National Grid plc (NG) Earnings Call Transcript & Summary

Welcome to the shareholder webcast regarding National Grid's proposed acquisition of Western Power Distribution, WPD. I'm Peter Gershon, the Chairman of National Grid, and I'm joined today by our CEO, John Pettigrew; our CFO, Andy Agg; and Justine Campbell, Group General Counsel and Company Secretary. The WPD acquisition is conditional on, amongst other things, the approval of shareholders, and we have therefore convened a general meeting on the 22nd of April for this purpose. A shareholder circular containing the Notice of General Meeting and explanatory notes was made available to shareholders on our website on the 31st of March 2021, as well as being posted to shareholders who have elected for hard copy documents. The health and safety of our shareholders and colleagues is vitally important to us. And therefore, in light of the continuing COVID-19 pandemic and current U.K. government restrictions, which prohibit public gatherings, the general meeting will be a closed meeting. This means it will be held with only the minimum number of people legally required to form a quorate meeting. Please do not travel to the general meeting, as anyone who seeks to attend in person will be refused entry. I therefore strongly urge all shareholders to register their votes in advance by appointing myself as Chairman of the General Meeting as their proxy and giving voting instructions. We do not recommend the appointment of any other person as your proxy on this occasion as they will not be able to attend the general meeting and your vote will not be counted. Votes can either be cast electronically through share vote, the Equiniti Shareview portal or CREST or by paper proxy card. For shareholders who do not automatically receive a paper proxy card, 1 can be requested from our registrar, Equiniti. In order for votes to be validly counted, the card must be received by Equiniti by 12:00 p.m. on the 20th of April. Further information on voting can be found on our website and in the shareholder circular. Although shareholders are not able to attend the meeting in person, we recognize the importance of communication with our shareholders and allowing them the opportunity to engage with the board. We have, therefore, recorded this webcast to explain: firstly, the rationale for the WPD acquisition; secondly, why the WPD acquisition is, in the Board's opinion, in the best interest of our shareholders and, accordingly, why the Board unanimously recommends that shareholders vote in favor of the resolutions to be proposed at the general meeting, as the directors intend to do in respect of their own beneficial holdings; and thirdly, to provide an opportunity for engagement with our shareholders and for questions to be answered ahead of the voting cut-off date. The WPD acquisition from PPL is 1 of 3 transactions that we announced at the same time on the 18th of March. The other 2 are the sale of our Rhode Island business in the U.S., NECO, to PPL. This is conditional on National Grid's successful completion of the WPD acquisition. And the intention to commence a process later this year for the sale of a majority stake in our UK Gas Transmission business, National Grid Gas plc. As I set out in the shareholder circular, together, these transactions will strategically pivot National Grid's U.K. portfolio towards electricity. The proportion of National Grid's assets in electricity will increase from about 60% to about 70%. It will strengthen National Grid's long-term growth outlook by ensuring a significant scale position in electricity distribution through the acquisition of the WPD Group, the U.K.'s largest electricity distribution business. Electricity distribution is expected to see a high level of growth in the U.K. as a result of the ongoing energy transition. It will significantly enhance National Grid's central role in the delivery of the U.K.'s net zero targets given the complementary nature of transmission and distribution, providing benefits for customers. It will deliver shareholder value as the WPD acquisition and the NECO sale are expected to be significantly earnings accretive from year 1, generate a return in excess of National Grid's cost of capital, and taken together with the proposed National Grid gas sale, continue to be earnings accretive in the longer term. The transactions underpin National Grid's 5% to 7% asset growth target for longer, further supporting National Grid's updated dividend policy to deliver annual dividend per share growth in line with U.K. CPIH inflation while expecting to maintain its current overall strong investment-grade credit rating. The transactions maintain National Grid's geographic and regulatory diversity, with approximately 40% of the group's assets in the U.S. after the sales of NECO and a majority stake in National Grid Gas plc. The transactions generate attractive shareholder value through the sales of NECO and the majority stake in National Grid Gas, and they will ensure management continuity and focus. The CEO and CFO of the WPD Group will lead the U.K. distribution business as part of the enlarged National Grid Group. The company, recognizing the importance of Western Power Distribution to the communities it serves, intends to maintain the WPD Group headquarters in Bristol and other offices in key locations. I would now like to hand over to John Pettigrew, Chief Executive Officer of National Grid, to briefly provide some further background to the deal and how it fits within our strategic vision. John?

Thank you, Sir Peter, and thank you, everyone, for joining us on this webcast. As I've said on many occasions, our vision at National Grid is to be at the heart of a clean, fair and affordable energy future. We'll do this through the execution of our strategic priorities, which are: to deliver for our customers efficiently; to grow our organizational capabilities; to empower our people for great performance; and to enable the energy transition for all. And it's with this vision in mind that I'm hugely excited about these transactions. For those of you who followed our story over the years, you'll know we have a great track record of delivering shareholder value through portfolio repositioning, both large and small. This has taken the form of large-scale acquisitions with our purchase of the KeySpan business in 2007 and also crystallizing shareholder value with the more recent sale of our UK Gas Distribution business, resulting in a GBP 4 billion return of capital in 2017. National Grid has also established National Grid Ventures, which is investing in renewables and interconnectors and is delivering real value for the group. The acquisition of WPD is a one-off opportunity to gain a scale position in U.K. electricity distribution, which is expected to see high levels of asset growth as a result of the ongoing energy transition. WPD is the U.K.'s largest electricity distribution network operator or DNO, with the forecast March 2022 regulated asset base of GBP 8.8 billion, having grown by around 5% per annum over the past 6 years. It's responsible for 4 networks across the East and West Midlands, South Wales and Southwest England. Altogether, it has more than 6,500 employees and serves nearly 8 million customers. And in addition to its size, WPD is also one of the best performing operators in the U.K. with a fantastic track record of delivery. Firstly, it's demonstrated a great track record of stakeholder engagement and was the only DNO to be fast tracked by Ofgem in its recent price control. Secondly, it's delivered very strong operational performance with customer engagement ranked towards the top of its peers throughout the current regulatory period. Thirdly, its financial performance is strong, consistently delivering best-in-class returns. And finally, it's led by a strong and highly experienced management team. I've known Phil Swift, WPD's CEO, for many years and look forward to working closely with him and his team to continue to deliver the great performance WPD's employees and customers have come to expect. We believe that the integration of WPD International Grid will bring complementary strengths to the group as we move along the energy transition pathway. So Peter has already outlined the strategic benefits of the transaction, but I want to highlight 4 key points: firstly, the increasing growth of electricity and our key role as the U.K.'s largest transmission and distribution owner; secondly, the improved growth outlook for the group; thirdly, our enhanced role in the energy transition; and then finally, the continued benefit of geographic and regulatory diversity. So starting with our increased electricity footprint. On completion of all 3 transactions, nearly 70% of the group's assets will be focused on electricity, up from around 60% today. That's very significant at a time when electricity demand is expected to rise substantially in the years ahead. The coming decades will see the acceleration of renewable generation, enormous growth in electric vehicle penetration and a significant change in the way we heat our homes with electric heating solutions growing to complement the acceleration of clean gas alternatives. The core scenario set out by the committee on climate change sees a 70% increase in U.K. demand by 2050. The outlook, therefore, for both electricity transmission and distribution is extremely exciting, as the largest electricity transmission and distribution owner in the U.K. will play a pivotal role in enabling growing levels of electrification with investment levels and growth that remain elevated across our networks as we look ahead through this decade and beyond. Which brings me to the second point, the growth outlook. Overall, we see these transactions materially improving the group's long-term growth outlook given the multi-decade changes we see ahead for the electricity sector. WPD's regulated asset base has grown around 5% per annum over the past 6 years and its draft, ED2 business plan, expects investment levels to rise by 20% from ED1 to facilitate the smarter electricity networks that will be required. With the transactions retaining our current strong investment-grade credit rating, there is sufficient headroom to take advantage of these growth opportunities as they emerge, delivering a cleaner energy system and attractive returns for our shareholders. So as we transition our U.K. business to higher-growth electricity distribution, we expect group asset growth to be in our 5% to 7% range for longer. This transaction also enhances the pivotal role we'll play in the delivery of net zero and places National Grid at the heart of the energy transition. It will enable us to deliver a more holistic approach across the entire U.K. electricity sector, helping the U.K.'s wider net zero ambitions. An area where combining WPD within National Grid can help deliver customer and shareholder benefits whilst delivering the energy transition is around renewable connections and the development of smarter networks. There's been around 50 gigawatts of renewable generation connected to the U.K. electricity network to date, with over 6 gigawatts of connections to our transmission network in RIIO-T1 and WPD already having connected 10 gigawatts distributed generation and storage. Together, our high- and low-voltage engineers will be able to share their knowledge and experience to efficiently deliver increasing levels of renewables, both large and small. Another example is across EV charging infrastructure. In our transmission business, we've worked with the U.K. government on the GBP 950 million rapid charging fund, which will help to deliver ultrafast charging infrastructure at a national level across motorway service stations. At the local level, WPD is looking to deliver over 200,000 charging points across its territory by 2023 as part of its road map to deliver enough connections by 2030 to allow up to 3 million EVs. This is a great example of where we'd be able to share best practice across engineering and customer solutions to help drive a more effective EV rollout. Finally, these transactions help to keep the attractive geographic and regulatory diversity of the group intact and allow for the group to capture growth opportunities as they arise across our businesses. By increasing our U.K. regulatory footprint, this transaction shows we continue to believe the U.K. will remain an attractive place to invest with the right support to innovate as the U.K. moves forward with its ambitious net zero goals. So to reiterate, we believe the acquisition of WPD Group will transform National Grid's shape and positioning by increasing our focus on electricity at a time of significant change in the sector. It will give us a one-off opportunity to establish a scale position in U.K. electricity distribution and offer compelling opportunities for future growth, thereby, enhancing our ability to deliver in our 5% to 7% asset growth range for longer. This will further underpin the dividend for the long term. Our vision is for National Grid to be at the heart of a clean, fair and affordable energy future. On completion of this transaction, National Grid will be the U.K.'s largest electricity transmission and distribution owner, having an even greater role to play in helping the country meet its net zero target. With that, I'll hand you back to Sir Peter.

Thank you, John. We will now move to question and answers. We will today be addressing all questions that were received before the deadline of 5:00 p.m. on the 12th of April. If you have further questions, you may submit these through our website until midday on the 20th of April. We will provide answers to questions received by midday on the 20th of April on the website as soon as possible after this webcast.

First question is from [ Mr. Michael Kemp ]. At a time when good governance is as critical as it has ever been, can the Board please explain why the company has not run a hybrid general meeting this year when technology and U.K. law allows for this to happen? Whilst COVID rules mean public gatherings cannot occur physically, the law allows for hybrid meetings, and market guidance is clear that this should occur if our articles permit it. The legislation allowing closed meetings is not being extended. If National Grid's articles do not permit it, please confirm this is being addressed as hybrids provide better governance than merely physical or virtual meetings. Sir Peter?

Thank you for the question. Good governance is imperative. And as a Board, we take great care to ensure that we provide our stakeholders, including our shareholders, with the opportunity to engage with us whenever possible. The company's current Articles of Association do not allow for a hybrid meeting to take place, and therefore, we have been unable to offer this format for the general meeting. We are considering the May Board, when we look at the resolutions we're going to propose for this year's Annual General Meeting, the possibility of putting a resolution to the AGM to amend the Articles of Association to allow for hybrid meetings going forward. With hindsight, if we'd known at this time last year that we were going to be convening a general meeting to consider this acquisition, I think we would have brought forward a resolution to last year's Annual General Meeting. But unfortunately, we did not have that gift of foresight. And so as I said at the beginning, regrettably, we are not able to have this general meeting as a hybrid. But I do assure you that the Board will give the serious consideration at its meeting next month when we do consider the resolutions for the '21 AGM.

Next question is from [ Mr. Colin Ovington ]. How will shareholders be compensated for the sell-off of National Grid Gas assets? Why is this happening as the merger in 2003 was supposed to be a great way to reduce OpEx. John?

Yes. Thank you for that question. What you've heard today is that the sale of the Gas Transmission business -- a majority stake in the Gas Transmission business is part of the strategic pivot that we're making that includes the sale of our Rhode Island business as well as the acquisition of WPD. We'd expect to start the sale process for the majority stake in Gas Transmission later this year, and typically, that will take around 12 months to complete. The proceeds that we will receive through the sale of Gas Transmission will then be used to partly offset the debt facility that we've taken in order to acquire WPD. With regards to Gas Transmission, it is a really good business. It has been performing really well. It's got a fantastic reputation for safety and reliability. And of course, it's got the optionality to grow as we see the energy transition unfold in the U.K. So we'd expect to see a lot of interest from buyers for that business. But with the acquisition of WPD, what we've effectively done is strategically pivot towards electricity. And with that, that will allow us to actually see stronger growth for a longer period of time and more certain growth. And of course, that underpins the dividend policy that we've set most recently.

The next question is from [ Mr. Nick Deeley ]. What is the reason for withdrawing from your gas operation in the U.K. as it appears to have been profitable? Andy?

Yes. Thank you for that question. As you've already heard today, the announcement of the proposed sale of a majority stake is alongside our other 2 transactions that purchased the WPD and the sale of the Rhode Island business. The Board anticipates significant buyer interest as we've heard in the sale of these assets, given its high-quality operations and proven delivery, the strategic nature of the business and the key role that Gas Transmission will continue to play in the U.K.'s energy transition. And so whilst the Gas Transmission business is indeed a profitable business and is also strongly cash generative, we believe the sale of a stake in that business, aligned with the purchase of WPD, will enable National Grid to focus on higher-growth assets, as we've heard, underpinning our group asset growth target of 5% to 7% for longer. And this, in turn, will underpin our renewed dividend policy of growing the dividend in line with U.K. CPIH inflation and all of this whilst continuing to maintain our strong balance sheet.

And the last question is from [ Mr. Jenkins ]. Have any employees of upper management or the Board of Directors personally invested in National Grid Group? Or have they simply acquired company shares through bonuses or by exercising options granted to them? In other words, are they personally at risk as would be the case with private ownership or sole proprietorship? To me, their overall compensation should reflect, in some manner, the amount of personal financial risk they have in the success or failure of the company. Otherwise, they're just employees and their annual compensation should be significantly adjusted downward. Sir Peter?

Yes, members of upper management have purchased shares with their own money and by participating in the company's Sharesave and Share Incentive Plan, but also by purchasing shares on the open market. We have also disclosed these details in the shareholder circular that supports this general meeting. Nonexecutive directors have also purchased shares in the open market using their own money. For example, I now hold over 100,000 shares in National Grid, which have been purchased entirely from my own funds. Senior management need to have personal risk in the long-term success of the company. And that is why our remuneration policy reflects the need for a close alignment between the interest of management and the long-term interest of the company and its investors. You may recollect that every 3 years, we put our remuneration policy to the vote of shareholders, and I'm pleased to say that every time we have done that, investors have comprehensively supported our remuneration policy with a very significant number of votes cast in support of the policy. Also, a number of years ago, we made a change to the policy which shifted the emphasis of the policy more heavily towards longer-term incentivization away from the annual bonus scheme. This part all illustrate the importance we place on the alignment of management's interest with the long-term interest of the company. And as a result of these policies, for example, the Chief Executive now holds over 5x his annual salary in company shares. At the point at which he leaves, there is also a restriction on him and on other senior executives for selling those shares for a period of time after their departure. In the Chief Executive's case, that is a period of 2 years. So that, again, reinforces management's alignment with the long-term interest of the business. And it is arising from that alignment that led to the thinking that underpins the transaction we are considering today and the other 2 transactions we announced at the same time last month. Because it is about getting the company's asset growth trajectory, and therefore, its longer-term growth parts onto a steeper curve than would be the case if we were not undertaking the 3 transactions that we announced. And so that is very much, again, reflecting the incentivization management has to do things, which are demonstrably in the long-term interest of the company and its shareholders. I'd like to thank those shareholders who submitted questions for answering today. And I hope that after watching this webcast, you now have a clear understanding of the rationale for National Grid's acquisition of Western Power Distribution. I'd like to conclude by reminding you that in the Board's opinion, the WPD acquisition is in the best interest of our shareholders, and the Board, therefore, unanimously recommends that shareholders vote in favor of both the resolutions proposed at the general meeting as the directors are doing in respect of their own beneficial holdings. Thank you very much indeed for watching this webcast.