong overall investment-grade issuer credit rating, and today's announcement doesn't change that. With that, I'll hand you back to John.

Thanks, Andy. So moving on to the dividend. I'm pleased to say that the Board has reaffirmed the existing dividend policy for this financial year to grow the dividend at least in line with RPI inflation. From April 1, the dividend policy will be updated to reflect the move from RPI to a CPIH inflation Link for our U.K. regulated businesses. The new policy will aim to grow the annual dividend in line with CPIH, maintaining the dividend per share in real terms. As with our previous policy, the Board will review this policy regularly, taking into account a range of factors, including the expected business performance and regulatory developments. The scrip alternative will continue to be offered, and we don't expect to buy it back given the continued outlook for strong asset growth. Overall, I'm pleased that the work we carried out, in particular, since the draft determinations has been recognized by Ofgem. This has led us to accept a large part of the final determinations. We'll work closely with the CMA through the course of the year as it works through our appeals. Whilst we expect to see our credit metrics a little lower in the coming years, we remain committed to a strong investment-grade credit rating, leaving us well-placed to deliver strong asset growth towards the top end of our 5% to 7% range, which will enable the NG transition in the years ahead. Looking forward, we'll provide more detailed guidance on '21, '22 and how we see the impact of RIIO-T2 on our businesses at our full year results presentation on the 20th of May. So with that, Andy and I will be happy to take any questions.

[Operator Instructions]

Okay. So I can see that Dominic has got his hand up from Barclays. Dominic, do you want to ask your question?

Yes. And thank you for your presentation. I have 3 questions, please, for you, if I can. The first one is on your acceptance of the fund determination around the totex numbers. Have you gone through this? And are you in a position now to say that you will at least meet the regulatory targets with potential to beat it? And if so, do we know what that is yet? Secondly, on the totex numbers, you're saying that the totex numbers, CapEx numbers are sort of GBP 10 billion or so. That's -- obviously comes to a high totex number, I think it's put about GBP 12 billion, GBP 13 billion, I think, on that number. Can you just give us some guidance on the process that you're going to go through? I mean, we're going to start seeing these go through the uncertainty mechanisms? And then the final question is when you put these numbers in. What's your base case for credit ratings and dividend policy around whether or not you get an uptick in your ROE numbers? And/or whether you're going to be outperforming against the regulatory contract. Is your base case on credit and dividend policy that -- were at the lower of those ROE numbers and no outperformance? Or have you baked something in your sort of narrative here?

Okay. Thanks, Dominic. So why don't I take the first 2, and then I'll ask Andy to take the third one. In terms of today's announcement, what you've seen as set out is that the vast majority of the fund determination that we are accepting it. And obviously, there are 2 elements that we're referring to CMA for technical reasons. Now that we've got a much clearer view of the regulatory framework for RIIO-T2. Obviously, we only got the license in February to really understand the detail of what's been expected of us and what actually the overall framework looks like. We'll now be able to really start to work through where there are opportunities for innovation and efficiency. And when we do our May results, Dominic, we'll be able to share with you how we're thinking about it and where we see opportunities for our performance. In terms of your totex question, the second question. So yes, what we said today, our CapEx expectation is around about GBP 10 billion and totex is around GBP 12 billion over the 5 years. If you look at the sort of the baseline regulatory CapEx for ET, and GT. Then for ET, it probably represents about 60% of what we expect to spend. And for GT, about 80% of what we expect to spend. So we've built into that GBP 10 billion, where we expect to see uncertainty mechanisms. As you know, some of them are automatic, so where we have to invest to increase the capacity on the boundary, for example, then that automatically adjusts, and we've reflected that in gas transmission. There are certain processes we need to go back to Ofgem and agree. So for example, our investment on compressor stations, that is a sort of manual process. But we've taken that into account, but you can assume about 80% for GT and about 60% for ET in terms of baseline and the rest come through the uncertainty mechanisms. Andy?

Yes. Dominic, thanks. Just on the third one, as you can imagine, when we've made our decisions on the dividend policy going forward and also the guidance around metrics, we've taken into account a wide range of scenarios. As John said, we're working through the detail in terms of the opportunities and the delivery plan for RIIO-T2. So we'll give more clarity on where we see those opportunities for performance going forward. But it's safe to say that, effectively, the decisions we've announced this morning -- stand good under any of those potential outcomes in terms of levels of outperformance going forward, but we'll confirm more down the track.

Thanks, Dominic. Chris from Morgan Stanley. I see you've got a question.

I was just wondering if I could ask a question on funding. Just the impact, Andy, on your hybrids, if you do take A or except a credit rating downgrade at the PLC level, what impact, if any, is there on your hybrid? And I guess in terms of the uncertainty mechanisms, John, perhaps if you could give us a sense for how long it will take you to get rolling on those processes and when we can sort of expect timing to come into it? Just following on from the previous question.

Okay. Andy, why don't you take the funding question?

Yes. So thanks, Chris. Yes. So as you know, the hybrids' currently 2 notches below our existing rating. So you would expect if there was action taken that we would see the hybrids notch down as well. That would effectively push them into sub investment grade, but they would continue to exist. And we would continue to believe that even at that level, we would continue to have access to the hybrid markets if we chose to. And as we haven't announced anything this morning, and that's not in our current plans, but clearly, we would still have capacity against our metrics. And there are plenty of examples of investment-grade credit issuers who do issue hybrids at that subinvestment grade as well.

Chris, in terms of uncertainty mechanisms, as I said, some of them are automatic. So as we identify the need for the work, then the revenues will adjust automatically. Some of them are manually. It's quite a complex process RIIO-T2 in that there are quite a number of uncertainty mechanisms, much more than we saw in RIIO-T1 and we've built a schedule to make sure that we're having the conversation engagement with Ofgem at the right time. When we get to the May results, we'll probably share some of the more material ones with everyone so that you can see the timing of them. But we're just building out that schedule at the moment to reflect the capital investment plans that we need. Mark from Crédit Suisse. I see you've got a question.

I've got 3 questions. Firstly, you say that you're only appealing the cost of equity in the outperformance wedge. But clearly, there are other things that tie into that, the 300 bps REMS, if you like, which may be a nuisance for some players and potentially yourselves as well and also on the cost of debt indexation. So do you think it's possible that the CMA may also look at those as part of the cost of equity referral. Secondly, just on the electricity system operator, that business is not subject to a CMA appeal, but it's got a lot of fast money in the asset lives only 7 years. So it's, it's a business that probably shouldn't be accretive for the credit ratios, but is because of that technicality. So have you looked at the credit ratios and the group, excluding that? And just thirdly, can you give us an update on the Keyspan rate reviews, please? I know you said that you would only be looking at -- and I've stepped outside of the box. But if there's anything you can provide, that would be great.

Yes. Thanks, Mark. I'll just pick up the key stamping here, and then I'll ask Andy to just pick up the first Q. So in terms of having your keys, for a long time, Mark. So in terms of KEDLI and KEDNY, so our downstate gas distribution businesses. As you're aware, we've been in conversations with the PSC for quite a while now in terms of trying to agree the rate filing. I think I mentioned that the half year results with the significant impact that COVID's having in New York, we're trying to just make sure we get the balance right between the investment that's needed, both for safety and reliability, but also for investment as we go through the NG transition. Balancing that with, obviously, we want to try and mitigate the impact on customer bills over the short term. So we're making good progress. We're in ongoing dialogue with PSC staff, and I'd be hopeful that we'll be able to get to a conclusion very, very soon on that. Andy?

Yes. Thanks, Mark. And I think your first part of your question was around what you described as the 300 bps, which I think -- I'm assuming you're meaning the outperformance potential before you start hitting the upper bounds of that. Just to be clear, the technical of that -- we've, yes. So the technical appeal we've launched this morning is purely around the base allowed return and the outperformance wedge that Ofgem has proposed. So that doesn't read across into anything related to the potential for outperformance or underperformance or the bounds around that. But just to be clear. And secondly, on the cost of debt, absolutely. So no, we're -- again, we're accepting the cost of debt proposals in relation to National Grid within the final determinations. Your broader question, obviously, we can't comment on what others might choose to do. So there may be other CMA activity around those areas. But just to be clear, our technical appeal is focused purely on those 2 areas that we've talked about this morning. The second piece around the system operator -- yes. And I think as I said on previous calls, the impact of the system operator on our numbers is very small, and that continues to be the case going forward. But we've absolutely taken that into account in terms of our modeling around and our thoughts on credit metrics going forward.

Deepa from Bernstein. I see you've got a question.

I have 3 or 4 questions. So firstly, on the CapEx, the GBP 2 billion, that's roughly around maybe GBP 500 million per annum over the baseline in the Ofgem model. I was just wondering if you can provide some color on what sort of projects? And is there anything included in this for any offshore transmission? Second question is really relating to offshore transmission a bit of -- on today's announcement, but just was wondering what your expectations are from the government's review? And when do you think offshore transmission can start becoming material? Is it the back end of this RIIO? Or is it RIIO-3? Third question is, could you confirm what your U.K. wrap expectation is? My back of the envelope suggests around 4.5%. Could you please confirm that? And my last question for Andy is, what do you now expect your FFO net debt and RCF to net debt to be? And is that broadly consistent with a BBB at the corporate level and BBB+ at the U.K. regulated level?

Okay. Thanks, Deepa. So let me have a go at the first 3 and then I'll ask Andy to the fourth. So in terms of CapEx and the types of projects, I mean there are multiple projects over the baseline. So as I said, the uncertainty mechanisms for quite a lot of projects that relate to demand growth or increase in generation capacity on the network are reflected through the uncertainty mechanisms that feeds through. Some of the bigger projects will include things like our program to replace SF6, which I mentioned in my remarks. So that is a significant program of work that will be taken forward as part of RIIO-T2, as part of our responsible business charter. And then within the GBP 2 billion, some of the investment associated with the Eastern Link will be included in that, the first Eastern Link project which supports some of the offshore wind that you mentioned. So those are the types of projects. And again, when we get to May, we can give a lot more detail and substance around some of the bigger programs of work. In terms of the offshore transmission review that [indiscernible] is undertaking, as you can imagine, we're participating in that. From our perspective, we have said that there is a real opportunity for increased coordination in terms of delivering the 40 gigawatts by 2080 -- 2030. From our perspective, there are a number of potential projects that could be delivered starting in RIIO-T2, but a lot of the CapEx will be in RIIO-T3. So there's potential for a couple more eastern links. There's a potential for an investment between Suffolk and Kent, there's a reinforcement in Central Yorkshire and a reinforcement on the Southeast Coast. All of those are needed to support 40 gigawatts but a lot of the pre-engineering will be done in RIIO-T2, and then it will ramp-up in RIIO-T3. So that's something that we're focused very carefully on at the moment, as you can imagine. And in terms of the U.K. rate growth, I haven't got the exact number. It is around about 4.5%. ET -- electricity transmission is much stronger. It's in excess of 5% and gas transmission around about 2%. But I think it works at about 4.5% on average. Andy?

Yes. Deepa, thanks. Just in relation to the FFO question, as we've indicated this morning, we would expect our metrics going forward to stay comfortably in the next bounds. We'll have to wait and see where the rating agencies do go in terms of announcements and what they indicate, it was the -- what they only really give you clarity on the bounds of the band that you're within, but we would expect to be comfortably within sufficient headroom across any bottom bound for the next banding as well.

Can I ask one follow-up to Andy. Just a question on your credit rating. So you have the A- for the U.K. regulated entities and a BBB+ for the corporate. When you go and issue, say, new debt for the U.K., which entity do you raise it from? So what's the relevant credit rating? Is it A- now? Or is it BBB+? Like what should we be looking at?

So Deepa, as you may now, we tend to -- we raise debt from a range of entities across the group. The majority of our operating companies, U.K. and U.S. and also at Holdco as well. So again, we'll have to wait and see what the rating agencies do, whether they act across the opcos as well as the Holdco. But you're right, at the moment, we're A- at the U.K. Opcos where we do issue from which is B+ at the Holdco.

Okay. I can see that Martin from Investec has got his hand up. Martin, would you like to ask a question?

Just a few quick questions. In terms of the 6-month time line expectation that you've communicated, obviously, I'm very cognizant of the fact that water is going the full year. And if other energy networks appeal parts of the package to the CMA, do you think that you could see your appeal taking up to a year? And related to that is, if the CMA finds in your favor and changes things, how does that then feed through into the regulatory models. The GBP 10 billion that you gave just to check, is that in nominal terms or actually '18, '19 money? And then on the U.S., you've obviously made that suggestion that COVID recovery could take a little bit longer than you had previously expected. I wonder if you could give anything more in that respect because you've never really given too much in the first place about what your expectations with the time line of recovery?

Okay. Thanks, Martin. So let me work through the first few, and I'll ask Andy just to talk about the U.S. and COVID recovery. In terms of the process for the CMA, it's pretty well-established. So as I said in our remarks, we will make our referral tomorrow, which is the last date that we can do that. The CMA then has the opportunity to review it before accepting the referral, which is likely to take to the beginning of April. And then there is a 6-month process that takes you to October. My understanding is that they can take an additional month to make it a 7-month process. So to your point, Martin, if we see a number of the networks referring, it's likely it's possible that CMA may choose to take that extra month. Obviously, I'm not sure about that, but that would take us to November. So our time is at the end of April, we would expect to get acceptance of the referral. We're likely to see a draft determination from them in the sort of summer on the July period. And then depending whether it takes 6 or 7 months, we'll see an outcome in October or November. In terms of the regulatory model. So again, the way that it works is that the license that reflects RIIO-T2 will come into effect from the 1st of April. In the event that the CMA make a determination in our favor with regards to the cost of equity, then the formula within the license will be recalculated on the higher cost of equity. And will be retrospectively then applied from the 1st of April of 2021. So that will flow through in terms of higher revenues in 2021 going forward. And in terms of the CapEx that we close to GBP 10 billion, that in outturn prices. So hopefully, that's clearer for you. Andy?

Yes. Martin, just to point on COVID recovery. I think we probably said a few times now that obviously, the dialogue with regulators about the impacts of COVID is entirely wrapped up with working through and managing the impact on customer bills. So I don't think it's surprising that as we deal with that and with the pandemic, obviously running on for much longer than maybe was initially anticipated. That we do expect, as we said, again, this morning, bills to stay lower or increases to stay lower for longer in the U.S., that doesn't ultimately impact our confidence, but it does mean that we'll just be pushing out the timing of some of that cash coming in. But clearly, some of it flows through existing mechanisms, both in the U.K. and the U.S. So as we work through those and land that, we'll obviously update that guidance going forward.

Okay. [indiscernible] from RBC. I see you got your hand up.

First question and sorry my line cut up a little bit there. Just on the GBP 10 billion was nominal or real. And the second question, just on the credit metrics, if you're assuming -- or if there was a softening from the CMA and elimination of the outperformance, would that prove your outlook on the credit metrics going forward?

Okay. Yes. So the GBP 10 billion is nominal. So just to be clear on that. So Andy, do you want to pick up the credit issue?

Yes. I think, again, Mitchell. When we've looked at the various scenarios in front of us, we've obviously taken account of a range of possible outcomes. And I think given the issues involved at the CMA, the guidance that we've given around our metrics this morning remains sort of good under those different outcomes. So I wouldn't expect it to change the overall position that we've set out this morning.

Mark from Crédit Suisse. I think you've got your hand up again.

Can I please ask some follow-up questions just on the wording of the dividend policy. I mean, in the past, you've used the word foreseeable, which was devised 8 years ago. Can we read anything into the changing of that? And secondly, a question for Andy. I mean, if I recall, the U.S. tax reform 3 years ago cost you about USD 330 million per year of cash flow. If some of that were to be reversed, would it be plausible that you could maintain the current group, BBB+ credit ratios? And I guess just surrounding that. I mean, the RNA today reads a little bit like you're resigned to go into BBB or resigned to a one notch downgrade at the group level. But clearly, there are a number of scenarios under which you could maintain that credit rating and under which there would be no reason for the credit rating agencies to downgrade you. Is that fair?

Andy, do you want to take that?

Yes. So I do the credit point one first, Mark? I think if I take the tax reform point in particular, but then I'll come back to your broader point, you're absolutely right, technically that if the new Biden administration did choose to reverse some of the U.S. tax reform impacts and potentially increase the rate again, that we would expect that to feed through. Ultimately, the regulatory arrangements we have in our jurisdictions. And ultimately, yes, we would expect to recover that from consumers. As I just answered one of the previous questions, though, you have to look at this in the context of the overall customer bill in the U.S. and it's another factor that would need to be taken into account in setting those customer bills going forward. So ultimately, yes, economically neutral as well with tax reform, it went in the other direction. But I think we'd have to work through very carefully the timing of the recovery of those additional amounts from a cash perspective. So I don't think you'd be able to say there's a direct read across from one to the other. In terms of the broader question there, Mark, just to say it's probably generally on the words that we're resigned to. I think we've made a conscious decision this morning when we look at the scenarios in front of us. And the options in front of us in terms of managing our overall capital structure and funding the growth that we have in front of us, the slightly higher growth as we see going forward now, managing the impact of the new price control as well as the rate cases in the U.S. and we believe that we continue to maintain a strong investment-grade rating access to markets. And we believe that, that plus the dividend that we've reaffirmed this morning is the right combination for us going forward.

Yes. And Mark, in terms of your first question, I think [ RNA ] would just to be as crisp as we possibly can be, which is -- so the policy going forward is to maintain the dividend in real terms and our aim is to increase it by U.K. CPIH. So we were just aiming to be as crisp as we possibly can be in the policy going forward. Dominic, I think you got your hand up from Barclays.

I have 2 quick questions. Firstly, what do you think your cost of equity should be? I don't think -- you might have said it, but I think I kind of missed it. And following on from that, if the CMA comes back in mid-March on the waters with a fairly low response, will you retract your appeal? Or do you think that you will continue regardless of the response on the water. And then the final question I've got is, if we have a one notch downgrade, can you quantify what the actual increase in interest costs would be, please?

Yes. So why don't I take the first 2 and then ask Andy to do the last one. So in terms of the cost of equity. So you -- when we make the referral to the CMA tomorrow, we will provide a lot more detail setting out our case, as you would expect. As you know, Dominic, we're referring the cost of equity and the outperformance wedge. On the cost of equity, we believe that certain information hasn't been considered, which would impact on the cost of equity around the total market returns, the BT co-efficient and the risk-free rate. There's also the issue about whether it's appropriate to aim up when you do these calculations because each of those point estimates has a range. Our view is that when you put all that together, a cost of equity should be in excess of 5.6%. I think on a balanced assessment of all the information that's available to us. And that's what you'll see in our referral to the CMA when it comes out tomorrow. In terms of the basis of retraction. I think it's the question you're asking, Dominic. I mean, fundamentally, for the energy sector, as you know, the basis of referring to CMA is whether you believe there are issues in terms of error in methodology or judgment on specific issues. And that is the basis in which the CMA will do their assessment. And therefore, because we feel very strongly that actually not all the information has been considered in determining the cost of equity, and we've always been consistent about our concerns around outperformance wedge. Then it's on that basis that we're making the referral rather than anything specific to PR19. Obviously, we will read the outcome of PR19 with interest, and it will inform us in the dialogue we have with CMA going forward. But actually, it's on the fundamentals of the methodology that we're making the referral to the CMA. And then the third issue, Andy?

Yes. So just on the cost of debt going forward, Dominic, obviously, it would only start to impact new issuance as we go forward. And if we look at sort of comparator issuance costs, then we would absolutely expect to be modest. Even though its certainly in the early years as we start -- if we are downgraded, and we start to fund at that new level.

And can you quantify how many bps higher on the sort of new issuances we're kind of looking at?

I mean, it's very hard to be precise because, obviously, as you look at the different curves going forward and different issuers have different ratings. But something maybe in the 20 bps type of range.

Verity from HSBC. I see you've got your hand up.

So just a follow-up to Dominic and some of the other questions about the wedge. So as a baseline, I'm sure you will see this tomorrow. You will just like that 0.22% just added into the cost of equity even before some of the other considerations are taken into account just because you think the methodology is flawed. So 4.25% plus 0.22% is kind of where we start. And then is that way we should think about it? Or are you just going back to fundamentals, as you mentioned before? So question, what do we do with the outperformance wedge? Are we just -- are you asking Ofgem to just add it back?

Yes. So we're not really asking Ofgem to do anything in terms of the CMA referral. So fundamentally, you have to go back to the fundamentals. We don't believe the performance wedge has any position in the fundamentals of calculating the cost of equity. So if you do it on the basis of the fundamentals, using all the information available, we believe you get to a cost of equity above 5.6%. So Ofgem, obviously, of adjusted their calculation of the cost of equity by reducing it 1.25%, reflecting the outperformance wedge on the basis that there's an assumption of our performance going forward. We don't think that's the appropriate way of doing it because, effectively, it's an efficiency measure by another name. And we believe that Ofgem, we've got plenty of tools available to them in order to drive the efficiency of networks rather than sort of pollute how you do the calculation of the cost of equity. So our argument to the CMA will be based on fundamentally what's the right cost of equity given the risks associated with the methods going forward. I can see Chris from Morgan Stanley. You got your hand up. Chris?

Thank you, John. Just one remaining question on my list, which is previously, we thought of the buyback of the scrip as a temporary policy shift for just RIIO-1 and RIIO-2 resumption of the strip with the buyback is normal. Should we consider this announcement today as temporary? Or is this a permanent funding sort of tool that you'll be using, just, I guess, some comments around the duration of that buyback payoff would be great?

Okay. Thanks, Chris. Andy, do you want to?

Yes. Thanks, Chris. You're absolutely right. So previously, we just guided to the last 2 years of RIIO-1. But as you see in the announcement this morning, we've effectively said that while we continue with higher growth, and I think we've clearly signaled with the outcome of RIIO-1 that we expect higher growth certainly for the next few years as we go through T2, that we will continue to not to buy back the scrip while we're in that high-growth period. So yes, you can absolutely assume that it's an ongoing situation.

Ahmed from Jefferies. I can see that you've got your hand up.

Yes. 2 from my side. I'm just trying to sort of be helpful to understand what do you see the constraints around spending more than GBP 10 billion. Because, I mean, I see GBP 10 billion is obviously a bit above the base case FD allowance. But as I see it, it's still below sort of the illustrative net [ 02 ] scenario. So if there was sort of an opportunity to the -- to spend more would you be constrained by balance sheet or other factors? I'll just be interested in your thoughts around that. Then my second question is fairly feel quite comfortable with your dividend policy in the context of credit metrics. I just wonder if you could say anything about how the dividend policy looks in the context of payout ratio and earnings go, if that's also been a consideration and how you see that?

Thanks, Ahmed. I'll take the first, and I'll ask Andy to pick up the second. So in terms of the GBP 10 billion of capital investment over the 5 years. So as I said, it's above the regulatory baseline, reflecting the uncertainty mechanisms. It's about GBP 1 billion higher, I think, than the scenario 1 that was discussed and about 2 and a bit billion below scenario 2. So it sits in the sort of the range that was being debated as part of this process. I mean there is the potential for further increases in CapEx going forward, potentially for 2 reasons: one, an acceleration of some of the projects as we work towards net 0, and in particular, the offshore wind target for 2030. The other is where the competition is introduced or not over the next few years going forward. So as you know, there's been a lot of debate with Ofgem about onshore competition. And it was picked up as part of the white paper, the NG paid just before Christmas. So that is still uncertainty at the moment. So there is the potential that if competition isn't introduced, then there might be some increase in CapEx. It's likely to be relatively modest in terms of GBP 10 billion, partly because these tend to be large programs of work, which take a while to get moving in terms of large CapEx spend. So potentially, you might see another sort of 5% to 10% increase if that was to happen. But in setting out our proposals today, which as Andy has said, we're very comfortable with and we think the right decisions for the business in terms of the balance sheet. We, of course, look at a number of scenarios, both in terms of slower CapEx and faster CapEx going forward over the 5 years, and we're very comfortable with where we set it out today. Andy?

Yes, Ahmed, just on the dividend and the ratios and so forth. So absolutely, we've looked at those aspects as well. And as we've previously guided, as we go through this year, particularly with the impacts of COVID, yes, we do expect the payout ratio and dividend covers to be impacted in the very short term. But the Board -- when it's looked at this and the decision is made very comfortable with -- as we come back out of COVID and go through into -- sorry, into T2 and beyond, that we're very comfortable with the levels of payout ratio and the dividend cover associated.

Martin from Investec, you got your hand up.

Yes. Just one more from me, if I may. I'm obviously very cognizant of the fact that there is supposed to be a consultation on a vision for energy as a guide to Ofgem, that's going to be brought forward, I guess, in the spring or maybe the summer. Given your appeal, this morning can be I guess, interpreted saying the cost of equity that is being set out by Ofgem is not sufficient to propel as properly along the road to net 0. I just wondered what your sort of high-level thoughts were about the state of regulation in the U.K. and how that might develop and change going forward?

Yes. Thanks, Martin. I mean, I think as I said in my remarks this morning, I was particularly pleased with the level of engagement and discussion and debate that we had with Ofgem moving from the draft determination to final determination. I always said that there were 3 objectives that we had for RIIO-T2. The first was to ensure that we had sufficient CapEx to deliver the asset health and resilience reliability that's important during a period of change. The second is that the mechanisms are flexible enough to reflect the uncertainty associated with NG transition. And we've said today that we're broadly accepting those because Ofgem have made significant moves. The third area is around the cost of equity in the overall financial package. And we're in a position where, at the moment, we don't believe that Ofgem have used all the data available to do that assessment to get to a cost of equity that we believe is appropriate. The good thing about U.K. is that we have an independent regulator who can adjudicate when there is a difference of opinion between the regulator and the regulatee, which is why we're doing the technical referral. I don't read anything into that in terms of the broader regulatory regime in the U.K. As I said, we've had very constructive relationships with Ofgem. They are very committed to net 0, and they're very committed to working with us on that. This is, to a large extent, a difference of opinion around how you calculate the cost of equity. Of course, it is really important to us because, fundamentally, there are tens of millions, billions of pounds of investment needed over the next several decades. And therefore, the argument we will be making is that it's incredibly important that investors get a fair return for the risk they're taking. And our CMA appeal really reflects that to a large extent, to make sure that not just in the short term, but in the long-term as well, we get a fair return for the risks associated with these networks. Andrew from CreditSights. I think you've got your hand up.

Andrew, can I just check that your microphone is unmuted, please. I'm afraid we can't hear you.

Sorry. Is that better now?

Yes.

Yes, sorry, John. Sorry, Andy. Yes, I just wanted to come back on a question that Deepa asked earlier. She was looking at the ratings of the various entities within the National Grid Group. You've talked about the expectation of the downgrade at the Holdco. Could you just confirm, I guess it's a yes or no question. Do you also expect a downgrade at the U.K. opcos from the current A3, A- level? And finally, as a credit analyst, I mean, I'm sorry about this, but I just have to ask this. I mean, did you consider reducing the dividend or issuing equity in order to maintain your ratios and your current ratings?

Yes. Thanks, Andrew. So firstly, on the U.K. opco's point, I think, clearly, we'll have to wait and see what actions, the 3 agencies that follow us may or may not take. I would anticipate that we probably hear from them quite soon. But I'm not in a position to comment whether they'll take action beyond the group or at the group or at a specific opco. So -- but I hope that we will see news from them pretty soon.

Can I just come -- could I just come back on that a second. I mean, do not think it would be extremely unusual to have a 2 notch differential between the opco and the parent Holdco?

Sorry to the -- sorry, yes, to that question, if they do take action, then I would absolutely expect them to look at the delta between the opco and the Holdco rating, sorry, yes, Andrew. So logic may say that they would extend the action to certainly some or all of the opcos. But again, it will be wrong for me to sort of comment on what they may or may not do until we see from them. Yes. In terms of the broader point, just to step back a moment. Clearly, it's a decision that the Board has taken very carefully. And it was a difficult decision as we weigh up the scenarios, the growth opportunities, how best to fund them. And what's the right financing structure for the group going forward. Ultimately, we believe that the mix that we put forward with the maintenance of the dividend maintaining a strong investment-grade rating, albeit with an understanding that may be one notch down and continue to fund through senior debt is the right overall proposition, taking all our stakeholders into account. I understand that there will be many potentially on the debt holder side that we'll be disappointed. And obviously, we're doing a call later today with our debt investors specifically on that as well. So yes, it's a difficult decision, but we do believe that, ultimately, this is the right balance decision to take.

Okay. It doesn't look like there are any further questions. So in which case, can I just thank everybody for joining the call this morning. I think what you've heard is the decision that we're taking today. The good news is we have a lot of clarity and transparency going forward now that we've got the framework set out for RIIO-T2. We're very well-positioned to deliver on the GBP 10 billion of investment we talked about over the next 5 years. We will, of course, keep the market informed as the CMA referral progresses and will provide, as I said in my remarks earlier, some further detail about RIIO-T2 and how we're thinking about it going forward at our May results on the 20th of May. So thank you, everybody, for joining, and look forward to seeing you all very, very soon.

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